SEC Division of Corporation Finance no-action letter: Diamond Foods, Inc.

UNITED STATES

SECUR ITIES AND EXCHANGE COMMISSION

WASHINGTON , D .C. 20549

DIVISION OF
CORPORATION FI NANCE
Horace Nash, Esq.
Fenwick & West LLP
801 California Street
Mountain View, CA 94041
Re: SEC v. Diamond Foods, Inc., Civil Action No. 3:14-cv-00123 (N.D. Cal) (Jan. 9, 2014) Waiver Request under Regulation A and Rules 505 and 506 of Regulation D Dear Mr. Nash:
This responds to your letter dated March 6, 2014 (" Waiver Request"), written on behalf of Diamond Foods, Inc . (" Diamond Foods"), and constituting an application for waivers of disqualification under Rule 262 of Regulation A and Rules 505(b )(2)(iii)(C) and 506( d)(2)(ii) of Regulation D under the Securities Act of 1933. In the Waiver Request, Diamond Foods requested relief from any disqualification that may ari se under Rule 262 of Regulation A and Rules 505 and 506 of Regulation D by virtue of the Final Judgment entered on January 2 1, 2014 by the United States District Co urt for the Northern District of California in SEC v. Diamond Foods. Inc. , Civil Action No. 3:14-cv-001 23 (N. D. Cal) (Jan. 9, 2014) (the "Final Judgment"). The Final Judgment, among other things, permanently restrains and enjoins Diamond Foods from committing future violations ofthe relevant federal securities laws and imposes ci vi l monetary penalties. Based on the facts and representations set forth in your Waiver Request, and assuming Diamond Foods complies with the Final Judgment, the Commission, pursuant to delegated authority, has determined that Diamond Foods has made a showing of good cause under Rule 262 of Regulation A and Rules 505(b )(2)(iii)(C) and 506( d)(2)(ii) of Regulation D that it is not necessary under the circumstances to deny the exemptions available under Regulation A and Rules 505 and 506 of Regulation D by virtue of the entry ofthe Final Judgment. Accordingly, the relief requested in the Wai ver Request regarding such di squalifications that may arise as to Diamond Foods under Rule 262 of Regulation A and Rules 505 and 506 of Regulation D by virtue of the entry of the Final Judgment is granted. Any different facts or representations in the Waiver Request or non-compliance with the Final Judgment might result in a different conclusion. Very trul y yo urs, ~~4h~ Sebastian Gomez Abero Chief, Office of Small Business Policy Division of Corporation Finance

FENWICK & WEST LLP

SILICON VALLEY CENTER 801 CALIFORNIA STREET MOUNTAIN VIEW, CA .94041

TEL 650-988.8500 FAX 650·938.5200 WWW.FENWICK.COM

March 6~ 2014
BY ELECTRONIC DELIVERY
Sebastian Gomez-Abero
Chief, Office ofSmall Business Policy
Division ofCorporation Finance
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Securities and Exchange Commission v. Diamond Foods, Inc.,
Civ. Action No. 3:14-cv-00123 (N.D. Cal) (January 9, 2014)
Dear Mr. Gomez-Abero:
This letter is submitted on behalfofour client, Diamond Foods, Inc. ("Diamond Foods"), the settling defendant in the above-captioned civil injunctive action brought by the SeCtlliti~ and Exchange Commission ("Commission''). Diamond Foods hereby requests, pursuant to Rule 262 ofRegulation A and Rules 505(b)(2)(iii)(C) and 506(d)(2)(ii) ofRegulation D ofthe Commission promulgated under the Securities Act of 1933 ("Securities Act"), waivers ofany disqualifications from relying on exemptions under Regulation A and Rules 505 and 506 of Regulation D that may be applicable as a result ofthe entry ofa Final Judgment as to Defendant Diamond Foods, Inc. ("Final Judgment'') entered on January 21,2014, which is described below. BACKGROUND The staffofthe Division ofEnforcement ("Staff') engaged in settlement discussions with Diamond Foods prior to and in connection with the above-captioned civil action. As a result of these discussions, Diamond Foods submitted a Consent ofDefendant Diamond Foods, Inc. ("Consent") that was presented by the Staff to the United States District Court for the Northern District ofCalifornia ("Court") when the Commission filed its complaint ("Complaint") against Diamond Foods in the civil action captioned above.

