FOR IMMEDIATE RELEASE

2014-4
Washington D.C., Jan. 9, 2014 The Securities and Exchange Commission today charged San Francisco-
based snack foods company Diamond Foods and its former CFO in an accounting scheme to falsify walnut
costs in order to boost earnings and meet estimates by stock analysts. The SEC also charged Diamonds
former CEO for his role in the companys false financial statements filed with the SEC.
The SEC alleges that Diamonds then-chief financial officer Steven Neil directed the effort to fraudulently
underreport money paid to walnut growers by delaying the recording of payments into later fiscal periods.
In internal e-mails, Neil referred to these commodity costs as a lever to manage earnings in Diamonds
financial statements. 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 companys
stock price slid to just $17 per share from a high of $90 per share in 2011.
Diamond Foods agreed to pay $5 million to settle the SECs charges. Former CEO Michael Mendes, who
should have known that Diamonds reported walnut cost was incorrect at the time he certified the
companys financial statements, also agreed to settle charges against him. The SECs litigation continues
against Neil.
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 SECs San Francisco Regional Office.
Corporate officers cannot manipulate fiscal numbers to create a false impression of consistent earnings
growth.
According to the SECs complaints filed in federal court in San Francisco, one of the companys significant
lines of business involves buying walnuts from its growers and selling the walnuts to retailers. With 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. Yet 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 reports to the investing public. And Neil was facing pressure to meet or exceed the
earnings estimates of Wall Street stock analysts.
The SEC alleges that while faced with competing demands, Neil orchestrated a scheme to have it both
ways. He devised two special payments to please Diamonds walnut growers and bring the total yearly
amounts paid to growers closer to market prices, but improperly excluded portions of those payments from
year-end financial statements. Instead of correctly recording the costs on Diamonds books, Neil instructed
his finance team to consider the payments as advances on crops that had not yet been delivered. By
disguising the reality that the payments were related to prior crop deliveries, Diamond was able to
manipulate walnut costs in its accounting to hit quarterly targets for earnings per share (EPS) and exceed
estimates by analysts. For instance, after adjusting the walnut cost in order to meet an EPS target for the
second quarter of 2010, Diamond went on to tout its record of Twelve Consecutive Quarters of
Outperformance in its reported EPS results during investor presentations.
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SEC Charges Diamond Foods and Two Former Executives Following
Accounting Scheme to Boost Earnings Growth
The SEC further alleges that Neil misled Diamonds independent auditors by giving false and incomplete
information to justify the unusual accounting treatment for the payments. Neil personally benefited from
the fraud by receiving cash bonuses and other compensation based on Diamonds reported EPS in fiscal
years 2010 and 2011.
The SECs order against Mendes finds that he should have known that Diamonds reported walnut cost was
incorrect because of information he received at the time, and he omitted facts in certain representations to
Diamonds outside auditors about the special walnut payments. Mendes agreed to pay a $125,000 penalty
to settle the charges without admitting or denying the allegations. Mendes already has returned or forfeited
more than $4 million in bonuses and other benefits he received during the time of the companys fraudulent
financial reporting.
The SECs complaints against Diamond and Neil allege that they violated or caused violations of Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Sections 17(a)(1), (2), and (3) of
the Securities Act of 1933. Diamond agreed to settle the charges without admitting or denying the
allegations. The Commission took into account Diamonds cooperation with the SECs investigation and its
remedial efforts once the fraud came to light. The penalties collected from Diamond and Mendes may be
distributed to harmed investors if SEC staff determines that a distribution is feasible.
The SECs investigation was conducted by Jennifer J. Lee, Adrienne Miller, and Cary Robnett of the San
Francisco office. The SECs litigation against Neil will be led by Lloyd Farnham.
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Related Materials
SEC complaint against Diamond Foods
SEC complaint against Neil
SEC order against Mendes