Diamond Foods settles securities class action over failed purchase of Pringles

Posted on: October 9th, 2013 by Steve Larson
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Stocks and sharesA California federal judge on September 26, 2013, gave preliminary approval to Diamond Foods Inc.’s bid, potentially worth $120 million, to exit a class action claiming the snack maker duped investors into buying its stock before failing to complete a $2.3 billion deal to purchase Procter & Gamble Company’s Pringles brand, which sent share prices plummeting.

U.S. District Court Judge William Alsup issued his order approving the deal shortly after a brief hearing on September 26, 2013, morning in California federal court. Under the settlement, Diamond will pay the investor class $11 million in cash and 4.45 million shares of common stock, which was valued at $85.1 million when the settlement was struck in August but was worth $109 million Thursday at the close of the stock market on September 26, 2013.

Judge Alsup said in his order that “although a cash only settlement would have been preferable,” it was clear that Diamond Foods’ precarious financial position made that impossible. The plaintiffs’ damages expert estimated that the class suffered roughly $430 million in losses, while the company only has about $7.2 million in cash and cash equivalents on hand, according to his ruling.

Diamond also faces $579 million in long-term debt and has lost 40 percent of its volume in walnut sales over the past year. “As such, Diamond’s weakened financial condition was a significant factor in determining that the company was unable to pay a cash-only settlement,” Judge Alsup wrote.

The plaintiffs said they were eager to settle the case because they had “significant concerns that even the continued litigation of this action could have a deleterious effect on the company’s liquidity and ability to continue as a going concern, and would, at a minimum, deplete insurance proceeds that might be available for any settlement,” according to the motion for settlement.

Diamond got into trouble with investors in the first place through walnut sales, the plaintiffs said. In the two lawsuits filed in California federal court, investors claim Diamond puffed up its earnings by improperly accounting for at least $50 million in payments to walnut farmers that were designed to artificially lower the company’s costs for fiscal 2011.

When those payments came to light, the company was forced to delay the closing of its $2.3 billion deal for the Pringles brand. The revelations and delay also sent Diamond’s stock spiraling down, from a close on the New York Stock Exchange of $64.12 on November 1, 2011, to a $39.09 close November 7, 2011, the day the suits were filed, according to the investors.

Diamond’s stock closed at $24.48 per share on September 26, 2013.

In May, Judge Alsup certified a class action, rejecting Diamond’s contentions that Mississippi Public Employees’ Retirement System is not typical of the class nor an adequate representative.

During oral argument on the plaintiffs’ motion to certify the class, Judge Alsup told Diamond’s attorneys that the plaintiffs appeared to have a solid case and called Mississippi PERS a likely candidate for class representation.

The case is In re: Diamond Foods Securities Litigation, case number 3:11-cv-05386, in the U.S. District Court for the Northern District of California.