TOANO, Va. – A Virginia-based retail company has agreed to a $33 million penalty for securities fraud.
Lumber Liquidators Holdings, Inc. agreed to the penalty for filing a materially false and misleading statement to investors about the sale of its laminate flooring from China to its customers in the United States.
Lumber Liquidators is a public corporation headquartered in Toano and one of the largest retailers of flooring products in the United States.
The company entered into a deferred prosecution agreement in connection with a criminal information filed on Tuesday charging the company with securities fraud.
“This resolution holds Lumber Liquidators accountable for misleading the investing public,” said G. Zachary Terwilliger, U.S. Attorney for the Eastern District of Virginia. “It also recognizes that the company has cooperated with the government’s investigation, completely replaced its senior executive team, and installed experienced executives who have displayed a commitment to building an ethical corporate culture. We will continue to ensure that market participants can trust information communicated by public companies when making investment decisions. My thanks to our prosecutorial team and our investigative partners for their outstanding work on this case.”
The case was mostly focused on Lumber Liquidators knowingly filing 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 regulations.
“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.”
Court documents filed as part of the DPA say that 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 made an announcement 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.
“This penalty should serve as a warning to other corporations who seek to mislead investors,” said David W. Archey, Special Agent in Charge of the FBI’s Richmond Field Office. “FBI Richmond is grateful for the commitment to this case of its partners at the U.S. Attorney’s Office, the Justice Department’s Fraud Section, IRS Criminal Investigations and the U.S. Postal Inspection Service.”
Foreign and domestic flooring suppliers alerted Lumber Liquidators of CARB compliance concerns related to the company’s Chinese laminate products in 2014. In February of that year, Lumber Liquidators’ Chinese laminate suppliers requested an increase in price citing concerns about the increased cost of CARB compliant cores and their ability to pass deconstructive testing for formaldehyde emissions.
Around a 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 limited steps to determine the validity of the suppliers’ concerns, and sought to generate support for its position that deconstructive testing was not a valid test method instead.
“Lumber Liquidators knowingly deceived the shareholders they were entrusted to serve,” said Kelly R. Jackson, Special Agent in Charge of IRS-Criminal Investigation (IRS-CI) Washington, D.C. Field Office. “IRS-CI will continue to work diligently with our federal law enforcement partners to ensure that the punishment for such crimes matches the seriousness of the offense.”
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 for testing along with other samples made 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. The samples from the suspect pallet, manufactured before employees arrived, failed deconstructive testing.
“Those seeking to maximize profits while misleading investors should expect to pay a heavy price,” said Peter R. Rendina, Inspector in Charge of the Washington Division of the U.S. Postal Inspection Service. “The U.S. Postal Inspection Service has investigated these kinds of deceptive practices for years to protect investors and the integrity of the marketplace. Postal Inspectors work tirelessly to identify and hold accountable any company who uses the U.S. mail to defraud American citizens.”
Lumber Liquidators visited Supplier A again in September 2014 and January 2015. After those visits, Lumber Liquidators concluded that Supplier A had numerous record keeping 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.
In January 2015, the company’s former senior management team decided to discontinue its relationship with Supplier A due to CARB compliance concerns. However, Lumber Liquidators ordered more laminate flooring from Supplier A that same day.
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 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, 60 Minutes obtained undercover videos from three of Lumber Liquidators Chinese laminate suppliers, including Supplier A, in which the suppliers admitted that the laminates they made for the company 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. However, Law Firm B told these former executives 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.
On March 2, 2015, that next morning, 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 same 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.
To be exact, 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.
Complying with 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 January 16, 2015 through on or about May 7, 2015.
Lumber Liquidators also agreed to implement rigorous internal controls and cooperate fully with the Department’s ongoing investigation, including its investigation of individuals. Under the DPA, prosecution of the company for securities fraud will be deferred for an initial period of three years to allow Lumber Liquidators to demonstrate good conduct.
The U.S. Securities and Exchange Commission (SEC) announced a separate settlement with Lumber Liquidators in connection with related parallel proceedings. Under the terms of its resolution with the SEC, Lumber Liquidators agreed to a total of $6,097,298.42 in disgorgement of profits and prejudgment interest.
The Department of Justice agreed to credit the amount paid to the SEC in disgorgement as part of its agreement. The combined total amount of criminal and regulatory penalties paid by Lumber Liquidators will be $33 million.
This penalty is meant to reflect the nature and seriousness of the conduct, as well as Lumber Liquidators’ ongoing cooperation with the United States and the company’s extensive efforts at remediation.
Among other remedial efforts, Lumber Liquidators suspended the sale of all laminate flooring from China in May 2015; offered consumers in-home testing for already installed flooring; and implemented new policies and procedures regarding compliance with California Air Resources Board (CARB) emission standards and other environmental regulations, sourcing of flooring products, financial reporting and internal controls. The employees involved in wrongdoing either were terminated or resigned from Lumber Liquidators, and the company replaced its executive management team with experienced executives who have displayed a commitment to building an ethical corporate culture.