A Lumber Liquidators shareholder filed a class action lawsuit Nov. 26 seeking compensation for damages he says the company caused by the alleged illegal importation of certain wood products and elevated levels of formaldehyde in other wood products.
The lawsuit is filed on behalf of the shareholder, Gregg Kiken, as well as everyone who bought stocks in the company between Feb. 22, 2012, and Nov. 21.
Kiken alleges two misdeeds in his lawsuit. The first is the alleged illegal importation of wood products from China that “two accredited independent laboratories found that formaldehyde emissions from the tested product were over 3.5x the maximum legal limit even though the product was labeled as being [compliant with law].”
That allegation stems from an article on published in June on investment website SeekingAlpha.com. The writer of that article claims he sent the company’s “Mayflower” brand of hardwood flooring for testing, revealing the elevated level of formaldehyde. He said he sent it to Berkeley Analytical and the National Wood Flooring Association for testing.
The lawsuit says that upon the release of that news, the value of James City County-based Lumber Liquidators’ shares declined by $9.40 per share to $76.63, a nearly 11 percent loss.
The second allegation comes from a recently released report by the Environmental Investigation Agency. That group sends undercover investigators around the world to expose environmental crimes. An October report from that group shows a multi-year undercover investigation in the Russian Far East leading to a Chinese-owned wood-flooring company called Suifenhe Xingjia Economic and Trade Company.
According to the lawsuit, Suifenhe Xingjia operates at least three factories and 14 sawmills in northeastern China, which borders the Russian Far East. The EIA report claims Lumber Liquidators is that company’s largest customer. It then alleges that company conducts illegal logging operations in the Russian Far East by falsifying documents and bribing local officials.
Lumber Liquidators and Suifenhe Xingjia have done business together since at least 2007, according to the lawsuit. The head of Lumber Liquidators’ sourcing operations visited Suifenhe Xingjia’s offices and sawmills in May 2012 and then made the company its chief Chinese supplier of solid oak flooring.
To read more about how illegal lumber harvesting affects the Russian Far East, check out this article about the endangered Siberian Tiger.
The Wall Street Journal reported in October that EIA had shared the results of its report with the federal government prior to releasing it to the public. On Sept. 26, agents from the Department of Homeland Security Investigations, the Department of Justice and the U.S. Department of Fish and Wildlife Services raided the Toano headquarters of Lumber Liquidators and a retail store in Henrico County. WSJ reported the agents were looking for imported wood products from the Russian Far East.
At the time of the raids, Homeland Security Investigations spokesperson Brandon Montgomery declined to comment on the reason for the raids. The reason was revealed when a man found the plan for the raid in the parking lot of a Henrico County Target where agents had staged before moving out on the raid. In that document, the agents were instructed to search for emails and other documents that would show evidence of the company and personnel in China being aware of illegal harvesting activities.
Lumber Liquidators issued a statement Sept. 27 saying the action by federal authorities relates to “the importation of certain of the Company’s wood flooring products.” The release went on to say “The Company takes its sourcing and compliance very seriously, and is cooperating with authorities to provide them with requested information.”
The agents were searching for alleged violations of the Lacey Act. Laws on the books in Russia criminalize the harvesting of wood in the forests of the Russian Far East, which makes it illegal to import the wood to the U.S. due to the Lacey Act. That law, originally passed in 1900, was amended in 2008 to address several items, including the criminalization of the importation of illegally harvested wood.
The shareholder’s lawsuit says that on Nov. 21, “well known hedge fund manager Whitney Tilson criticized the company for importing illegally sourced timber from Russia in direct violation of U.S. laws. Mr. Tilson explained that the company was only able to maintain its unbelievably high margins, and thus inflate its revenues, as a result of importing illegal timber.”
The lawsuit spells out how the stock tumbled in the immediate aftermath of the release of each piece of news. The stock was trading at $100.69 per share as of Sunday.
Kiken alleges in the lawsuit Lumber Liquidators “made false and/or misleading statements as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects.”
He said the company is in a position to face “large fines, penalties, forfeitures, judgments and/or settlements in connection with government regulatory actions and/or consumer class actions” and that “as a result of Defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the company’s securities, Plaintiff and other Class members have suffered significant damages.”
The lawsuit was filed in U.S. District Court for the Eastern District of Virginia. The company has until sometime in December to respond to Kiken’s complaint.
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