LUMBER-INVESTIGATION/

(Reuters)

Lumber Liquidators Stock Soars as Investors Question '60 Minutes' Report

A growing number of hedge funds and large investors are now questioning the methodology behind the televised “60 Minutes” report which suggested that Lumber Liquidators’ (LL) laminate flooring product has high levels of the cancer causing toxin formaldehyde, FOX Business has learned.

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The report, broadcast on March 1, had initially pummeled the company’s stock.

But the growing skepticism regarding the investigative report has prompted investors to start snapping up shares of Lumber Liquidators, a shift in the stock’s trajectory that continued Wednesday. Last week, FOX Business was first to report that activist investor Robert Chapman has taken a long position in the stock amid questions about the scientific veracity of the testing.

At the crux of some hedge funds' concerns is how the expose tested the flooring, according to hedge fund executives who spoke to FOX Business.

One hedge fund executive told FOX Business that the methodology used by “60 Minutes” was faulty. The news program apparently tested the laminate flooring in a deconstructed manner that is not mandated by California. That means the flooring product was taken apart and then each individual piece tested for the toxin.

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The law requires that the product is tested using just a piece of the core before the final piece is glued on top. That's the way Lumber Liquidators says they test their product and the toxin levels are much lower.

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One hedge fund executive told FOX Business that they came to this conclusion after talking to the lab and figuring out that the company might be following the law when conducting it’s testing.

A spokesman for the lab company used by “60 Minutes,” HPVA Laboratories, would not comment. A “60 Minutes” spokesman declined repeated requests for comment.

However, people at the lab tell FOX Business they believe the investigation was done correctly, as does Kip Howlett, president of the Hardwood Plywood and Veneer Association, which represents North American manufacturers of flooring.

Howlett said Lumber Liquidators get some of its laminate flooring from China, which circumvents U.S. regulatory standards. “Out in China it’s the Wild West,” he said, “You can save a lot of money, by saying you are compliant [with U.S. laws] and just hoping that you don’t get caught.”

As news spreads about hedge funds questioning the testing done by the news programs, shares have rebounded.  Tuesday, major investor Blackrock (BLK) reported that it boosted its stake in the company from 9.13% to 10.1%; Wednesday shares are continuing to rebound after Lumber Liquidators stock closed up 5.8% the day before.

U.S. Senator Bill Nelson, (D-FL), recently called for a federal probe into the practices of Lumber Liquidators. The ranking Democrat on the Senate Committee on Commerce, Science and Transportation Committee, has sent letters to the Consumer Product Safety Commission (CPSC), CDC and the FTC. The committee is expected to make an announcement on the matter sometime this week.

As previously reported, the lumber distributing giant is fighting back, telling customer service representatives to tell consumers that these accusations are the work of hedge fund short-sellers, as reported by FOX Business. Short-selling is a type of trade that becomes profitable when investors borrow shares of a stock, sell them, and then repay the borrowers when the shares decline in price. 

In other words, investors who “short” a stock make money when the stock price declines.

The company's sales representatives have been armed with scripts to address concerns from customers about the "60 Minutes" report. The Toano, Va.-based company denies the charge, and its scripts, read by customer service representatives, blame "hedge-fund short-sellers” with “trying to scare [their] customers with inaccurate allegations." The company's scripts also say "60 Minutes" has aired the allegations while ignoring data that shows the company’s products are safe.

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