Cash-Strapped Company Can Settle With Stock
SAN FRANCISCO (CN) - Diamond Foods can use stock to pay part of a multimillion-dollar class-action settlement because it does not have enough cash on hand, a federal judge ruled.
U.S. District Judge William Alsup preliminarily approved a deal to settle claims that Diamond Foods and two former executives understated the cost of walnuts to increase apparent profits.
Shareholders said Diamond Foods was motivated by its bid to acquire Pringles from Proctor & Gamble Co. in 2011 using stock.
An equity research firm for the Off Wall Street Consulting Group uncovered the scheme in a report questioning Diamond Foods' accounting practices, according to one shareholder class action.
In September 2011, The Wall Street Journal published an article about the report, noting that as walnut prices surged for the 2010 crop, Diamond Foods actually paid growers much less than other buyers.
After the company's 2011 fiscal year closed, Diamond Foods then paid growers special "momentum" payments, shareholders said.
"The article estimates that the 'momentum' payments could total as much as $50 million, which if made prior to July 31, 2011, would have substantially reduced the company's $93 million in operating income that it had previously reported for the entire 2011 fiscal year," according to the class action.
When word got out about the inflation, share prices initially fell $5 per share to $85.26 per share. As investigations continued, the share price fell to $52.79, prompting numerous shareholder class actions.
Alsup granted early approval to a settlement requiring Diamond to pay $11 million and to distribute 4.45 million shares of common stock to the class members.
"As of August 21, the market value of the 4.45 million shares was $85.1 million," Alsup explained. "Any amounts remaining after disbursement of the settlement amount will be paid out as additional distribution to class members or to a charitable organization. Based on lead plaintiff's damages analysis, the maximum aggregate damages totaled approximately $430 million."
The judge acknowledged that a cash-only settlement "would have been preferable," but agreed with the parties that Diamond Foods was in no position to shell out that kind of cash.
The company had just $7.2 million in cash and cash equivalents on its balance sheet, according to the lead plaintiff's damages expert.
"Diamond is also highly leveraged, with $579 million in long-term obligations," Alsup added. "Furthermore, the company lost 40% of its volume in walnut sales from the previous 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."
Preliminary approval is proper, he said, "given Diamond's strained financial state and the uncertainty with lead plaintiff's ability to collect on any judgment."
The Mississippi Public Employees Retirement System is listed as lead plaintiff, while former Diamond Foods executives Michael Mendes and Steven Neil are co-defendants. Claims against accounting firm Deloitte & Touche were dismissed in November 2012.
A final approval hearing is scheduled for Jan. 9, 2014.