410 Present

SECvDiamondFoodscomplaint.pdf

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SEC V. DIAMOND FOODS, INC. 1 COMPLAINT

JINA L. CHOI (New York Bar No. 154425) MICHAEL S. DICKE (Cal. Bar No. 158187) LLOYD A. FARNHAM (Cal. Bar No. 202231) [email protected] JENNIFER J. LEE (Cal. Bar No. 261399) [email protected] Attorneys for Plaintiff SECURITIES AND EXCHANGE COMMISSION 44 Montgomery Street, 28th Floor San Francisco, California 94104 Telephone: (415) 705-2500 Facsimile: (415) 705-2501

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. DIAMOND FOODS, INC., Defendant.

Case No. COMPLAINT

Plaintiff Securities and Exchange Commission (the “Commission”) alleges:

SUMMARY OF THE ACTION

1. This case involves financial reporting fraud and earnings management at

Diamond Foods, Inc. (“Diamond”), a San Francisco-based snack food company. One of

Diamond’s businesses involved buying walnuts from its growers and selling those walnuts to

retailers. As a result of a scheme by Diamond’s Chief Financial Officer Steven Neil to

fraudulently manipulate and delay appropriate recording of the costs paid to walnut growers,

Diamond reported inflated earnings during fiscal years 2010 and 2011.

2. During 2010, CFO Neil faced pressure to meet or exceed the earnings estimates of

Wall Street stock analysts. At that time, Neil and Diamond encountered sharp increases in

walnut prices. Diamond’s largest commodity cost was walnuts. Diamond would need to pay

growers higher prices for their walnuts in order to maintain the company’s longstanding

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SEC V. DIAMOND FOODS, INC. 2 COMPLAINT

relationships with its growers. Yet Diamond could not increase the amounts paid to growers for

walnuts without decreasing Diamond’s net income as reported to the investing public.

3. Faced with these two competing demands, Neil orchestrated a scheme to have it

both ways. In August of 2010, Diamond made a final installment payment to growers for the

2009 walnut crop. The final installment brought the total payments to growers close to market

prices. But instead of recording the final installment accurately as a cost of acquiring walnuts for

fiscal year 2010, Neil instructed his finance and accounting team to treat a portion of this amount

– referred to as the “continuity” payment – as an advance payment for a future, as yet

undelivered, walnut crop. According to Neil, the portion labeled the “continuity” payment

would “close the gap” between the recorded walnut cost and the market prices, but was not

recorded as a cost of walnuts acquired during fiscal year 2010. By delaying the recognition of a

portion of the cost of walnuts acquired into later fiscal periods, Neil materially underreported the

cost of acquiring walnuts and overstated earnings by $10.5 million in fiscal year 2010.

4. Neil devised a similar, but even larger, payment (which Diamond personnel said

would “make up” for a low final price) when Diamond growers were paid for walnuts delivered

the following fiscal year. Neil treated this payment, labeled a “momentum” payment, as an

advance for future crops and did not recognize the payment as a cost of the walnuts Diamond

acquired in that fiscal year. By again delaying the recognition of a portion of the cost of walnuts

acquired into later fiscal periods, Neil materially underreported the cost of acquiring walnuts and

overstated earnings by $23.6 million in fiscal year 2011.

5. Diamond materially misstated its financial results in multiple SEC Forms 10-Q,

10-K, and 8-K from at least February 2010 and ending in September 2011. In this timeframe,

Diamond reported artificially inflated earnings per share (“EPS”) that beat Wall Street earnings

estimates on a quarterly and yearly basis, and its stock price reached a high of over $90 per share

after filing the last of its materially false financial statements in September 2011. Diamond also

successfully raised approximately $181 million through a stock offering, and reached an

agreement to acquire a major potato chip brand with Diamond’s stock as consideration.

