Exhibit 10.2

 

UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

 

SECURITIES EXCHANGE ACT OF 1934

Release No.

 

ADMINISTRATIVE PROCEEDING

File No.

 

 

In the Matter of

 

Lumber Liquidators Holdings,
Inc.,

 

Respondent.

 

 

ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 21C OF THE
SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING A
CEASE-AND-DESIST ORDER

 

I.

 

The Securities and Exchange Commission (“Commission”) deems it appropriate that
cease-and-desist proceedings be, and hereby are, instituted pursuant to Section
21C of the Securities Exchange Act of 1934 (“Exchange Act”), against Lumber
Liquidators Holdings, Inc. (“Lumber Liquidators” or “Respondent”).

 

II.

 

In anticipation of the institution of these proceedings, Respondent has
submitted an Offer of Settlement (the “Offer”), which the Commission has
determined to accept. Solely for the purpose of these proceedings and any other
proceedings brought by or on behalf of the Commission, or to which the
Commission is a party, Respondent admits the Commission’s jurisdiction over it
and the subject matter of these proceedings, and consents to the entry of this
Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the
Securities Exchange Act of 1934, Making Findings, and Imposing a
Cease-and-Desist Order (“Order”), as set forth below.

 

 

 

 

III.

 

On the basis of this Order and Respondent’s Offer, the Commission finds that:

 

Summary

 

1.          Lumber Liquidators Holdings, Inc. (“Lumber Liquidators”) made
misrepresentations to investors concerning its product testing and regulatory
compliance program in connection with the sourcing and sale of laminate flooring
products.

 

2.          In July 2014, Lumber Liquidators was sued for allegedly failing to
warn customers about potential formaldehyde emissions from products offered for
sale by Lumber Liquidators. On Sunday, March 1, 2015, the CBS news program“60
Minutes” aired an episode (“60 Minutes Episode”) alleging that Lumber
Liquidators’ Chinese laminate contained levels of formaldehyde exceeding
standards set by California Air Resources Board (“CARB”), and showing undercover
video footage of Lumber Liquidators’ suppliers stating they did not provide
CARB-compliant product to the company. The company’s share price dropped 25% the
following day.

 

3.          Lumber Liquidators responded with a series of public statements
designed to assure the market that it had robust product testing and regulatory
compliance programs. Lumber Liquidators stated that: (a) its fiberboard core
manufacturers were all certified by CARB; (b) it had documentation to prove
regulatory compliance; (c) its products underwent rigorous third-party testing
that proved and ensured CARB compliance; (d) it discontinued sourcing from
suppliers that were unable to meet the company’s purportedly rigorous product
quality standards; and (e) the suppliers purportedly in the video had recently
confirmed to Lumber Liquidators that they were not in the video and that all
products they sold to the company were CARB-compliant.

 

4.          Those statements were materially false and misleading. By December
15, 2014, Lumber Liquidators knew or recklessly disregarded that its largest
Chinese supplier had: (a) used fiberboard cores that were not from a
CARB-certified manufacturer; (b) failed third-party deconstructive testing for
formaldehyde emissions; and (c) been unable to produce documentation evidencing
CARB compliance. Nonetheless, Lumber Liquidators continued sourcing product from
that same Chinese supplier. Lumber Liquidators officials also recognized two of
the factories and one factory employee in the video footage as its suppliers.

 

Respondent

 

5.          Lumber Liquidators is a Delaware corporation with its principal
place of business in Toano, Virginia. Its stock is registered with the
Commission under Section 12(b) of the Exchange Act and trades on the New York
Stock Exchange (ticker: LL). The company is a North American discount retailer
of hardwood and laminate flooring. On October 22, 2015, Lumber Liquidators
pleaded guilty to federal environmental crimes under the Lacey Act related to
its illegal importation of hardwood from protected forests in far eastern
Russia.

