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In Re Lumber Liquidators Holdings, Inc. Securities Litigation 13-CV-00157

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In Re Lumber Liquidators Holdings, Inc. Securities Litigation 13-CV-00157 Case 4:13-cv-00157-AWA-LRL Document 80 Filed 04/22/15 Page 1 of 150 PageID# 1399 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF VIRGINIA NEWPORT NEWS DIVISION IN RE LUMBER LIQUIDATORS Master File No.: 4:13-cv-00157-AWA-DEM HOLDINGS, INC. SECURITIES LITIGATION Hon. Arenda L. Wright Allen CLASS ACTION JURY TRIAL DEMANDED CONSOLIDATED AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS Case 4:13-cv-00157-AWA-LRL Document 80 Filed 04/22/15 Page 2 of 150 PageID# 1400 TABLE OF CONTENTS Page I. INTRODUCTION .............................................................................................................. 1 II. JURISDICTION AND VENUE ......................................................................................... 9 III. THE PARTIES.................................................................................................................. 10 A. Lead Plaintiffs ....................................................................................................... 10 B. Defendants ............................................................................................................ 10 1. Corporate Defendant ................................................................................. 10 2. Individual Defendants ............................................................................... 11 IV. OVERVIEW OF THE FRAUD ........................................................................................ 12 A. Background On Lumber Liquidators .................................................................... 12 1. History And Business Operations ............................................................. 12 2. Acquisition Of Sequoia And Implementation Of “Sourcing Initiatives” ................................................................................................. 14 3. Defendants’ Knowledge Of Lumber Liquidators’ Sourcing Practices In China ..................................................................................... 16 B. Applicable Government Regulations .................................................................... 21 1. The Lacey Act Bans The Import And Trade Of Illegally Sourced Wood Products ............................................................................ 21 2. The Protected Ecosystem Of The Russian Far East .................................. 22 3. Government Regulation Of Formaldehyde In Composite Wood Products .......................................................................................... 24 C. Defendants’ Illegal Sourcing Of Timber In Violation Of The Lacey Act ......................................................................................................................... 26 1. The Company Illegally Purchased Lumber Sourced From the Russian Far East .................................................................................. 26 2. Xingjia’s Executives Further Confirm Defendants’ Illegal Sourcing Activities .................................................................................... 29 3. Lumber Liquidators Concealed The Illegal Sourcing ............................... 32 D. Defendants’ Illegal Selling Of Laminate And Engineered Hardwood Flooring With High Levels Of Formaldehyde .................................... 36 i Case 4:13-cv-00157-AWA-LRL Document 80 Filed 04/22/15 Page 3 of 150 PageID# 1401 1. Sourcing From China ................................................................................ 37 2. Xuhua Zhou Conducted Independent Tests Of Lumber Liquidators’ Chinese-Made Laminates ..................................................... 38 3. Additional Independent Tests Demonstrate That Lumber Liquidators Chinese-Made Laminates Were 100 Times Above Legal Limits Set By Proposition 65 .............................................. 42 4. 60 Minutes’ Independent Tests And Investigation Of Lumber Liquidators’ Chinese-Made Laminates ....................................... 44 5. The Company’s Defective And Insufficient Quality Control For Formaldehyde Emissions ................................................................... 50 6. Aftermath And Regulatory Actions In Response To The 60 Minutes Report .......................................................................................... 52 V. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS AND OMISSIONS ..................................................................................................................... 53 A. 2011 Annual Report .............................................................................................. 54 B. Website Representations ....................................................................................... 60 C. Quarterly Report For 1Q 2012 .............................................................................. 61 D. Quarterly Report For 2Q 2012 .............................................................................. 63 E. August And September 2012 Analyst Conferences .............................................. 66 F. Quarterly Report For 3Q 2012 .............................................................................. 68 G. The Company’s Supplier Code of Conduct .......................................................... 70 H. 2012 Annual Report .............................................................................................. 71 I. Quarterly Report For 1Q 2013 .............................................................................. 78 J. Quarterly Report For 2Q 2013 .............................................................................. 79 K. August And September 2013 Analyst Conferences .............................................. 83 L. September 27, 2013 Press Release ........................................................................ 85 M. Quarterly Report For 3Q 2013 .............................................................................. 86 N. December 10, 2013 Investor Conference .............................................................. 88 O. 2013 Annual Report .............................................................................................. 89 P. Quarterly Report For 1Q 2014 .............................................................................. 97 Q. Quarterly Report For 2Q 2014 ............................................................................ 100 ii Case 4:13-cv-00157-AWA-LRL Document 80 Filed 04/22/15 Page 4 of 150 PageID# 1402 R. Quarterly Report For 3Q 2014 ............................................................................ 102 S. 2014 Annual Report ............................................................................................ 104 VI. THE INDIVIDUAL DEFENDANTS PROFITED FROM THEIR FRAUDULENT SCHEME ............................................................................................. 111 A. Insider Trading Allegations ................................................................................ 111 B. Defendants’ Bonus Compensation Was Linked To Gross Margins And Operating Income ........................................................................................ 114 VII. ADDITIONAL ALLEGATIONS OF SCIENTER ......................................................... 116 VIII. LOSS CAUSATION ....................................................................................................... 122 IX. PRESUMPTION OF RELIANCE .................................................................................. 129 X. INAPPLICABILITY OF THE STATUTORY SAFE HARBOR AND BESPEAKS CAUTION DOCTRINE ............................................................................ 130 XI. CLASS ACTION ALLEGATIONS ............................................................................... 131 COUNT I (For Violations Of Section 10(B) And Rule 10b-5 Promulgated Thereunder Against The Company, Lynch, Terrell, And Sullivan) ............................... 134 COUNT II (For Violations Of Section 20(a) Of The Exchange Act Against The Individual Defendants) .................................................................................................... 137 XII. PRAYER FOR RELIEF ................................................................................................. 138 XIII. DEMAND FOR TRIAL BY JURY ................................................................................ 139 iii Case 4:13-cv-00157-AWA-LRL Document 80 Filed 04/22/15 Page 5 of 150 PageID# 1403 CLASS ACTION COMPLAINT Lead Plaintiffs Gregg Kiken (“Kiken”), Keith Foster (“Foster”), David Lorenzo (“Lorenzo”), and Charles Hickman (“Hickman”) (collectively “Plaintiffs” or “Lead Plaintiffs”), individually and on behalf of all other persons similarly situated, by their undersigned attorneys, allege the following based upon personal knowledge as to themselves and their own acts, and information and belief as to all other matters based upon the investigation conducted by and through their attorneys, which included, among other things, review and analysis of Lumber Liquidators Holdings, Inc.’s (“Lumber Liquidators” or the “Company”) public documents, conference calls and announcements, United States Securities and Exchange Commission (“SEC”) filings, wire and press releases published by and regarding the Company, analysts’ reports, and reports from investigative journalists and investment advisors about the Company. Plaintiffs believe that substantial evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. I. INTRODUCTION 1. This is a federal securities
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