6. Following media reports questioning the “momentum” payment, Diamond

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SEC V. DIAMOND FOODS, INC. 3 COMPLAINT

conducted an internal investigation and concluded that its financial statements for fiscal years

2010 and 2011 incorrectly excluded the “continuity” payment and “momentum” payment as

costs of acquiring walnuts in those periods, respectively. Diamond’s stock price dropped from

approximately $90 per share in September 2011 to $17 per share in November 2012 after the

filing of its restatement. The stock drop represented a market capitalization loss of

approximately $1.7 billion.

JURISDICTION AND VENUE

7. The Commission brings this action pursuant to Sections 20(b) and 20(d) of the

Securities Act of 1933 (“Securities Act”) [15 U.S.C. §§ 77t(b), 77t(d)] and Sections 21(d) and

21(e) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. §§ 78u(d), 78u(e)].

8. This Court has jurisdiction over this action pursuant to Section 22 of the

Securities Act [15 U.S.C. § 77v] and Section 27 of the Exchange Act [15 U.S.C. § 78aa].

9. Defendant, directly or indirectly, made use of the means or instrumentalities of

interstate commerce, or of the mails, or of the facilities of a national securities exchange in

connection with the transactions, acts, practices and courses of business alleged herein.

10. Venue in the Northern District of California is proper pursuant to Section 22 of

the Securities Act [15 U.S.C. § 77v] and Section 27 of the Exchange Act [15 U.S.C. § 78aa]

because acts and transactions constituting the violations alleged in this Complaint occurred

within the district, because the relevant offer or sale of securities took place in the district, and

because the Defendant resides or transacts business in the district.

INTRADISTRICT ASSIGNMENT

11. Under Civil Local Rule 3-2, this civil action should be assigned to the San

Francisco or Oakland Divisions, because a substantial part of the events or omissions which give

rise to the claim occurred in the City and County of San Francisco.

DEFENDANT

12. Diamond Foods, Inc. (“Diamond”) is a Delaware corporation with its principal

place of business in San Francisco, California. The company was founded as a walnut

cooperative in 1912 and issued publicly-traded stock in 2005. During the time period of the

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SEC V. DIAMOND FOODS, INC. 4 COMPLAINT

conduct alleged in this complaint, Diamond’s stock was registered with the Commission

pursuant to Section 12(b) of the Exchange Act and was listed on NASDAQ.

FACTUAL ALLEGATIONS

A. Background

13. Diamond was originally formed in 1912 as a walnut grower cooperative. As a

cooperative, Diamond’s principal business involved buying walnuts from California-based

growers, processing the walnuts, and reselling the walnuts through various channels to retailers.

14. Diamond converted from a walnut grower cooperative into a public corporation in

2005, issuing stock priced at $17 per share through an initial public offering. Following this

initial stock offering, Diamond expanded into other snack food businesses through a series of

acquisitions, including the acquisition of businesses involved in the sale of microwave popcorn

and potato chips. By 2010, Diamond was becoming a large snack food conglomerate.

15. In 2010 and 2011, Diamond’s walnut business, while no longer the sole focus,

still represented a significant part of its revenue, and the cost of acquiring walnuts was its largest

commodity cost. Any recorded increase in the walnut price Diamond paid to growers (also

referred to as the “walnut cost” or “final crop price”) would decrease the company’s reported

earnings, and would decrease the company’s reported earnings per share (“EPS”). At the same

time, Diamond needed to pay a competitive walnut price in order to maintain longstanding

relationships with its growers and to avoid losing walnut supply to competitors.

16. During the time of the conduct alleged in this complaint, Diamond reported EPS

that consistently beat the forecasted expectations of Wall Street stock analysts. In this

timeframe, Diamond’s stock price increased from approximately $39 per share at the time of the

filing of SEC Form 10-Q for the second quarter of 2010 (filed on February 25, 2010) to

approximately $90 per share after the filing of SEC Form 10-K for the 2011 fiscal year (filed on

September 15, 2011). Diamond registered two stock offerings during the relevant time period,

including (1) a successful $181 million offering of Diamond stock priced at $37 per share in

March 2010; and (2) a June 20, 2011 registration statement for an issuance of stock pursuant to

an agreement to acquire a potato chip business unit from a major snack food company.