In the Consent, solely for the purpose ofproceedings brought by or on behalfofthe Com.missiort or to which the Commission is aparty, Diamond Foods cons~nted to the entry of the Final Judgment without admitting or denying the matters set forth therein (other than those relating to the jurisdiction ofthe district court over it and the subject matter solely for purposes ofthat actiori). The. Final Judgment, which was entered on January 21, 2014, .resolved the Complaint's allegations that as aresultofthe conduct of Steven Neil, Diamond Foods' former chief financial officer, Diamond Foods llJlderreported money paid to walnut growers by delaying the recording ofpayments into later fiscal periods and reported higher net income and earnings, thereby exceeding analysts' estimates for fiscal quarters in 2010 and 2011 .. Following an investigation by:its Audit Committee,. Diamond Foods restated its finan.cial resul~ in November 2012 to reflect the true costs of acquiring walnuts. The Complaint alleges· that as a result of these activities, Diamond Foods violated Section 17(a) ofthe SecUrities Act of 1933 ("Securities Act"), and Sections 1 O(b), 13(a), 13{b)(2)(A), and 13(b)(2)(B) ofthe Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rules lOb-S, 12b-20, 13a-i, 13a-11, and 13a-l3. The Final Judgment:
1. Enjoins Diamond Foods from violating, directly or indirectly, Section 1 O(b) ofthe
Exchange Act and Rule 1 Ob-5 promulgated thereunder, by using any means or instrmnentality ofinterstate commerce or ofthe mails, or ofany facility of any national securities exchange, in connection with the purchase or sale ofany security: (a) to employ any device, scheme, or artifice to defraud; (b) to make any untrue statement ofa material fact or to omit to state a material fact necessary in order to make the statements made, in light ofthe circmnstances under which they were made, not ·misleading; or (c) to engage in any act~ practice~ or course ofbusiness which operates or would operate as a fraud or deceit upon any person.
2. Enjoins Diamond Foods from violating Section 17(a) of the Securities Actin any offer or
sale of any security by the use ofany means or instruments oftransportation or communication in interstate commerce or by use ofthe mails, directly or indirectly: (a) to employ any device, scheme, or artifice to defraud; (b) to obtain money or property by means of any untrue statement of a matc;nial fact or any omission of a material fact necessary in order to make the statements made, in light ofthe circumstances under which they were made, not misleading; or (c) to engage in any·transaction, practice, or course ofbusiness which operates or would operate as a fraud or deceit upon the purchaser.
3. Enjoins Diamond Foods from violating, directly or indirectly, Section 13(a) of the
Exchange Act and Rule 12b-20, 13a-1, 13a-11, and 13a-13 promulgated thereunder, by failing to file, or by filing or causing to be filed, with the Commission any report required to be filed with the Commission pursuant to Section 13(a) ofthe Exchange Act and the rules and regulations promulgated thereunder, which report omits to disclose any information required to be disclosed or such further information, if any, as may be necessary to make the statements, in light ofthe circumstances under which they were made, not misleading.

