Diamond Foods Inc., already under investigation for possibly violating accounting rules, sank in early trading following a report that federal prosecutors in San Francisco have opened a probe.
Prosecutors are coordinating with the U.S. Securities & Exchange Commission to investigate how Diamond Foods paid its walnut growers, the Wall Street Journal reported on its website yesterday, citing unidentified sources.
The company began its own investigation last year into whether money paid to growers in September violated accounting rules. The SEC opened an inquiry afterward into possible wrongdoing that may upend Diamond’s proposed $2.35 billion deal for Procter & Gamble Co.’s Pringles snack brand.
Diamond Foods, led by Chief Executive Officer Michael Mendes, fell 10 percent to $29.70 at 8:08 a.m. in New York. The shares dropped 39 percent last year.
“Diamond continues to cooperate with the SEC in its ongoing investigation,” Lucy Neugart, a spokeswoman for the company, said in an e-mailed statement yesterday. “It is not unusual for the SEC to coordinate with other agencies and to the extent other agencies request information, the company would cooperate fully.”
The company’s audit committee hasn’t reached any conclusions and anticipates completing its investigation by the middle of February, Neugart said.
“The SEC has said its investigation should not be construed as an indication that any violations of law have occurred,” she said.
Joshua Eaton, a spokesman for the U.S. Attorney’s Office in San Francisco, declined to comment on Diamond Foods.
The company along with external legal and audit firms, are looking into so-called “momentum payments” Diamond sent to walnut growers in September. Diamond said the money was a prepayment for the current crop year, and as such should be included in its 2012 fiscal year, which began in August.
Some growers and short-sellers say the payment was to top off growers who were underpaid last year, according to reports in the Journal and Barron’s. If so, the payment belongs in Diamond’s 2011 fiscal year, which would have reduced its annual profit to $1.14 a share from $2.61, according to an analysis by Mark Roberts, president of Off Wall Street Consulting Group Inc., a New York research firm.
That would make the exchange of Diamond shares for Pringles much less attractive to P&G shareholders, who will own 57 percent of Diamond under terms of the deal. P&G said Dec. 15 that the Pringles sale depends on the “favorable resolution” of Diamond’s investigation. Diamond told the Journal its agreements with growers are confidential.
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