In November, 2013, Whitney Tilson, who runs a small hedge fund called Kase Capital Management, gave a presentation to a group of money managers. Tilson’s talk was about a flooring company called Lumber Liquidators. In the previous two years, its profits had more than doubled and its stock had risen sevenfold. But Tilson made a case for selling the company short—betting on its stock to fall. He thought that its profit margins were unsustainably high and suspected that it had driven down costs by buying wood illegally harvested in Siberia. (The company denies buying illegally logged wood but says that it may face criminal charges relating to this issue.) Months later, a whistle-blower contacted him. “He said the story was much bigger than the sourcing of illegal hardwood,” Tilson told me. The contact alleged that the company was saving money by buying laminates made of wood soaked in formaldehyde (a carcinogen) from Chinese factories, and that the resins these factories used also contained the substance. Tilson hired a lab to test the laminates, and it found formaldehyde levels two to seven times the limit established as safe by California, on which forthcoming federal standards are based. A small investor named Xuhua Zhou had already published a detailed report alleging similar problems.
Shorting Lumber Liquidators turned out to be a good call. On March 1st, “60 Minutes” aired a blistering exposé on the company. The segment included tests showing high formaldehyde levels and hidden-camera interviews in which workers in China admitted lying about quality. The next day, Lumber Liquidators’ stock fell twenty-five per cent. It then recovered a bit as the company mounted a P.R. offensive—insisting that its products were safe and that “60 Minutes” had used “improper” testing procedures. But the stock is still down more than forty per cent in the past three weeks.
More here – The New Yorker