Extreme Volatility Continues in Diamond Foods; Stock Down 20%

Diamond Foods DMND has been one of the most volatile stocks on the NASDAQ over the last couple of months as the company is undergoing an internal accounting investigation into payments made to walnut growers. Over the last two trading sessions that volatility has gotten even more extreme with shares rising more than 50% on Friday only to fall 20% on Monday. The catalyst for DMND's massive rally last week was a note from an analyst suggesting that the investigation was unlikely to uncover any wrongdoing, along with some comments made by a director of the company on CNN. On Monday, the stock has lost a chunk of Friday's gains after the Wall Street Journal reported that some walnut farmers questioned the explanations of payments. The company also announced on Monday that it would be delaying its fiscal first quarter earnings filing until the accounting probe could be completed. Diamond expects that its audit committee will be able to finish the probe by the middle of February and report earnings sometime thereafter. The investigation into the mysterious payments made to walnut growers centers on whether the company potentially inflated its previous year's earnings by as much as 100% by delaying the $50 million payment until September. The company has said that the payment was an advance for farmers' 2011 walnut crop. This explanation is being refuted by some farmers, however, who have said that they received checks despite the fact they were not planning on delivering their 2011 walnut crops to DMND. When these farmers questioned the company about the checks they were told that they were so called "momentum payments" for their 2010 crops. These farmers were told they could go ahead and cash the checks even if they weren't planning on selling walnuts to DMND in 2011. The potential implication is that the company used the September payments to shift its costs forward into fiscal 2011, thereby inflating fiscal 2010's earnings. The investigation into these payments has not only significantly damaged the stock which has lost around two-thirds of its value since trading as high as $92 in September, it has also delayed the company's acquisition of Pringles from Proctor & Gamble PG.