Whitney Tilson has covered his Lumber Liquidators short, and now the stock is exploding higher

Hedge fund manager Whitney Tilson, the founder of Kase Capital, has cashed out on his bet against of Lumber Liquidators.

"In the past week, I've received information (I can't reveal the details at this point) which leads me to believe that it's likely that senior management of Lumber Liquidators: 1) Wasn't aware that the company was selling Chinese-made laminate that had high (non-CARB2-compliant) levels of formaldehyde; and 2) Made the decision to continue selling the product even after the 60 Minutes story aired in large part because they genuinely believed that the product was safe and compliant," Tilson wrote in a blog post on SeekingAlpha on Monday.

"If this information is correct, then the company was sloppy and naïve, but not evil."

Shares of the Toano, Virginia-based specialty hardwood retailer surged more than 23% in the pre-market hours on the news. The stock last traded up $3.27, or 23.3%, at $17.33 per share.

Shares of Lumber Liquidators had collapsed more than 77% since the beginning of March.

'60 Minutes' report

In early March, "60 Minutes" and Anderson Cooper aired a report that found that Lumber Liquidators appeared to be selling laminate flooring from China with levels of formaldehyde that were higher than that permitted under California law. Numerous health concerns surround high levels of formaldehyde.

In a statement issued afterwards, Lumber Liquidators said that "60 Minutes" got it wrong and used an improper testing method.

In the months that followed the stock tanked and key executives departed. In late May, Lumber Liquidators CEO Robert Lynch "unexpectedly" quit and the company's CFO Daniel Terrell left in June.

The short

Tilson was the one who flagged this story for "60 Minutes." He did an interview for the piece, but other than that he left the investigative work to the reporters.

Tilson initially shorted the stock in 2013 around $102.69 per share. He has said the first red flag for him was the sudden dramatic increase in Lumber Liquidators' gross margin. He believed the increase was enabled by the sourcing of illegal (and cheaper) wood in Russia, based on a report from the Environmental Investigation Agency.

Tilson shorted the company again in the $57 range after receiving a phone call from someone in China. Tilson's source told him the real story was the company's laminate flooring. His source told Tilson that Lumber Liquidators was buying cheaper laminate that was not CARB (California Air Resources Board) compliant.

In the SeekingAlpha blog, Tilson wrote that he has covered his short by buying in-the-money ($10 strike) call options expiring next month.

"To be clear: I no longer believe that Lumber Liquidators' stock, at today's price, is an attractive short," he wrote.

Beyond the SeekingAlpha article, Tilson said in an email he had no further comment.

Here's a chart of Lumber Liquidators stock performance this year: