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. C11-05386 WHA (U.S. Dist. Ct., 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-todismiss 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.