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B. Determining and Accounting for the Walnut Cost

17. Diamond was required to prepare financial statements in conformity with

Generally Accepted Accounting Principles (“GAAP”), and disclosed in its SEC Forms 10-K

annual reports filed with the Commission that its financial statements were prepared in

conformity with GAAP. In its SEC Forms 10-K for fiscal years ended July 31, 2010 and July

31, 2011, Diamond disclosed the following accounting policy regarding the accounting for

walnut crop payments:

We have entered into long-term Walnut Purchase Agreements with growers, under which they deliver their entire walnut crop to us during the Fall harvest season and we determine the minimum price for this inventory by March 31, or later, of the following calendar year. This purchase price will be a price determined by us in good faith, taking into account market conditions, crop size, quality, and nut varieties, among other relevant factors. Since the ultimate price to be paid will be determined subsequent to receiving the walnut crop, we must make an estimate of price for interim financial statements. Those estimates may subsequently change and the effect of the change could be significant.

18. GAAP required Diamond to record walnut inventory and any payables to growers

at acquisition cost in the period in which the walnuts were purchased, and to recognize the cost

of selling the walnut inventory in the period in which the walnuts were sold. Pursuant to GAAP,

Diamond was required to record all payments used to acquire the 2009 crop in FY2010 (when

the crop was purchased and mostly sold), and all payments used to acquire the 2010 crop in

FY2011 (same). The “walnut cost” – i.e., the term that Diamond used to refer to the final price it

paid growers for a given crop – had financial effects on several line items on Diamond’s

financial statements, including value of inventory, payables to growers, and cost of goods sold.

19. During the relevant period, Diamond’s practice was to accept delivery of a walnut

crop in the fall after the harvest, and then to determine the final walnut price it would pay to

growers by fiscal year-end (i.e., July 31 of the next calendar year following the harvest).

Because walnuts were being acquired and sold throughout the year and before the determination

of the final crop price, Diamond recorded the costs of walnuts in its quarterly financial

statements using a walnut cost estimate. According to the disclosed accounting policy, the

walnut cost estimate was supposed to reflect the best estimate of the final walnut cost Diamond

intended to pay its growers.

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20. Diamond’s contracts with its growers discussed the determination of the final

crop price: “The Final Price will be determined in good faith, taking into account market

conditions, quality, variety, and other relevant factors.” Similar guidance appeared in Diamond’s

internal accounting controls, other accounting policies in effect during the relevant time period,

and publicly-disclosed accounting policies contained in Diamond’s SEC Forms 10-K and 10-Q.

Pursuant to the contracts, Diamond issued a series of installment payments to growers, with the

final payment accrued at fiscal year-end. These installment payments totaled the final crop price

paid for the walnut crop acquired during that fiscal year.

21. At all relevant times, CFO Neil supervised both Diamond’s finance and

accounting team (“Finance Team”), and Diamond’s team dealing with growers (“Grower

Relations Team”). Diamond’s Finance Team provided information to Diamond’s independent

outside auditors justifying the quarterly walnut cost accrual estimate and final walnut cost.

C. Understated Walnut Cost in Diamond’s 2010 Financial Statements

22. As noted above, Diamond’s critical accounting policy and contracts specified that

the walnut cost would be determined in “good faith, taking into account market conditions, crop

size, quality, and nut varieties, among other relevant factors.” However, during the relevant time

period Diamond did not maintain adequate internal accounting controls to reasonably ensure

Diamond complied with this standard. In the absence of adequate controls governing the walnut

cost, Diamond understated the recorded walnut cost in its financial statements in fiscal year 2010

by (1) improperly adjusting the walnut cost accrual estimates in certain quarters to hit EPS

targets, and (2) improperly excluding a portion of the final walnut cost for the 2009 crop from

fiscal year-end financial statements. As a result of the understated walnut cost, Diamond

materially misstated its financial results from the second quarter of fiscal year 2010 through the

fourth quarter of fiscal year 2010, and failed to keep and maintain accurate books and records.

