Lumber Liquidators Settle $33 million SEC Lawsuit

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Lumber Liquidators, a leading American retailer of hardwood flooring, has finally settled their $33 million criminal lawsuits with the DoJ and SEC. The company, founded in 1994 by Tom Sullivan, was embroiled in a class action lawsuit regarding the use of illegal, non-CARB laminate flooring from China.

Who are Lumber Liquidators?

Since its opening, the company has grown tremendously becoming one of the largest retailers of hardwood flooring in North America. Lumber Liquidators now has over 360 stores, over 1,000 employees and revenues of more than a billion dollars a year. Every year in American homes, about 100 million square feet of the company’s cheaper laminate flooring is installed.

In states such as California, laminate flooring must have a CARB certification to show that it has a legal level of formaldehyde in it. This toxic chemical has been linked to an increase in cancer cases in the past and can cause respiratory issues for people with asthma as well as eye, nose and throat irritation for anyone.

Although Lumber Liquidators are an American company, they purchase much of their laminate flooring from China, and according to an enquiry by 60-minutes, their products failed to meet health and safety standards due to increased levels of carcinogenic Formaldehyde.

Exposed by 60-minutes

In 2015, a “60 minutes” news program episode revealed an undercover video of Lumber Liquidators suppliers stating they supplied the company with products that did not meet the regulatory requirements. The general manager of a manufacturing company in China states to the 60-minute investigators “No, no, no… I have to be honest with you. It’s not CARB 2.” CARB2 means it meets California formaldehyde emissions standards. After the investigator asks “can I get this in CARB 2” the manager responds “Yes, you can. It’s just the price issue. We can make CARB 2 but it would be very expensive”.

Why use formaldehyde?

Using high formaldehyde saves the company 10-15 per cent on the price. Lumber Liquidators made false public statements in response to the video. They told their investors that third-party test results of its flooring products proved in accordance with formaldehyde emissions standards and that they stopped sourcing materials from suppliers that did not meet these standards.

Now Lumber Liquidators came to an agreement with the Justice Department’s Fraud Section and the U.S. Attorney’s Office for the Eastern District of Virginia to pay $33 million in criminal fines and forfeiture. However, as part of this deal, the company took no responsibility and admitted no wrongdoing.

Previous scandals

Previously the company in 2016 paid $23 million in sanctions, fines and penalties for selling illegally smuggled wood from Russian habitats of endangered tigers.

Assistant Attorney General Benczkowsli states “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.” Currently, no one in specific has been charged for these faults.

The company cooperated with the government’s investigation by installing new experienced executives who show a commitment to creating an ethical corporate culture. All employees involved in wrongdoing were either terminated or had to resign. They have also subsequently ceased all dealings with this supplier.

Whether Lumber Liquidators were in on this fraud or not, their reputation has been damaged and they will be rocked by this significant fine.