This Hedge Fund Manager Spoke With Lumber Liquidators' Chairman After 60 Minutes Report; Here's What He Thinks

As Lumber Liquidators Holdings Inc LL slowly recuperates from the effects of the 60 Minutes report, Lemelson Capital Management Chief Investment Officer Rev. Emmanuel Lemelson spoke with Founder and Chairman Tom Sullivan. Lemelson then shared his thoughts and conclusions with Benzinga.

He said that he encouraged Sullivan to change the response he gave to Whitney and CBS. “LL’s early response attributing the findings simply to profit-motivated short sellers was essentially Ad Hominem – a logical fallacy, and the same error Whitney made in pinning responsibility (pre-maturely) on Tom personally, going as far as to offer motives,” Lemelson explained.

Lemelson Capital Management encouraged the Chairman to “work with the errors in Whitney’s arguments, for which there are several, but not to attack him personally, since the CBS report has at a very minimum uncovered improprieties at the Chinese factories and at a maximum possibly helped prevent serious health risks to consumers.”

The hedge fund manager told Benzinga that he encouraged Sullivan to focus on:

“- Constructing rational and dispassionate arguments.

e.g. Financial analysis indicating that based on sales mix, laminate flooring margins could not have led to the ‘doubling of margins’ Whitney suggested, and thus invalidates the alleged profit motive.

- Asking legitimate questions in a dispassionate way

e.g. Why did CBS and Whitney not report the potentially hazardous finding immediately?

- Why is the investigating attorney ‘backed’ by Whitney?

- Why did Whitney, the Attorney and CBS hold back the information while they prepared the documentary, making agreements amongst themselves on how it would be released, rather than alert the public of a potential safety issue involving children?

- The fallacy here is: Ad Populum – Appealing to the emotions of the crowd.

- Exploring alternative explanations that have been overlooked

- Examine the merits of Whitney’s arguments (e.g. If LL directed a breach of CA regulations, fail rate would have been 100%)

- The hidden camera audio is edited, so listener does not hear what else the factory rep. has to say on the issues of Carb 2 compliance and when it is offered and on what grounds (i.e. required testing)

- Focus on the customer (and parenthetically, their safety)

- Withdraw backing of factories immediately.”

Following this conversation, Lumber Liquidators and Sullivan himself have adapted their response. “Tom has been consistent that the tests used by CBS are misleading,” Lemelson says. “LL must provide evidence on the CC to invalidate the lab findings, and buttress this claim. LCM will be on the call. It is certain that the above/revised arguments now being made by the company will lead to greater investor confidence than those made in their initial ‘knee-jerk’ response. Nonetheless, the future of the company rests on their ability to invalidate the lab findings."

Shares of Lumber Liquidators are trading up almost 11 percent on Wednesday afternoon.