Home Stocks Whitney Tilson Still Not Happy With Lumber Liquidators (LL) Flooring

Whitney Tilson Still Not Happy With Lumber Liquidators (LL) Flooring

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Whtiney Tilson is not ending his crusade against Lumber Liquidators (LL) anytime soon – the following is excerpted from an email which Tilson sent to investors (H/T Max).

Whitney Tilson

Date: Sun, Mar 29, 2015 at 12:10 PM
Subject: LL thoughts; testimonial; my answers to six questions
To:

1) Spot-on comments from a friend:

 

Appalled general market seems to think breaching Law as to CARB2 is okay under an argument that Formaldehyde may or may not be bad for you over time and certain exposures.

 

We do not get to select the Laws we abide by based on whether we arbitrarily believe they are good Laws or bad ones.  Anarchy would ensue. Why does LL get that ability?  The answer is simple, they do not.

 

LL labeled their products as CARB2 compliant when in fact they were not, end of story.  There should be massive penalties, fines and Lawsuits resultant there from and the fall out from that Criminal decision as made by Management (even if it kills the Company) is on their hands.

 

2) Another tale of woe from a LL customer who emailed me:

 

The flooring was installed by my husband in 2012, it was Bamboo strand, I thought I was allergic when I began to feel unwell as I do have allergies.  It took us over a year to find out what the problem was.   No one would believe us or help us here.   Our symptoms – I had a terrible cough, sinus problem, extreme fatigue, nausea, rash, shortness of breath, everntually weight loss and was bedridden most of 2012-13 winter with what my doctors thought was a really bad flu.  My husband ended up in emerg with a cough so bad that he couldn’t  get his breath – and my husband has never had allergies.   We still have spent a fortune trying to fix the problem.  We still have no help from Insurance though we were well insured –  or govt. Fed’s or otherwise.  If you know of any wayfor us to enter a Class Action in hte States  we’d be grateful.

 

3) I posted answers on the Seeking Alpha message board to six questions I received (all posted publicly at:http://seekingalpha.com/article/3029526-why-the-u-s-consumer-product-safety-commission-conference-call-portends-a-double-whammy-for-lumber-liquidators#comments_header):

 

  1. A) Ray messaged me and asked:

 

“I value what you do and it is not always easy to be facing off an evil doing company or entity.

 

What is puzzling to me is that why California CARB regulatory agency has not stepped forward to put an end to the mis-labeling practices of LL or other companies doing the same?

 

Is there anything that we can do to help?”

 

Dear Ray,

 

Thanks for your question. I’m not surprised that CARB hasn’t taken any action yet. My experience with most regulatory agencies is that they take FOREVER to take action, even in the most obvious cases of wrongdoing. In fairness, it can take time to document everything, to ensure that whatever action they take will hold up in court when the company inevitably countersues/appeals.

 

I think there’s a lot of scrutiny/pressure on CARB (and other regulatory agencies like the Consumer Product Safety Commission), however, so I’d be surprised if there isn’t meaningful action in the next month or two.

 

Best regards,

 

Whitney

—————-

  1. B) Ken messaged me and asked:

 

“I see the issue not as “this test vs. that test” but whether or not there was deliberate mis-labeling of product and if LL had knowledge, should have had knowledge or was complicit.

 

Obviously, the factory workers statement is anecdotal evidence.

 

My question is simply …

 

What steps are or can be taken to investigate the veracity of their claims? …. and are they underway or likely to be pursued?

 

Is there any indication of what tests the mill used to certify the product … was it deconstructive?

 

Thank you.”

 

I replied:

 

Dear Ken,

 

Thanks for your questions. To the first one, in addition to a half dozen or so regulatory agencies looking into Lumber Liquidators, there are nearly a dozen lawsuits against the company (here’s a list: http://www.classaction.org/blog/lumber-liquidators-lawsuits-filed-following-60-minutes-report). Most (if not all) of these entities will likely get all of LL’s emails, have the board and management give depositions under oath, etc., so I have little doubt that the truth will come out.

 

I’ve talked to many knowledgeable people, observed the company’s behavior, and applied common sense – all of which has led me to the conclusion that I’ve published in a number of articles: that they knew they were buying (and selling to their customers) non-CARB-compliant laminate.

