In June of this year, Seeking Alpha, an online stock market news and financial analysis site, published a report by Xuhua Zhou, a private investor, that alleged that Lumber Liquidators’ Mayflower Bund Birch engineered hardwood, sold in at least one of the store’s California showrooms, contained three and a half times the legal level of formaldehyde.
Zhou’s claims were based on analysis conducted by Berkeley Analytical, an environmental laboratory that specializes in the analysis of organic chemicals emitted by building products, finishes, furniture, medical devices, and consumer products.
It is significant that the products were purchased in California, the state governed by the strictest of air quality standards. The California Air Resources Board (CARB) was founded in 1967 with the mission to “…promote and protect public health, welfare and ecological resources through the effective and efficient reduction of air pollutants, while recognizing and considering the effects on the state’s economy.” CARB has established legal limits for formaldehyde emissions from hardwood plywood, hardwood plywood veneer core, hardwood plywood composite core, particleboard, and medium density fiberboard. While CARB standards are not upheld in every state, many manufacturers voluntarily abide by them, and the box of flooring that is alleged to be in violation carried a seal of CARB compliance.
Zhou says that he purchased, at random, three different types of engineered hardwood in a Los Angeles Lumber Liquidators store and then sent the products to Berkeley Analytical for analysis at the cost of $1,000 per SKU, testing which he says he paid for out of his own pocket. One of the three SKUs was found to be in violation of CARB standards for composite wood products.
Zhou reports that he was motivated to start his research after considering how Lumber Liquidators, which sells primarily commodity flooring at a lower cost than many of its competitors, was able to achieve high gross margins. He knew that Lumber Liquidators sourced a lot of its product from China and was familiar with a recent scandal in China about formaldehyde in engineered hardwood. Zhou then went online and began reading complaints from Lumber Liquidator customers, some of which described exhibiting symptoms consistent with formaldehyde poisoning.
Formaldehyde poisoning poses a significant danger to those exposed. According to the Healthy House Institute, "Formaldehyde is a potent mucous membrane irritant. As such, acute (short term) formaldehyde exposure concentrations > 0.05 ppm can cause irritation of the eyes, nose, throat and sinuses. Resulting symptoms include burning, dryness, redness and itching of eyes, nasal dryness, soreness, runniness; sore or dry throat, and sinus congestion or post-nasal drip. Secondary effects associated with these symptoms may include cough, chest tightness, excessive phlegm production, repeated sinus infections, eye infections and possibly bronchitis. In very sensitive individuals these respiratory symptoms may progress to asthma and for those with existing asthma exposure to formaldehyde may precipitate asthmatic attacks."
As one might expect, long-term exposure is even more concerning. According to a 2009 study entitled Formaldehyde in China: Production, Consumption, Exposure Levels, and Health Effects, "Chronic exposure at higher levels, starting at around 1.9 ppm, has been shown to result in significant damage to pulmonary function, resulting in reduced maximum mid-expiratory flow and forced vital capacity. There is also research that supports the theory that formaldehyde exposure contributes to reproductive problems in women. A study on Finnish women working in laboratories at least three days a week found a significant correlation between spontaneous abortion and formaldehyde exposure, and a study of Chinese women found abnormal menstrual cycles in 70% of the women occupationally exposed to formaldehyde compared to only 17% in the control group." According to Berkeley’s analysis, the reading on Mayflower Bund Birch was 0.17 ppm. In addition, the National Research Council and Environmental Protection Agency (EPA) acknowledge a causal connection between formaldehyde and cancer of the nose and nasal cavity. In fact, the EPA classifies formaldehyde as a probable human carcinogen under conditions of unusually high or prolonged exposure. So clearly, the implications could be significant for Lumber Liquidators’ customers if Zhou’s findings are accurate.
Fortunately, in a setting like a home, formaldehyde emissions from flooring decrease over time, as off gassing slows.
Floor Focus reached out to Lumber Liquidators for a comment on Zhou’s claims and received an email signed with CEO Tom Sullivan’s name saying, "His report was nonsense. He is a short seller of our stock and put out this report in attempt to hurt our stock. We have more quality control people and testing labs than anyone in the business." Of course, this isn’t simply a matter of someone bad-mouthing Lumber Liquidators. If Zhou’s claims are indeed "nonsense," as Sullivan says, it means that Zhou has gone to great lengths to fabricate his "findings" and doing so in order to hurt a publically traded stock would certainly be a matter that could be pursued in the courts. Floor Focus asked Sullivan for a statement regarding any legal proceedings it is pursuing in relation to Zhou but requests for a comment were not acknowledged.
