Tile Shop CEO's brother-in-law fired for violations of business ethics policy

  • Article by: NEAL ST. ANTHONY , Star Tribune
  • Updated: January 27, 2014 - 7:43 PM

Brother-in-law of CEO fired for violations of business ethics policy.

The brother-in-law of Tile Shop Holdings CEO Robert Rucker has been fired for “multiple violations’’ of the public company’s “business-ethics policy,” the company said in a press release late Monday.

The brother-in-law, Fumitake Nishi, the owner of a Chinese export-promotion firm called Beijing Pingxiu, also netted $1.1 million in illicit “consulting fees” from Chinese manufacturers who sell to Tile Shop, according to the results of an investigation conducted by the Minneapolis law firm Dorsey & Whitney and a major accounting firm.

Violations also involved the hiding of an acquisition of a Chinese vendor that sold millions of dollars worth of product to Tile Shop between 2011 and 2013, the company said.

The relationship between Nishi and Tile Shop first surfaced in a critical November report by Gotham City Research, an institutional short seller, which also raised questions about Tile Shop’s financial reporting. The value of the stock from about $21 to $13 on Nov. 14 after the report was released.

Tile Shop’s shares, which have rebounded somewhat, closed down more than 6 percent to $14.72 per share Monday, just ahead of release of the report after the market closed.

Tile Shop refuted Gotham’s claims that it was overstating the value of its inventory or understating the cost of goods imported from China.

CEO Rucker, in a prepared statement, said: “I am … extremely disappointed to learn of the nature and extent of the previously undisclosed relationships that Mr. Nishi maintained with our vendors. Our senior management team has had direct and pointed conversations with our vendors about this situation. We believe that by working together we will implement better practices to safeguard against any of these situations recurring in the future.

“The investigation took longer than we anticipated, but because of the diligence of the process, our company will be stronger in the future. We have reexamined our business practices and have initiated the implementation of new procedures to better manage and control our vendor relationships,’’ Rucker said.

Meanwhile, Tile Shop said that due to lower fourth quarter revenue and narrower operating margins, its adjusted operating earnings would be $53 million to $55 million instead of the $60 million that it forecast earlier in the year. That estimate is before the costs of the investigation that could total $1.5 million in the fourth quarter.

“While we are disappointed with our performance in the fourth quarter, we are still energized and excited about our long-term growth strategy,” Rucker said in the prepared statement.

Gotham responds

“I’m starting to see a pattern here,” said Daniel Yu, director of research at Gotham City. “The company, as in November, confronted with bad news that Gotham pointed out, comes out with some confidence-inspiring statement for investors, and then in the fine print, they say they have uncovered some evidence that confirms what was in the Gotham report. They say everything is fine . . . and then there is more information that says otherwise. Maybe Mr. Nishi is the only bad apple and the company is the victim. I think it’s more likely he’s just being thrown under the bus. We need to see how this unravels.”

The effect on Tile Shop’s valuation won’t be known until trading in the Plymouth-based retailer of manufactured and natural stone tiles resumes on Tuesday. The company will release its 2013 financial results on Feb. 20.

 

Neal St. Anthony • 612-673-7144

 

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