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How a 25-Year-Old Sparked Lumber Liquidators’ Stock Plunge

Lumber Liquidators Holdings Inc.’s stock plunge over the past week, fueled by allegations of excessive formaldehyde in its flooring, can be traced back to a blog post from an obscure 25-year-old short seller.

Xuhua Zhou, who had dropped out of UCLA’s doctoral program in finance and became an individual investor, took an interest in Lumber Liquidators about two years ago. After seeing a surge in the company’s gross profit margin, Zhou learned that it sourced some products from China. That raised his suspicions that safety might have been skirted in pursuit of lower costs, he said in an interview.

Zhou, who was born and raised in China, already had experience researching suppliers in the country, so he began investigating. His digging ultimately led to lawsuits, a “60 Minutes” report and accolades from the well-known short seller Whitney Tilson, who also bet against Lumber Liquidators.

“It’s pretty amazing what he did on his own,” said Tilson, head of Kase Capital Management, calling Zhou “the pioneer” of the Lumber Liquidators story.

Lumber Liquidators, a retailer of hardwood flooring and accessories, is now under fire for allegedly selling products with more formaldehyde than is allowed by California law. The “60 Minutes” piece, which relied in part on undercover reporters and hidden cameras, showed managers at three Chinese factories admitting to using false labeling that made it look like the products met regulations. In a response to...