Posted on March 13 2019
Lumber Liquidators $33million
To understand the context of the recent DOJ announcement, we should probably hop in a Delorean and go back to 2015.
At the time, this October 2015 60 Minutes segment made a few ripples. 60 Minutes did what reporters should do, they followed the facts and then presented their findings to the American people. Their findings showed that Lumber Liquidators sold substandard wood flooring from China that had unacceptable (aka unsafe) levels of formaldehyde. At the time Lumber Liquidators vociferously pushed back on the 60 Minutes Report.
In 2015 Lumber Liquidators purchased nearly 40% of their laminate flooring from China. In March of 2016 the Centers for Disease Control and Prevention released a revised report and found heightened risk of cancer. You can view the whole CDC docket/report file here.
As further explained on page 30, the CDC reexamination included wider testing.
sensitive individuals who are exposed chronically in their homes (the elderly, children, asthmatics, and people with compromised cardiopulmonary systems) are more likely to experience health effects from formaldehyde exposure at lower levels than occupationally-exposed, healthy adults. Floorboards evaluated in this assessment may emit between 185 and 930 µg/m3 of formaldehyde to the indoor environment, resulting in an exposure high enough to cause irritant effects in sensitive and in normal, healthy individuals.
Although largely accepted by the Scientific Community that formaldehyde is a known carcinogen...the question really remains on the testing methodology along with age of the home and product. On the surface the CDC explained that in general Formaldehyde serves as an inhaled irritant and is particularly bad for children and the elderly
Department of Health and Human Services (DHHS) and the International Agency for Research on Cancer (IARC) have characterized formaldehyde as a known human carcinogen based on studies of inhalation exposure in humans and laboratory animals
Ultimately the CDC issued an updated report, which revised numbers it’s previous numbers from CDC released a report Feb. 10 that linked the Chinese-made laminate to formaldehyde and warned that exposure could lead to a low risk of cancer, affecting possibly 2 to 9 people out of 100,000. The revised numbers are below:
6 and 30 people per 100,000 are estimated to be at risk of cancer and found to have a three times higher risk of causing cancer than previously stated. This revises the CDC’s own findings.
We estimated the cancer risk to be between 6 and 30 extra cases for every 100,000 people breathing in formaldehyde from this type of flooring all day, every day. To put these numbers into perspective, the American Cancer Society estimates that up to 50,000 of every 100,000 people may develop cancer from all causes over their lifetimes.
Suffice to say that Lumber Liquidators is in it, as furthe described by their recently filed SEC form 8-K, which discloses the Deferred Prosecution Agreement found on page 1.01 and reads in part (for the record this is some excellent lawyering speak)
Deferred Prosecution Agreement:
the Company is required, among other things, to
(1) pay a fine in the amount of $19,095,648 to the United States Treasury,
(2) forfeit to the U.S. Attorney and the DOJ the sum of $13,904,352, of which up to $6,097,298 will be paid by the Company to the SEC in disgorgement and prejudgment interest under the Order and
(3) adopt a new compliance program, or modify its existing one, including internal controls, compliance policies, and procedures in order to ensure that the Company maintains an effective system of internal account controls designed to ensure the making and keeping of
fair and accurate books, records and accounts, and a rigorous compliance program designed to prevent and detect violations of federal securities laws throughout its operations.
The Company will also be required to report to the U.S. Attorney and DOJ annually during the term of the DPA regardingremediation and implementation of the compliance measures described in the DPA.
Securities Exchange Commission:
This link will take you to the SEC ADMINISTRATIVE PROCEEDING
File No. 3-19104
the SEC noted that upon the airing of the 60 Minutes 2015 Segment Lumber Liquidators made the following pronouncements, all of which were untrue, false and misleading. In addition to the $33million:
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. Thus, the combined total amount of criminal and regulatory penalties paid by Lumber Liquidators will be $33 million.
Lumber Liquidators responded with a series of public statements designed to assure the market that it had robust product testing and regulatory compliance programs. Lumber Liquidators stated that: (a) its fiberboard core manufacturers were all certified by CARB; (b) it had documentation to prove regulatory compliance; (c) its products underwent rigorous third-party testing that proved and ensured CARB compliance; (d) it discontinued sourcing from suppliers that were unable to meet the company’s purportedly rigorous product quality standards; and (e) the suppliers purportedly in the video had recently confirmed to Lumber Liquidators that they were not in the video and that all products they sold to the company were CARB-compliant.
Those statements were materially false and misleading. By December 15, 2014, Lumber Liquidators knew or recklessly disregarded that its largest Chinese supplier had: (a) used fiberboard cores that were not from a CARB-certified manufacturer; (b) failed third-party deconstructive testing for formaldehyde emissions; and (c) been unable to produce documentation evidencing CARB compliance.
Nonetheless, Lumber Liquidators continued sourcing product
from that same Chinese supplier. Lumber Liquidators officials also recognized two of the factories and one factory employee in the video footage as its suppliers.
Department of Justice & Lumber Liquidators DPA
Now let’s see what the DOJ’s Filing, this link will take you to Lumber Liquidators two page Criminal Information:
The 52 page Deferred Prosecution Agreement can be found here it is one helluva read. Essentially Lumber Liquidators gave up nearly all their rights as a “deal” to NOT be criminally prosecuted by the Department of Justice and the SEC. What is interesting is it is possible that the Attorneys General for CA and./or VA could pursue criminal charges against them, but to my knowledge nothing is slated in those respective AG offices.
Page 2, paragraph 2 is the whole enchilada and retried beans (Lordy I’m craving some Anita’s, don’t judge its excellent TexMex food in the DMV, yes DC, MD, VA we call it the DMV)...
