The Diamond Foods Qui Tam whistleblower lawsuit alleges and involves financial reporting fraud and earnings management at Diamond Foods, Inc. (“Diamond”), a San Francisco-based snack food company in which one of Diamond’s businesses involved buying walnuts from its growers and selling those walnuts to retailers.

The Diamond Foods Qui Tam whistleblower lawsuit may have been filed under the whistleblower program and appears to involve financial security fraud.  And, it may have been filed based on input and information received from someone (e.g., public stakeholders, employee etc.) who possibly reported financial reporting and/or accounting fraud and such misconduct to the Office of the Whistleblower (SEC) via the anonymous submission program.  One of the most unique aspects of the Whistleblower program is that anyone with information can submit the information anonymously with the help of an attorney.

And, if the lawsuit is successful, the person who anonymously provided the information may be able to participate in the recovery.  More specifically, the eligible whistleblower may be entitled to:

• an award of between 10% and 30% of the monetary sanctions collected in actions brought by the SEC and related actions brought by other regulatory and law enforcement authorities
• submit your information in anonymity with the help of a lawyer
• a prohibition of retaliation by employers against employees who provide The Office of the Whistleblower with information about possible securities violations

The Diamond Foods Qui Tam Whistleblower lawsuit alleges:

1. complaints against former CFO Steven Neil and Diamond, which were filed in federal court in San Francisco
2. Neil directed the effort to fraudulently underreport money paid to walnut growers by delaying the recording of payments into later fiscal periods
3. In internal e-mails, Neil referred to these commodity costs as a “lever” to manage earnings in Diamond’s financial statements
4. By manipulating walnut costs, Diamond correspondingly reported higher net income and inflated earnings to exceed analysts’ estimates for fiscal quarters in 2010 and 2011
5. 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
6. Diamond Foods agreed to pay $5 million to settle the SEC’s charges
7. Former CEO Michael Mendes, who allegedly should have known that Diamond’s reported walnut cost was incorrect at the time he certified the company’s financial statements, also agreed to settle charges against him. The SEC’s litigation continues against Neil.
8. complaints filed against Neil and Diamond, one of the company’s significant lines of business involves buying walnuts from its growers and selling the walnuts to retailers
9. 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
10. 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
11. And Neil was facing pressure to meet or exceed the earnings estimates of Wall Street stock analysts
12. further alleges that while faced with competing demands, Neil orchestrated a scheme to have it both ways
    1. He devised two special payments to please Diamond’s 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
    2. Instead of correctly recording the costs on Diamond’s books, Neil instructed his finance team to consider the payments as advances on crops that had not yet been delivered
    3. 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
    4. 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.
13. The Commission further alleges that Neil misled Diamond’s independent auditors by giving false and incomplete information to justify the unusual accounting treatment for the payments
14. 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
15. The case is styled – Securities and Exchange Commission v. Diamond Foods, Inc., Civil Action No. 3:14-cv-00122 (N.D. Cal.); Securities and Exchange Commission v. Steven Neil Civil Action No. 3:14-cv-00122 (N.D. Cal.)