 

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Background

 

Lumber Liquidators’ Business and Regulatory Requirements

 

6.          Lumber Liquidators sells hardwood flooring, including composite
flooring like laminate and engineered flooring. From at least 2009 through May
2015, Lumber Liquidators purchased composite hardwood flooring from suppliers in
China, who, in turn, fabricated the flooring using fiberboard cores purchased
from third-party manufacturers (called “core manufacturers”). Fiberboard cores
include resin that often contains formaldehyde.

 

7.          The California regulatory board, known as CARB, regulates these
products by setting emissions limits on the fiberboard cores. CARB regulations
require suppliers to use fiberboard core from core manufacturers that have been
certified by CARB, to label finished goods to show CARB compliance, and to keep
records documenting the steps they have taken to ensure regulatory compliance.
The regulations require retailers and importers of composite flooring – like
Lumber Liquidators – to take reasonably prudent precautions to ensure the
fiberboard core contained in the finished goods they sell comply with CARB
standards, including obtaining written documentation from their suppliers that
the products are CARB-compliant.

 

8.          Lumber Liquidators put into place periodic product testing and
supplier audits to verify CARB compliance in response to these regulatory
requirements.

 

Lumber Liquidators’ Public Relations Problems

 

9.          On July 23, 2014, two organizations filed a lawsuit in California
state court alleging that Lumber Liquidators had violated California law by
failing to warn consumers in California about potential emissions from products
offered for sale by Lumber Liquidators.

 

10.         In late 2014, Lumber Liquidators learned that CBS had commissioned
third-party deconstructive testing of certain Lumber Liquidators flooring
products for CARB compliance. On February 25, 2015, the company became aware of
the specific allegations that would be included in the upcoming 60 Minutes
Episode.

 

11.         The 60 Minutes Episode aired the evening of Sunday, March 1, 2015.
It contained video footage of investigators, posing as buyers, visiting three
Lumber Liquidators’ Chinese suppliers who stated that they did not sell
CARB-compliant products to Lumber Liquidators and that they falsely labeled
Lumber Liquidators’ products as CARB-compliant.

 

12.         The company’s share price dropped by 20% before the market opened on
the morning of Monday, March 2, 2015. Later that morning, the NYSE halted
trading pending Lumber Liquidators’ issuance of a press release.  By the end of
that day, the company’s share price had closed down 25%.

 

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Lumber Liquidators Made False and Misleading Statements in Response to
Allegations of Regulatory Violations

 

13.         On July 23, 2014, Lumber Liquidators responded to the lawsuit filed
in California state court by posting the July 2014 Release to its investor
relations website denying the allegations and assuring the public that its
flooring underwent “rigorous, independent, third-party testing” evidencing and
designed to ensure compliance with emissions standards.

 

14.         In the 2014 Form 10-K, filed February 25, 2015, Lumber Liquidators
again represented that it had high quality products and regulatory compliance
standards and assured the public that it “discontinue[s] sourcing from suppliers
that are unable to meet [its] standards.”

 

15.         On March 2, 2015, Lumber Liquidators issued a response in the form
of a press release on the March 2015 Form 8-K, stating that: (a) “[e]very
manufacturer” of fiberboard cores used in its products was CARB-certified; (b)
Lumber Liquidators had “documentation to support each step of [its] production
processes,” including vendor invoices and test results, and “to serve as further
proof that [its] processes, practices and products [were] compliant across the
board”; and (c) it randomly tested its Chinese suppliers using “unannounced
audits and all products tested [were] compliant and safe.” It also stated that,
after the 60 Minutes Episode, the company reached out to the Chinese suppliers
included in the story, who “confirmed that all products provided to Lumber
Liquidators have been and are CARB complaint” and “could not verify the identity
of the individuals appearing in the videos,” and that “[o]ne of the suppliers
featured questioned whether the product shown was actually from its factory.”

