What happened with Lumber Liquidators is a perfect example of why hedge funds can be great for America

Whitney Tilson's table.
Whitney Tilson Julia La Roche for Business Insider

Whitney Tilson, who runs Kase Capital, just gave us all a great example of how hedge funds can be a force of good.

On Sunday,“60 Minutes” and Anderson Cooper ran a damning report about Lumber Liquidators — America’s largest specialty retailer of hardwood floors. The report found that Lumber Liquidators appears to be selling laminate flooring from China with levels of formaldehyde that’s higher than what’s permitted under California law. High levels of formaldehyde have a number of health concerns.

A lot of people have been talking about the story. And the stock price has taken an absolute beating.

Tilson was the one who flagged this story for “60 Minutes.” He did an interview for the piece, but other than that he left the investigative work to the reporters.

He later wrote in a group email he circulated that he was in “awe” of the investigative journalism. He pointed out that they uncovered things that he didn’t know.

In an interview later with CNBC’s Scott Wapner, Tilson explained that he didn’t see it as a conflict of interest. He felt he had a moral obligation share the troubling findings.

“I discovered what Lumber Liquidators was doing — poisoning its customers. And I said there was a beautiful, not conflict of interest, but confluence of interest between me doing my job as a hedge fund manager and exposing a company that’s doing terrible things to untold numbers of Americans. So, honestly, I have never been prouder than bringing this story to light,” Tilson said on CNBC.

CNBC’s Wapner asked Tilson was if he felt there would be a conflict of interests if short-sellers were backing lawsuits against the company. Tilson said he has not funding any lawsuits. He said there are some short sellers based in California doing so, but that he wasn’t aware they existed until the “60 Minutes” piece aired.

Tilson also isn’t hiding what he stands to gain from his short. He said in the group email that his fund’s position in Lumber Liquidators represents 3% of the overall portfolio. He also said that his investors will make $US3 million if the stock goes to $US0.

The bottom line here is that funds have the ability and the resources to shed light on issues that the public would want to know about. And it’s OK if they make money for their investors in the process.

“In fact, this is a case study of how hedge funds, however self-interested their motivations may be, can be a force for good, by doing the difficult and expensive work it can take to uncover companies doing nefarious things (such as poisoning their own customers) — and then bringing this to the attention of regulators, prosecutors and the media,” Tilson wrote in the group email after the segment aired.

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