Lumber Liquidators deals with its 15 minutes of infamy

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.
- Lumber Liquidators Linked to Health and Safety Violations – CBS News
- How a 25-Year-Old Sparked Lumber Liquidators’ Stock Plunge – Bloomberg
- Senator Bill Nelson calls for federal probe of Lumber Liquidators – Reuters
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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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.
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.
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.
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.
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.
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.
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.
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.
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.