Image of SEC Obtains $5 Million Penalty for Accounting Scheme

SEC Obtains $5 Million Penalty for Accounting Scheme

Company Inflated Earrings by Underreporting Costs

In a press release, the SEC announced a settlement with Diamond Foods and two former executives for violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Sections 17(a)(1), (2), and (3) of the Securities Act of 1933.  To boost earnings, the company fraudulently underreported payments paid to walnut growers.  By manipulating walnut costs, Diamond correspondingly reported higher net income and inflated earnings to exceed analysts’ estimates.

The company’s former CEO is paying a $125,000 penalty to settle charges against him and has returned or forfeited more than $4 million in bonuses and other benefits he received during the time of the fraudulent financial reporting.  The SEC’s complaint  alleges that the former CFO directed the effort to fraudulently underreport payments to walnut growers, and indeed internal emails showed that the former CFO referred to commodity costs as a “lever” to manage earnings.  He benefited from this earnings management by obtaining bonuses and other compensation for meeting earnings per share estimates.

While the press release does not identify the source of the investigation, many SEC enforcement actions result from tips provided by corporate insiders or whistleblowers.  Under the Dodd-Frank Act’s whistleblower bounty provision, a whistleblower that provides original information to the SEC that results in monetary sanctions exceeding $1 million is eligible for a bounty of ten to thirty percent of the amount recovered.   Factors to be considered in calculating the amount of the award include the significance of the information provided by the whistleblower, the degree of assistance provided by the whistleblower, and the SEC’s interest in deterring violations by making awards to whistleblowers.

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Jason Zuckerman, Principal of Zuckerman Law, litigates whistleblower retaliation, qui tam, wrongful discharge, and other employment-related claims. He is rated 10 out of 10 by Avvo, was recognized by Washingtonian magazine as a “Top Whistleblower Lawyer” in 2015 and selected by his peers to be included in The Best Lawyers in America® and in SuperLawyers.