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U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 23379 / October 6, 2015

Accounting and Auditing Release No. 3712 / October 6, 2015

Securities and Exchange Commission v. Ryan Petersen Civil Action No. 5:15-cv-04599 (N.D. Cal.)

Securities and Exchange Commission v. Arthur Knapp Civil Action No. 5:15-cv-04598 (N.D. Cal.)

 

SEC Charges Former Executives with Accounting Fraud and Other Accounting Failures

The Securities and Exchange Commission today charged two former top executives at OCZ Technology Group, Inc. for accounting failures at the now-bankrupt seller of computer memory storage and power supply devices.

In a complaint filed in the Northern District of California, the SEC alleges that OCZ’s former CEO Ryan Petersen engaged in a scheme to materially inflate OCZ’s revenues and gross margins from 2010 to 2012. It separately charged OCZ’s former chief financial officer Arthur Knapp for certain accounting, disclosure, and internal accounting controls failures at OCZ. Knapp agreed to settle the SEC's charges without admitting or denying the allegations against him. The SEC's litigation continues against Petersen.

The SEC’s complaints allege that:

  • Petersen’s scheme included mischaracterizing sales discounts as marketing expenses and having employees create false documentation to conceal the scheme, channel-stuffing OCZ’s largest customer by shipping more goods than the customer could sell in the normal course of business, and concealing large product returns from OCZ's finance department and OCZ’s auditor so that those returns would not be recorded in OCZ’s books and records.
     
  • OCZ filings that Petersen signed and certified portrayed the company in a way that was a far cry from its true operational and financial condition.
     
  • Petersen personally profited from his misstatements by selling shares of OCZ stock and receiving a bonus during the period when OCZ’s public filings contained inflated financial results.
     
  • Knapp instituted or maintained policies that caused OCZ to record transactions in a manner that was not in accordance with U.S. generally accepted accounting principles. These policies included reclassifying costs of goods sold as research and development expenses without sufficient basis for doing so, failing to capitalize labor and overhead costs in OCZ’s inventory costs, recognizing revenues upon product shipment rather than upon delivery of the product to OCZ’s customers, and understating OCZ’s accruals for product returns.
     
  • As CFO, Knapp had responsibility for OCZ’s internal accounting controls and procedures. Nevertheless, he failed to implement sufficient internal accounting controls to prevent OCZ from misclassifying sales discounts as marketing expenses and significantly overstating its revenues and gross profits.

The SEC charged Petersen with violating the antifraud, certification, books and records, internal controls, lying to accountants, and clawback provisions of the federal securities laws and with aiding and abetting OCZ’s violations of the reporting, books and records and internal controls provisions.  Specifically, Petersen is charged with violating Section 17(a) of the Securities Act of 1933 (“Securities Act”); Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”); Exchange Act Rules 10b-5, 13a-14, 13b2-1 and 13b2-2; and Section 304(a) of the Sarbanes-Oxley Act of 2002; and aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. The complaint seeks a permanent injunction, disgorgement plus prejudgment interest, a civil penalty, an officer and director bar, and forfeiture of Petersen’s stock sales profits and bonus.

The SEC charged Knapp with violating certain antifraud provisions, and the certification, and internal controls provisions of the federal securities laws, and with aiding and abetting OCZ’s violations of the reporting, books and records, and internal controls provisions. Specifically, Knapp is charged with violation Sections 17(a)(2) and (3) of the Securities Act; Section 13(b)(5) of the Exchange Act; and Exchange Act Rules 13a-14 and 13b2-1; and aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act; and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13.  Knapp agreed to be permanently enjoined from violating or aiding and abetting violations of these provisions, to be barred from acting as an officer or director of a public company, to pay a total of $130,000 in disgorgement, prejudgment interest, and civil penalties, and to forego any claims against OCZ for $170,000 in unpaid compensation. The settlement is subject to court approval. 

The SEC's investigation, which is continuing, has been conducted by Ian Dattner, Michi Harthcock, Jonathan Cowen, and Stacy Bogert under the supervision of Assistant Director Lisa Deitch. The litigation will be handled by Kevin Lombardi and Ian Dattner.

http://www.sec.gov/litigation/litreleases/2015/lr23379.htm

Modified: 10/06/2015