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Jesse Prentice-Dunn Headshot

Illegal Logging and Wall Street?

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It's been a rough start to the holiday season for Lumber Liquidators, the top-selling flooring retailer in America. Last month I noted that federal officers raided Lumber Liquidators headquarters, investigating whether the company had imported illegally logged wood products from eastern Russia, the home of the critically endangered Siberian tiger. Importing illegally harvested timber or wildlife violates the U.S. Lacey Act, with violators subject to fines and penalties. Now, after facing criticism from a noted hedge fund advisor, Lumber Liquidators is being hit with class action lawsuits.

On Nov. 21, well-known hedge fund manager Whitney Tilson gave a presentation to a conference of investors in which he argued that Lumber Liquidators' recent increases in profit margins have come, in part, by increasing imports of illegally harvested wood from China and the Russian Far East. Tilson's presentation notes that over the last two years, Lumber Liquidators has increased the percentage of wood sourced from Asia from 42 percent to 51 percent, coinciding with a rapid increase in profits. New investigative reports have provided compelling evidence that much of this wood sourced by Lumber Liquidators was illegally harvested in the Russian Far East.

These recent events have also hurt Lumber Liquidators' shareholders. After the raid of Lumber Liquidators headquarters, shares fell by $5.83 per share (more than five percent) to close at $107.13. And following Tilson's presentation to investors, shares fell $16.07 (roughly 13 percent), to close at $99.29. Interestingly, the founder of Lumber Liquidators, Tom Sullivan, sold more than $26 million of his own stock this year. Similarly, CEO Robert Lynch sold more than $10 million in company stock this year.

Now multiple law firms have filed class action lawsuits on behalf of Lumber Liquidators investors, claiming that the company made false and misleading statements to shareholders while racking up profits by procuring illegally logged wood from the Russian Far East and selling wood with illegal levels of formaldehyde.

While Lumber Liquidators has not been formally charged by the Department of Justice, this is a case to watch going forward. Only about 450 Siberian tigers remain in the wild, largely living in the forests of the Russian Far East. Rampant illegal logging not only threatens the tigers, it also fuels underground crime and artificially lowers wood product prices in the U.S., threatening jobs in our American wood products industry.

Corporations might drink in profits in the short term from their illegal antics, but illegal logging is a bad investment. American companies and American workers lose an estimated $1 billion each year due to illegal wood entering U.S. markets. These recent developments show there is a clear need for the U.S. to fully enforce the Lacey Act, the most effective tool we have to stop illegal logging and associated trade, and hold companies accountable for importing illegally harvested timber.

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