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Lumber Liquidators CEO Resigns

Lumber Liquidators Holdings Inc. Chief Executive Officer Robert Lynch abruptly resigned on Thursday amid controversy that the company sold laminate flooring made in China that contained toxic levels of formaldehyde.

The company’s founder Thomas Sullivan will serve as CEO while the company searches for a permanent replacement.

Mr. Lynch’s departure came less than a month after the company announced its CFO Daniel Terrell is leaving in June.

The company’s stock price has been on a free fall since late February when rumors that CBS’s news program “60 Minutes” was going to air a piece about toxic levels of formaldehyde used in the Chinese-made laminate flooring sold by the company.

The use of formaldehyde, a chemical that is used in the glue used to bind wood particles in wood laminate flooring, under certain levels is legal.

But room ventilation may release the chemical into the air causing serious respiratory illnesses and even cancer when high concentrations of the chemical is present in the flooring, with children being most susceptible group to developing symptoms.

The “60 Minutes” piece featured an investigation conducted by Denny Larson, the CEO of Global Community Monitor and prominent environmental attorney Richard Drury, found that Lumber Liquidators’ Chinese laminate flooring formaldehyde levels were on average 6 to 7 times above California’s permitted standards for formaldehyde emission levels.

“60 Minutes” conducted its own investigation using flooring samples from around the country that found similar results.

Mr. Drury is leading a class action suit against the company and Mr. Larson called Lumber Liquidators to remove the tainted flooring purchased by customers and replace with clean flooring at their cost.

In the program, Mr. Sullivan refuted the validity of the methodology used to test the flooring and said that the company is not required by law to test the levels of formaldehyde in the finished product. He also questioned the intention of those who were alleging wrong doing by the company, which include lawyers who are suing the company and short-sellers of the company’s stock.

The “60 Minutes” piece, spurred a probe  by the U.S. Consumer Product Safety Commission into Lumber Liquidators’ Chinese-made flooring.

And, prior to the “60 Minutes” segment, Lumber Liquidators was under investigation by the U.S. Justice Department which is looking into allegations that the company bought illegally logged wood from Russia to keep its costs down and increase profit margins. The company recently confirmed that the DOJ may file criminal charges against the company.

The Response

During the “60 Minutes” segment, after he was shown a clip of Chinese manufacturers admitting that the levels of formaldehyde used in the flooring shipped to be sold by Lumber Liquidators were not in compliance with California’s CARB 2 regulatory levels, Mr. Sullivan said that the company would investigate those claims.

On March 2, the day after the “60  Minutes” segment aired, the company issued a statement:

“Lumber Liquidators is a leader in safety, as evidenced by our track record of providing our wide range of products to two million satisfied customers across America,” the statement read.

“We comply with applicable regulations set by the California Air Resources Board (“CARB”), which is currently the only regulator of composite core emissions.”

On March 12, Bloomberg News reported that Lumber Liquidators said  it would offer free, third-party testing to customers and may replace some flooring, aiming to show that its products are safe.

April 29, Lumber Liquidators confirmed in a regulatory filing that the DOJ is seeking criminals charges against the company for its illegal foreign sourcing of wood.

On the same day, the company also announced that CFO Daniel Tarrell would step down in June.

On May 7, more than two months after the “60 Minutes” segment, Lumber Liquidators announced that it was pulling its Chinese-made laminate flooring from stores shelves. According to the Wall Street Journal, the company also brought on a “former Federal Bureau of Investigation director to review its sourcing procedures amid widespread concern over the safety of its products.”

On May 21, the company announced that its CEO had resigned.

The Verdict

The company’s initial reaction to deny the allegations is unfortunately as common as it is ineffective and counterproductive.

Reports indicate that Lumber Liquidators stock started to slip before the “60 Minutes” segment aired when investors were warned by the company’s CEO that the show that would portray the company “in an unfavorable light.”

In light of the DOJ probe and knowing that the “60 Minutes” story would portray the company “in an unfavorable light” ahead of time was a missed opportunity to prepare for a proper response.

Pulling the questionable flooring off the shelves, offering customers free testing, and announcing an investigation into the matter are steps the company should have taken on March 2.

And since it seems that cutting corners to bump profit margins was becoming a regular business practice for Lumber Liquidators, the company’s Board should have shown the CEO  the door. Mr. Lynch’s departure should have been deliberate, and not “abrupt” or “unexpected.”

Because the company was so slow to take decisive action to correct its illegal cost-cutting practices, investors lost confidence in the company’s ability to keep its customers and its revenues which was evidenced by its stock price losing more than two-thirds of its value since late February.

As a result, the company will now pay a much heavier price over a much longer period of time as it faces federal investigations, settles lawsuits, scrambles to regain investor trust, and struggles to reestablish credibility with its customers in an attempt to salvage what is left of its reputation. Perhaps, ceasing sales of the flooring in question and replacing the tainted flooring sooner than later was a much cheaper and laudable solution.

 

 

About Elbinha (29 Articles)
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