A regulatory investigation into Avon Products Inc was triggered by the cosmetics company's vice chairman sharing material information about a China bribery investigation with a Citigroup analyst, a person familiar with the matter said on Tuesday.

The Securities and Exchange Commission's Regulation FD investigation began after Citigroup Inc's Wendy Nicholson published a research report on May 25 citing a meeting with Chuck Cramb, Avon's vice chairman of the developed market group and interim chief finance officer.

In 2008, Avon said that it had started an internal investigation into whether it had violated the Foreign Corrupt Practices Act, which bars U.S.-linked companies from paying bribes to officials of foreign governments.

In the report, Nicholson said that she had recently met with Cramb, who served as CFO starting in 2005 and became interim CFO in February.

While Avon has expanded its initial internal investigation in China to other international markets, it appears at this point that the real wrongdoings are confined to China, Nicholson wrote in her May 25 research note.

She raised the risk rating on Avon to high from medium and kept her buy rating on the shares.

That contact between Cramb, a longtime executive in the household products industry, and Nicholson, a longtime analyst in the sector, is the focus of the government's Regulation FD investigation that Avon disclosed last week, said the person, who asked not to be named.

Avon said on Tuesday that it would not comment on ongoing investigations, and that it was cooperating in the matter. A Citi spokeswoman and an SEC spokeswoman declined to comment.

Shares of Avon fell 3.4 percent to $17.66 during Tuesday's broad market sell-off. The shares have fallen 39.2 percent so far this year and are down 41.1 percent from their closing price on May 24, the day before Nicholson's note was issued.

FAIR DISCLOSURE

The U.S. Securities and Exchange Commission adopted Regulation FD, short for fair disclosure, in 2000 to prevent companies from tipping off analysts and investors about material information.

Regulation fair disclosure ensures that either everybody knows a piece of information or nobody knows a piece of information, said Michael Robinson, senior vice president at Levick Strategic Communications in Washington, D.C. and former director of public affairs at the SEC. Regulation FD bans selective disclosure.

Nicholson's report came at a time when investors were concerned that the probe had expanded into other countries where Avon operates.

Avon has already poured tens of millions of dollars into its international investigation which it started in China and then extended to other countries, which it has not named.

The world's largest direct seller of cosmetics, which was started by a bookseller 125 years ago, said last week that it no longer expected to meet its revenue and operating margin targets for 2011.

At the same time, Avon said that it had received a subpoena from the SEC on October 26. Avon said in its quarterly filing that the SEC was seeking information from the company about its contacts and communications with certain financial analysts and other representatives of the financial community.

The company did not disclose which people or information were at issue.

However, the person familiar with the matter said on Tuesday that the SEC's investigation had been prompted by a May 25 report issued by Nicholson.

China seems to be the focus of the criminal investigation, and it seems to be the area of most genuine concern, Nicholson wrote in the report.

The Citi report included other details that Avon had not previously addressed in filings, quarterly calls or public meetings.

According to the report, Cramb told Nicholson, for example, that he had not been involved in the selection of incoming CFO Kimberly Ross. Avon announced her appointment on May 23.

Nicholson also wrote in the report that Cramb told her that, going forward, new compliance infrastructure Avon put in place in response to the bribery investigation would cost more than 1 cent per share, and that allegations of lax internal controls at Avon were misplaced.

Avon has fired several of its China-based managers, and has said that it expanded its investigation and a review of its compliance program to additional countries, but the company has limited its discussion of any federal probes into the matter.

Federal prosecutors have been examining whether the company paid bribes to Chinese government officials in order to change a crucial direct-marketing law there or to get a new license, people familiar with the matter have said.

The SEC has brought few fair disclosure cases since 2005, when a federal judge dismissed its case against Siebel Systems and said the SEC's excessive scrutiny would force corporate management to become linguistic experts.

One exception is Office Depot Inc, which paid $1 million last year to settle allegations that it had signaled to analysts that it would not meet quarterly earnings targets.

Cramb joined Avon as its CFO in late 2005 after a 35-year career at Gillette Co, including serving as the razor maker's CFO from 1997 to 2005.

(Reporting by Aruna Viswanatha in Washington D.C. and Jessica Wohl in Chicago)