By Amanda Bronstad, From The National Law Journal

Lumber Liquidators Holdings Inc., whose stock has plummeted since a “60 Minutes” exposé revealed that its hardwood laminate flooring products contained illegal levels of formaldehyde, is fending off a raft of shareholder lawsuits filed against its top executives, many of whom have abruptly left the company.

The shareholder lawsuits are separate from the more than 100 consumer class actions coordinated before U.S. District Judge Anthony Trenga in the Eastern District of Virginia.

Shareholders filed a consolidated derivative complaint on behalf of Toano, Virginia-based Lumber Liquidators on June 26 against the company’s board and five officers, including three who have left since the “60 Minutes” report on March 1. In April, the company announced Chief Financial Officer Daniel Terrell’s resignation. Chief Executive Officer Robert Lynch abruptly left in May. William Schlegel, who was the head of merchandising, was fired last month.

Those executives and Lumber Liquidators also moved last month to dismiss a separate securities class action brought on behalf of shareholders accusing them of securities fraud.

The lawsuits have proliferated since the “60 Minutes” piece revealed Lumber Liquidators was working with Chinese mills that didn’t comply with the California Air Resources Board’s regulations on formaldehyde emissions.

Depending on the reasons, the high profile executive departures could bolster the shareholder litigation against Lumber Liquidators, said John Coffee, a professor at Columbia Law School.

“If they’re getting fired because they knew the company was importing noncompliant products – products that didn’t comply with California law—that would be a case in which you can say ‘Gee, that shows it was negligent,’” he said. “The case against those fired officers would be somewhat stronger.”

A Lumber Liquidators spokeswoman and Lyle Roberts, a partner in the Washington office of Palo Alto, Calif.-based Cooley who represents the company and its board and officers, did not respond to a request for comment.

Both shareholder actions allege that Lumber Liquidators and its executives misled investors in financial reports and conference calls by attributing its increasing gross margins to improvements in its business partnerships. Instead, the lawsuits allege, Lumber Liquidators used illegally sourced, cheaper lumber and partnered with Chinese mills that manufactured flooring products with dangerous levels of formaldehyde.

The securities class action complaint originally was filed in November 2013 following reports that federal agents had searched the corporate offices of Lumber Liquidators. Since then, Lumber Liquidators stock has plummeted from a peak of $119 a share to less than $20.

On Feb. 25, Lumber Liquidators confirmed that the Justice Department was considering criminal charges as part of an investigation into whether the company violated the U.S. Lacey Act by importing illegally sourced timber from protected forests in Russia.

In the securities class action’s amended complaint, filed on April 22, plaintiffs allege that the misrepresentations of the three executives and founder Thomas Sullivan, now interim CEO, caused investor losses of $1.52 billion. The complaint, which references the statements of six confidential witnesses, also alleges that they had a financial incentive to conceal that information because they cashed out millions of dollars of their own stock during the class period.

“Our investigation showed the company was illegally sourcing wood from China and that explained the exceptional gross margins that Lumber Liquidators was able to achieve,” said Jeremy Lieberman, a partner at Pomerantz in New York, lead plaintiffs counsel in the class action. “The recent resignations since the ‘60 Minutes’ episode only confirm the allegations that we had in the original complaint. The company had too high levels of formaldehyde—above levels by regulators—in addition to illegally sourced wood.”

The class action was brought on behalf of anyone who purchased Lumber Liquidators stock between February 22, 2012, and February 27, 2015.

The defendants moved to dismiss that action on June 2, blaming some of the stock drops on negative reports of short sellers and refuting any knowledge of the noncompliance issues.

“The complaint identifies no document, witness, or other piece of evidence establishing that any individual defendant – or anyone else at the company – knew or was severely reckless in not knowing of the supposed regulatory violations and their alleged impact on Lumber Liquidators’ financial performance,” wrote Roberts, of Cooley.

On Tuesday, U.S. District Judge Arenda Wright Allen of the Eastern District of Virginia ordered that plaintiffs attorneys submit more information by July 21 about the confidential witnesses cited in their complaint after Lumber Liquidators discovered that one of them, having been contacted, disputed making the statements.

Meanwhile, shareholders also have filed five derivative actions, which are brought by shareholders on behalf of the company generally against board members for failing to perform their fiduciary duties. Two cases have been filed in state courts in Virginia and Delaware, where the company is incorporated. On June 17, Wright Allen consolidated three derivative actions in federal court.

The defendants are due to file their motions to dismiss by July 24.

Despite the higher hurdle of a derivative complaint, Benny Goodman, a partner at San Diego’s Robbins Geller Rudman & Dowd who filed the consolidated derivative complaint, said the executive departures could demonstrate wrongdoing.

“Often times, we see these kinds of mass resignations in the corporate suite in light of massive wrongdoing when there’s a big financial scandal,” he said. “In light of this, I think it’s fair to say we rarely see a major financial scandal like this that doesn’t originate from a failure of corporate governance.”

IMAGE: A man walks past a Lumber Liquidators store, Thursday, March 12, 2015, in Philadelphia. Photo: Matt Slocum/AP

For more on this story go to: http://www.nationallawjournal.com/id=1202732255952/Lumber-Liquidators-Mired-in-Shareholder-Lawsuits#ixzz3g3wxRK60