1. Manipulation of the 2009 Walnut Cost to Meet EPS Targets

23. Diamond began understating its walnut cost, and thereby overstated earnings and

EPS, in financial statements prepared for the second quarter of 2010 (ending January 31, 2010).

24. As of the quarter ending October 31, 2009, Diamond had received the 2009

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walnut crop from growers and had recorded an average walnut cost of 82 cents per pound in

Diamond’s financial statements based on the estimated walnut price of 82 cents.

25. In February 2010, Diamond CFO Neil instructed members of the Finance Team to

adjust the walnut cost to hit an EPS target for the second quarter. Members of the Finance Team

provided Neil with a walnut cost estimate that would result in reported EPS that would be higher

than the consensus analyst estimates of $0.47 per share for the quarter. Based on these

calculations, Neil reduced the existing walnut cost estimate of 82 cents per pound by 10 cents per

pound, to 72 cents per pound. Diamond’s quarterly financial statements for the second quarter of

2010, as well as its books and records, accounted for the walnut cost at the adjusted estimate of

72 cents per pound.

26. On or about February 25, 2010, Diamond filed an SEC Form 10-Q with the

Commission that included the second quarter 2010 financial statements. The same day,

Diamond filed an SEC Form 8-K reporting EPS of $0.48, beating consensus analyst estimates.

A week later, on March 1, 2010, Diamond filed an SEC Form 424B5 prospectus related to a

proposed stock sale to pay a portion of the acquisition costs associated with Diamond’s recent

acquisition of a snack food company, and the prospectus incorporated the Form 10-Q for second

quarter of 2010. This offering closed on March 8, 2010, and Diamond raised approximately

$181 million.

27. On March 10, 2010, Diamond filed an SEC Form 8-K, which attached an investor

presentation touting Diamond’s EPS record of “Twelve Consecutive Quarters of

Outperformance” from Q3 2007 through Q2 2010.

2. Extraordinary “Continuity” Payment Excluded from the 2009 Walnut Cost

28. In March 2010, Neil and others at Diamond began determining the final crop

price and final payment for the 2009 crop (which related to fiscal year 2010, ended July 31,

2010). At the time, Diamond’s practice was to issue an individualized statement to each grower

projecting a “final minimum price,” a number meant to communicate the guaranteed lowest price

that the grower would receive for the 2009 crop. The estimated “final minimum price” was on

average 71 cents per pound (further reduced from the Q2 2010 estimate of 72 cents per pound).

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SEC V. DIAMOND FOODS, INC. 8 COMPLAINT

29. Neil was aware that growers were dissatisfied with Diamond’s estimated “final

minimum price” of 71 cents per pound, and that other walnut handlers who purchased walnuts

from growers for resale were paying approximately 87 cents per pound. Neil was informed by

his Grower Relations Team that walnut growers expected Diamond to pay walnut prices that

were within five to seven cents per pound of what other handlers were paying for the 2009 crop.

Neil instructed the Grower Relations Team to tell growers that Diamond would “close the gap”

with other handlers’ prices through its final payment.

30. From March 2010 through July 2010, Neil and others at Diamond discussed an

extraordinary payment to walnut growers that they termed a “continuity” payment. During these

discussions, Neil proposed excluding the “continuity” payment from costs recorded in

Diamond’s financial statements for fiscal year 2010. However, Neil knew, or was reckless in not

knowing, that the payment should be treated as a cost of acquiring the 2009 crop and thus

recognized in fiscal year 2010. Ultimately, Neil caused Diamond to record the final walnut cost

for the 2009 crop using an average cost of 71 cents per pound, and excluded the “continuity”

payment (equal to $20 million, or approximately 10 cents per pound) from the recorded walnut

cost at the end of fiscal year 2010 (July 31, 2010) in its financial statements for fiscal year 2010,

and its books and records.

