Last Sunday night, “60 Minutes” on CBS raised some serious concerns about Lumber Liquidators (LL) products, linking them to possible health and safety violations. Trading of LL stock was halted for two hours the following morning, and ultimately ended the day down 25%. Lumber Liquidator customers and shareholders alike are sure to be upset, and there is a likelihood of some sort of class action suit going forward. As with many large companies, this will not be Lumber Liquidator’s first rodeo with the lawyers. According to our litigation database, the company has recently faced at least two cases related to the chemical composition of their wood products, stemming back to 2013.
While there have been no settlements and it seems that Lumber Liquidators intends to defend this matter intensely, this story may have come as no surprise to those who were paying attention to the company’s litigation disclosures. Lumber Liquidators is currently a defendant in three open class action cases, one of which stems from the issues mentioned in the 60 Minutes piece. That case pertains to securities law and alleges LL failed to disclose material adverse facts about the chemical content in its wood products, and that the company’s stock was artificially inflated as a result. When this case was filed on November 26, 2013 the price of LL stock was $103.68. LL closed at $38.83 the day after the 60 minutes piece.
Seeing such a dramatic drop in stock price, we were interested to see what other similar companies may have open securities law cases. Using NAICS code 32 (Manufacturing) we were able to find 166 open securities law cases. Below is a list of all of the companies listed as defendants in 2 or more cases, many of which are household names.
Source: http://www.AuditAnalytics.com
Unsurprisingly, BP is atop the list as they face several cases alleging that they mislead investors and omitted material information relating to their safety protocols and oil flow rates. Another example includes allegations that Johnson & Johnson has paid kickbacks to Iraq in order to obtain contracts under the United Nations Oil for Food Program.
It’s easy to see a drop in price and look historically for a justification. With Lumber Liquidators, looking back we can see that there was some potential for future issues. While it is not possible to predict the future, using all available resources and applying proper due diligence can help balance the risk vs. the reward.