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Judge refuses to toss Diamond Foods suit

Published on December 13, 2012 3:01AM

Last changed on January 10, 2013 7:50AM

A federal judge has rejected a request by Diamond Foods to throw out a lawsuit that accuses the snack food company of securities fraud.

Last year, several legal complaints were filed alleging that the company had reported walnut payments too late in its financial reports to artificially inflate the appearance of profit.

The former walnut farmers' cooperative converted to a publicly traded corporation in 2005.

The accounting controversy caused turmoil at Diamond Foods, resulting in the ouster of its longtime CEO and a steep drop in its stock price. Diamond Foods' planned takeover of the Pringles potato chip brand fell through as well.

The company did not dispute in court that it incorrectly accounted for about $80 million in walnut payments in 2010 and 2011, but claimed there wasn't sufficient indication that financial statements were falsified intentionally or with deliberate recklessness.

U.S. District Judge William Alsup has rejected the company's motion to dismiss the lawsuits, which seek class action status, ruling that they have sufficiently pleaded "scienter" -- basically, the knowledge of wrongdoing.

"The magnitude of the wrongful accounting, the fact that the (generally accepted accounting principle) violations were basic and fundamental, and Diamond's inconsistent and deliberately ambiguous statements regarding the nature and purpose of the payments all contribute to a strong inference of intentional misconduct," the judge said.

Alsup also refused to dismiss claims against Diamond's ex-CEO, Michael Mendes, and former chief financial officer, Steven Neil, but he did remove accounting auditor Deloitte & Touche as a defendant in the litigation.

-- Mateusz Perkowski


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