31. In justifying the unusual accounting treatment for the “continuity” payment, Neil

instructed his Finance Team that the payment was an “advance” for the crop to be delivered in

the fall of 2010. Neil knew, however, that some growers believed that the payment was part of

the payment for the already-delivered 2009 crop. During visits to certain growers in July 2010,

Neil and others at Diamond assured the growers that they would receive a competitive price for

the 2009 crop and discussed specific final prices that were higher than Diamond’s communicated

“final minimum price “of 71 cents per pound. Neil also knew that the “continuity” payment,

when added to the crop price for the 2009 crop, brought growers within competitive range of

market prices.

32. In August 2010, Neil authorized the Grower Relations Team to issue the

“continuity” payment together with the final grower payment in one check and accompanied by

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one statement. The statement sent to growers accompanying the single check was titled, “Final

Payment 2009 Crop.” The additional payment amount was approximately 10 cents per pound

above the final minimum price of 71 cents per pound already communicated to growers, but

appeared as a lump sum payment for the 2009 crop. Neil also approved and reviewed a letter to

growers that accompanied the final payment and “continuity” payment. This letter did not

explain the purpose of the “continuity” payment, did not separate the amount of the payment that

constituted a “continuity” payment, and did not identify the payment as an advance payment for

the 2010 crop.

33. Though Neil instructed his Finance Team to account for the “continuity” payment

as an advance on the 2010 crop, and told Diamond’s independent auditors that the payment was

an advance to growers for the next year’s deliveries, Neil did not instruct the Grower Relations

Team to issue the payment to only those growers that were under contract or otherwise expected

to deliver the 2010 crop. As a result, Diamond issued over $400,000 in “continuity” payment

amounts to growers who delivered a 2009 crop but were not under contract to deliver the 2010

crop, and another $450,000 in “continuity” payments to growers who delivered a 2009 crop but

did not ultimately deliver the 2010 crop.

34. Growers generally understood the “continuity” payment to be a 2009 payment.

The payment, if considered in conjunction with the previous installments and final payments,

would have totaled 82 cents per pound as the final walnut cost for the 2009 crop. The 82 cents

per pound would have brought Diamond closer to the walnut prices paid by other handlers for

the 2009 crop (approximately 87 cents per pound) and in some cases, what Diamond had

promised growers for the 2009 crop.

35. Diamond filed its SEC Form 10-K for the year ended July 31, 2010, on October 5,

2010. As a result of the walnut cost understatement, the Form 10-K reported EPS of $1.91,

above consensus analyst expectations between $1.84 and $1.88. That same day, Diamond filed

an SEC Form 8-K attaching an earnings release, which touted its 52% growth in earnings during

fiscal year 2010 and raised its EPS guidance for fiscal year 2011.

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SEC V. DIAMOND FOODS, INC. 10 COMPLAINT

C. Understated Walnut Cost in Diamond’s 2011 Financial Statements

36. In fiscal year 2011, Diamond still lacked adequate internal controls governing the

walnut cost, grower payments, and financial reporting. Diamond continued to understate the

recorded walnut cost, and thereby overstated earnings and EPS, in its financial statements in

fiscal year 2011, by (1) manipulating the walnut cost accruals in certain quarters to hit EPS

targets, and (2) improperly excluding a portion of the final walnut cost for the 2010 crop from

fiscal year-end financial statements. As a result of the understated walnut cost, Diamond

materially misstated its financial results from the first quarter of fiscal year 2011 through the

fourth quarter of fiscal year 2011, and similarly falsified its books and records.

