Lead Plaintiff Public Employees’ Retirement System of Mississippi (hereinafter, "Plaintiff") is a pension fund established for current and retired public employees of the State of Mississippi, including current and retired employees of the Mississippi's public-school districts, municipalities, counties, community colleges, state universities, libraries, and water districts.1 See Am. Compl. ¶ 37 [Doc. 37]. Defendants are Mohawk Industries, Inc. (hereinafter, "Mohawk" or the "Company"), and Jeffrey S. Lorberbaum. See id. ¶¶ 38–39.
Mohawk is one of the world's largest manufacturers of flooring products, including carpet, rugs, hardwood flooring, laminates, tile, and ceramic. See id. ¶ 38. The Company is publicly traded on the New York Stock Exchange and sells its flooring products to distributors, wholesalers, and retailers, including big-box stores like Sherwin Williams and Floor & Décor. See id. The Company conducts business in three (3) divisions or "segments," with its Flooring North America (or "Flooring, N.A.") segment being the largest by far. See id. ¶ 6. Defendant Lorberbaum has been Mohawk's chief executive officer (or "CEO") since January 2001 and its chairman of the board of directors since May 2004. See id. ¶ 39.
Plaintiff manages over $33 billion in assets for its beneficiaries. See id. ¶ 37. According to the Amended Complaint, Plaintiff purchased common stock in Mohawk between April 28, 2017 and July 25, 2019, inclusive (the "Class Period"). See id.; see also Compl. ¶ 1 [Doc. 1]. Plaintiff brings this suit on behalf of its members and all others similarly situated to recover losses suffered from Defendants’ alleged violations of federal securities laws. See Am. Compl. 1, ¶ 37.
The Court includes a detailed examination of Plaintiff's allegations in its analysis, but provides here a general summary of the facts Plaintiff alleges in its Amended Complaint for context:
7. Leading up to the start of the Class Period, Mohawk's stock price soared, as the Company reported record earnings for eleven consecutive quarters. Mohawk's dominance of the market for Conventional Flooring Products fueled that growth. But, by the start of the Class Period, a potential threat to Mohawk's market dominance was looming, as Luxury Vinyl Tile ("LVT"), a relatively new flooring option, emerged as an attractive alternative to Conventional Flooring Products.
8. LVT is a resilient flooring product designed to look like wood, stone, or ceramic tile. LVT is waterproof and wears better than wood, stone, or ceramic tile. It is also easier, and hence cheaper, to install. LVT thus offers home and business owners more bang for their buck—the same or similar aesthetic as wood, stone, or tile, but at a much lower cost while being much easier to maintain. That combination caused demand for LVT to skyrocket.
9. The surge in demand for LVT was so great that it represented almost 60% of the total resilient flooring market by 2017 and helped turn resilient flooring into the largest flooring category in the United States. The Company's Chief Executive Officer, Defendant Jeffrey Lorberbaum, described the rise of LVT as the biggest change in flooring since carpet in the 1960s, noting that it had grown faster than anything he had seen in his 40 years in the industry.
10. As demand for LVT swelled, demand for Mohawk's Conventional Flooring Products weakened, and Mohawk had to figure out how to obtain sources of LVT in order to meet the changing demands of the marketplace. One option was to establish relationships with reliable, cost-effective producers (most of whom were in China) that were already producing and supplying LVT. The other option was to attempt to acquire the means to manufacture the products itself. Mohawk's two principal competitors in the U.S. (Shaw Industries and Armstrong Flooring) chose the first option and quickly procured reliable sources of LVT. Mohawk chose the second option, paying $1.2 billion to acquire a Belgian LVT manufacturer (IVC Group) with a new manufacturing plant in Dalton, Georgia (the "U.S. LVT Plant"). Defendants promised that the U.S. LVT Plant would quickly come online and enable Mohawk to meet the soaring domestic demand for LVT. Unfortunately, those promises proved hollow.
11. A little over eighteen months after Mohawk acquired the U.S. LVT Plant, the Company was falling further and further behind its competitors in the still-burgeoning market for LVT flooring. Shaw, for example, had increased its share of the LVT market from almost zero to nearly 30% in less than 2 years. Mohawk, by comparison, had captured only 12% of the LVT market.
12. Rather than admit it had blundered in attempting to meet domestic LVT demand through Mohawk-manufactured products, the Company offered excuses for its struggles, coupled with assurances that things would soon be better. Defendants routinely blamed "capacity constraints," claiming (falsely) that Mohawk was selling all the LVT it was currently manufacturing and would be able to sell even more when it was able to increase production capacity. But the undisclosed truth was that the Company's efforts to increase domestic production were hamstrung by serious problems with production lines at the U.S. LVT Plant, which caused the lines to consistently produce huge volumes of defective "scrap" LVT that could not be sold to customers.
13. Mohawk's former Senior Vice President of Sales for the Builder and Multifamily division, one of Mohawk's most senior executives and a member of the Company's Executive Leadership Team, recounted that approximately 50% of the LVT the Company produced during the Class Period was unsalable scrap. The quality was so poor, in fact, that he forbade his 125-person salesforce from selling it. That salesforce was responsible for all large-scale builders in North America and generated roughly $1 billion in annual revenue—20% of Mohawk's Flooring[, N.A.] total revenues.
14. When Defendant Lorberbaum asked the former executive why his team was not selling the Company's domestically produced LVT, the executive told him point blank: "we don't make it any good" and "you cannot sell it in our arena because it would not work." Even though the scrap LVT was unsalable and was specifically coded in the Company's computers as not to be sold, Mohawk nonetheless carried the product in its publicly reported inventory as "first quality" for the express purpose of hiding the ongoing production problems and avoiding the negative financial implications writing down that inventory would cause.
15. By the beginning of the Class Period, losing LVT market share to competitors was not Mohawk's only problem. The emergence of LVT was also eroding demand for Mohawk's Conventional Flooring Products, especially in the Flooring[, N.A.] segment. In 2017 alone, the U.S. market for LVT grew more than 20%, while the entire U.S. flooring market grew only 4%. Defendant Lorberbaum admitted that LVT had "grown faster than anything that I've seen in my 40 years of history."
16. Against this backdrop, many analysts covering Mohawk questioned whether the Company would be able to continue its string of record quarterly sales. The Company provided a resounding affirmative response to those questions at the start of the Class Period when it reported that it had achieved the highest first-quarter sales in the Company's history in the first quarter of 2017. Defendants attributed much of that success to the Flooring[, N.A.] segment, which accounted for approximately 42% of Mohawk's total sales.
17. Mohawk reported similarly spectacular results for each of the remaining quarters in 2017, again crediting Flooring[, N.A.] for driving those results. Analysts were impressed, with many continuing to maintain their "Buy" or "Outperform" ratings on Mohawk's stock. One even gushed, "All cylinders firing!" This investor enthusiasm drove the Company's stock price to an all-time high in late November 2017.
18. Unbeknownst to investors and the market, however, the Company had "achieved" these results through an unsustainable fraudulent scheme.... [A]t the end of each fiscal quarter, Company executives instructed employees in the Company's distribution centers to load Company trucks with millions of pounds of flooring products that were not ordered for delivery to customers until the next quarter or quarters [(the "Saturday Scheme")]. Employees would load the trucks on Friday as if "delivery" would occur on Saturday, knowing full-well that there would be no one to accept or reject
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