 

16.         In August 2014, a company employee visiting Lumber Liquidators’
largest Chinese supplier (the “Supplier”), noticed a pallet of finished laminate
flooring that the Supplier said was Lumber Liquidators’ product, which contained
a label indicating that a non-CARB certified core manufacturer supplied the
cores used to produce the laminate. The former employee took five samples from
this suspect pallet for testing, along with flooring samples manufactured in
front of him.

 

17.         On December 15, 2014, members of Lumber Liquidators’ senior
management team, who are no longer associated with the company, learned that the
Supplier’s product manufactured with the core from the non-CARB certified
manufacturer had failed deconstructive formaldehyde testing while the product
manufactured in front of the employee largely passed deconstructive testing.
They were told by the third-party testing company that the high deconstructive
test failures were a strong indicator that the underlying cores used to
construct the flooring were not CARB-compliant. They also knew that the
Supplier’s flooring, as well as certain of its other Chinese suppliers’
flooring, had failed deconstructive testing conducted by CARB in September 2013,
as well as the company’s own deconstructive testing conducted on these same
products.

 

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18.         Lumber Liquidators conducted an unannounced factory audit of the
Supplier in September 2014, which revealed that the Supplier had numerous
recordkeeping discrepancies and anomalies that did not conform to CARB record
retention requirements and did not permit the factory to reliably demonstrate
that CARB-compliant cores were used in its products. Lumber Liquidators
conducted another unannounced factory visit to the Supplier in January 2015.
During the visit, the Supplier refused to implement corrective action requests
from the September 2014 audit, and provided inconsistent information about the
Supplier’s use of non-CARB compliant cores in its laminate flooring.

 

 

19.         As a result of these audits and test failures by the Supplier, an
Executive Risk Committee, made up of the entire former executive management team
at Lumber Liquidators, met on January 16, 2015 and concluded that the company
should discontinue its relationship with the Supplier due to CARB compliance
concerns. Notwithstanding this conclusion, Lumber Liquidators ordered 1.64
million square feet of flooring form the Supplier that same day. Moreover,
unable to locate a replacement for the Supplier’s products and concerned that
discontinuing Lumber Liquidators’ relationship with the Supplier would lead to
supply constraints, Lumber Liquidators approved the placement of new purchase
orders with the Supplier on March 2, 2015 (the same day of the March 2015 Form
8-K).

 

20.         Finally, before issuing the March 2015 8-K, Lumber Liquidators
recognized two of the factories and one factory employee from the 60 Minutes
Episode video footage, in which three Lumber Liquidators’ Chinese suppliers
stated that they did not sell CARB-compliant products to Lumber Liquidators and
that they falsely labeled Lumber Liquidators’ products as CARB-compliant. Lumber
Liquidator also knew that one of its former quality inspectors in China had
stated that most suppliers did not use CARB-compliant cores and had sometimes
circumvented Lumber Liquidators’ procedures by selecting the samples for
emissions testing.

 

21.         On May 7, 2015, Lumber Liquidators announced its decision to suspend
sales of Chinese laminate, citing the ongoing investigation and industry
concerns about laminate products sourced from China.

 

22.         In 2016, Lumber Liquidators entered into a corrective action plan
with the Consumer Product Safety Commission (“CPSC”) with respect to certain
laminate flooring products manufactured in and imported from China and sold in
the United States from 2011 to May 2015.  CPSC has completed its evaluation of
the safety of those products.  In July 2017, CPSC determined that no further
monitoring was warranted and closed the case with respect to the corrective
action plan without further action.

 

23.         Lumber Liquidators’ false and misleading statements permitted it to
continue selling and sourcing non-CARB compliant laminate from China until May
of 2015, resulting in increased profits and cost reductions by approximately $6
million.

 

Violations

 

24.         As a result of the conduct described above, Respondent violated
Section 10(b) of the Exchange Act and Rule 10b-5(b) thereunder, which prohibit,
in connection with the purchase or sale of any security making an untrue
statement of a material fact or omitting to state a material fact necessary in
order to make the statements made, in the light of the circumstances under which
they were made, not misleading.