1. Manipulation of Walnut Cost for the 2010 Crop to Meet EPS Targets

37. During fiscal year 2011, Neil continued to manipulate costs of acquiring the 2010

walnut crop to meet EPS targets. As a result of Neil’s walnut cost adjustments, Diamond

reported EPS that met or exceeded consensus analyst expectations for every quarter in 2011. In

addition, Diamond continued to file SEC Forms 8-K with earnings releases touting its earnings

and EPS record throughout 2011.

38. Diamond’s stock price was central to its proposed acquisition of a major potato

chip business unit in the spring of 2011. According to registration documents filed with the

Commission, Diamond agreed, pursuant to the agreement between Diamond and the potato chip

unit’s parent, to issue 29 million shares of its stock to the parent company. The agreement also

included a payment of $850 million to the parent of the potato chip business unit, with a

provision that Diamond would pay additional amounts if its stock dropped below a certain price.

2. Extraordinary “Momentum” Payment Excluded from Walnut Cost for the 2010 Crop

39. In the spring of 2011, Neil and others at Diamond began considering the final

crop price for the 2010 crop. Neil was aware that other walnut handlers had paid other growers

approximately $1.00 to $1.20 per pound for the 2010 crop. He also knew that Diamond’s

growers were concerned about Diamond’s small first installment payments for the 2010 crop,

which were an average of only 57 cents per pound. Neil assured the Grower Relations Team that

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Diamond was on track to pay a competitive price close to $1.00 per pound for the 2010 crop.

40. In the summer of 2011, Neil and others at Diamond began determining the final

payment and final price for the 2010 crop. Neil decided to issue a final payment of

approximately eight cents per pound, and an extraordinary and unusual payment, termed the

“momentum” payment, of 30 cents per pound. At fiscal year-end for 2011 (July 31, 2011),

Diamond recorded the final walnut cost for the 2010 crop as 74 cents per pound. Diamond did

not record the “momentum” payment as part of the costs of acquiring the 2010 crop in FY2011

in its financial statements for fiscal year 2011 or books and records. Rather, the Finance Team

treated the “momentum” payment as advance for the crop to be delivered in the fall of 2011.

41. Neil knew that the final price for the 2010 crop, not including the “momentum”

payment, was approximately 40 cents per pound below prices being paid by other handlers for

the walnut crop that year. This gap would have been unusual and unprecedented. At least some

growers were told by Diamond personnel that the purpose of the “momentum” payment was to

“make up” for the low final payment made only a few days earlier.

42. The “momentum” payment was issued to all growers who delivered walnuts to

Diamond for the 2010 crop approximately two days after the final payment for the 2010 crop.

The grower letter accompanying the final crop payment and the “momentum” payments did not

identify the “momentum” payment as an advance for the 2011 crop. The amount of the

“momentum” payment for each grower was calculated using the pounds of walnuts that they had

delivered for the 2010 crop.

43. By failing to limit the “momentum” payment to growers that were under contract

or otherwise expected to deliver a 2011 crop, Diamond issued more than $3 million in

“momentum” payments to growers who delivered a 2010 crop but were not under contract to

deliver a 2011 crop, and another $5.8. million in “momentum” payments to growers who

delivered a 2010 crop but did not ultimately deliver the 2011 crop.

44. Diamond filed its SEC Form 10-K for the year ended July 31, 2011 on September

15, 2011. As a result of the walnut cost understatement, the Form 10-K reported EPS of $2.61,

above consensus analyst expectations of $2.49. That same day, Diamond filed an SEC Form 8-K

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attaching an earnings release, which touted its 37% increase in EPS during fiscal year 2011.

D. Diamond Restates its Financial Statements to Correct Walnut Costs

45. On November 1, 2011, Diamond filed with the Commission an SEC Form 8-K,

disclosing that the Audit Committee of the Board of Directors would be initiating an internal

investigation with respect to walnut crop payments.

46. On February 8, 2012, Diamond filed with the Commission an SEC Form 8-K,

disclosing that the Audit Committee of the Board of Directors determined that the company’s

financial statements for fiscal years 2010 and 2011 did not correctly account for certain

extraordinary walnut payments and would need to be restated. The Form 8-K announced that the

company’s CEO and its CFO Neil had been placed on administrative leave.

