Was Diamond Foods Engaging In Enron-Like Fraudulent Activity?

| About: Diamond Foods, (DMND)

Back in November, I wrote an article on my concerns about the Diamond Foods (NASDAQ:DMND) director's suicide. My thesis was a man who has accomplished as much as Joe Silveira probably wouldn't commit suicide unless it was for a very good reason. Only he and the former executives of Diamond Foods, who have since been fired by the board, knew the extent of the accounting shenanigans they used.

Investors downplayed Joe Silveira's suicide with the idea that it doesn't make the company itself any less profitable. However, I am an avid student of psychology and know that most of the time suicide victims leave a note to their family. There was no suicide note - which leads me to believe there are complex, career-oriented reasons for his suicide. There was no evidence that he committed suicide for any reason not related to the company. Do investors really believe his suicide was simply because the company didn't record the walnut grower payments at the right time?

My prediction was it's possible that Diamond Foods cooked the books so badly, that it would severely break their debt covenants with their creditors. This would result in the creditors demanding their principal payments right away. The company has a negative tangible book value. It has little to no cash, and debt of over $500 million. The company will have to start selling off it's assets piecemeal if this happens and file for bankruptcy, which would likely leave the shareholders with nothing.

Today on Stocktwits, CNBC's Herb Greenberg said: "You (NYSE:I) can't help wonder why the $DMND restatement is taking so long."

Herb has a valid point. On February 8th, 2012, the company stated that it was going to reinstate its previous earnings due to certain payments to walnut growers that weren't accounted for in the correct periods. It has been four months since. Why would it take so long simply to change the date when walnut growers were paid? They have auditors and accountants working every day to reinstate the company's financials ever since February 8th. My hunch is that there is much more behind the curtain than simply the changing of the date of walnut grower payments.

Even if the company manages to revive itself from this mess, it is going to have to face more problems ahead. In the past, the company was stiffing its nut grower partners. In this article, it mentions how Diamond's competitors have offered farmers a premium of at least 30%, sometimes 100%, of what Diamond pays them for their nuts. It mentions one family of farmers who have let their contract with Diamond lapse after selling to them for 14 years, and other former Diamond Foods farmers have also left.

On top of that, Oaktree has invested $225 million in convertible notes, which have a 12% interest rate. That's a high rate which comes to $27 million per year in interest, which will certainly cut into the company's income that was recorded at $50 million in 2011. Even at the company's current price as I write this, it's market cap is about $410 million. That gives it a PE of 8. That's a decent PE for a value company, but I don't think Diamond is even a value company, and it certainly isn't a growth company at this point.

The company now says that it won't even be able to have its annual shareholder meeting before July 31st. In March, the company had to deal with lenders to extend its payment deadlines. The company had to increase its interest rates, and pay some extra fees. In the near term, I foresee more of this happening. In the medium term, I foresee a de-listing from the Nasdaq. In the longer term, I foresee a bankruptcy. Rating: Strong Sell. Note: the company will probably drift to around $17.50-$18 in the near term.

Disclosure: I am short DMND.