(CN) – Former managers of timber company Rayonier continue to face shareholder ire in Florida federal court over claims they concealed systemic overharvesting of Pacific Northwest woodlands.
A derivative lawsuit in the Middle District of Florida alleges one-time CEO Paul Boynton and several other former Rayonier managers concealed that the company had overharvested woodlands in Washington state and depleted timber inventory at an unsustainable rate.
Executives allegedly made false public statements asserting the company was operating below sustainable harvest levels.
The company in May 2017 executed a $73 million settlement in a shareholder class action over similar claims.
According to the derivative lawsuit, the “scheme” was discovered after Rayonier spun off its performance fiber business in 2014, and new Rayonier CEO, nonparty David Nunes, initiated a review of the company’s operations.
A subsequent internal investigation called “Project Longleaf” revealed that the company’s harvest level in the Pacific Northwest from 2004 to 2013 “exceeded the rate those timberlands could support.”
Additionally, the report found “a material weakness in Rayonier’s internal controls related to merchantable timber inventory during 2013 through Sept. 30, 2014.” Namely, the company’s inventory figures incorrectly tallied timber in environmentally protected and inaccessible areas.
The company ended up cutting its dividend and restating its financials with a 10 percent reduction in its reported merchantable timber inventory, and a reduction in its reported quarterly income in Q2 2014 by $2 million, or 33 percent, according to the complaint.
In order “to reverse the effects of years of overharvesting,” the derivative lawsuit says, the company announced in late 2014 that it would have to reduce its Pacific Northwest harvest by a million tons annually by 2017 and maintain that level for several years to allow for inventory replenishment. Nancy Wilson, who had been executive vice president of forest resources, resigned amid the controversy.
The plaintiff shareholder seeks damages for breach of fiduciary duty against defendants, several of whom are now serving on the board at the spinoff company Rayonier Advanced Materials, where Boynton is president.
A second count for unjust enrichment is listed against defendants Boynton, Wilson and Hans Vanden Noort, the former chief financial officer of Rayonier. According to the complaint, these executives unfairly received performance-based bonuses while the company’s financial performance and stock price were artificially inflated.
Beyond the legal expenses in the class action, the company incurred millions of dollars in costs for internal reviews and responses to an Securities and Exchange Commission investigation into Rayonier’s financial statements, the derivative lawsuit says.
In the now-settled class action, Rayonier argued that when Nunes took over at CEO, the company shifted from a “flexible market-based harvest approach” centered on product demand, to a new approach based on sustainability.
There was no viable evidence that the defendant executives were aware of the new estimate of sustainable yield that was put forth in the Nunes management model, Rayonier contended. The class thus inferred “fraud by hindsight,” unjustly assuming Boynton and Wilson made intentionally inaccurate statements about sustainable yields, when they were in reality working in accordance with their “flexible market-based” business model, the company claimed.
The company also contended that the class allegations were derived in large part from a “confidential witness” – a former Rayonier business development director – who ultimately denied ever making the statements attributed to him by the plaintiffs.
After a motion to dismiss was denied by a Jacksonville judge, the company agreed to the $73 million settlement in March 2017, without admitting wrongdoing. The settlement sum was “funded by the Company’s directors and officers (D&O) liability insurance carriers,” according to a Rayonier press release.
The company has maintained that the restatement of its financials was minimal, and had no impact on EBITDA earnings calculations in the affected fiscal quarters.
The defendants in the derivative lawsuit have not yet filed response pleadings.
Based in Wildlight, Florida, Rayonier announced last year that it acquired $263 million worth of timberland in Oregon and Washington while it disposed of 55,000 acres for $130 million. The company, which has been harvesting lumber in Washington for 90 years, said the transactions were aimed at smoothing its timber-age distribution, improving harvest potential and increasing merchantable inventory.