4. Enjoins Diamond Foods from violating, directly or indirectly, Se~tion 13(b)(2)(A) ofthe
Exchange Act, by failing to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the exp~ses and transactions ofthe Company.
5. Enjoins Diamond Foods from violating, directly or indirectly, Section 13(b)(2)(B) ofthe
Exchange Act by failing to devise and· maintain a system ofinternal accounting controls sufficient to provide reasonable assurances that transactions are re~rded as necessary to permit preparation offinancial statements in conformity with. generally accepted accounting principl~ or any other criteria applicable to snch statements, and to maintain accountability for such assets.
6. Orders that Diamond Foods shall pay a civil penalty in the antount of$5,000,000 to the
Securities and Exchange Commission pursuant to Section 20(d) ofthe Securities Act and
Section 21 (d) ofthe Exchange Act, and that Diamond Foods shall satisfy this obligation
by paying $5,000,000 to the Commission Within 14 days after entry ofthe Final Judgment Diamond has timely paid the civil penalty. DISCUSSION Diamond Foods understands that the entry ofthe Final Judgment may disqualify it, its affiliated entities~ and other issuers from relying on certain exemptions under Regulation A and Rules 505 and 506 ofRegulation D promulgated under the Securities Act. Diamond Foods is concerned that, should it or any ofits affiliated entities be d~emed to \le an issuer, predecessor of the issuer, affiliated issuer, general partner or managing member ofissuer, promoter, underwriter ofsecurities or in any other capacity described in Securities Act Rules 262, 505, and 506 for the purposes ofSecurities Act Rule 262(a)( 4), Rule 262{b)(2), Rule SOS(b)(2)(iii) or Rule 506(d){l)(ii), Diamond Foods, its issuer affiliates, and other issuers, with which it is associated in one ofthose listed capacities and which rely upon or may rely upon these offering exemptions when issuing securities would be prohibited from doing so. The Comniission has the authority to waive the Regulation A and D exemption disqualifications upon a showing ofgood cause that such disqualifications are not necessary under the circumstances. See 17 C.P.R. §§ 230.262, 230.505(b)(2)(iii)(C), and 230.506(d)(2)(ii). Diamond Foods requests that the Commission waive any disqualifying effects that the Final Judgment may have under Regulation A and Rules 505 and 506 ofRegulation D as a result ofits entry as to Diamond Foods on the following grounds:
1. Diamond Foods' conduct addressed in the Final Judgment does not pertain to the
offer and sale ofsecurities. Rather, the conduct alleged in the Complaint relates to the alleged misstatement ofwalnut costs in order to boost earnings and meet estimates by stock analysts. The alleged violations were the result of an effort directed by the former CPO ofDiamond Foods, who was terminated by the Company in 2012 as a result ofthe Audit Committee's investigation and who is the defendant in a separate action filed by the SEC in the Northern District ofCalifornia. Furthermore, the alleged violations in the Complaint, as described above,

and covered by the Final Judgment relate to fiscal quarters in 2010 and 2011, and those financial statements were restated in November 2012 to reflect the true costs of acquiring walnuts.
2. Over the past two years, Diamond Foods has taken multi-tiered and
comp~h~sive mea.&Ures to address the, conduct alleged in the Complaint, including steps reasonably designed to prevent future violations ofthe securities laws. Since the events that are the subject ofthe Complaint, Diamond Foods has adopted a number of changes to its controi environment and walnut grower accounting. As a result, management has concluded that the original material weaknesses were remediated as ofJuly 31~ .2013, based on the testing and evaluation ofthe effectiveness ofthe remediation steps iinplemented during fiscal 2013. Changes to the Di~ond Foods control environment include:

• Replacement ofthe former chief:financial officer, former chiefexecutive officer and
  former controller;
• Enhanced monthly financial and operatiQn~l reporting packages with detailed financial
  analysis and identification ofsignificant and non-routine transactions which are circulated for review by management; and
• Development and implementation oftraining, led by the Diamond ChiefExecutive ·
  Officer and reinforced by finance executives with appropriate accounting expertise, for executives, finance persQnnel ~d grower accounting to enhance awaren~s and understanding ofstandards and principles for accounting and. financial reporting as well as the importance offinancial :reporting integrity and the Company's Code ofConduct and Ethics Policy. Changes to walnut grower accounting included:
• Revised the walnut cost estimation policy to incorporate a wide variety ofinputs each
  quarter with review and sign-off by cross-functional management;
• Enhanced documentation, oversight and monitoring of accounting policies and

procedures relating to walnut grower payments and walnut grower accounting;

• Enhanced review and oversight of grower communications;
• Reassessment ofresponsibilities and realignment ofreporting relationships within the
  walnut operations and grower accounting function;
• Creation ofa Grower Advisory Board including members from a cross section of
  Diamond's grower base to provide a forum for input from growers and communication between Diamond senior management and growers;

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• linplementation ofqum.ez:Iy repres~tations by grower services regarding compliance
  with grower contracting procedures; and
• Update and revision ofSarbanes-Oxley internal control narratives related to grower
  accounting.
  In addition, Diamond Foods obtained recovery ofmore than $4.0 million in bonuses and other benefits from its former chiefexecutive officer.

