This story originally appeared in sister publication The Recorder.
SAN FRANCISCO — Eager to settle a securities class action over its 2012 accounting scandal, Diamond Foods Inc. has agreed to a deal worth roughly $96 million — a sum that falls short of what plaintiffs think they could recover but won't capsize the troubled nut and snack maker either.
Diamond will shell out $11 million in cash and issue more than four million shares of stock to settle the suit, according to a motion filed in U.S. District Court for the Northern District of California on Wednesday by lawyers for the Mississippi Public Employees Retirement System.
MPERS, the lead plaintiff in the class action, accuses the San Francisco-based company and two of its former directors of fraudulently accounting for payments to walnut growers in order to inflate earnings ahead of its failed bid to buy Pringles from Procter & Gamble.
With Diamond now in dire financial straits, the deal is a far cry from the "typical settlement where a plaintiff, at least theoretically, can wring as much from the defendant as possible, regardless of the consequences," MPERS lawyer John Harnes of Atlanta's Chitwood Harley Harnes wrote in a motion for preliminary approval of the proposed settlement.
Knowing payment to the class would largely come in the form of Diamond stock, plaintiffs lawyers had to walk a tightrope between recovering as much as possible for the class and keeping the company afloat, Harnes wrote. The $96.1 million settlement represents 25 to 40 percent of the maximum amount plaintiffs thought they could recover in the suit. The stock component was worth approximately $85.1 million at Tuesday's closing price.
"Any settlement could not be so onerous that it destroyed the value of the common stock that lead plaintiff and the class were receiving, or that it impaired the company's business plans going forward," Harnes wrote.
Harnes firm and San Francisco's Lieff Cabraser Heimann & Bernstein served as class counsel. Richard Heimann, who is on the Lieff Cabraser team, declined to comment. Diamond was defended by Fenwick & West partners Dean Kristy and Susan Muck, who did not respond to requests for comment.
In May, U.S. District Judge William Alsup certified a class of shareholders who bought Diamond stock between October 2010 and February 2012.
After broaching the topic of a settlement this past December, lawyers for Diamond and the class agreed in June to enter mediation before U.S. Magistrate Judge Jacqueline Scott Corley, according to the settlement motion. Diamond's debt loomed large in the negotiations. The company has just $7.2 million in cash and long-term obligations of $579 million, meaning stock would be the main currency for settling In re Diamond Foods Securities Litigation, 11-05386.
Plaintiffs lawyers wrote that they were motivated to strike a deal in part because they feared that further litigation could drain insurance proceeds available for a settlement or even drive Diamond into bankruptcy.
"Once settlement negotiations commenced, lead plaintiff's principal consideration was not the maximum damages that could be achieved after trial, but the maximum that the company realistically had the ability to pay," Harnes wrote.
Diamond is so deeply in debt that settlement talks had to involve the company's creditors, including Oaktree Capital Management, a Los Angeles-based asset management firm, according to plaintiffs' motion.
"In a very real sense, lead plaintiff was not only negotiating with Diamond, but to some extent with its lenders as well," Harnes wrote.
Diamond has been hit hard by falling walnut sales, and its books are weighed down by debt from prior acquisitions as well as its botched attempt to purchase Pringles in 2012, according to the motion.
The Pringles deal crumbled after alleged accounting improprieties at Diamond came to light. Diamond disclosed in February 2012 that it would amend its financial statements because payments to walnut growers had been misrepresented. The plaintiffs contend that Diamond understated payments made to walnut growers and then made additional payments to the farmers after the end of the fiscal years, which overstated the company's income in 2010 and 2011.
Although former Diamond CEO Michael Mendes and former chief financial officer Steven Neil were named as defendants in the complaint, the settlement does not offer recovery against their personal assets. Plaintiffs opted not to pursue Mendes and Neil because insurance companies' willingness to contribute to the settlement hinged on the release of all parties, Harnes wrote.
Alsup has scheduled a hearing for Thursday.
