Virginia-based Lumber Liquidators, one of the largest flooring retailers in the country, has agreed to pay a $33 million penalty for misleading investors about formaldehyde-laced laminate flooring from China.
The investigation and agreement with federal prosecutors in the Eastern District of Virginia stemmed from a 2015 “60 Minutes” investigation finding dangerous levels of formaldehyde in Lumber Liquidators’ laminate flooring.
The company, which has its headquarters in Toano in southeast Virginia, agreed to pay a $19 million criminal fine and $14 million in forfeiture. Under the deferred prosecution, the Justice Department will dismiss a charge of securities fraud in three years if Lumber Liquidators meets its obligations.
“We have cooperated with this investigation and are pleased to have reached a resolution,” chief executive Dennis Knowles said in a statement. “Lumber Liquidators has undergone a significant transformation in recent years and today is a new company led by an entirely new management team that is committed to our customers, compliance, transparency, and accountability across our organization.”
U.S. Attorney G. Zachary Terwilliger likewise said the company has now “installed experienced executives who have displayed a commitment to building an ethical corporate culture.”
At issue was whether the flooring met California’s formaldehyde emissions standards for composite wood products, which have since been adopted at the national level.
The settlement with the Justice Department, filed Tuesday in federal court in Richmond, did not make findings regarding the safety of the flooring. But the Centers for Disease Control and Prevention found that the level of the formaldehyde in the flooring at issue would increase a person’s risk of cancer and could cause respiratory problems for people with asthma, as well as eye, nose and throat irritation for anyone.
Some of the flooring emitted more formaldehyde, “60 Minutes” reported, than the labs the show’s investigators used had ever seen. A medical expert told CBS that children would be particularly at risk of respiratory problems with extended exposure to that amount of formaldehyde.
Lumber Liquidators denied the allegations aired by “60 Minutes” at the time, according to prosecutors, and misled investors by withholding internal information that backed up the report. Company officials declined to comment Tuesday beyond Knowles’s statement.
The company has already agreed to pay $36 million in settlements to 760,000 customers who bought the laminate flooring. The company stopped selling laminate flooring from China in May 2015, and prosecutors say all employees involved in wrongdoing were either let go or resigned.
According to the court records, in 2011 Lumber Liquidators began directly buying laminate flooring in China, helping increase profits. Laminates accounted for about 20 percent of the company’s $1 billion in sales in 2014 and had the highest profit margin of any type of flooring.
That year, prosecutors wrote, the company got warnings from suppliers in China and an American flooring company about complying with California’s formaldehyde emissions standards. On a trip to China, employees found evidence that a supplier was using product that did not meet those standards. When “60 Minutes” began investigating and found high levels of formaldehyde in Lumber Liquidators’ products, the company’s internal probes broadly backed up the show’s findings. Its own tests showed the flooring released too much formaldehyde to be sold in California, and an audit of one supplier found inconsistent record keeping and other concerns.
But Lumber Liquidators kept using the same suppliers and solicited from them denials of any wrongdoing, according to court documents.
“The fact they can get our vendors saying this is horrible,” one executive wrote another concerning the CBS broadcast. “Do we have an issue with . . . our relationships with vendors. That they so willingly throw us under the bus.” In another email, the executive said that they had to get the vendors on video “rescinding their statements” to CBS.
Against advice from lawyers, prosecutors said, the company pushed back on the “60 Minutes” report in a statement to investors by citing the denials from their Chinese producers.
“The suppliers could not verify the identity of the individuals appearing in the videos,” the company wrote in a message reproduced in the court filings. “One of the suppliers featured questioned whether the product shown was actually from its factory.”
Just a few days later, Lumber Liquidators stopped selling all Chinese laminate flooring. But the company had made $13.9 million from such sales since January 2015, prosecutors said, when executives concluded they had to stop using one Chinese supplier because of the formaldehyde concerns.
“Lumber Liquidators lied to investors and to the public about its compliance with formaldehyde regulations for the flooring it sold — all to protect its stock price,” Assistant Attorney General Brian Benczkowski said in a statement.
The company paid $23 million in sanctions, fines and penalties in 2016 for selling wood smuggled from the Russian habitats of endangered tigers. But that settlement did not address the formaldehyde issue that had at the time just sparked new lawsuits.