Lumber Liquidators pays $33M penalty for false statement

Lumber Liquidators headquarters is in Toano. (WYDaily/ File photo)
Lumber Liquidators headquarters is in Toano. (Southside Daily/ File photo)

Toano-based flooring manufacturer Lumber Liquidators has agreed to pay a $33 million penalty for filing a “materially false and misleading statement to investors” about its laminate flooring from China.

The company has been the subject of class-action lawsuits because of its non-compliance with formaldehyde regulations for the flooring it sold in the United States.

Lumber Liquidators entered into an agreement Tuesday with prosecutors in the United States District Court for the Eastern District of Virginia, agreeing to pay $33 million for making false statements about the formaldehyde issue in connection with a March 2015 episode of “60 Minutes,” according to a news release from the Department of Justice.

The penalty is part of a deferred prosecution agreement between prosecutors and the company.

The company also settled with the U.S. Securities and Exchange Commission in connection with “related parallel proceedings” totaling $6.1 million, which is included in the $33 million figure.

The case centered around Lumber Liquidator’s statement to investors — and the public — after the episode of “60 Minutes” aired. The statement broadly denied allegations from the episode, claiming the company had not complied with California Air Resources Board regulations, according to the news release.

“Lumber Liquidators lied to investors and to the public about its compliance with formaldehyde regulations for the flooring it sold – all to protect its stock price,” said Brian A. Benczkowski, assistant attorney general of the justice department’s Criminal Division. “False and misleading financial reports undermine the integrity of our securities markets and harm investors. The Department and our law enforcement partners are committed to doing everything we can to ensure that those who commit securities fraud are held accountable.”

Lumber Liquidators is subject to multiple laws that regulate the use of chemicals in wood products, including formaldehyde emissions from composite wood projects, according to the news release.

In 2013 and 2014, after testing of flooring products, the California Air Resources Board notified Lumber Liquidators their flooring did not comply with formaldehyde emission regulations.

In 2014, foreign and domestic flooring suppliers also notified the company of compliance concerns with Lumber Liquidators Chinese laminate flooring.

“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,” the release said.

Later that year, Lumber Liquidators employees visited two Chinese laminate suppliers to collect and test samples. The flooring manufactured in front of the employees at one supplier later passed deconstructive testing for formaldehyde emissions, but samples taken from other pallets manufactured before the employees arrived — marked for Lumber Liquidators sale — did not pass.

Despite concern about the supplier’s compliance, Lumber Liquidators did not sever the relationship until January 2015.

Before the relationship with the Chinese supplier was cut off, “60 Minutes” retained a testing lab — the same one used by Lumber Liquidators — to test the flooring. “60 Minutes” also obtained undercover videos where the Chinese supplier admitted their Lumber Liquidators flooring did not comply with regulations.

Lumber Liquidators learned of the show’s findings before it aired.

After the “60 Minutes” episode aired March 1, the new York Stock Exchange paused trading of the company’s stock, waiting for Lumber Liquidators to release a statement.

The statement released by the company denied the allegations and said the company complied with 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,” the release said.

Lumber Liquidators suspended the sale of all laminate flooring from China in May 2015.

The $33 million amount includes a $19 million fine and $14 million in forfeiture, representing the sale of 100 percent of the Chinese flooring from Jan. 16, 2015 to May 7, 2015.

Lumber Liquidators has completely replaced its senior executive team and hired new executives who “have displayed a commitment to building an ethical corporate culture,” according to the news release.

Under the agreement entered Tuesday, prosecution on the charge against Lumber Liquidators will be deferred for three years to allow the company to demonstrate “good conduct.”

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John Mangalonzo (john@localvoicemedia.com) is the managing editor of Local Voice Media’s Virginia papers – WYDaily (Williamsburg), Southside Daily (Virginia Beach) and HNNDaily (Hampton-Newport News). Before coming to Local Voice, John was the senior content editor of The Bellingham Herald, a McClatchy newspaper in Washington state. Previously, he served as city editor/content strategist for USA Today Network newsrooms in St. George and Cedar City, Utah. John started his professional journalism career shortly after graduating from Lyceum of The Philippines University in 1990. As a rookie reporter for a national newspaper in Manila that year, John was assigned to cover four of the most dangerous cities in Metro Manila. Later that year, John was transferred to cover the Philippine National Police and Armed Forces of the Philippines. He spent the latter part of 1990 to early 1992 embedded with troopers in the southern Philippines as they fought with communist rebels and Muslim extremists. His U.S. journalism career includes reporting and editing stints for newspapers and other media outlets in New York City, California, Texas, Iowa, Utah, Colorado and Washington state.