This stockholder derivative action is brought on behalf of Mohawk against certain current and former members of the Company’s Board of Directors (the “Board”) and other Mohawk executives for (a) permitting and/or engaging in a fraudulent scheme to inflate the Company’s revenues and conceal inventory overflow; (b) making and/or allowing others to make materially false and misleading statements in violation of federal securities law; and (c) failing to ensure Mohawk maintained adequate reporting systems and oversight controls concerning legal compliance, financial reporting, and other mission critical Company operations.
Mohawk is one of the world’s largest publicly traded manufacturers and distributors of flooring products. Mohawk derives substantial revenue from its Flooring North America segment (“Flooring NA”), which consists of (a) traditional flooring products like carpets, laminate, tile, and hardwood; and (b) luxury vinyl tile (“LVT”) – a vinyl product designed to look like conventional wood, stone, or ceramic tiles that has become highly favored among consumers in recent years.
As alleged in the Complaint, Mohawk hoped to secure a foothold in the emerging LVT market and, in June 2015, acquired an LVT manufacturing company and two LVT manufacturing plants for $1.2 billion. The Board also approved additional funding to produce LVT in 2017. Mohawk, however, failed to capture its desired share of the LVT market and was being outperformed by competitors. Further, as demand for LVT continued to steadily increase, demand for conventional flooring products waivered, and Flooring NA began to suffer.
As further alleged in the Complaint, notwithstanding the Company’s declining performance, from April 28, 2017 through July 25, 2019 (the “Relevant Period”), the Company reported exceptional quarterly financial results. Mohawk credited Flooring NA and claimed the successes were achieved through legitimate business practices. Unbeknownst to the public, the Company’s reported revenues and operating margins throughout the Relevant Period were the product of an illegal channel-stuffing scheme whereby Mohawk executives instructed employees to pretend to deliver products to certain customers on Saturdays, knowing these customers were closed for deliveries (and could neither accept nor reject the goods), to inflate the Company’s revenues and conceal inventory overflow (the “Saturday Scheme”). Mohawk executives instructed employees to recognize the fabricated sales revenues as soon as the product was loaded on the truck, artificially inflating sales for the quarter. Mohawk also intentionally overproduced products to drive down per-unit costs and artificially boost operating margins.
As alleged, it was the Board’s fiduciary responsibility to monitor and ensure the adequacy of the Company’s internal controls over its financial reporting and the accuracy of public statements regarding sales revenue, inventory levels, and product development. In failing to do so, the Individual Defendants either knowingly violated their fiduciary duties to shareholders or willfully ignored blatant red flags warning of misconduct.
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