Lumber Liquidators’ CEO Resigns Amid Investigation into Illegal Timber Imports

U.S. flooring retailer forecasts 10 million dollars in losses from criminal charges by the Department of Justice

By Susanne Breitkopf, EIA Forests Policy Manager

Update: On June 15, Lumber Liquidators announced the termination of Chief Merchandizing Officer William K. Schlegel. Schlegel oversaw the company’s wood sourcing and frequently visited China for business according to witnesses and company representatives. Schlegel is the fourth senior officer to leave Lumber Liquidators in the past two months following CEO Robert Lynch, and the Chief Financial Officer and Chief Compliance Officer.

Lumber Liquidators Chief Executive Officer Robert Lynch has resigned unexpectedly as the company faces criminal charges over illegally sourced Russian hardwood and lawsuits over the formaldehyde content of its products.

In its latest regulatory filing, the flooring company revealed that the U.S. Department of Justice (DOJ) is seeking criminal charges over violations of the Lacey Act, which prohibits the importation of illegally sourced wildlife and plant products. Lumber Liquidators estimates the “probable loss that may result from this action” is $10 million U.S. dollars, though this figure may be conservative.

Timeline of Events: Lumber Liquidators’ troubles

September 2013: U.S. federal agents raid Lumber Liquidators’ Virginia headquarters as part of an ongoing investigation into suspected imports of illegally sourced hardwood flooring.

October 2013: EIA releases a report entitled “Liquidating the Forests,” uncovering questionable supply chains of illegal timber from the Russian Far East, through Chinese factories, to U.S. consumers. The report documents evidence that Lumber Liquidators knowingly imported large quantities of hardwood flooring sourced illegally from protected tiger habitat in the Russian Far East via a Chinese supplier.

September 2014: Greenpeace publishes an investigation into the systemic laundering of illegal timber in the Brazilian Amazon. Greenpeace’s report finds that Lumber Liquidators’ Brazilian suppliers had purchased wood from sawmills that had processed laundered timber.

October 2014: Lumber Liquidators posts a new “sustainability policy” for wood sourcing and denies that they have ever bought illegal timber despite the evidence presented in the EIA report.

December 2014: A Russian court finds six senior executives of Lumber Liquidators’ Chinese manufacturer’s main Russian timber supplier guilty of organized crime and illegal logging. The company’s CEO is sentenced to 15 years in a penal colony. March 2015: A CBS 60 Minutes investigation finds that samples of Lumber Liquidators’ Chinese-made laminate flooring contains unsafe levels of formaldehyde. The report is followed by over 100 class actions against the company.

April 2015: Lumber Liquidators discloses in its SEC filing that the Department of Justice is seeking criminal charges over illegally sourced wood under the Lacey Act, connected to the 2013 raid. The company estimates ten million dollars in losses as a result of these charges.

May 2015: Lumber Liquidators’ CEO Robert Lynch resigns, days after Chief Financial Officer Daniel Terrell announced his departure.

June 2015: Lumber Liquidators announces the termination of William K. Schlegel, Chief Merchandising Officer.

The investigation started in 2013 over suspected illegal wood from Russia via a Chinese supplier, documented in the EIA report, "Liquidating the Forests." Shortly before the EIA report was released, on September 26, 2013, the U.S. Immigrations and Customs Enforcement, together with the Fish and Wildlife Service, raided the company’s corporate offices in Toano and a store in Richmond, both in Virginia, regarding the company’s illegal wood imports. The company’s stock value dropped nearly 20 percent immediately following the raids.

The Lacey Act makes it illegal to import or sell fish, wildlife, or plants sourced in violation of foreign law. Violations of the law can result in criminal convictions, civil penalties, and forfeiture of assets. In a criminal conviction, sentencing guidelines are generally determined based on the market value of the illicit goods. In the case of Lumber Liquidators, this would refer to the value of the wood that was illegally imported. However, the value of forfeited assets may be much higher and include all proceeds or instruments of the crime. In addition, there can be substantial legal fees. The $10 million in losses currently estimated by the company would equal the estimated cost of opening 25-35 new retail stores across the country, according to Lumber Liquidators SEC filing. The company recently announced that it has stopped its sourcing of laminate flooring from China.

The DOJ may also investigate other violations by the company beyond the illegal Russian timber imports documented in EIA’s 2013 report. In September 2014, Greenpeace released a report showing that Lumber Liquidators was sourcing from a company buying illegally harvested wood from the Brazilian Amazon. Lumber Liquidators’ stock value dropped further after a broadcast of 60 Minutes in 2015 alleged that the Chinese made flooring contains unsafe levels of formaldehyde, violating California’s emissions regulations.

In addition to the monetary damage, Lumber Liquidators cites substantial reputational and market risks associated with the criminal charges, stating that “[n]egative publicity surrounding these government investigations and legal actions also may harm our reputation and the demand for our products. Any one of these results could negatively affect our operations, financial conditions and liquidity and impair our ability to grow or sustain our business.”

The Lacey Act, for the first time in history, now creates consequences for trafficking in stolen timber. Lumber Liquidator’s own projections of monetary losses and the significant reputational risks associated with a federal investigation reveal the extraordinary costs to businesses that engage in this illicit trade. Illegal logging and forest crime has an estimated worth of $30 to $100 billion U.S. dollars annually, comprising 10 to 30 percent of the total global timber trade.

EIA estimates that 80 percent of the wood in the Russian Far East is illegally harvested, stolen by organized criminal groups who plunder the forests that are home to the world’s last 450 Siberian Tigers. Lumber Liquidators has imported millions of square feet of this illegal wood, making consumers the unwitting financiers of the timber mafias that are destroying the world’s forests.

The Lacey Act is a powerful tool to stop this devastating trade, and these recent statements and actions by Lumber Liquidators make it clear that the law can have a far-reaching impact. Full and effective enforcement across the industry is needed to ensure that destructive illegal timber is eliminated from the U.S. market, to the benefit of the world's forests and the American consumer.