WASHINGTON – The U.S. Securities and Exchange Commission on Jan. 9 charged Diamond Foods, Inc. and former executives Steven Neil and Michael Mendes for their roles in an accounting scheme to falsify walnut costs. Diamond Foods, without admitting or denying the allegations, agreed to pay $5 million to resolve the investigation, according to the company’s Jan. 9 filing with the S.E.C. The settlement terms are consistent with the $5 million expense recorded in the fiscal year’s first quarter ended Oct. 31, 2013.
The S.E.C. alleged Mr. Neil, then chief financial officer for the San Francisco-based snack foods company, directed an effort to fraudulently underreport money paid to walnut growers by delaying the recording of payments into later fiscal periods. Because of the manipulated walnut costs, Diamond Foods reported higher net income and inflated earnings to exceed analysts’ estimates for fiscal quarters in 2010 and 2011.
The S.E.C.’s litigation continues against Mr. Neil.
The S.E.C. also alleges Mr. Mendes, then chief executive officer, should have known the reported Diamond Foods’ walnut cost was incorrect at the time he certified the company’s financial statements. Mr. Mendes agreed to pay a $125,000 penalty to settle the charges without admitting or denying the allegations. Mr. Mendes already has returned or forfeited more than $4 million in bonuses and other benefits that he received during the time of the fraudulent financial reporting.
The penalties collected from Diamond and Mr. Mendes may be distributed to harmed investors if the S.E.C. determines it is feasible.
“Diamond Foods misled investors on Main Street to believe that the company was consistently beating earnings estimates on Wall Street,” said Jina L. Choi, director of the S.E.C.’s San Francisco regional office. “Corporate officers cannot manipulate fiscal numbers to create a false impression of consistent earnings growth.”