47. On November 14, 2012, Diamond filed with the Commission an SEC Form

10-K/A, which included restated financial results for fiscal years 2010 and 2011. The restated

financial results reported the extraordinary walnut payments as a prior period walnut cost,

thereby increasing cost of goods sold, value of inventory, and payables to growers in fiscal years

2010 and 2011. By improperly excluding the true cost paid related to walnut acquisitions,

Diamond’s original financial statements materially misstated its financial results in multiple SEC

Forms 10-Q, 10-K, 8-K, and S-4 starting in at least February 2010 and ending in September

2011, as listed below:

a. SEC Form 10-Q for Q2 FY2010 (filed 2/25/10);

b. SEC Form 8-K and attachments thereto (2/25/10);

c. SEC Form 424B5 prospectus (filed 3/1/10);

d. SEC Form 10-Q for Q3 FY2010 (filed 5/27/10);

e. SEC Form 8-K and attachments thereto (filed 5/27/10);

f. SEC Form 10-K for FY2010 (filed 10/5/10);

g. SEC Form 8-K and attachments thereto (filed 10/5/10);

h. SEC Form 10-Q for Q1 FY2011 (filed 12/8/10);

i. SEC Form 8-K and attachments thereto (filed 12/8/10);

j. SEC Form 10-Q for Q2 FY2011 (filed 3/8/11);

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k. SEC Form 8-K and attachments thereto (filed 3/8/11);

l. SEC Form 10-Q for Q3 FY2011 (filed 6/2/11);

m. SEC Form 8-K and attachments thereto (filed 6/2/11);

n. SEC Form S-4 (filed 6/20/11), with amendments filed on 8/4/11 and

9/16/11;

o. SEC Form 10-K for FY2011 (filed 9/15/11); and

p. SEC Form 8-K and attachments thereto (filed 9/15/11).

Diamond’s stock price dropped to $17 per share after the filing of the restatement in November

2012 from its high of approximately $90 per share after the filing of its SEC Form 10-K for

fiscal year 2011 in September 2011.

48. From at least February 25, 2010 through September 15, 2011, Diamond

understated the reported walnut cost in its financial statements for the purpose of improving EPS.

As a result of the understatement of the walnut cost, Diamond met or exceeded analyst

expectations on EPS every quarter during the relevant timeframe. Diamond acted with scienter

in issuing materially false and misleading financial statements, earnings releases, and other

documents filed with the Commission because Neil, in his capacity as Diamond’s CFO, knew or

was reckless in not knowing that the statements contained in these documents were false.

49. Diamond’s financial statements prepared for each quarter and each year-end

during the relevant time frame understated the walnut costs, and overstated earnings, by a

material amount, and the accurate reporting of the costs and earnings, including EPS, would have

been material to a reasonable investor. Diamond’s reported EPS for the fiscal year 2010 was

overstated by more than 65 percent, and Diamond’s reported EPS for the fiscal year 2011 was

overstated by more than 89 percent.

50. Diamond failed to devise and maintain an adequate system of internal controls to

ensure the accuracy of its books and records. Among other things, Diamond did not implement

any policies to ensure the accuracy of the reported walnut cost, the accounting for walnut

payments, and the manner in which the walnut cost was incorporated into the financial

statements. The controls and policies in place were insufficient to prevent the manipulation of

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walnut costs to meet EPS targets or the delayed recognition of walnut costs in incorrect fiscal

periods. The absence of adequate internal controls enabled Neil to falsify Diamond’s books and

records regarding its walnut cost, earnings, EPS, and other financial information.

