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CPSIA, collateral and Sarbanes-Oxley

What happens when a law like CPSIA suddenly renders valueless large stocks of inventory of children's products, amounting to tens of thousands or even millions of dollars at a given company? One result, notes manufacturer/activist Rick Woldenberg, will be to throw many businesses overnight into default on bank loans that are secured with inventory as collateral. Another will be to present publicly held companies with sudden issues of Sarbanes-Oxley exposure. Have their public disclosures of the losses prompt and comprehensive enough?

With yesterday's court decision making it unlawful to sell children's goods containing certain phthalates as well as lead after next Tuesday, the question for many retailers (and some manufacturers) will be what to do with inventories whose lead- or phthalate-containing status is unknown and that have not been tested to verify the substances' absence. A legislative bulletin from the Toy Industry Association says, "TIA has learned that some large national retailers - noting the stay on testing and certification and the difficulty in obtaining information on older inventory - are presuming that product already on shelves does not violate CPSIA requirements unless specifically advised otherwise by the Commission."

In other words, despite the $100,000-per-instance penalties on the books, they're going to hope they get lucky.

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Rafael Mangual
Project Manager,
Legal Policy

Katherine Lazarski
Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.