Lumber Liquidators Holdings Inc.’s top executives are facing a shareholder action by Amalgamated Bank in a Virginia federal court. It’s alleged that they exposed the company to damaging investigations by allowing it to sell illegally sourced and toxic hardwood flooring. The company and its entire board of directors were named as Defendants in the derivative complaint filed last month by Amalgamated Bank, the trustee for an index fund that has invested in Lumber Liquidators stock. The suit alleges that the directors breached their duties to shareholders by failing to prevent possible violations of environmental and consumer protection laws and by failing to disclose the shady practices in public U.S. Securities and Exchange Commission (SEC) filings.
Lumber Liquidators has said it could face criminal charges related to its harvesting of wood from Russia. The company has also been under investigation by the U.S. Consumer Protection Safety Commission (CPSC) and other federal and state regulators following a “60 Minutes” expose regarding unsafe formaldehyde levels in laminated flooring from China. The shareholder complaint states:
Although Lumber Liquidators has been severely injured, defendants have not fared nearly so badly. During the relevant time period, defendants collectively pocketed millions in salaries, fees, stock options, illicit insider trading profits and other payments that were not justified in light of the violations of state and federal law at Lumber Liquidators that occurred on their watch.
It’s alleged in the complaint that Lumber Liquidators’ stock price had been artificially inflated before the illegal practices came to light. Between 2007 and 2011, the company’s profit margins were roughly similar to those of its top competitors, Home Depot Inc. and Lowe’s Companies Inc. However, the suit says Lumber Liquidators’ profit margins increased dramatically after it began purchasing and selling illegally sourced wood from protected Russian forests and toxic wood from Chinese mills.
According to the shareholders, the scandals have exposed Lumber Liquidators to “millions of dollars in potential liability” from investigations and other stockholder suits. It said the allegations had already wiped out more than $1 billion in shareholder equity. The complaint added:
Moreover, these actions have irreparably damaged Lumber Liquidators’ ‘environmentally conscientious’ corporate image. For at least the foreseeable future, Lumber Liquidators will suffer from what is known as the ‘liar’s discount,’ a term applied to the stocks of companies that have been implicated in improper behavior and have misled the investing public, such that Lumber Liquidators’ ability to raise equity capital or debt on favorable terms in the future is now impaired.
The individual Defendants named in the suit include Lumber Liquidators CEO Robert Lynch, founder Thomas Sullivan, and former CEO Jeffrey Griffiths. There will be much more to this story before this litigation is over – stay tuned!
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