Lumber Liquidators Inc. has agreed to pay $26 million to settle shareholder and derivative suits alleging the company misled investors regarding its importation of hazardous products that used illegally harvested wood from China. Lumber Liquidators will also pay $1 million to settle a contract dispute with its ex-CEO.
The flooring manufacturer, which has faced a series of suits and actions over formaldehyde used in the glue to hold the imported composite flooring together, said in a U.S. Securities and Exchange Commission (SEC) filing that it will pay $26 million and issue stock worth $16 million under the terms of a settlement ending the proposed consolidated securities lawsuit.
The 8-K filing also said ex-President and CEO Robert M. Lynch had agreed to a general release of claims to cooperate with the company, and to certain restrictive terms regarding confidential information, non-competition and non-solicitation of its employees or customers.
Lumber Liquidators came under scrutiny when independent analysts began investigating the company, followed by federal regulators and journalists with “60 Minutes.” The news program, in a March 2015 episode, purchased dozens of boxes of Chinese flooring from Lumber Liquidators stores in four states, and said that independent testing revealed that all but one of the samples surpassed the California limit for unsafe formaldehyde levels, with some going more than 13 times beyond the mark.
Plaintiffs in the securities lawsuit alleged the company was buying engineered and laminate flooring manufactured in China that contained and emitted dangerously high levels of formaldehyde, as well as wood that had been illegally harvested from protected forests in the Russian Far East, home to the critically endangered Siberian tiger and Far East leopard, which are both among the rarest animal species on the planet.
The U.S. Lacey Act bans trading in illegally sourced wood products imported in violation of foreign laws. The company’s allegedly false statements led to its stock price soaring from $19.17 to a high of $115.44 in less than two years, but these values plummeted resulting in a “massive loss in shareholder value” when the company came under suspicion of violating the law, according to the Plaintiffs.
The securities filing also said Lumber Liquidators reached an agreement in principle last month to settle related derivative litigation. Under the terms of that settlement, the company would adopt new stock holding guidelines and make other corporate governance changes, according to the filing.