 

To your second question (“Is there any indication of what tests the mill used to certify the product … was it deconstructive?”), the initial tests the company relied on (the only required tests) were of the medium-density fiberboard (MDF) before it was processed into laminate by the Chinese factories. There’s obviously no issue of deconstruction here. Then, the company tested the finished product and, contrary to CARB’s clear guidance, didn’t deconstruct the laminate (i.e., sand off the outer layer). I discuss this at length in three prior articles:

 

1) Why Lumber Liquidators’ Wood Testing Doesn’t Comply With CARB (http://seekingalpha.com/article/2972606-why-lumber-liquidators-wood-testing-doesnt-comply-with-carb);

2) Lumber Liquidators’ Campaign Of Distraction And Deception (http://seekingalpha.com/article/2990196-lumber-liquidators-campaign-of-distraction-and-deception); and

3) Explaining Lumber Liquidators’ Reckless Strategy And Rebutting Its Claims About Deconstructive Testing (http://seekingalpha.com/article/3001666-explaining-lumber-liquidators-reckless-strategy-and-rebutting-its-claims-about-deconstructive-testing).

 

Best regards,

 

Whitney

——————-

  1. C) Clayton messaged me and asked:

 

Whitney I was hoping you can comment on LL’s quote on CARB, located on the third line on Page 4: app.quotemedia.com/data/downloadFiling?w...

 

“CARB has indicated to us that no one in the industry is required to conduct deconstructive testing for compliance purposes ”

 

Why is CARB apparently telling LL one thing and you another?

 

I replied:

 

Dear Clayton,

 

Thank you for your question. This is a typical statement from Lumber Liquidators: true but highly misleading and disingenuous. CARB doesn’t require testing of finished laminate at all (only the initial medium-density fiberboard, before it’s made into laminate), but if testing of finished product is done, it specifies clearly that it must first be deconstructed.

 

If you’re interested in the details of exactly why Lumber Liquidators’ claim that 60 Minutes (and others’) testing is “improper” is wrong – it’s their testing that’s questionable and/or improper – I suggest reading a few of my articles:

 

 

Best regards,

 

Whitney

———————-

  1. D) Igsman messaged me and asked:

 

Now that the government has decided to do testing consistent with the companies view on how it should be tested, the game has changed. Failure of the test will almost certainly result in immediate chapter 11 for the company, as they would be ordered to replace all flooring at their expense. I do not know how and manager with a fiduciary obligation would be able to hold a position into and all or none scenario. they would be liable to for holding.

 

I replied:

 

Dear Igsman,

 

Thank you for your question. I disagree with your premise that “the government has decided to do testing consistent with the companies view on how it should be tested.” As I explained in my latest article (Why the U.S. Consumer Product Safety Commission Conference Call Portends a Double Whammy for Lumber Liquidators, http://seekingalpha.com/article/3029526-why-the-u-s-consumer-product-safety-commission-conference-call-portends-a-double-whammy-for-lumber-liquidators), there are two types of tests, one of which involves deconstruction and one of which doesn’t. Numerous tests of LL’s Chinese-made laminate show that it will fail both tests in spectacular fashion.

 

I also disagree with your assertion that “Failure of the test will almost certainly result in immediate chapter 11 for the company, as they would be ordered to replace all flooring at their expense.” I don’t think anything will be immediate – if LL does go to zero, it will happen over a long time I’d guess because it’s not clear what regulators will require LL to do to remedy the problem, nor that the correct solution for most (or even a small percentage) of homeowners is to rip out the existing flooring. If the flooring was installed a year or two earlier, most of the formaldehyde has likely “off-gassed” and thus don’t pose a danger. This doesn’t mean LL is off the hook, however, as these homeowners, if they suffered coughing, bronchitis, etc., will still have a great claim for damages. It’s long-tailed legal liabilities like these that would eventually bankrupt the company, not short-term regulatory action.

 

Lastly, I disagree with you here: “I do not know how and manager with a fiduciary obligation would be able to hold a position into and all or none scenario. they would be liable to for holding.” Lots of investment managers, myself included, invest in tainted businesses in the hopes that things turn out better than expected – and if they don’t, they don’t (nor should they) face liability.

 

Best regards,

 

Whitney

——————-

  1. E) Eric messaged me and asked:

 

Dear Mr. Tilson,

 

I appreciate your effort of answering the questions that many of us have had.

 

Would you consider provide further transparency and give us some information about your connection to GCM, and its joint plaintiff Sunshine Park LLC? Lumber Liquidators had claimed that GCM and Sunshine Park LLC are motivated by short sellers, but Sunshine Park LLC had remained silent through the trial. Do you know anything about who is behind this entity?