Zhou is indeed a short seller on Lumber Liquidators stock (meaning that he makes money when the stock loses value), a fact that he let his readers know up front, and he says that he did indeed profit from publishing the report, QUOTE Did I make money from publishing the report? Yes, I did. But does that make the information any less truthful? I don’t think so.END QUOTE It was reported by The Motley Fool that Lumber Liquidators' stock dropped 11% in the days following the release of Zhou’s report.
Floor Focus contacted Berkeley Analytical to verify that Zhou’s report was indeed legitimate. Berkeley emphasized that it does not do work for private individuals or stock firms, indicating that Zhou had misled Berkeley about his identity when he submitted the products for testing. "It is not our policy to work with individuals. This was sort of a bait and switch," says Alfred Hodgson, co-founder and research director for Berkeley.
Zhou explains that he found Berkeley and commissioned the report through a friend who works as a chemistry professor at Duke University. Berkeley, then, was led to believe that they were doing work for academic research, not testing a consumer product for possible violations, so it conducted its testing as it would in that situation. In fact, Hodgson and his team only became aware of the true purpose of the analysis when a redacted copy of the report was posted on the Internet.
If Berkeley had agreed to do the testing with a true understanding of the situation, it would have conducted the analysis differently, procuring the materials itself and following specific chain of custody standards. Berkeley stands by its report that one of the three tested products did have high levels of formaldehyde; however, it has no way of guaranteeing that the product submitted was what Zhou claimed it to be, Lumber Liquidators' Mayflower engineered hardwood.
On June 19, Zhou petitioned CARB to look into his findings, submitting a letter; picture of the Mayflower identification label, which includes a claim of CARB compliance for formaldehyde; screen shot of the Mayflower listing on Lumber Liquidators’ website; and a copy of Berkeley’s report. Of the situation, the California Air Resources Board, which calls itself ARB, says, "The Air Resources Board is aware of the blog postings on the Seeking Alpha website regarding formaldehyde levels in Lumber Liquidators products, posted last June. We are currently looking into the matter and will be assessing our test results to determine if further investigation is warranted.
"The California regulation establishes emission standards for composite wood panels, the raw materials used to make a variety of finished goods, such as cabinets and flooring. The regulation does not establish emission standards for finished goods, only composite wood products (particle board, medium density fiberboard and hardwood plywood) that are used in making finished goods. To determine compliance with the current California regulation we would only test the composite wood elements that are components of these finished goods.
"The ARB Enforcement Division takes samples of boards, panels and finished goods from a number of retailers. If the finished goods contain composite wood products, we test to determine if the emissions of these composite wood products are compliant with our formaldehyde emission standards."
Hodgson explains how Berkeley isolated the core materials for testing, "This analysis was interesting from a technical perspective. ATCM affects the core materials. This is a composite wood base with a veneer, so how should it be tested? You could machine the finish off, I suppose. But we chose to seal off the surface and tested the backside. We believe that this is the best approach for something like this."
Interestingly, in the months following Zhou’s report, Lumber Liquidators put its Mayflower Bund Birch product on sale, reducing the price 26% from $2.29 per square foot to $1.69 per square foot.
According to Zhou, there are rumblings of class-action lawsuits by consumers who have purchased Lumber Liquidators’ flooring with high levels of formaldehyde, and a Google search reveals this to be the case. However, it’s hard to tell whether these are legitimate claims or simply ambulance chasers reacting to Zhou’s Seeking Alpha report. Floor Focus asked Lumber Liquidators to address the details of this case specifically—whether it is pursuing legal action against Zhou, whether it is conducting independent testing on Mayflower, what it plans to do for consumers who purchased Mayflower, and how it could explain Berkeley’s analysis—and received this response, “We stand by our products. Period. We’ve got what we believe to be an industry-leading compliance program and we regularly confirm our own product compliance utilizing recognized independent laboratories that test against the industry regulatory standards. This is in addition to other quality assurance measures we have in place.
"We take every claim seriously, no matter the context or the motivation behind it. We guarantee quality. Our comprehensive quality control system is designed to ensure Lumber Liquidators customers receive the best and safest flooring available. We hold ourselves to a higher standard with our customers and consumers in mind. The result is a product we are confident to put in our own homes and are proud to sell."
But Zhou counters, "There’s one simple question to answer here. Was the product I tested significantly noncompliant or not? If so, why and how pervasive is the issue? Instead of blaming on my profession or motive, they should be looking at the facts. It’s plain and simple chemistry, not a matter of opinion."