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Stop the Presses: Misleading Investors in the Wake of Bad Press Leads to Criminal and Civil Penalties

P. T. Barnum is credited as saying “There is no such thing as bad publicity.” That may be true in running a circus, but it is demonstrably untrue in running a public company. Bad press causes the company’s stock price to fall and puts pressure on management to right the ship. Recent enforcement actions by the DOJ and SEC make clear that companies should be thoughtful in how they respond to bad press, lest they violate the law.

On March 12, 2019, the DOJ announced that Lumber Liquidators Holdings Inc. (“Lumber Liquidators”), one of the largest retailers of flooring products in the United States, agreed to pay a $33 million penalty for making materially false and misleading statements to investors in the wake of bad press. The same day, the SEC announced a settlement of civil securities fraud claims for $6 million in disgorgement and interest. Both settlements arose from statements Lumber Liquidators made on March 2, 2015 in a press release, which sought to reassure investors following an episode of CBS’s 60 Minutes that raised doubts about the company’s suppliers and the content of its flooring products.

On March 1, 2015, 60 Minutes aired an episode reporting on a months-long investigation into whether Lumber Liquidator’s products complied with California Air Resources Board (“CARB”) regulations. The 60 Minutes investigation included deconstructive testing of Lumber Liquidators’ laminate flooring products and secretly recorded interviews with employees of its supply factories in China in which the employees admitted Lumber Liquidators’ products were not CARB compliant.

Lumber Liquidators’ share price fell 25% after the 60 Minutes episode aired, and the New York Stock Exchange halted trading of the company’s stock in the expectation that the company would issue a response to the 60 Minutes report. Later that day, Lumber Liquidators issued a press release and filed a current report on Form 8-K with the SEC, in which it denied the allegations in the 60 Minutes episode and asserted that the products in question were actually in conformance with CARB regulations. According to the DOJ and SEC, Lumber Liquidators knew those statements were false: Lumber Liquidators knew that laminate products from at least one of its suppliers in China did not meet CARB requirements, it had decided to discontinue business with that supplier, and its own internal testing had revealed CARB non-compliance in certain products.

A multi-year DOJ and SEC investigation ensued that ultimately led to the $33 million dollar settlement with both agencies. Lumber Liquidators also suspended the sale of laminate products sourced from China and suspended or terminated the employees involved in the violations, including its executive management team. It offered in-home testing to previous customers of laminate products, and overhauled the company’s compliance and testing policy.

Bad press can come in a variety of ways: whistleblowers, internal investigations, news reports, or some combination of the above. No company likes public disclosure of bad news, or the stock price drop that may follow. But acting hastily to alleviate investor concerns can cost a company exponentially more than taking the time to craft an accurate response. If necessary, a company should conduct a thorough internal investigation to ensure that any statement it does make is completely truthful. The company should also think about obtaining outside counsel to assist in fully understanding the legal implications of each possible response. While bad press hurts, years of government investigations and criminal and civil penalties hurt worse.

Visit our website to learn more about V&E’s Government Investigations & White Collar Criminal Defense practice. For more information, please contact Vinson & Elkins lawyers Jeffrey Johnston or Casey Downing.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.