 

Thank you for your time, and I look forward to your answer. Sincerely,

 

Eric

 

I replied:

 

Dear Eric,

 

Thank you for your question. It’s an easy one: contrary to the company’s claim that “These attacks are driven by a small group of short-selling investors who are working together…” (www.lumberliquidators.com/sustainability/health-and-safety), there is no such conspiracy (at least to my knowledge). I have no idea who the hedge fund(s) are behind Sunshine Park LLC, nor have I met or had any communication with Denny Larson, the executive director of Global Community Monitor, or Richard Drury, the prominent environmental attorney, both of whom were featured in the 60 Minutes story.

 

I can only assume that the hedge fund(s) behind Sunshine Park figured out, as I did, that Lumber Liquidators was poisoning its customers, but chose a different route than I did to be an activist (by hiring Larson and Drury).

 

Best regards,

 

Whitney

————–

  1. F) Christian messaged me and asked:

 

i compared your data that you took from the 60 Minutes home model tests and compared it to the actual tests from the 60 Minutes website and couldn’t make them tie.  perhaps you might explain in a comment how your 3 sample numbers, 268, 93, 57 ppb, can be footed to the pdfs of the tests that 60 Minutes posted.  thanks in advance

 

I replied:

 

Dear Christian,

 

Thank you for your question. It’s a long answer, so bear with me.

 

First, download the tests 60 Minutes did, which they posted here: www.cbsnews.com/htdocs/pdf/00_2015/03-2015/Test-Results.zip

 

You’re looking for two files:

 

1) In the folder named “CBS – HPVA Test Results”, open the pdf entitled “1350 Summary.CA 01350 VOC Test Report_CBS News_1-5-2015”. On page 2 of the pdf, in the middle of the page, in red, under “Estimated VOC Concentrations – Flooring (?g/m3)**”, you’ll see that the formaldehyde reading is 113.6. And on page 3, in the same space, you’ll see that the formaldehyde reading is 329.3.

 

2) In the folder named “CBS – Benchmark Test Results” (this is the other lab 60 Minutes used), open the folder named “Benchmark – CDPH”, and in there you’ll find an 8-page pdf named “CBS News CA 01350 Test Report 12WS.” On page 7, about halfway down the page, you’ll see that the formaldehyde reading is 69.96.

 

OK, so now we have the results from the three California Dept of Public Health (CDPH) real-world tests – the kind that the Consumer Product Safety Commission will be doing:

 

1) 329.3 micrograms per meter cubed

2) 113.6 micrograms per meter cubed

3) 69.96 micrograms per meter cubed

 

Now, we need to convert micrograms per meter cubed into parts per billion, which you do by dividing by 1.227 (or 1,227 for parts per million).

 

(This number comes from the volume of 1 mole of gas at 25C (24.47 L) and the molecular weight of formaldehyde (30.03 grams/mole). See e.g. ASTM D6007 equation (6); see the middle of page 2 of this white paper:

http://berkeleyanalytical.com/sites/default/files/WhitePaper_BkA_WP_07-01_Composite_Wood_ATCM_090707.pdf.)

 

So:

 

1) 329.3 micrograms per meter cubed = 268 ppb = .268 ppm

2) 113.6 micrograms per meter cubed = 93 ppb = .093 ppm

3) 69.96 micrograms per meter cubed = 57 ppb = .057 ppm

 

Even the lowest of these three numbers is massively higher than the limits regulators have set to protect everyone, including children. Here are three formaldehyde limits set by two regulators:

 

1) The California Office of Environmental Health Hazard Assessment (see: www.oehha.ca.gov/air/Allrels.html) sets formaldehyde limits of 55 micrograms per meter cubed for acute (short-term) exposure and 9 micrograms per meter cubed for 8-hour and chronic exposure.

 

(9 micrograms per meter cubed = 7 ppb, which is the figure I used in my article, A Response To Lumber Liquidators(http://seekingalpha.com/article/2996156-a-response-to-lumber-liquidators), when I wrote: “Lumber Liquidators claims that “The emissions from our laminate floors will typically only add approximately 5 ppb to a home when first installed.” If true, this would be good news since regulators have set 7 ppb as the limit to protect everyone, including children.”)

 

2) The California Office of Environmental Health Hazard Assessment, in another document (see page 5:www.oehha.ca.gov/prop65/pdf/safeharbor081513.pdf), sets formaldehyde limits of 40 micrograms per meter cubed for “No Significant Risk Levels (NSRLs) for Carcinogens.”

 

3) The Centers for Disease Control and Prevention’s National Institute for Occupational Safety and Health (NIOSH) PocketGuide to Chemical Hazards (www.cdc.gov/niosh/npg/npgd0293.html) sets formaldehyde limits of 0.016 ppm (16 ppb) for an 8-10 hour period.

 

Best regards,

 

Whitney

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