Lumber Liquidators 2015 Annual Report Download - page 31

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Securities Laws
In March 2015, we received a grand jury subpoena issued in connection with a criminal investigation
being conducted by the U.S. Attorney’s Office for the Eastern District of Virginia (the ‘‘U.S. Attorney’’). In
addition, on May 19, 2015 and July 13, 2015, the Company received subpoenas from the New York Regional
Office of the SEC in connection with an inquiry by the SEC staff. Based on the subpoenas, we believe the
focus of both the U.S. Attorney investigation and SEC investigation primarily relate to compliance with
disclosure, financial reporting and trading requirements under the securities laws since 2011. We are fully
cooperating with the U.S. Attorney’s subpoena, the SEC’s subpoenas and the related investigations by the
U.S. Attorney and SEC staff. Given that the investigation by the U.S. Attorney and SEC staff are still ongoing,
we cannot estimate the reasonably possible loss or range of loss that may result from this matter.
California Air Resources Board
We believe that the California Air Resources Board (‘‘CARB’’) is regularly looking at the entire industry
to ensure compliance with its emissions standards. While conducting routine inspections of our products,
CARB has performed ‘‘deconstructive’’ testing on our products as well as, we believe, products from others in
the industry. In CARB’s preliminary findings, some of the samples of our finished product that CARB
deconstructed and tested exceeded the CARB limits for raw composite wood cores. This could occur for
numerous reasons, including one or more of the variability factors associated with this type of testing. In
May 2015, CARB notified us that additional samples of finished products were obtained in 2014, some of
which, based on deconstructive testing, exceeded the CARB limits for raw composite wood cores. CARB has
further informed us that it has performed additional deconstructive testing on certain finished products it
obtained in March 2015, with certain of the samples of our products exceeding the CARB limits for raw
composite wood cores.
We have been fully cooperative with CARB as CARB continues to work on this matter by, among other
things, providing CARB with requested information related to the products CARB tested and removing
laminate flooring sourced from China from our stores in California. Based on discussions with CARB, our
best estimate of the probable loss that may result from this matter is approximately $1.5 million, which we
recorded in other current liabilities and selling, general and administrative expenses in the fourth quarter of
2015. We believe that there is at least a reasonable possibility that a loss greater than the amount accrued may
be incurred, but we are unable to estimate the amount at this time.
Securities Litigation Matter
On or about November 26, 2013, Gregg Kiken (‘‘Kiken’’) filed a securities class action lawsuit (the
‘‘Kiken Lawsuit’’), which was subsequently amended, in the United States District Court for the Eastern
District of Virginia against us, our founder, former Chief Executive Officer and President, former Chief
Financial Officer and former Chief Merchandising Officer (collectively, the ‘‘Kiken Defendants’’). On or about
September 17, 2014, the City of Hallandale Beach Police Officers’ and Firefighters’ Personnel Retirement
Trust (‘‘Hallandale’’) filed a securities class action lawsuit (the ‘‘Hallandale Lawsuit’’) in the United States
District Court for the Eastern District of Virginia against us, our former Chief Executive Officer and President
and our former Chief Financial Officer (collectively, the ‘‘Hallandale Defendants,’’ and with the Kiken
Defendants, the ‘‘Defendants’’). On March 23, 2015, the court consolidated the Kiken Lawsuit with the
Hallandale Lawsuit, appointed lead plaintiffs and lead counsel for the consolidated action, and captioned the
consolidated action as In re Lumber Liquidators Holdings, Inc. Securities Litigation.
The lead plaintiffs filed a consolidated amended complaint on April 22, 2015. The consolidated amended
complaint alleges that the Defendants made material false and/or misleading statements that caused losses to
investors. In particular, the lead plaintiffs allege that the Defendants made material misstatements or omissions
related to our compliance with the Lacey Act, the chemical content of certain of our wood products, and our
supply chain and inventory position. The lead plaintiffs do not quantify any alleged damages in their
consolidated amended complaint but, in addition to attorneys’ fees and costs, they seek to recover damages on
behalf of themselves and other persons who purchased or otherwise acquired our stock during the putative
class period at allegedly inflated prices and purportedly suffered financial harm as a result. The Defendants
moved to dismiss the consolidated amended complaint but, on December 21, 2015, the court denied this
motion. We dispute these claims and intend to defend the matter vigorously. Given the uncertainty of
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