3. Diamond provided meaningful cooperation with the Staff.throughout the two-year
   investigation, including; among things:

• Production of approximately 980,000 documents, many ofwhich were produced without
  regard to subpoena, privilege or other limitations;
• Production on a voluntary basis ofnumerous witnesses for interviews or testimony;
• Detailed presentations to the Staffby counsel for the Audit Committee setting. out the
  Audit Committee's investigative procedures and ffudings;
• Detaile4 presentations and frequent in person meetings between the Staff and counsel for
  the Company regarding additional procedures conducted,. analysis ofdocuments and evidence, and findings reached by the Audit Committee and new management; and
• Detailed presentations to the Staff by counsel for the Company on numerous topics,
  including Diamond's remediation ofinternal control weaknesses; executive compensation and clawback efforts; other personnel ~ctions; and impact ofthe investigation on the Company's investors and other stakeholders.

4. The disqualification ofDiamond Foods and any ofits affiliates from relying on
   the exemptions under Regulation A an4 R'Qles 505 and 506 ofRegulation D would, we believe, have an adverse impact on third parties, including stockholders ofDiamond Foods that may benefit from transactions under such exemptions should Diamond Foods or any ofits affiliates seek to utilize such exemptions for capital-raising purposes.
5. For a period offive years from the date ofthe Final Judgment, Diamond Foods
   will furnish (or cause to be furnished) to each purchaser in a Regulation A, Rule 505 or Rule 506 offering that would otherwise be subject to the disqualification under Securities Act Rule 262(a)( 4), Rule 262(b )(2), Rule 505(b )(2)(iii) or Rule 506( d)(l) as a result ofthe Final Judgment, a description in writing ofthe Final Judgment a reasonable time prior to sale.

In light ofthe grounds for relief discussed above, we believe that disqualification is not necessary under the circumstances and that Diamond Foods has shown good cause that relief should be granted. 1

• *
  Please do not hesitate to call me at the number listed above ifyou have any questions. Sincerely, JL.. ~ ~rwt.l Horace L. Nash 1 We note in support ofthis request that the Commission has granted relief under Rule 262 ofRegulation A and Rules 505(b)(2)(iii)(C) and 506(d)(2)(ii) ofRegulation D for similar reasons or in similar circumstances. See, e.g., General Electric Co., SEC No-Action Letter (Aug. 11, 2009) (waiver after violation ofSection 17{a) ofthe Securities Act, Sections 10{b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) ofthe Exchange Act, and Rules.lOb-5, 12b-20, l3a-l, 13a-11 and 13a-13 promulgated thereunder); Delllnc., SEC No-Action Letter (Oct 13, 2010) (same);· Harbert Management Corporation, et al., SEC No-Action Letter (July 3, 2012) (waiver after violation ofSection lO(b) ofthe Exchange Act and Rule lOb-S promulgated thereunder); lnvestools Inc., SEC No-Action Letter (Dec. 16, 2009) (same); RBS Securities Inc., SEC No-Action Letter (Nov. 25, 2013) (waiver after violation ofSections 17(a) ofthe Securities Act); J.P. Morgan Securities LLC, et al., SEC No-Action Letter (Jan. 8, 2013) (same); Mizuho Securities USA Inc., SEC No-Action Letter (July 26, 2012) (same); H&R Block, Inc. and Block Financial LLC, SEC No-Action Letter (May 2, 2012) (same); GE Funding Capital Market Services, Inc., SEC No-Action Letter (Jan. 23, 2012) (same); Wells Fargo Bank. N.A., SEC No-Action Letter (Dec. 9, 2011) (same); J.P. Morgan Securities LLC, SEC No-Action Letter (June 29, 2011) (same); Goldman Sachs & Co., SEC No-Action Letter (July 20, 2010) (same); A. G. Edwards & Sons, Inc., SEC No-Action Letter (May 31, 2006) (same); Bear, Steams & Co. Inc., SEC No-Action Letter (May 31, 2006) (same); Goldman, Sachs & Co., SEC No-Action Letter (May 31, 2006) (same); Koss Corp., SEC No-Action Letter {Feb. 23, 2012) (waiver after violation of Sections 13(a), 13(b)(2){A) and 13(b)(2)(B) ofthe Exchange Act and Rules 12b-20, 13a-1, 13a-ll and 13a-13 promulgated thereunder).