Lumber Liquidators deals with its 15 minutes of infamy

Discussion
Mar 05, 2015
Matthew Stern

This week, a scandal struck flooring retailer Lumber Liquidators that is pushing the discussion of how much retailers need to know about their products to the front of the headlines. An episode of "60 Minutes" featured an expose on the company, which has been accused of selling Chinese-made laminate flooring that contains levels of potentially carcinogenic formaldehyde exceeding the legal limit in California.

Denny Larson, executive director of a non-profit called Global Community Monitor, and environmental attorney Richard Drury, purchased Chinese-made flooring at the company’s California locations and had it tested at a lab. The flooring contained levels of formaldehyde six to seven times — and sometimes 20 times — higher than that allowed by California’s CARB 2 standard.

Lumber Liquidators CEO Tom Sullivan claims that the negative attention was the work of groups of lawyers looking to sue the company and short-sellers.

Short-sellers were in fact the people to first bring attention to the issue. According to a Bloomberg article, hedge eund manager Whitney Tilson, who was shorting the stock, pitched the story to "60 Minutes".

According to a Bloomberg article, Tilson had contacted individual investor Xuhua Zhou, who in 2013 noticed complaints online about the company’s Chinese-made laminate from Lumber Liquidators and purchased some in order to have it independently tested. Those tests revealed elevated formaldehyde levels. On June 30, 2013, Zhou posted a message on Seeking Alpha advocating shorting the stock because of the formaldehyde levels, causing a stock drop at that time.

On "60 Minutes", Tilson claimed that the reason for the company using the non-CARB 2 compliant wood was "greed, plain and simple."

Sullivan, on the other hand, maintained that the company is compliant, sells a good product at a good price, and saves money by buying at volume and having low overhead costs.

Later in the segment, 60 Minutes reporters, who went undercover at three mills in China that supply Lumber Liquidators, taped mill employees who freely admitted to falsely labeling the laminate as CARB 2, stating they can make CARB 2-compliant laminate, but it drives the price up.

Mr. Sullivan, when shown the footage by Anderson Cooper, said that it was "not anything [the company] can condone in any way to save a cent," and said they would investigate immediately.

In a related development, U.S. Sen. Bill Nelson, the ranking Democrat on the Senate Committee on Commerce, Science and Transportation Committee, has sent letters to the Consumer Product Safety Commission (CPSC), the Centers for Disease Control and Prevention (CDC) and the Federal Trade Commission (FTC) asking for an investigation into the matter.

Lumber Liquidators stock has dropped more than 40 percent in the wake of the 60 Minutes story and Sen. Nelson’s called for a federal probe of the company’s practices.

What responsibility, if any, do companies have to make sure products they sell comply with environmental and health regulations? If the claims of unsafe levels of formaldehyde prove to be true, should Lumber Liquidators be held responsible for the costs associated with the removal and replacement of the tainted wood laminate flooring it sold to consumers?

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13 Comments on "Lumber Liquidators deals with its 15 minutes of infamy"


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Bob Phibbs
Guest
5 years 7 months ago

What is it with Wall Street shortselling retailers? This was a hit job to make money on the stock going down. If the claims are true, and there had been all of these complaints, it’s a little hard to believe that some state would not have investigated it.

I tend to believe Sullivan that this was news to them. Plenty of other manufacturers have been caught in using offshore suppliers doing things without the brands’ knowledge. While Ackerman has led a huge push to bring Herbalife down, this is the first I’ve heard of activist investors going straight to the news media.

Frank Riso
Guest
5 years 7 months ago

When dealing with products made in the U.S. and especially with products made outside of the U.S., a company has an obligation to its customers to ensure that the products are safe and comply in any and all ways to protect both the environment and its population. We have seen a number of cases where retailers fail to investigate and monitor the factories that manufacture their products. Poor quality, child labor and now harmful levels of formaldehyde are just examples of why it is necessary to monitor them.

Here in the U.S., the manufacturer would bare the blame, but when dealing with factories outside of the U.S. I do believe the retailer has that responsibility and they should be liable for items sold to consumers. Lumber Liquidators needs to do the right thing now so that they will have a future in retail.

Max Goldberg
Guest
5 years 7 months ago

If the issue first arose in 2013, why does it take a 60 Minutes story in 2015 to get the CEO’s attention? Companies need to take compliance seriously. There have been numerous instances of substandard products and ingredients coming from China, as well as allegations of poor working conditions. Companies need to police this themselves or risk public rebuke and financial backlash when allegations come to light.

Lumber Liquidators is facing years of litigation and millions of dollars in costs. They need to get on top of this situation in order to reassure the public that the products they sell meet all regulations and are safe.

Jerry Gelsomino
Guest
5 years 7 months ago

Companies who sells products manufactured elsewhere ultimately bear the responsibility to ensure that a consistent quality is sold, not only at the time the contract to produce is signed.

Gordon Arnold
Guest
5 years 7 months ago

If Lumber Liquidators were seen as free from false advertising and awareness of product carcinogen content levels exceeding advertised levels this would not be an issue and the short-sellers would be in jeopardy. After viewing the 60 Minutes show we might see Lumber Liquidators facing formal investigations with class action lawsuits following. If, when all is said and done, Lumber Liqidators is proven free from any guilt actual or implied there will be little or no recourse for the company to regain public trust and an intact market position. This is how poorly the laws we have protect the innocent from harm caused by exploitation. This is a good example of just how poor a job our lawmakers in all branches of government are doing.