FIRST CLAIM FOR RELIEF

Violations of Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5

51. Paragraphs 1 through 50 are re-alleged and incorporated herein by reference.

52. By engaging in the conduct described above, Diamond, directly or indirectly, in

connection with the purchase or sale of securities, by the use of means or instrumentalities of

interstate commerce, or the mails, with scienter:

(a) Employed devices, schemes, or artifices to defraud;

(b) Made untrue statements of material facts or omitted to state material facts

necessary in order to make the statements made, in the light of the circumstances

under which they were made, not misleading; and

operate as a fraud or deceit upon other persons, including purchasers and sellers

of securities.

53. By reason of the foregoing, Diamond has violated and, unless restrained and

enjoined, will continue to violate Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and

Rule 10b-5 [17 C.F.R. § 240.10b-5].

SECOND CLAIM FOR RELIEF

Violations of Sections 17(a)(1), (2), and (3) of the Securities Act

54. Paragraphs 1 through 50 are re-alleged and incorporated herein by reference.

55. By engaging in the conduct described above, Diamond directly or indirectly, in

the offer or sale of securities, by use of the means or instruments of transportation or

communication in interstate commerce or by use of the mails,

(1) with scienter, employed devices, schemes, or artifices to defraud;

(2) obtained money or property by means of untrue statements of material fact or by

omitting to state a material fact necessary in order to make the statements made,

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in light of the circumstances under which they were made, not misleading; and

(3) engaged in transactions, practices, or courses of business which operated or would

operate as a fraud or deceit upon purchasers.

56. By reason of the foregoing, Diamond violated and, unless restrained and enjoined,

will continue to violate Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)].

THIRD CLAIM FOR RELIEF

Violations of Section 13(a) of the Exchange Act

and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13

57. Paragraphs 1 through 50 are re-alleged and incorporated herein by reference.

58. Based on the conduct alleged above, Diamond violated Section 13(a) of the

Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder [17

C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11, 240.13a-13], which obligate issuers of securities

registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l] to file with the

Commission periodic reports, including annual reports, with information that is accurate and not

misleading, and unless restrained and enjoined, will continue to violate such provisions.

FOURTH CLAIM FOR RELIEF

Violations of Section 13(b)(2)(A) of the Exchange Act

59. Paragraphs 1 through 50 are re-alleged and incorporated herein by reference.

60. Based on the conduct alleged above, Diamond violated Section 13(b)(2)(A) of the

Exchange Act [15 U.S.C. § 78m(b)(2)(A)], which obligates issuers of securities registered

pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l] to make and keep books, records,

and accounts which, in reasonable detail, accurately and fairly reflect the transactions and

dispositions of the assets of the issuer, and unless restrained and enjoined, will continue to

violate these provisions.

FIFTH CLAIM FOR RELIEF

Violations of Section 13(b)(2)(B) of the Exchange Act

61. Paragraphs 1 through 50 are re-alleged and incorporated herein by reference.

62. Based on the conduct alleged above, Diamond violated Section 13(b)(2)(B) of the

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SEC V. DIAMOND FOODS, INC. 16 COMPLAINT

Exchange Act [15 U.S.C. § 78m(b)(2)(B)], which obligates issuers of securities registered

pursuant to Section 12 of the Exchange Act [15 U.S.C. § 78l] to devise and maintain a sufficient

system of internal accounting controls, and unless restrained and enjoined, will continue to

violate such provisions.

PRAYER FOR RELIEF

WHEREFORE, the Commission respectfully requests that this Court:

Permanently enjoin Defendant from directly or indirectly violating the applicable

provisions and rules of the Federal securities laws as alleged and asserted above.

II.

Order Defendant to pay civil penalties pursuant to Section 20(d) of the Securities Act [15

U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)].

Retain jurisdiction of this action in accordance with the principles of equity and the

Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and

decrees that may be entered, or to entertain any suitable application or motion for additional

relief within the jurisdiction of this Court.

VI.

Grant such other and further relief as this Court may determine to be just and necessary.

Dated: January 9, 2014 Respectfully submitted,

/s/ Jennifer J. Lee JENNIFER J. LEE Attorneys for Plaintiff SECURITIES AND EXCHANGE COMMISSION

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