 

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25.         As a result of the conduct described above, Lumber Liquidators
violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-11
thereunder, which require issuers of securities registered pursuant to Section
12 of the Exchange Act to file periodic and other reports with the Commission,
including annual and current reports respectively on the appropriate forms and
within the period specified on the form, and that the required reports must
contain any material information necessary to make the required statements made
in the report not misleading.

 

Lumber Liquidators’ Remedial Efforts

 

26.         In determining to accept the Offer, the Commission considered
remedial acts undertaken by Respondent and cooperation afforded the Commission
staff.

 

Non-Imposition of a Civil Penalty

 

27.         Respondent acknowledges that the Commission is not imposing a civil
penalty based upon the imposition of a $19,095,648 criminal fine as part of
Respondent’s settlement with the U.S. Attorney’s Office for the Eastern District
of Virginia.

 

Undertakings

 

28.         Respondent has undertaken to cooperate fully with the Commission in
any and all investigations, litigations or other proceedings relating to or
arising from the matters described in the Order. In connection with such
cooperation, Lumber Liquidators agrees that cooperation includes the following:

 

a.on an ongoing basis, producing, in any subsequent investigations or
proceedings brought by the Commission, without service of a notice or subpoena
and with a custodian declaration as to authenticity, to the Commission any and
all documents and other non-privileged materials, wherever located, in
Respondent’s possession, custody, or control, and/or appropriate privilege logs,
as reasonably requested by the Division’s staff. Respondent agrees that it will
preserve documents within its possession, custody or control relating to or
arising from the matters described in the Order; and

 

b.using reasonable efforts to secure the full, truthful, prompt and continuing
cooperation of Respondent’s directors, officers, employees and agents, when
reasonably requested by the Division’s staff, including making those persons
available for interviews, depositions, and testimony (at trial, administrative
proceedings or otherwise), at such times and place as the staff reasonably
requests in any and all investigations, litigations or other proceedings
relating to or arising from the matters described in the Order.

 

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29.         In determining whether to accept the Offer, the Commission has
considered these undertakings.

 

IV.

 

In view of the foregoing, the Commission deems it appropriate to impose the
sanctions agreed to in Respondent’s Offer.

 

Accordingly, it is hereby ORDERED that:

 

A.           Pursuant to Section 21C of the Exchange Act, Respondent cease and
desist from committing or causing any violations and any future violations of
Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and
13a-11 thereunder.

 

B.           Respondents shall, within 10 days of the entry of this Order, pay
disgorgement of $6,037,738 and prejudgment interest of $59,660 to the Securities
and Exchange Commission for transfer to the general fund of the United States
Treasury, subject to Exchange Act Section 21F(g)(3).  If timely payment is not
made, additional interest shall accrue pursuant to SEC Rule of Practice 600.
Payment must be made in one of the following ways:

 

(1)Respondent may transmit payment electronically to the Commission, which will
provide detailed ACH transfer/Fedwire instructions upon request;

 

(2)Respondent may make direct payment from a bank account via Pay.gov through
the SEC website at http://www.sec.gov/about/offices/ofm.htm; or

 

(3)Respondent may pay by certified check, bank cashier’s check, or United States
postal money order, made payable to the Securities and Exchange Commission and
hand-delivered or mailed to:

 

Enterprise Services Center

Accounts Receivable Branch

HQ Bldg., Room 181, AMZ-341

6500 South MacArthur Boulevard

Oklahoma City, OK 73169

 

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C.           Payments by check or money order must be accompanied by a cover
letter identifying Lumber Liquidators Holdings, Inc. as a Respondent in these
proceedings, and the file number of these proceedings; a copy of the cover
letter and check or money order must be sent to Sanjay Wadhwa, Senior Associate
Regional Director, Division of Enforcement, Securities and Exchange Commission,
200 Vesey Street, New York, New York 10281-1022.

 

By the Commission.

 

  Brent J. Fields   Secretary

 

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