Sun-Diamond Co-op: Harvest of Discontent
The post office serving the San Joaquin Valley town of Madera experienced an unusually heavy flow of certified mail this spring--much of it generated by raisin farmers notifying Sun-Maid Growers of their withdrawal from the farmer-owned cooperative that had expected to handle their 1986 crops.
About 29% of the cooperative’s 2,100 members, who account for 35% of Sun-Maid’s acreage, pulled out in the wake of revelations that, through negligence or fraud, they had been overpaid to the tune of $27.3 million--an average of $12,380 per grower.
Shocking as was this overpayment, it represented just the biggest piece of $43 million in unrelated but otherwise non-existent profits previously reported by Sun-Maid Growers and Diamond Walnut Growers, the largest divisions of Stockton-based Sun-Diamond Growers of California.
A plan to restore the overpayments and the lost equity in the grower-owned cooperative has yet to be announced, but scheduled crop payments have been delayed and a cloud has been placed over the members’ financial situation at a time when crop credit is anything but easily obtained.
Sun-Diamond is a marketing cooperative formed in 1980 to provide centralized services for the long-standing cooperatives owned by California raisin, walnut, prune and fig growers and Oregon hazelnut farmers. With net annual sales averaging about $500 million in recent years, the super-cooperative ranked 471st on Fortune magazine’s latest ranking of the nation’s 500 largest industrial enterprises.
The first word that growers had of what has developed into a lengthening tale of woe came last August with the revelation that a $4.7-million miscalculation had been found in closing Diamond Walnut’s books on the fiscal year ended July 31.
This inspired Sun-Diamond to order further financial reviews. These turned up a further $11-million shortage due to the overvaluation of 10,000 tons of unfinished shelled walnuts in Diamond’s huge storage sheds adjacent to corporate headquarters on Stockton’s sparsely settled south side.
It was not until November that Sun-Maid discovered its $27.3 million in overpayments to raisin growers.
That led to the ordering of a special audit by Touche Ross & Co., which on Jan. 31 confirmed the $43-million loss to Sun-Diamond but did not attempt to fix blame. That task is being handled by the Los Angeles law firm of Tuttle & Taylor.
Discovery of the full extent of the scandal forced the withdrawal last December of Frank R. Light, who as president of Sun-Maid helped create Sun-Diamond in 1980 and became not only its president and chief executive but president and chief executive of each of the member cooperatives as well.
Sun-Diamond’s board quickly named as interim President William F. Allewelt Jr., who retired last June as president of Tri/Valley Growers, a San Francisco-based fruit-canning cooperative.
Major Reorganization
On May 1, David R. Newstadt, former executive vice president of Best Foods, North America, assumed Sun-Diamond’s permanent leadership.
By that time, Allewelt had completed a major reorganization that included naming separate presidents for each member cooperative; slashing headquarters staff and cutting fixed costs to generate annual savings of about $30 million; refinancing Sun-Diamond’s unsecured debt through the federally sanctioned Sacramento Bank for Cooperatives, and developing a multiyear plan to repay the $43 million and restore the lost equity.
“A lot has been accomplished,” Allewelt said, “but there are still a lot of wrinkles that need to be smoothed out.”
Along with the “wrinkles,” Newstadt inherits a sizable pile of litigation:
- Light sued Sun-Diamond on March 26 seeking “in excess of” $1 million in compensatory damages and $25 million in punitive damages for harm caused to his reputation and for restoration of supplemental pension benefits denied him after he stepped down in December--a denial that he maintains is contrary to an agreement with the board of directors signed shortly after his 57th birthday (but before the discovery of the full magnitude of the overpayments).
- Sun-Diamond responded on April 29 with a countersuit against Light and other departed executives alleging responsibility, through negligence and fraud, and seeking total compensatory damages “in excess of” $45 million and punitive damages of $60 million.
- Coopers & Lybrand, the San Francisco accounting firm that audited the cooperative’s books during the years in which the shortage appears to have developed, sued Sun-Diamond on April 19 before the cooperative could file against Coopers & Lybrand (which it did last week) for failure to detect the discrepancies. The accounting firm, maintaining that the audits it was hired to perform did not include records directly relating to the overpayments, seeks $18,436 in unpaid fees, $2 million in general damages to its reputation and $25 million in punitive damages.
(Sun-Diamond last week named Peat Marwick to replace Coopers & Lybrand as the cooperative’s outside auditor.)
The Coopers & Lybrand lawsuit is pending in U.S. District Court in San Francisco, while Light’s suit against Sun-Diamond was filed in U.S. District Court in Fresno.
Light, in a letter to Sun-Diamond’s board March 14, argued that he had initiated the investigation that uncovered the full extent of the misrepresentations and that the directors themselves had been privy to the same financial data as he had.
“Regrettably,” he concluded, “you and I trusted the information provided us by the managers and controllers in question and did not know of their misstatements. In short, we were both misled by the same people whom we had no reason to distrust.”
The cooperative in its countersuit charged that Light “engaged in a course of conduct intended to delay disclosure” of overpayments until after his birthday last Oct. 13, a date that triggered the lucrative supplement to his pension plan.
Agreed to Remain
Light announced his intent to retire Oct. 16, but was prevailed upon by Sun-Diamond’s directors, in an agreement signed Oct. 23, to stay on for up to 18 months or until a successor was found. He then stepped down in December at the board’s request, only to find himself “fired” in February and his $135,000 pension terminated.
In his letter, Light argued that this chronology “not only flies in the face of my vested contractual rights but was deceitful.”