Paula Rosenblum
Guest
5 years 7 months ago
Slightly off-topic, but worthy of note, back when I worked at iParty (in the late ’90s and early 2000s), Lumber Liquidators headquarters were actually right next door to our offices. Tom is a really good guy, and I’ve been surprised to see how much the company has grown. It’s pretty profound. On a personal note, I hope he and the company can work through this issue. Okay, I’ve said it. But there is a reality here that everyone ignores. Quality of products coming out of China has always been spotty. Down here in South Florida, we have entire building complexes that had to be torn apart because the builder bought Chinese drywall that contained a toxic material in it. I think that was formaldehyde too (I think). In the mid-2000s, a key recipe ingredient in heparin was sourced in China and caused the FDA to do a recall after many were sickened. The public explanation was that “the agency didn’t have the ability to quality-confirm the ingredients. They were only able to confirm the final… Read more »
Ben Ball
Guest
5 years 7 months ago

Short-sellers using the press to attack targets is nothing new. It just so happens that this time the vehicle of attack was consumer health rather than the usual questioning of “financial rigor” or some ridiculous “sky is falling” claim. And Seeking Alpha is the primary forum for this stuff.

Stock manipulation complaints aside though, the answer to Matthew’s question is that it simply doesn’t matter what obligation the retailer has—it only matters that the public, through the press of course, assigns them that obligation. The rest is just “liquidation” of a different sort.

Oh, and the short-sellers buy another home in South Beach. There is that part too I guess.

Tom Redd
Guest
5 years 7 months ago

This was a surprise to me. Being a wood buying guy I always see Lumber Liquidators as a group with top-grade lumber. Now who knows if the California levels of formaldehyde are even reasonable. Most of their rules for products—especially motorcycle exhaust rules, are ridiculous—but that is California.

Lumber Liquidators may not have even known that the levels were that high. They should create a program to assist their customers with this challenge, but not bear the total cost of replacement. Get the manufacturer for that.

Gene Detroyer
Guest
5 years 7 months ago
The interviews with the Chinese manufacturers give a very clear indication of lack of understanding of business culture between two countries. Lumber Liquidators goes to the manufacturer and tells them they want CARB-2 compliant and labeled product. The manufacturer says it will cost 100X. Lumber Liquidators says “too much” and the negotiations begin. Lumber Liquidators assumes that they are negotiating on the original specs. The manufacturer assumes that as soon as Lumber Liquidators said that they wanted a better price, Lumber Liquidators would understand (wink, wink) that the manufacturer would cut the quality in some way that was never to be spoken of. Even as the contract is signed for the new lower price with all the original specs in it, the manufacturer thinks Lumber Liquidators understands that they are complicit in producing and selling the lesser product, no matter what is written. Whose liability? It doesn’t matter if it is naivety or greed, it is the liability of Lumber Liquidators. The Chinese manufacturers were just doing business within the framework of the business culture… Read more »
J. Kent Smith
Guest
5 years 7 months ago

Perhaps another way to answer the question is: If the retailer is NOT responsible for the products they sell, who is? The reality is that everyone in the product chain bears responsibility. There’s a legal position here I’m not in a position to discuss—I see this more as a warning and reminder around due diligence, the value of long standing trusted relationships, and of course the reality is that far flung places are harder to police. I’ll side step the question of who should replace, ultimately the courts will decide. Make no mistake about it, this will be a landmark case. And I feel badly for the folks at Lumber Liquidators, everyone I’ve met there seemed genuine and nice.

Ed Rosenbaum
Guest
5 years 7 months ago

Lumber Liquidators certainly has a major responsibility to insure and assure the public the products they sell meet environmental and health regulations. That is first and foremost in this soon-to-be fiasco. Next, what is the driver for Wall Street’s involvement? Certainly they do not have a human interest. So are they trying successfully to drive down the stocks for the short-sellers? Yes is my guess. It now has to be a warning to all companies bringing in stock from overseas for resale. Dot your i’s and cross your t’s because a bigger wolf is now watching and waiting for more profits from your mistakes.

W. Frank Dell II
Guest
5 years 7 months ago
Product responsibility is a grey area. Some want to believe the retailer is responsible. For most consumer products this is neither practical nor realistic. Retailers stocking thousands of products do not have the staff, education, experience and capability to test all the products they sell. They rely on the manufacturer. They are the ones with the knowledge base to insure a safe product. Manufacturers that produce products overseas usually define the formulation, quality control and testing. There have been many problem with China-produced products. In the construction industry it was formaldehyde in sheet rock that had to be replaced. The real issue for retailers is private label or store brand product. Most retailers rely on their suppler for technology and quality control. When product is imported, the issue gets complex due to different laws and legal systems. Lumber Liquidators should research and test to determine the extent of the issue. An approach is to identify customers who purchased or likely purchased the product. A good plan is to work with the customers to resolve the… Read more »
Ed Dennis
Guest
Ed Dennis
5 years 7 months ago
Lumber Liquidators is toast. I saw the broadcast and when a supplier is asked if their product is legal and the manufacturer directly states no it’s not to a third party, you know that Lumber Liquidators “only had to ask” to get the same answer. It was obvious that Lumber Liquidators was only interested in price and didn’t give a damn about consumer health and they will be held responsible for their lack of over site of their suppliers. Besides, if you have ever had any dealing with the Chinese you know they will only do what is speced and inspected. It’s obvious that Lumber Liquidators did a poor job with specs and did less regarding inspection. I don’t think Lumber Liquidators will ever volunteer to replace bad product it sold. I got the distinct idea Lumber Liquidators would keep this tied up in court for as long as possible, probably until they declare bankruptcy. I expect ownership to flee the U.S. and hole up in some country with no extradition treaty. These are the… Read more »
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