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?