The Sun-Diamond suit counters that its directors would have fired Light had the overvalued inventory come to their attention before his birthday. Sun-Diamond also charges that Light and William Dabney, former chief financial officer, failed to establish “reasonable and practical” controls on crop payments, inventory and internal management. (The countersuit also names Howard Webb, former vice president of operations at Diamond Walnut; Fred D. Allen Jr., who was vice president and controller at Sun-Maid Growers, and Arthur G. Meola, Diamond Walnut plant superintendent.)
No hearing dates have been set.
Meanwhile, many of the disaffected raisin growers have already signed on with independent packers to handle their 1986 crops. As a consequence, Sun-Maid itself has had to contract to buy processed raisins from several independents to make up the anticipated shortage and meet existing sales commitments this fall for the raisin grapes now on the vine.
The impending shortage may appear ironic in light of the staggering raisin surpluses of recent years, which have sent prices plunging from $1,300 a ton to $700 and put many growers in tight financial straits or out of business altogether.
But under a federal marketing order that seeks to moderate price shocks, only 59% of the crop can be sold at prevailing prices. The balance must be retained by the packers as reserves for use in market development and other programs that, at best, generate delayed and below-market returns for growers.
Face Heavier Burden
In short, Sun-Maid will be able to fill 1986 contracts with a crop that will be up to 35% below expectation because of lost membership.
Even worse, the remaining members will have to shoulder a larger share of overhead at Sun-Maid’s big plant at Kingsburg, near Fresno. Barry F. Kriegel, former Sun-Diamond general counsel who now heads Sun-Maid as president and general manager, said negotiations continue in an effort to persuade uncommitted growers to stick with the cooperative.
The ramifications were less pronounced at Diamond Walnut Growers, according to Gerald Barton, Kriegel’s counterpart for the walnut cooperative, in part because of the smaller magnitude of the loss but also because only 20% of its members’ five-year contracts were up for renewal this year, when all Sun-Maid contracts expired.
To forestall an exodus, these members were granted a unique, one-year extension of their contract.
“Our people do have a stay of execution, so to speak,” said William C. Hosie, chairman of Diamond Walnut and one of three vice chairmen of Sun-Diamond (the others being the chairmen of Sun-Maid and Sunsweet). “Prices are not particularly inspiring, inventories are plentiful, and there may not be attractive options,” he added.
As a result, only about 50 of Diamond Walnut’s 2,700 members have withdrawn, representing 3.2% of production, Barton said. He called that figure “less than we expected”--given that the Diamond loss would average $6,185 if divided equally.
Diamond last year handled 54% of the nation’s walnut crop (all of which is grown in California). Prices have been little better for walnut growers than for raisin farmers in recent years, and a small crop this year would be a blessing for the surplus-swollen industry, Hosie said.
Tariffs Raised Sharply
In addition, last Oct. 31 the European Communities singled out walnuts and lemons for sharply higher tariffs in retaliation for an increased U.S. tariff on Italian pasta instituted after the international General Agreement on Tariffs and Trade ruled in favor of a longstanding contention by this country’s citrus industry that the Europeans unfairly discriminated against its exports.
The walnut tariff was raised to 30% from 8% in retaliation for a 40% levy on pasta, Barton said, calling it a case of “economic terrorism.” The higher tariff hit the industry during the prime holiday shipping season “with a lot of walnuts on the water,” costing growers $2 million in increased duties when the freighters reached European ports, he said.
While much of this was offset by a weakening in the value of the dollar, he acknowledged, the tariff penalty inhibited what might otherwise have been “a major turnaround” for California’s hard-pressed walnut growers.
Some independent packers have voiced suspicions in the past that large cooperatives manipulated the pay-out to their members, particularly in years of low prices, to appear more profitable than their private competitors. No such manipulation has been proved, however. Still at least one independent executive remained skeptical when the Sun-Diamond scandal erupted. “Frank Light is an accountant,” this executive commented, “so he knows to the penny what the grower pay-out schedule is all during each crop year--to the hundredth of a cent!”
Despite the growing bitterness generated by the revelations and ensuing litigation, Light and his former employers agree on the continuing value of Sun-Diamond as a kind of holding company, or cooperative of cooperatives, providing centralized marketing and other services to its subsidiaries. Allewelt, on departing from his nearly six months as interim president, called the cooperative a powerful and effective marketing force.
The weaknesses he found, Allewelt said, were in basic manufacturing--shortcomings susceptible of relative rapid resolution through reorganization and cost-cutting.
Concept Still Good
“The concept of Sun-Diamond is as good as gold,” Light agreed in a telephone interview from his new home in San Diego. “These revelations have obviously put progress on hold. But large public companies stumble over things like this and eventually pick themselves up and move on. With grower-owned cooperatives, it may take longer.
“Farmer co-ops are the backbone of California agriculture,” Light added, “and in the case of the Sun-Diamond brands they are the backbone of their respective industries.”
To Vice Chairman Hosie the worst is already behind Sun-Diamond and its subsidiary cooperatives.
“We have nowhere to go but up,” Hosie said. “We don’t anticipate any more surprises.”
SUN-DIAMOND AT A GLANCE
1983 1984 1985 Net $522.2 $517.4 $487.2 Sales* Total 242.6 267.2 282.3 Expenses* Returns to 279.6 250.3 204.9 Members*
*In millions of dollars, before special audit.
Source: Annual report for year ended July 31, 1985.
SUN-DIAMOND’S REPORTING ERRORS
Overpayments to Diamond Walnut growers: $ 4.7 million
Overvalued Diamond Walnut inventory: 11.0 million
Overpayments to Sun-Maid raisin growers: 27.3 million
Total: $43.0 million Source: Touche Ross & Co. special audit, Jan. 31, 1986.
