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Last week the stock of San Francisco walnut company Diamond Foods (DMND) dropped nearly 40% after the company’s CEO and CFO were dismissed after an internal review discovered accounting irregularities.
In a statement released after the close of trading on Wednesday the company said it had exposed some $80 million in unusual payments to walnut farmers; payments not accounted for correctly in prior financial statements. The revelation will require a restatement of the company’s 2010 and 2011 earnings results.
In the attached clip Trademonster.com co-founder Jon Najarian and I discuss what happened and why last week’s news may be only mark the beginning of Diamond’s troubles. The company fired it’s top two executives on Tuesday evening yet allowed Diamond’s stock to trade all day Wednesday. Bad idea.
“The board seems to have had really bad legal advice,” understates Najarian. “Anything you know that’s material and non-public you’re supposed to disperse that information in as wide an area as possible.” Such a practice is called Fair Disclosure one of the few securities laws with a straight forward definition.
Last Wednesday as DMND’s board crafted a statement for after the bell, the stock traded 6.9 million shares, more than all the other days of February combined and the highest volume the stock had seen since last December 12th.
Najarian says his service, which triggers alerts when unusually high levels of puts or calls are traded on a security, also flagged curiously aggressive put buying in Diamond during Wednesday’s trading session. The following day Diamond’s stock fell nearly 40%. There are those who may think the high volume of trading in puts and stocks ahead of DMND’s announcement was coincidental.
“This is the definition of insider information,” says Najarian. Such trading is illegal, even for members of Congress.
It’s within the realm of the possible that the trading on Wednesday was organic. Perhaps there was a downgrade, a walnut weather problem, or one lucky fund dumping shares in one day immediately prior to disastrous news.
Regardless the trading in Diamond last week is exactly what illegal trading looks like.
If you held Diamond last week you were at a disadvantage. If you actually bought last Wednesday it’s extremely likely you were flat-out robbed.
Diamond Foods is yet another opportunity for the regulatory agencies to help restore American’s confidence in markets by enforcing the rules we have rather than harrumphing about the need for new securities laws. It’s a lot to ask in an election year but maybe, just maybe, this can be one time when protecting shareholders is the government’s top priority.
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the float is only 22 million shares outstanding. dmnd traded 39 million shares.odd,no. not only did they have shit counsel. my question is, where was deloitte touche at,as the accounting company in all this,where was there stellar advice?. and why should have the trades been halted? because 2 exec’s got canned……. something else is terribly wrong with this whole story.
It is amazing that even after Worldcom, Enron, etc. these accounting firms still get away with not doing their fucking jobs. They collect millions in fees, bang out a boilerplate letter to include in the 10-k and walk away.
If shit blows up, too bad; you’re fucked and the accouting firm denies any knowledge of the shady dealings.
Not to worry. Dodd-Frank will solve everything.
Somebody knew and the word got out. You have to be incredibly naive to think otherwise. The big question is, as the writer said, will the regulators enforce existing law or just say we need more new laws?