Lumber Liquidators disclosed in a regulatory filing that the United States Department of Justice (DOJ) intends to file criminal charges  in connection with the ongoing investigation regarding its imported products.

In its regulatory filing, Lumber Liquidators explained that the Immigration and Customs Enforcement of the Department of Homeland Security and the U.S. Fish and Wildlife Service executed a search warrant at its corporate headquarters in Toano and Richmond, Virginia on September 26, 2013.

The search warrants from the agencies requested information particularly documentation related to its importation of certain wood flooring products in accordance with the Lacey Act. Lumber Liquidators said it had been cooperating with federal authorities including the DOJ on their investigation.

“In recent communications, the DOJ indicated that it is seeking criminal charges under the Lacey Act. We, through the Special Committee, expect to continue to communicate with the DOJ regarding its intentions and possible courses of action in this matter,” according to Lumber Liquidators.

The company estimated that it would incur approximately $10 million in potential losses that may result from DOJ’s action. Lumber Liquidators recorded the estimated amount in other current liabilities and selling, general and administrative (SG&A) expenses in the first quarter of 2015.

Lumber Liquidators said, “We believe that there is at least a reasonable possibility that a loss greater than or less than the amount accrued may be incurred, but we are unable to estimate the amount at this time.”

Lumber Liquidators first quarter financial results

Lumber Liquidators also announced its financial results for the first quarter today. The company said posted a net loss or $7.8 million or $0.29 per diluted share. Its net sales increased 5.6% to $260 million.

According to the company, its selling, general and administrative (SG&A) expenses increased 23.6% to $97.4 million due to a $10 million non-deductible accrual for a regulatory matter. Its gross margin was 35.2% in the first quarter.

Robert M. Lynch, president and CEO of Lumber Liquidators said, ” Costs related to legal and professional fees and a regulatory accrual were significant in the first quarter. However, we are committed to addressing the challenges presented while maintaining our focus on our core business and value proposition.”

Lumber Liquidators stopped importing laminate flooring from China

During a conference call with analysts and investors, Lynch said the company temporarily stopped importing laminate flooring from China.
There are more than 100 pending class action lawsuits against Lumber Liquidators related to its laminate flooring products from China based on its regulatory filing.

Last March, CBS news program, 60 Minutes reported that Lumber Liquidator’s laminate flooring products from China contains high levels of formaldehyde.

Whitney Tilson

In an email to investors the value oriented short seller told investors:

Here’s a summary from my broker (emphasis added):

  • Government/DOJ investigation
    • On September 26, 2013, sealed search warrants were executed at the Company’s corporate offices in Toano and Richmond, Virginia by the Department of Homeland Security’s Immigration and Customs Enforcement and the U.S. Fis and Wildlife Service. The search warrants requested information, primarily documentation, related to the importation o certain of the Company’s wood flooring products in accordance with the Lacey Act. Since then, the Company has been cooperating with the federal authorities, including the Department of Justice (“DOJ”), in their investigation. In recent communications, the DOJ indicated that it is seeking criminal charges under the Lacey Act.
    • Based on the information available, we recorded approximately $10.0M in selling, general and administrative expenses in Q1 of 2015 with a corresponding increase in other current liabilities . We have considered this item in our Q1 2015 tax provision. Based on the information available, including communications with the DOJ, we believe there is at least a reasonable possibility that a loss greater than or less than the amount accrued may be incurred, but we are unable to estimate the amount at this time.
  • US Attorney and SEC
    • In March 2015, we received a grand jury subpoena issued in connection with a criminal investigation being conducted by the U.S. Attorney’s Office for the Eastern District of Virginia.
    • In addition, on 11-Mar-15, we received a letter from the New York Regional Office of the SEC requesting that, in connection with an inquiry by the SEC staff, we preserve certain information.
    • Based on the subpoena and SEC request, we believe the focus of both the U.S. Attorney investigation and SEC staff inquiry are connected to recent concerns about our laminate flooring sourced from China and primarily relate to compliance with disclosure and trading requirements under the securities laws.
    • We, along with the Special Committee, are fully cooperating with the U.S. Attorney’s subpoena, the SEC request to preserve information and the related investigations by the U.S. Attorney and SEC staff.
  • State requests
    • In March 2015, we received requests for information from various state attorneys general regarding our laminate flooring sourced from China. We have been fully cooperating with these requests.
  • CPSC
    • As previously reported, on 4-Mar-15, we received notice from the Consumer Product Safety Commission that it has requested samples of our laminate flooring manufactured in China. We have been fully cooperating with the CPSC and have provided testing and safety information to the CPSC staff.
    • On 9-Mar-15, we submitted an initial report in accordance with Section 15 of the Consumer Product Safety Act. On 9-Apr-15, at the CPSC’s request, we submitted a Section 15B full report.
    • We have been in ongoing discussions with CPSC about our air quality testing program and are providing the CPSC with frequent updates.

The shares of Lumber Liquidators declined nearly 20% to $26.76 per share on Wednesday.

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