Executives at Lumber Liquidators (NYSE:LL), the controversial discount floor retailer, are telling investors they are feeling so emboldened by a recent regulatory announcement they may sue the news program “60 Minutes” over its reporting that raised issues about the safety of the company’s products, the FOX Business Network has learned. On Wednesday, the U.S. Consumer Product Safety Commission (CPSC) announced it will conduct an investigation into the company’s laminate flooring. However, the agency said it would not use the same “destructive” testing method used by '60 Minutes.' The CBS (NYSE:CBS) news show reported on March 1 its tests revealed Lumber Liquidators' laminate flooring imported from China had extremely high levels of the carcinogen formaldehyde. Company officials denied the accusation, maintaining their testing methods are sound and the carcinogen level in their flooring products meet regulatory standards. Still, shares of Lumber Liquidators have fallen more than 40% since the broadcast, prompting a discussion among senior executives over whether to sue '60 Minutes' for libel. Those discussions have now heated up; company officials tell investors they believe the company will receive a clean bill of health from the CPSC since the agency is using the same testing method the company has used. As a result, Lumber Liquidators officials believe they could develop a strong legal case that '60 Minutes' was both reckless in its reporting, and that the company incurred significant damage in terms of its reputation and the sharp decline in its share price. “I would say it’s 50 – 50,” one investor who has spoken to senior Lumber Liquidators executives said about a possible libel suit. “The company thinks once the safety commission’s investigation is over it will have enough data to show '60 Minutes' ignored its side of the story. That said, there is also a feeling inside the company that it will be exonerated, so who needs a long legal battle.” A spokesman for '60 Minutes' acknowledged the news show has heard about the possibility of a libel suit, but defended the testing used for its report. The spokesman added since the “report aired, several federal and state regulatory agencies are working to investigate this issue. We look forward to their results." A Lumber Liquidators spokesman said "We have no comment on litigation." Peter Henning, a business law professor at Wayne State University gave the company low odds in winning a libel suit if it chooses to file a case.
“It’s very difficult,” he said, because the company would have to prove that the news show had “actual malice” in its reporting, meaning that '60 Minutes' had a reckless disregard for the truth. “That’s a very difficult standard to meet,” Henning said.
(BOLD) Testing Methodology (BOLD)
The deconstructive method for testing flooring is conducted by taking the product apart, and then testing each individual piece for the toxin. But the safety commission said Wednesday it would be testing only the finished goods, similar to the methods Lumber Liquidators uses, and one in which the carcinogen level in the flooring appears much lower. The commission’s announcement caused the company’s stock price to rally more than 10% despite a nearly 300-point decline in the Dow Jones Industrial Average that day. On Thursday shares fell more than 6% to just below $30. The '60 Minutes' report said after testing 31 samples using the deconstructive method, it found 30 of them contained levels of formaldehyde emissions that exceeded the legal limits set by California. Amid the furor spurred by the CBS report, the company armed its customer-service representatives with scripts blaming "hedge-fund short-sellers” with “trying to scare [their] customers with inaccurate allegations." (short sellers make money when shares of a stock decline). The representatives also said '60 Minutes' aired those allegations while ignoring data that shows the company’s products to be safe. Some hedge fund managers agreed with the company’s assessment after conducting their own research following the '60 Minutes' segment. As FOX Business was first to report, activist investor Robert Chapman has taken a long position in the stock amid questions about the scientific veracity of the testing. If Lumber Liquidators does file charges, it may also file a separate case against Whitney Tilson, the short seller who initially tipped '60 Minutes' off the possible toxins in Lumber Liquidators flooring. In a recent blog post, Tilson called company “evil” and said it "knowingly endangering the health and safety of its customers, especially children, by continuing to sell toxic Chinese-made laminate." He has also defended the '60 Minutes' testing of Lumber Liquidators product. Tilson declined to comment about the possible libel suit.