Is Lumber Liquidators the New Chinese Drywall?

Last Sunday night, 60 Minutes aired a story on wood flooring products retailer Lumber Liquidators and its laminate flooring products that purportedly contain formaldehyde levels that exceed acceptable standards for consumer products in the US. The laminate flooring products, manufactured in China, could cause debilitating diseases such as acute myelogenous leukemia and nasopharyngeal cancer if allegations about the formaldehyde content are true. Lumber Liquidators is being investigated by the U.S. Department of Justice in connection with the formaldehyde claims, which could lead to significant civil, or even criminal, sanctions for the company. The concerns around formaldehyde content in laminate flooring were identified at the federal level a half-decade ago, evidenced by the passage of the Formaldehyde Standards for Composite Wood Products Act in 2010 which tasked the Environmental Protection Agency with creating a regulatory plan for these types of products that is expected to be enacted by year-end 2015.

The report continues a trend in serious health risks posed by building materials manufactured in China, the most notorious being drywall contaminated with sulfurous gases carbon disulfide, carbonyl sulfide, and hydrogen sulfide, which led to multidistrict litigation with about 4,000 plaintiffs. If the allegations levied in the 60 Minutes episode are true, there will likely be many similar legal issues in the inevitable Lumber Liquidators litigation to the Chinese drywall litigation, such as whether homeowner insurance policies cover abatement of the toxic product.

On Monday morning, following the report, trading of Lumber Liquidators stock was halted by the New York Stock Exchange, a sign of likely heavy short pressure as investors bail on the retailer. With sharp price deterioration in Lumber Liquidators stock over the last several weeks, the specter of liability for securities fraud is raised if Lumber Liquidators concealed the product issues and regulatory investigations from investors, an occurrence playing out frequently with publicly-traded drug makers for “off-label” promotion of pharmaceuticals.    

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