Diamond Foods faces SEC and Federal Investigation

Diamond Foods is facing a formal investigation by the SEC and federal prosecutors as to whether certain financial practices involved criminal fraud.  The investigation revolves around how the company made crop payments to walnut growers. 

Diamond made sizable payments to its walnut growers in September that they claimed were an advance on their 2011 crop.  However, three walnut growers allege that they told Diamond that they did not intend to deliver their 2011 crops to Diamond but were assured by company representatives that they could cash the checks anyway.  Some critics believe the payments were used to inflate last year’s earnings by shifting costs into the current year.  Diamonds fiscal year ends in July so the September payment shifted the costs into the 2012 accounting year.  Diamond contends that these “momentum payments” were made in an effort to optimize cash flow for growers and has denied that these payments were compensation for last year’s crop.   

If true, the company’s 2011 margins would be substantially lower.  Because of this investigation, Diamond has announced that its plans to acquire Pringles from Proctor & Gamble are on hold.  Diamond planed to pay most of the purchase price by issuing its stock to Proctor and Gamble shareholders.  The deal, which was initially valued at $2.35 billion, is now valued at $2 billion based on Diamonds current stock price.  The company’s stock price was trading around $96 in September are now trading around $33. 

Diamond intends to cooperate fully with the investigation.  An audit committee for the company is conducting an internal probe on the accounting treatment of the walnut payments and will provide the SEC with a detailed report of their findings.  The investigation has also opened Diamond up to several securities class-action lawsuits.