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Mark Punzalan (State Bar No. 247599) PUNZALAN LAW, P.C. 600 Allerton Street , Suite 201 Redwood City, CA 94063 Tel: (650) 362-4150 Fax: (650) 362-4151 Email: [email protected]
[Additional counsel on signature page ]
Attorneys for Lead Plaintiff
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
IN RE OCZ TECHNOLOGY GROUP, No. 3:12-cv-05265-RS INC. SECURITIES LITIGATION
CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS
1. Plaintiffs Leo Jegen, Vincent M. Monnier, Shih Leng Tan, and Len C. Villacres
(“Plaintiffs”), by their counsel, hereby allege the following upon personal knowledge as to
themselves and their transactions in OCZ Technology Group, Inc. (ÒOCZÓ or the “Company”)
common stock and call options, and upon information and belief as to all else, based upon the
investigation of counsel, including the review and analysis of Defendants’ filings with the
United States Securities and Exchange Commission (the ÒSECÓ), news articles, and analyst
reports. Plaintiffs believe that substantial additional evidentiary support exists for the allegations
set forth in this Complaint that will be revealed after a reasonable opportunity for discovery.
//
//
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STATEMENT OF THE CASE
2. This is a securities class action on behalf of all persons who purchased or
otherwise acquired common stock and call options of OCZ Technology Group, Inc. (“OCZ” or
the “Company”) between July 6, 2011 through January 22, 2013, inclusive (the “Class Period”),
against OCZ and two of its officers, Ryan M. Petersen (“Petersen”) and Arthur F. Knapp, Jr.
(“Knapp”) (the “Individual Defendants,” together with OCZ, “Defendants”), for violations of
the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §78a, et seq.
3. OCZ designs, manufactures, and distributes Solid-State Drives (“SSDs”) and
related computer components. OCZ specializes in high-speed memory and characterizes itself
as a leader in the enterprise and consumer SSD markets, a technology that competes with
traditional rotating magnetic disk drives. The Company was founded in 2002 and operates
worldwide, with over 400 customers located in 60 countries.
4. This case stems from Defendants’ deliberate manipulation of OCZ’s revenues
and net income. During the Class Period, the Defendants repeatedly reported “record results.”
The Company was reporting net revenues that were in many cases double what they were in the
same quarter for the previous year.
5. During the Class Period, however, Defendants recognized and reported net
revenues based on the use of customer incentives that allowed them to misrepresent their sales
and recognize fictitious revenue—classic fraudulent practices.
6. Defendants’ reported revenues showed steady, sequential growth from the
Company’s 1Q12 results to its 1Q13 results. During the Class Period, Defendants continued to
emphasize the success of the Company’s record SSD sales, noting that the substantial uptick in
worldwide demand was the driver in the Company’s meteoric rise. Defendants failed to
disclose, however, that OCZ’s customer incentive program was impermissibly skewing the
Company’s reported net revenues, artificially inflating the Company’s financial information.
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7. The first partial disclosure concerning the true state of the Company’s finances
was on September 5, 2012, when the Company announced preliminary 2Q13 revenue that was
$10-20 million below its previous guidance. Defendant Petersen was quick to reassure the
investing public, stating that the lower revenue was due “primarily to constraints in NAND flash
supply.” Defendants sought to blame the souring revenues on a temporary reduction in supply.
8. As a result of this news, the Company’s shares declined $1.01 per share to close
at $4.35 per share on September 6, 2012, a 19% decline on volume of nearly 23 million shares.
9. Less than two weeks later, on September 17, 2012, defendant Petersen abruptly
announced his resignation effective immediately. This led to more uncertainty at the Company,
causing OCZ’s shares to decline another $0.33 per share to close at $4.13 per share on
September 18, 2012, a 7% decline on volume of over 11 million shares.
10. The truth concerning OCZ’s misstated revenues continued to be revealed
piecemeal. On October 10, 2012, OCZ announced that it would not be filing its 2Q13 financial
results, instead asking the SEC for an extension. This press release also revealed that the
Company’s revenues were not down due to a short-term supply issue as previously represented .
Rather, the press release stated that the delay “ is principally due to the impact of customer
incentive programs which were discovered subsequent to the preliminary announcement
during the normal close process, and which the Company will be reporting as a material
weakness in its Form 10-Q .” This disclosure caused OCZ’s share price to decline over 40% to
close at $1.88 per share on unusually heavy trading volume.
11. This news was followed with the announcement on October 17, 2012 that the
Company’s Chief Sales Officer Richard Singh had resigned effective October 12, 2012.
12. On November 21, 2012, OCZ announced that the SEC was investigating the
Company and issued subpoenas in connection with the Company’s press releases on September
5, 2012 and October 10, 2012.
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3 Case No. 3:12-cv-05265-RS
CONSOLIDATED AMENDED CLASS ACTION COMPLAINT
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13. As a result of the foregoing and the SEC investigation, the Company announced
on December 17, 2012 that it would have to “restate the results for the first quarter of fiscal
2013, as well as the results for certain quarters of fiscal 2012 and for the fiscal year 2012.” The
press release also stated that any communications to shareholders concerning the Company’s
financial results since the beginning of fiscal 2012 “ should no longer be relied upon .”
