Lumber Liquidators Agrees to $33 Million Penalty for Securities Fraud

[nitpicker]

https://www.justice.gov/usao-edva/pr/lumber-liquidators-agrees-33-million-penalty-securities-fraud

Department of Justice
U.S. Attorney’s Office
Eastern District of Virginia

FOR IMMEDIATE RELEASE
Tuesday, March 12, 2019

Lumber Liquidators Agrees to $33 Million Penalty for Securities Fraud

RICHMOND, Va. – Lumber Liquidators Holdings, Inc. has agreed to pay a total penalty of $33 million for filing a materially false and misleading statement to investors regarding the sale of its laminate flooring from China to its customers in the United States.
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Lumber Liquidators, a public corporation headquartered in Toano and one of the largest retailers of flooring products in the United States, entered into a deferred prosecution agreement (DPA) in connection with a criminal information filed today charging the company with securities fraud. The case was primarily focused on the fact that Lumber Liquidators knowingly filed a false and misleading statement to investors broadly denying the allegations featured in a March 2015 episode of 60 Minutes, and affirming that the company complied with California Air Resources Board (CARB) regulations.
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According to court documents filed as part of the DPA, Lumber Liquidators was subject to various laws that regulated the chemicals used in wood products, including laminate flooring. Specifically, CARB enforced limits on formaldehyde emissions from composite wood products. In September 2013, CARB announced that it intended to use deconstructive testing to determine whether finished flooring products contained CARB compliant cores. In 2013 and 2014, CARB informed Lumber Liquidators that flooring samples collected from its California stores failed deconstructive testing for formaldehyde emissions. Lumber Liquidators own deconstructive tests of the same products yielded similar results.
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Also in 2014, foreign and domestic flooring suppliers alerted Lumber Liquidators of CARB compliance concerns related to the company’s Chinese laminate products. In February 2014, Lumber Liquidators’ Chinese laminate suppliers requested a price increase citing concerns about the increased cost of CARB compliant cores and their ability to pass deconstructive testing for formaldehyde emissions. Approximately one month later, a United States laminate supplier informed Lumber Liquidators that it tested a Chinese laminate sample purchased from one of Lumber Liquidators’ stores in the United States and that the sample emitted high levels of formaldehyde. Lumber Liquidators took only limited steps to determine the validity of the suppliers’ concerns, and instead sought to generate support for its position that deconstructive testing was not a valid test method.
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To that end, Lumber Liquidators visited two Chinese laminate suppliers in August 2014 to collect and test samples. While collecting samples from Supplier A, a former Lumber Liquidators employee noticed a pallet of laminate flooring that factory workers indicated was Lumber Liquidators’ product, but the label on the pallet indicated that it contained non-CARB compliant cores. The former employee took samples from this suspect pallet for testing along with other samples manufactured in his and other employees’ presence. Laboratory A later provided Lumber Liquidators with test results that undermined the company’s criticisms of deconstructive testing. All but one of the products manufactured in front of the Lumber Liquidators’ employees passed deconstructive testing. But the samples from the suspect pallet, manufactured before employees arrived, failed deconstructive testing.
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Lumber Liquidators again visited Supplier A in September 2014 and January 2015. Following these visits, Lumber Liquidators concluded that Supplier A had numerous recordkeeping anomalies, refused to implement CARB-related corrective action requests made by the company, and could not reliably demonstrate that its laminate flooring contained CARB compliant cores. Accordingly, in January 2015, the company’s former senior management team decided to discontinue its relationship with Supplier A due to CARB compliance concerns. Nevertheless, that same day, Lumber Liquidators ordered more laminate flooring from Supplier A.

In Fall 2014, Lumber Liquidators learned that the CBS news program, 60 Minutes, also retained Laboratory A to conduct deconstructive testing of Lumber Liquidators’ products. Shortly thereafter, Laboratory A secretly notified Lumber Liquidators that the deconstructive tests commissioned by 60 Minutes yielded significant test failures. The lab then allowed a former Lumber Liquidators employee to review and take pictures of these test results. In December 2014, the lab owner told former Lumber Liquidators employees that a high deconstructive test failure was a strong indicator that the product was not CARB compliant.

On Feb. 25, 2015, Lumber Liquidators learned that 60 Minutes obtained undercover videos from three of its Chinese laminate suppliers, including Supplier A, in which the suppliers admitted that the laminates they made for Lumber Liquidators were not CARB compliant. Lumber Liquidators’ former senior management team retained outside counsel from Law Firm B to interview the suppliers in the undercover videos. On Feb. 28, 2015, Law Firm B informed former Lumber Liquidators executives that it recorded one person from each of the three factories in the undercover videos saying that the product they sold Lumber Liquidators was CARB compliant. Nevertheless, Law Firm B told these former executives that they had limited confidence in the suppliers’ statements because, among other things, a former Lumber Liquidators inspector alleged that suppliers offered bribes to him and other company employees.

On March 1, 2015, 60 Minutes aired a segment alleging that laminate flooring sold by Lumber Liquidators in the United States did not meet CARB emission standards for formaldehyde. The episode featured the undercover videos and test results previously shown to Lumber Liquidators.

The next morning, March 2, 2015, the New York Stock Exchange halted trading of the company’s stock, with the expectation that Lumber Liquidators intended to issue a statement responding to the 60 Minutes episode. Later that morning, Lumber Liquidators, through its employees, knowingly filed a false and misleading SEC Form 8-K broadly denying the allegations in the 60 Minutes episode and affirming Lumber Liquidators complied with CARB regulations. Specifically, Lumber Liquidators omitted material facts from investors, including: CARB’s investigation of the company’s Chinese laminate products; its own deconstructive test results; the company’s decision to discontinue sourcing from Supplier A due to CARB compliance concerns; and evidence that undermined the suppliers’ statements that all products provided to Lumber Liquidators were CARB compliant.

Pursuant to its agreement with the Department of Justice, Lumber Liquidators agreed to pay a total criminal penalty of $33 million to the United States, including a criminal fine of approximately $19 million, and approximately $14 million in forfeiture. This amount represents the company’s net profits from the sale of 100 percent of its Chinese laminate from on or about Jan. 16, 2015 through on or about May 7, 2015.
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