Diamond Foods, based in Stockton, California, engages in processing, marketing, and distributing snack products, including roasted, glazed and flavored nuts, trail mixes, dried fruit, seeds microwave popcorn products, and potato and tortilla chips under brands Emerald, Pop Secret, and Kettle Brand. The Company also offers culinary in shell, and ingredient nuts under the Diamond of California brand name. The company sells its products directly to national grocery, mass merchandiser, convenience stores, and drug store chains in over 100 countries. Diamond Foods had a reputation of making bold and expensive acquisitions (Arpita & Renju, 2011). The series of acquisitions began in May 2006 through 2010, leveraging the Company by borrowing cash to complete the acquisitions. Within five years, Diamond had transformed from a relatively debt-free company specializing in nuts, to a highly leveraged, diversified, snack Food Company.
Without strong ethical oversight, questionable behavior began to persist at Diamond Foods. In 2011, an investigation was launched into the company’s financial measures and polices in response to multiple allegations of fraud (Henning, 2012). During the relevant period, Diamond and individual top management knowingly understated the costs of walnuts it purchased in order to inflate artificially the price of the Company’s common stock. Such common stock was the principal currency pursuant by which it sought to acquire a snack-foods manufacturer, an acquisition that was essential to the growth of the company and which double its size. Diamond Foods sought to conceal this understatement by issuing two payments, one after the close of Fiscal year 2010, and the other after the close of Fiscal year 2011, which they falsely stated were not payment for the prior year’s crop, but were for other purposes and chargeable to the following year.
The investigation led to serious implications for the company, including major financial losses and imminent need to restructure the company’s top leadership. After the investigation, the company began to focus on rebuilding the company’s image. Diamond’s current president and CEO Brian J. Driscoll has aimed to develop comprehensive strategic initiatives to advance the company past its ethical dilemmas, instill trust among investors and consumers, and bounce back from the accounting scandal that created both financial and reputational losses.
In 2011, Mark Robert, an analyst with the research firm Off Wall Street Consulting Group issued a report questioning Diamond Food’s accounting practices with respect to walnut purchases. On this new, shares of Diamond declined 5.7%, on unusually heavy trading volume. An article in Reuters Breakingviews entitled “P&G’s Pringles partner warrants careful taste test” exposed “momentum payments” that Diamond had made to growers.
The Wall Street Journal published an article on September 27, 2011, noting that as walnut prices surged for the 2010 crop, Diamond actually paid growers much less than most buyers. The article disclosed that on early September 2011, after the close of the Company’s 2011 Fiscal Year ending July 31,2011, the company made an unusual extra “momentum payment” to growers that growers had not received in past years. The article estimates that the “momentum payments” could total as much as $50 million. The article also stated that the ‘momentum payments” would have significantly impacted the Company’s 2011 Fiscal Year financial results had it been included in FY 2011, substantially reduced the Company’s $93 million in operating income that it had reported for the entire 2011 FY.
The “momentum payment” allowed Diamond Foods to report a significant rise in revenue, but a decrease in net income. Revenue was reported to be $650.162 million, but net income was reported to be only $26.21 million. Nevertheless, Mendes’ salary grew exponentially. Mendes’ total compensation had more than tripled…