Michel Vermette

Michel Vermette

Editor's note: This story was originally published Nov. 20, 2019.

An Armstrong Flooring shareholder is alleging that its management “deceived” and “defrauded” him and other recent investors.

Michael Chupa, an Armstrong shareholder in California, filed a 20-page class action suit against Armstrong and its management in Los Angeles federal court on Nov. 15.

Chupa alleges that Armstrong “made materially false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects.”

Instead, Armstrong made “positive statements” that “were materially misleading and/or lacked a reasonable basis,” Chupa maintains, in order to support an “artificially high” and “overvalued” stock price.

He describes this conduct as a “fraudulent scheme.”

Sizable corporate losses announced recently have triggered a “precipitous decline” in the stock price, hurting shareholders such as himself, Chupa said.

Chupa bought 100 shares on Sept. 13 at $7.31 a share. Armstrong stock closed Wednesday at $3.72, so the value of his holdings is off 49%.

Taking the longer view, the decline in the stock price is more severe. Armstrong stock was at $15.54 a year ago — down 76%.

Chupa says that had he known of Armstrong’s true condition, he would not have invested in the stock, or at least not at that price.

Lancaster-based Armstrong, with 500 employees here, denies the allegations of misconduct. “The complaint is without merit, and we plan to vigorously defend against it,” a spokesman said.

Though Chupa makes sweeping claims of wrongdoing, he’s light on specifics.

One instance that Chupa does spotlight is the company’s Nov. 5 announcement, when Armstrong disclosed a $31.4 million third-quarter net loss and slashed in half its forecast of full-year profits before certain costs were subtracted.

Chupa seems to imply that the earlier, higher forecast was deliberately misleading; Armstrong CEO Michel Vermette told Wall Street analysts that several key trends were turning out to be worse that Armstrong had expected.

Chupa also accuses Armstrong of failing to disclose that it had inadequate internal controls over inventory levels and that it had engaged in “channel stuffing to artificially boost sales.”

This too appears to be based on Armstrong’s third-quarter decline, which Armstrong attributed in part to distributors stocking up in 2018’s third quarter ahead of U.S. tariffs taking effect, then scaling back in 2019’s third quarter.

 In addition to Armstrong, other defendants are Vermette, former CEO Donald Maier, former interim CEO Larry McWilliams, CFO Douglas Bingham and former CFO Ronald Ford.