Lumber Liquidators has agreed to pay a criminal penalty equal to 100% of the profits it made from sales of Chinese made laminate flooring.
From January 2015 to May 2015, the Lumber Liquidators knowingly sold products containing unsafe levels of formaldehyde to consumers in the United States.
According to the EPA formaldehyde exposure can cause “nasal and eye irritation, neurological effects, and increased risk of asthma and/or allergy”
In 2011 the Department of Health and Human Services (HHS) determined that formaldehyde is a known human carcinogen.
According to the Centers for Disease Control and Prevention (CDC) 6 to 30 of every 100,000 customers who purchased and installed the formaldehyde laden products from Lumber Liquidators are expected to develop cancer.
The settlement which was reached in March of 2019 adds up to $33 Million. According to the class action, the settlement which is currently under appeal from two objectors will be paid as $22 Million in cash and $14 Million in credit vouchers.
In a related story, in July 2019, just 4 months after the announced settlement notable millionaire investor Whitney Tilson who famously shorted the Lumber liquidator stock in 2013 is now re-investing in the Company and claiming that Lumber Liquidators is ,”actually pretty good business“.
According to Tilson who initially shorted the stock because he , “suspected the company might be breaking the law” when he noted a 10% spike in the company’s profit margins, now claims the, “company has cleaned up its act“. Tilson also claims, “all the people who are associated with the formaldehyde scandal have long since left the company,”
The Company’s top two Chief’s both stepped down shortly after the scandal broke on 60 Minutes.
CEO Robert Lynch and CFO Daniel Terrell both stepped down in May of 2015.
So it appears that all is forgiven and we should now go back to buying from Lumber Liquidators.
Or should we?
Lumber Liquidators thinks you should.
On their website Lumber Liquidators claims to have made dramatic changes to their organization.
They claim to have, “undergone a complete management transformation” and to now have, “moved aggressively to bring in a new and highly experienced leadership team that would emphasize a culture of sound business practices, honesty, integrity and accountability”
They claim to have, “taken steps to broaden and integrate integrity and compliance throughout our operations, including driving improvements to, and oversight of, Lumber Liquidators’ vendor relationships.”
The Company also claims to have instituted, “strong quality and compliance programs to provide assurance that, no matter where products are sourced,…quality and safety requirements have been met.”
So is this enough to restore public trust?
I often find that CEO’s and CFO’s are given way too much credit. I hold this view whether that be reflective of something good a company does or something bad a company does.
Unless we are talking about a hands-on founder who created the company from scratch, I simply don’t agree that one (or two) individual could have as much influence over the behavior of a company this size.
Certainly these roles are responsible for the strategic direction of a company and they certainly have the power to create policies that drive behaviors, but are we really to believe that none of Lumber Liquidator’s employees with the exception of these two men were responsible for this?
So now with these two guys out-of-the-picture are we supposed to accept that Lumber Liquidators is out there strictly following all of the rules and no other employees were complicit?
The procurement lesson from this story is simple. You get what you pay for. If you want a Cadillac but you budget for a Hyundai, no amount of negotiating will make that Hyundai a Cadillac.
Even an outsider like Tilson was able to recognize that something was not right. How did none of the employees know? If they did know, did any of them speak up? Were they concerned for their own health?
So far we have focused on the unsuspecting customers who purchased and installed the formaldehyde laden products, but what about the installers? What about the material handlers? What about the factory workers in China that made this product?
I’m certainly not advocating a ban of Lumber Liquidators, but I do think it’s too soon to jump back on the Lumber Liquidators bandwagon. Investors like Tilson see Lumber Liquidators stock at an all-time low and think it is a bargain. They want you to think it’s all good to come back to the brand so the stock price can come back up earning them a profit.
The very same greedy behavior that drove the deception from Lumber Liquidators to intentionally mislabel their products is rearing it’s head again…until the next scandal.
What do you think? Has Lumber Liquidators done enough to regain public trust? Have you previously or will you now purchase products from Lumber Liquidators? Tell me your stories.
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