14. Finally, on January 22, 2013 the Company announced that it would be restating
all of its fiscal 2012 results as well as its 1Q13 results. However, as of the date of this
Complaint OCZ has yet to file its 2Q13 results or its restatement of the prior financial results.
Therefore, Plaintiffs intend to seek leave from the Court to amend this Complaint after the
Company actually restates its fiscal 2012 and 1Q13 results.
15. The Company’s financial statements for the 1Q12, 2Q12, 3Q12, 4Q12, 1Q13 and
the fiscal year 2012 were materially false and/or misleading and violated the Company’s
publicly stated revenue recognition policies and U.S. Generally Accepted Accounting Principles
(“GAAP”). 1
JURISDICTION AND VENUE
16. The federal law claims asserted herein arise under Section 10(b) and Section
20(a) of the Exchange Act, 15 U.S.C. § 78j(b) and § 78t(a), and Rule 10b-5 promulgated
thereunder by the SEC, 17 C.F.R. section 240.10b-5, as well as under the common law.
17. This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C.
§ 1331 and § 27 of the Exchange Act.
18. This Court has jurisdiction over each defendant named herein because each
defendant is an individual who has sufficient minimum contacts with this District so as to render
1 Generally Accepted Accounting Principles are those principles recognized by the accounting
profession as the conventions, rules and procedures necessary to define accepted accounting
practice at a particular time. SEC Regulation S-X (17 C.F.R. § 210.4-01(a)(1)) states that
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the exercise of jurisdiction by the District Court permissible under traditional notions of fair
play and substantial justice.
19. Venue is proper in this District pursuant to § 27 of the Exchange Act. Many of
the false and misleading statements were made in or issued from this District.
THE PARTIES
20. Plaintiff Leo Jegen purchased OCZ common stock in reliance on Defendants’
false and misleading statements and omissions of material facts and/or the integrity of the
market for OCZ securities at artificially inflated prices during the Class Period and suffered
economic loss and damages when the truth about OCZ that was misrepresented and omitted
during the Class Period was revealed to the market through the series of partial disclosures. The
certification for plaintiff Leo Jegen with a detailed listing of transactions was filed with this
Court on December 10, 2012 and is adopted by reference herein. ( See Dkt. N o. 18-3.)
21. Plaintiff Vincent M. Monnier purchased OCZ common stock in reliance on
Defendants’ false and misleading statements and omissions of material facts and/or the integrity
of the market for OCZ securities at artificially inflated prices during the Class Period and
suffered economic loss and damages when the truth about OCZ that was misrepresented and
omitted during the Class Period was revealed to the market through the series of partial
disclosures. The certification for plaintiff Vincent M. Monnier with a detailed listing of
transactions was filed with this Court on December 10, 2012 and is adopted by reference herein.
(See Dkt.No. 18-3.)
22. Plaintiff Shih Leng Tan purchased OCZ common stock and call options in
reliance on Defendants’ false and misleading statements and omissions of material facts and/or
the integrity of the market for OCZ securities at artificially inflated prices during the Class
Period and suffered economic loss and damages when the truth about OCZ that was
misrepresented and omitted during the Class Period was revealed to the market through the
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series of partial disclosures. The certification for plaintiff Shih Leng Tan with a detailed listing
of transactions was filed with this Court on December 10, 2012 and is adopted by reference
herein. (See Dkt. No. 18-3.)
23. Plaintiff Len C. Villacres purchased OCZ common stock in reliance on
Defendants’ false and misleading statements and omissions of material facts and/or the integrity
of the market for OCZ securities at artificially inflated prices during the Class Period and
suffered economic loss and damages when the truth about OCZ that was misrepresented and
omitted during the Class Period was revealed to the market through the series of partial
disclosures. The certification for plaintiff Len C. Villacres with a detailed listing of transactions
was filed with this Court on December 10, 2012 and is adopted by reference herein. ( See Dkt.
No. 18-3.)
24. Defendant OCZ is a Delaware corporation with its principal place of business
located at 6373 San Ignacio Avenue, San Jose, California 92612.
25. Defendant Petersen served as the Company’s Chief Executive Officer (“CEO”)
and a member of the Board from 2002, when he founded the Company, until his resignation on
September 17, 2012. Defendant Petersen is the inventor or co-inventor of much of OCZ’s
proprietary technology. Mr. Peterson started as an employee at Micron Technology, Inc., and
thereafter became an entrepreneur and self-taught innovator in the field of semiconductor
enhancement. Defendants Petersen is an active member of JEDEC, the technical standards
body. The OCZ Board of Directors had concluded that defendant Petersen should serve as a
director based on his experience and insight as one of its founders and as its Chief Executive
Officer.
