Improper Conduct at Avery Dennison

Label-making giant Avery Dennison Corp. disclosed Thursday that it had found “instances of improper conduct” by employees in its European operations and said it expected the infractions to result in fines that might be hefty.

Pasadena-based Avery said in a Securities and Exchange Commission filing that the misconduct was uncovered during an internal probe. The inquiry was launched this year after European regulators began to investigate Avery as part of a broader antitrust probe of possible price fixing and manipulation of the European paper market.

“It’s a real, real shocker,” said Ghansham Panjabi, an analyst with Lehman Bros., who has a “buy” rating on the stock. “The fundamentals of the business are doing well. But this opens the door to potential shareholder suits and brings management’s credibility into question.”

Avery, already under investigation in the United States for alleged anti-competitive practices, didn’t describe the nature of the wrongdoing in the filing. It also didn’t estimate the size of the expected fine but said it might be “material.” Fines levied by the European Commission -- the European Union’s antitrust authority -- can be as much as 10% of a company’s annual revenue, Avery said. That would be $480 million based on Avery’s 2003 revenue of $4.8 billion.

Charles Coleman, a spokesman for Avery, declined to comment.

The news, announced after the stock market closed, is expected to hurt Avery’s stock price when it begins trading today. The company’s shares fell nearly 2% in after-hours trading Thursday after rising $1.08 to $61.89 in regular trading on the New York Stock Exchange.

“It’s very unfortunate,” said Douglas Christopher, head of research at Crowell Weedon & Co. in Los Angeles, who has the shares rated as a “buy.” “You have to look at this and say, ‘What’s next?’ ”

The Justice Department last year started an investigation into possible anti-competitive practices in the $5-billion market for so-called pressure-sensitive label stock, which is used on such diverse products as shampoo bottles and office supplies. Avery Dennison, which controls about half of that market, was subpoenaed by the Justice Department last summer along with Minneapolis-based Bemis Co., an Avery competitor.

Also last year, the Justice Department sued to block a $420-million purchase of a Bemis unit by UPM-Kymmene of Finland.

According to the lawsuit, the relationship between UPM and Avery has given the two firms “the motivations, opportunities and means to coordinate on price, monitor adherence, punish cheating and engage in side payments.”

In May, European regulators opened their own inquiry into the activities of UPM, Avery and other participants in the continental label market. Regulators seized documents from Avery’s label stock facilities in the Netherlands and Germany as part of the probe.

Although the investigation by federal regulators into Avery’s domestic label stock business is continuing, Avery hasn’t had a significant inquiry from U.S. officials in nearly a year, a source familiar with the investigation said.

Michael Kulstad, a Justice Department spokesman in Washington, said he couldn’t comment immediately on an ongoing investigation.

It is unclear when either the European investigation or the U.S. investigation would be concluded, sources said.

The United States has the power to levy criminal charges against individuals, and the European Commission does not, lawyers said.

“This could go on for one to two years,” Panjabi, the Lehman Bros. analyst, said.