) -- Shares of

Diamond Foods


were walloped Wednesday as questions about the death of a former director stoked investor fears that a probe of the company's accounting could lead to the restatement of past financial results.

The San Francisco-based snack products company, whose brands include Pop Secret popcorn and Emerald nuts, acknowledged that Joseph Silveira passed away late last week and press reports late Tuesday indicated Silveira

may have committed suicide


The stock closed down 21% at $27.80 on volume of 9.7 million, nearly 10 times the issue's trailing three-month daily average of around 1 million.

Jefferies, which has a buy rating and 12-month price target of $46 on Diamond shares, took a measured view of the situation, acknowledging the questions about Silveira's passing add to the uncertainty engulfing the stock but cautioning against making any snap assumptions.

"While this might be seen as another indication of accounting problems we do not want to jump to conclusions," the firm said. "Our worst-case DCF

discounted cash flow value of $39 from last week is still valid."

The trouble started for Diamond on Nov. 1 when the company


the closing of its acquisition of the Pringles snack brand from

Procter & Gamble

(PG) - Get Report

would be delayed because Diamond's audit committee had received an "external communication" questioning the company's accounting for certain crop payments to walnut growers.

In response, Diamond's audit committee embarked on a probe of the matter, and the projected closing of the Pringles deal was pushed back to the first half of fiscal 2012 from the original expectation of this December.

Prior to the news, Diamond shares were trading in the low-$60 range, but they promptly fell to $52.79 on Nov. 2, a plunge of nearly 18%. By Nov. 14, the stock was down to the mid-$30s, where it stayed until Wednesday's plunge.

Jefferies acknowledged that the timing of Silveira's death was concerning but noted how little is really known about the circumstances surrounding the incident and whether personal issues could have played a part. The firm added however that Silveira was removed from the audit committee earlier this month because of the potential for a conflict of interest with the accounting probe because he managed walnut properties.

"Given that Mr. Silveira was not a member of the audit committee anymore and that any personal liability in this matter might have been covered by insurance, we do not think there is necessarily a direct link between the two events," Jefferies contended. "Also, given that the suicide took place over a week ago, one would assume that if there were a newsworthy item back then, it would have been disclosed by now. The fact that the investigation still appears to be ongoing is another reason for us to lean to the view that Mr. Silveira's suicide was unrelatedto the investigation."

In such a skittish market, however, investors who held on through the swoon in early November may not be willing to wait around for the other shoe to drop. Diamond's fall has been brutally fast with the stock hitting its 52-week high of $96.13 on Sept. 21, shortly after reporting

fiscal fourth-quarter earnings that topped Wall Street's expectations

by more than 17% and raising its fiscal 2012 outlook.

Jefferies is in the minority on the sell side in its bullishness about Diamond as 9 of the 13 analysts covering the stock now rate it a hold, up from five just a month ago.

In its research note reiterating a buy on the shares on Nov. 15, Jefferies outlined the worst-case DCF scenario previously referred to that it says supports a $39 per share price, explaining it assumes such conditions as the Pringles deal doesn't get done, no gross margin expansion for the company's core snacks business, and annual costs of at least $15 million for the next three fiscal years related to the accounting probe and legal expenses, among other factors.

In that same Nov. 15 note, the firm cut its price target to $46 from $94, and noted that Diamond's management looks vulnerable to criticism here, even if a restatement doesn't come to pass.

"DMND's unwillingness to provide relevant information from the beginning, e.g., size of momentum payment, amount and reason for the 2010 crop underpayment, 2011 grower guidelines, etc., make it seem like the facts would be damaging for DMND," Jefferies said. "By now, lawyers are determining what can be disclosed - i.e., nothing - but more forthcoming information in the beginning might have prevented the meltdown of the stock. Assuming DMND's accounting turns out to be indisputable, the poor handling of this crisis would raise the biggest concerns about management."

Jefferies doesn't buy into the idea that Diamond had to manipulate earnings in order to get the Pringles deal done but it did say that "the longer the investigation takes the less confident we get that the company will maintain its FY11 earnings."

Diamond has forecast non-GAAP earnings of $3.05 to $3.15 per share for fiscal 2012 ending in July with sales projected between $1.85 billion and $1.95 billion. The current average estimate of analysts polled by

Thomson Reuters

is for a profit of $2.90 a share on sales of $1.18 billion for the year, reflecting Wall Street's skepticism. Since the prior guidance was based on the Pringles deal closing in the first half of December, a revision from the company is likely forthcoming.

Wednesday's session low of $26.94 brought Diamond shares down to levels unseen since September 2009.

The deal for Pringles was originally announced in April with the transaction

said to be worth $2.35 billion

. That value, however, was based on a swap of 29.1 million Diamond shares with a then-estimated worth of $1.5 billion, and the assumption of $850 million in Pringles debt. Diamond's stock was trading in the high $50-low $60 range back then though, raising the possibility a restructuring of the deal may be necessary to complete the transaction.


Written by Michael Baron in New York.

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