Federal Court Allows Securities Fraud Claims to Proceed Against Diamond Foods

A federal court in California has determined that Diamond Foods’ investors
adequately pleaded knowledge, or scienter, on the part of the company and
individual senior officers to allow putative class claims against them for false and misleading statements in violation of federal securities laws to proceed. In re Diamond Foods, Inc., Securities Litig., No. 11-05386 (N.D.
Cal., order entered November 30, 2012). The court also dismissed claims filed
against the company’s auditor, finding insufficient allegations to raise a strong
inference of scienter, but allowed the plaintiffs to amend their complaint to
cure its deficiencies.

The litigation arises from events occurring in 2010-2012, when Diamond was attempting to purchase the Pringles brand of snack chips from P&G. The company allegedly manipulated prices paid to walnut growers during those years and failed to properly account for the payments, resulting in what appeared to be an inflated value for its shares. When the irregularities came to light, Diamond’s stock apparently plummeted nearly 37 percent. Citing witness statements and conflicting company statements to investors, the press and growers, the court found sufficient evidence at the motion-to-dismiss stage to support the plaintiffs’ scienter allegations. The court found that scienter was neither negated by the individual defendants’ failure to sell their stock during the class period nor by unqualified audit opinions provided by the company’s outside auditor.