Lumber Liquidators 2015 Annual Report Download - page 88

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Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands, except share data and per share amounts)
Note 10. Commitments and Contingencies − (continued)
Costello Matter
On or about March 6, 2015, James Costello (‘‘Costello’’) filed a shareholder derivative suit in the Court
of Chancery of the State of Delaware against the Company’s directors at that time (the ‘‘Costello Derivative
Defendants’’). The Company was named as a nominal defendant only. On April 1, 2015, the case was
voluntarily stayed. On June 19, 2015, the stay was lifted at Costello’s request and Costello subsequently filed
an amended complaint. The amended complaint added the Company’s Senior Vice President, Supply Chain,
former Chief Merchandising Officer and former Chief Financial Officer as defendants (along with the
Derivative Defendants, the ‘‘Costello Defendants’’). Costello’s allegations include (i) breach of fiduciary
duties, (ii) gross mismanagement, (iii) unjust enrichment, and (iv) insider selling and the misappropriation
of certain of our information in connection therewith. Costello did not quantify any alleged damages in the
amended complaint but, in addition to attorneys’ fees and costs, Costello seeks (i) against the Costello
Defendants and in the Company’s favor the amount of damages sustained by the Company as a result
of the Costello Defendants’ breaches of fiduciary duties, gross mismanagement and unjust enrichment,
(ii) extraordinary equitable and/or injunctive relief, including attaching, impounding, imposing a constructive
trust on or otherwise restricting the proceeds of the Costello Defendants’ trading activities or their assets,
(iii) awarding to the Company restitution from the Costello Defendants, and each of them, and ordering
disgorgement of all profits, benefits and other compensation obtained by the Costello Defendants; and
(iv) additional equitable and/or injunctive relief that would require the Company to institute certain
compliance policies and procedures.
The Company filed a motion to dismiss the amended complaint based on the failure to make a demand
upon the Company’s board of directors and the Costello Defendants filed a motion to dismiss based on the
failure to state a claim and the exculpatory provision in the Company’s Certificate of Incorporation. On
September 14, 2015, the parties entered into a stipulation voluntarily staying the case until the Demand
Review Committee has an opportunity to investigate Costello’s allegations and make a recommendation to the
Company’s board of directors, and the board of directors has the opportunity to act on that recommendation.
The court has approved the stipulation.
Based on the uncertainty of litigation and the preliminary stage of the case, the Company cannot estimate
the reasonably possible loss or range of loss that may result from this action.
McBride Matter
On or about March 27, 2015, James Michael McBride (‘‘McBride’’) filed a shareholder derivative suit in
the Circuit Court of the City of Williamsburg and County of James City, Virginia against the Company’s
directors at that time, as well as its former Chief Merchandising Officer and former Chief Financial Officer
(collectively, the ‘‘McBride Defendants’’). The Company was named as a nominal defendant only. In the
complaint, McBride’s allegations include (i) breach of fiduciary duties, (ii) gross mismanagement, (iii) abuse
of control, (iv) insider trading, and (v) unjust enrichment. McBride did not quantify any alleged damages in
his complaint but, in addition to attorneys’ fees and costs, McBride seeks (i) the awarding, against the
McBride Defendants, and in favor of the Company, of damages sustained by the Company as a result of
certain of the McBride Defendants’ breaches of their fiduciary duties and (ii) a directive to the Company to
(a) take all necessary actions to reform and improve its corporate governance and internal procedures,
(b) comply with its existing governance obligations and all applicable laws and (c) protect the Company and
its investors from a recurrence of the events that led to the filing of this action. On July 6, 2015, McBride
filed an amended complaint. The amended complaint added claims for statutory conspiracy and common law
conspiracy and, in connection with the statutory conspiracy claim, seeks damages in the amount of three times
the actual damages incurred by the Company as the result of the alleged wrongful acts. Pursuant to a
voluntary agreement between the parties, the defendants have not yet responded to the amended complaint.
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