LUMBER LIQUIDATORS admits, accepts, and acknowledges that it is
responsible under United States law for the acts of its present and former officers, directors,employees, and agents as charged in the lnformation, and as set forth in the attached Statement ofFacts, and that the allegations described in the information and the facts described in the attached Statement of Facts are true and accurate
Page 3, paragraph 4 (b), the DOJ discloses that initially Lumber Liquidators agreed to cooperate with the DOJ and respective investigators and then without warning Lumber Liquidators “changed course” by replacing their Counsel and then engaging in what Defendants typically do, death by a thousand paper cuts. In my opinion Lumber Liquidators made the pivot to un-cooperative to “buy” time. Meaning the more you obfuscate the more time you have to bury the evidence, I certainly do not think that’s an effective defense strategy. Especially when you have the full weight of multiple Government Agencies coming down on you it’s actually the best course of action to be a proactive cooperator otherwise the Government will be all up in your grill.
To Lumber Liquidators credits they did proactively make many changes to their Quality Control, disclosure and termination of employees who engaged in wrong doing, as detailed on page 4, paragraph 4(c)
These prior corrective actions resulted in the criminal penalty reduction of:
the Company received a reduction of $370,444 off the bottom of the otherwise-applicable U.S. Sentencing Guidelines fine range;
As noted on page 5, paragraph 5 there is an ongoing investigation and Lumber Liquidators is now obligated to fully and forthrightly cooperate with Investigators here in America and other Foreign Governments. For those of you who may not understand why Lumber Liquidators would now cooperate given their past history of being less than cooperative, this agreement enforces cooperation. Should they pivot back to being uncooperative then the DOJ would proceed with criminal prosecution. Ergo it is within the best interests of Lumber Liquidators to continue cooperating
For those of you who may not understand, perhaps this is the best way to explain the position Lumber Liquidators is now in: until further notice the Government owns them. Any record, any documentation any current and/or former employee Lumber Liquidators shall produce otherwise the Government can “un” Defer the Criminal Prosecution.
The criminal fines (don’t conflate this matter is not a civil matter) are not limited to the current $19+Million meaning it is plausible as the investigation continues the Company could face additional criminal fines.
The forfeiture is just savage, hence why I linked to the SEC Order, as those funds are subtracted from the following forfeited aka SpicyFiles’ most favorite legalese terminology ddisgorgement of $13,904,352.00 which represented the profits Lumber Liquidators made from January 16, 2015 to May 7, 2015 of the Chinese laminate flooring they sold here in America.
I’ll admit the Conditions of Release might appear heavy handed but understand this is the DOJ’s commitment to Justice and holding those responsible for the unlawful acts accountable. Based on the intitial reading it appears the DOJ has its sights set on former Lumber Liquidators Executives and other Senior Management.
On the upside once the term of the Agreement is reached, and provided Lumber Liquidators does not breach the agreement, six months from the Agreement Term being reached the Government:
...shall seek dismissal with prejudice of the lnformation filed agains LUMBER LIQUIDATORS described in Paragraph l...
I will say this is a brilliant trigger within the Agreement and it is clearly weighted towards the Government but given the history of Lumber Liquidators it actually makes a lot of sense, it’s almost like a preemptive gag order. <snort>
Now some of you may have overlooked the various departments within the DOJ, this is when you can clearly read the signatory page...for the record having the Criminal Division of the DOJ Fraud Section probably means Lumber Liquidators knew they were up the creek sans paddle.
Again this link will take you to the 52 page Deferred Prosecution Agreement, it’s a worthwhile read.
Upon the public release of this resolution AUSA Terwilliger stated the following:
“This resolution holds Lumber Liquidators accountable for misleading the investing public...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.”
This was a multi-agency initiative, involving the FBI, the Justice Department’s Fraud Section, the IRS Criminal Investigation, the U.S. Postal Inspection Service and the Securities Exchange Commission. Weird how we never hear any praise from the Trump Administration as it relates to big deals like this?
LUMBER LIQUIDATORS Lobbying:
Oh but before I forget, let’s look and see who and what Lumber Liquidators hired to lobbying because that’s just how things go in DC. Mo’ Money Mo’ Problems...
In December 2017 Mercury lobbied on behalf of Lumber Liquidators for the following areas:
Product testing methods for regulatory compliance of MDF products, CDC, CPSC, EPA oversight (all related to the Formaldehyde in the imported Chinese laminate flooring) hence why I included the CDC reports and highlighted the CPSC..although the EPA totally slipped my radar. See 2017 Q4 House LDA $30,000.00 Filing found here.
See Q3 2017 $50,000.00 House LDA Filing found here. In sum Lumber Liquidators spent $190,000.00 in Lobbying during 2017
2015 (the same year as the 60 Minutes segment) Lumber Liquidators hired Mercury and subsequently spent, $280,000.00 in Lobbying specifically for issues related to Formaldehyde in the Chinese made/imported laminate flooring, see Q2 2015 House LDA Report, found here.
Also just because I’m not on Twitter you do get if I see you lifting my research and passing it off as your own that it is super insulting. Meaning you are taking someone else’s work, it’s insulting AF, do you see me engaging in plagiarism? NOPE. Because in my profession you do not, engage in plagiarism. That’s enough to get you black listed for any decent firm for life. We take plagiarism super seriously. So don’t be that twitter douche canoe otherwise...either properly attribute or do your own research but taking another’s and passing it off as your’s is beyond intellectually dishonest, lazy and it’s shady AF. Otherwise I’ll start referring to you as Melanie.../snort\
P.S. work is super busy, it’s weird how productive I’ve been as of late, so I may not be able to live blog during the Manafort Hearing, given I’m going to be in the black hole of silence aka depos are super fun on a Wednesday -🌶Spicy Out🌶
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