SEC Charges Food Company and Executives Engaged in Walnut Scheme

The SEC charged snack food company, Diamond Foods and two of its former executives for their roles in an accounting scheme to falsify walnut costs in order to boost earnings and meet estimates by stock analysts. According to the SEC release, one of the company's significant lines of business involves buying walnuts from its growers and selling the walnuts to retailers. The SEC explained that, with the sharp increases in walnut prices in 2010, Diamond encountered a situation where it needed to pay more to its growers in order to maintain longstanding relationships with them. However, Diamond could not increase the amounts paid to growers for walnuts, which was its largest commodity cost, without also decreasing the net income that Diamond reported to the investing public.

By manipulating walnut costs, Diamond correspondingly reported higher net income and inflated earnings to exceed analysts' estimates for fiscal quarters in 2010 and 2011. After Diamond restated its financial results in November 2012 to reflect the true costs of acquiring walnuts, the company's stock price slid to just $17 per share from a high of $90 per share in 2011. Diamond C.F.O. Steven Neil misled Diamond's independent auditors by giving false and incomplete information to justify the unusual accounting treatment for the payments. Furthermore, the SEC stated that Neil personally benefited from the fraud by receiving cash bonuses and other compensation based on Diamond's reported EPS in fiscal years 2010 and 2011.

See: Complaint against Diamond; Complaint against Neil; Order against Mendes; Press Release.