A federal judge has refused to dismiss charges that Calhoun, Georgia-based Mohawk Industries deliberately misrepresented sales and performance of its luxury vinyl tile operations in the United States for more than two years, artificially inflating the company's stock value before what a lawsuit calls a "channel stuff" scheme was reported and the value of the company's stock plunged by $7.4 billion.
In a 58-page opinion issued last week, U.S. District Court Judge Eleanor L. Ross ruled that a lawsuit against Mohawk may proceed to determine whether the world's biggest floor covering firm misled shareholders in 2017 and 2018. The suit claims Mohawk falsely booked revenue through a scheme to make deliveries on the last Saturdays of each fiscal quarter when customers were closed and couldn't decline product they didn't need yet or that Mohawk knew was defective.
The proposed class-action suit, brought by the Public Employees' Retirement System of Mississippi, refers to accounts of former employees, including 14 anonymous sources, and portrays the "Saturday scheme" as a way for the company to "conceal from investors the true reasons for the company's ballooning (LTV) inventory."
"(Mohawk) continued to make false and misleading statements about the company's sales growth and demand for its conventional flooring products," Atlanta attorney H. Lamar Mixson said in his initial 33-page complaint against Mohawk filed in January 2020. "In truth, defendants engaged in deceptive and unsustainable sales practices to mask declining consumer demand for its conventional flooring products."
The lawsuit claims Mohawk and its CEO, Jeffrey Lorberbaum, engaged in "unsustainable channel stuffing" and delivered products to consumers on Saturdays at the end of the fiscal quarter so such deliveries could be booked as sales even when the products were never ordered.
When the truth was finally revealed to investors through a series of partial disclosures beginning in July 2018, Mixson said, the price of Mohawk common stock plunged, wiping out $7.4 billion in shareholder value.
Former Mohawk Flooring President Brian Carson who oversaw the LTV operations was fired from Mohawk in 2018.
Mohawk denied any reporting violations and its attorneys said the lawsuit "offers nothing more than half-baked conspiracy theories and innuendo" and relies for proof on charges made by 14 unnamed sources, none of whom are company executives. Atlanta attorney John Latham, counsel for Mohawk Industries, noted that the lawsuit never alleges that any of the company's financial reports were inaccurate or must be changed and "it does not allege that Mr. Lorberbaum had any plausible motive to engage in the alleged schemes."
"The federal securities laws should not be treated as a system for investor insurance that reimburses investors for any decline in the value of their investments," Latham said in his 46-page motion to dismiss the lawsuit.
Staff file photo / Jeff Lorberbaum, the chairman and chief executive officer of Mohawk Industries, speaks during a flag raising event at Mohawk Industries in 2019 in Calhoun, Georgia.But Judge Ross said there is sufficient evidence to warrant a trial on some of the allegations made against Mohawk, including questions about Lorberbaum saying that LTV was "being well accepted across all channels" when builders returned about 80% of Mohawk's domestic produced LTV and retail customers returned from 25 to 50% of they Mohawk LTV they bought. The lawsuit against Mohawk claims that the company's LTV sales fell by more than 60% due to alleged defects and customer complaints.
No trial date has been set for the shareholders' lawsuit.
Mohawk disclosed in June 2020 that the company had received subpoenas from the U.S. Securities and Exchange Commission "on topics similar to those raised by the complaints" filed by the Mississippi retirement fund.
But the company's audit committee, with the assistance of outside legal counsel, completed an internal investigation into the allegations in late 2020 and concluded that the allegations of wrongdoing were without merit. Earlier this year, Fitch bond rating service said it doesn't expect Mohawk to have to make any restatement of earning and improved its overall assessment for the company.
From its peak at $232.32 per share in 2017, Mohawk shares fell by more than 67% by the spring of 2019 when company shares fell to $76.24. But Mohawk share prices have since more than doubled and closed Monday at $177.92 per share.
Contact Dave Flessner at dflessner@timesfreepress.com or at 423-757-6340.