26. Defendant Knapp served as Chief Financial Officer (“CFO”) of OCZ from
December 2010 through the present. Defendant Knapp announced his intention to retire from
the Company on August 9, 2012, but has agreed to remain in his position until a replacement is
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hired. Mr. Knapp also served as OCZ ’s Chief Financial Officer from November 2005 to March
2009, served as its Vice President of Finance from March 2009 to October 2010 and served as
I OCZ’s Interim Chief Financial Officer from October 2010 to December 2010. Defendant
Knapp previously served as Chief Financial Officer at publicly-held high-tech companies such
as Duquesne Systems, Inc., LEGENT Corporation, Boole & Babbage Inc., and Calico
Commerce, Inc. Defendant Knapp also spent 10 years in public accounting, and is a
CPA/CMA. Mr. Knapp holds a B.S. in Accounting from Penn State University.
27. Defendants OCZ, Petersen and Knapp are collectively referred to hereinafter as
the “Defendants.” Defendants Petersen and Knapp are collectively referred to hereinafter as the
“Individual Defendants.”
28. The Individual Defendants, because of their positions with the Company,
possessed the power and authority to control the contents of OCZ’s quarterly reports, press
releases, and presentations to securities analysts, money and portfolio managers, and
institutional investors, i.e. , the market. They were provided with copies of the Company’s
reports and press releases alleged herein to be misleading prior to or shortly after their issuance
and had the ability and opportunity to prevent their issuance or cause them to be corrected.
Because of their positions with the Company, and their access to material, non-public
information available to them but not to the public, the Individual Defendants knew that the
adverse facts specified herein had not been disclosed to and were being concealed from the
public, and that the positive representations being made were then materially false and
misleading. The Individual Defendants are liable for the false and misleading statements alleged
herein.
FRAUDULENT SCHEME AND COURSE OF BUSINESS
29. Defendants are liable for: (i) making false and/or misleading statements; (ii)
failing to disclose adverse facts known to them about OCZ; and (iii) participating in a fraudulent
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scheme and course of business that operated as a fraud or deceit on purchasers of OCZ publicly
traded securities. Defendants’ fraud was a success, as it: (i) deceived the investing public
regarding OCZ’s revenue, earnings, income from operations, net income, gross profit, net
income per share, accounts receivable, interest income and stock-based compensation expense;
(ii) deceived the investing public regarding OCZ’s accounting practices, revenue recognition
practices and internal controls; (iii) artificially inflated the price of OCZ’s securities; and (iv)
caused Plaintiffs and other members of the Class to purchase OCZ publicly traded securities at
inflated prices and be damaged thereby.
DEFENDANTS’ FALSE REVENUE, GROWTH AND
EARNINGS STATEMENTS DURING THE CLASS PERIOD
Defendants’ Statements Regarding OCZ’s 2012 and 1Q13 Revenue, Growth and Earnings
Statements Were False and Misleading
30. On July 6, 2011, the start of the Class Period, OCZ held an earnings conference
call with investors and analysts. Defendants Petersen and Knapp were both present during the
call. During the conference call, defendant Petersen reported the Company’s 1Q12 financial
results: 2
We’re pleased with our record results during the first quarter as we have achieved
several key milestones. Our year over year revenue increased by 115% to $73.8
million, SSD revenue increased year over year by 418% to $69.1 million. Our
SSD products represented 94% of our revenue versus 39% of revenue in the
first quarter of 2011 .
Compared to last quarter, SSD revenue increased about 19% sequentially
representing our seventh straight quarter of sequential revenue growth for our
SSD products. GAAP gross margins were up 790 basis points to 20% for the first
quarter versus 12.1 a year ago and 340 basis points over the 16.6% we reported in
Q4. These margin increases were led by higher SSD margins.
2 Defendants’ false and misleading statements are provided in quotation format to provide
the appropriate context for the false and misleading statements and omissions. Specific false
and misleading statements in quotations are in bold and italics throughout.
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31. On the same call, defendant Knapp stated the following:
For the trailing 12 months, our overall SSD revenues were nearly 190 million
with a growth of 308%. Total revenues for the trailing 12 months were 230
million, up 61%. As I’ve mentioned on the last call the rapid transformation into
SSDs for memory skews the geographic results, particularly in North America
where year to year SSD growth was 187%, slightly higher than the 161%
growth rate achieved in Q4 .
However, the overall reported year to year revenue growth was 12% due to less memory revenue. Our international markets continue to show strong growth as we
expand our customer relationships and sales capabilities. Within SSDs, consumer
grade products decreased to 3% of revenues from 7% in Q4, reflecting less
emphasis in this area. Enterprise class products in Q1 grew by about 250% from
last year and accounted for nearly 12% of our SSD revenue.
Server and high performance products were approximately 85% of the Q1 SSD
sales and had a year to year growth rate of nearly 490%. GAAP gross margins
were 20% for the first quarter versus 12.1% a year ago and 16.6% in Q4. As
Ryan mentioned, this improvement was driven by higher SSD margins partly
due to less consumer mix, partly due to pricing power and partly purchasing
efficiencies with the additional capital raised in the April follow-on offering.
32. On July 15, 2011, OCZ issued a press release reiterating its 1Q12 financial
Net revenues in Q1’12 were a record $73.8 million , and increased 115% compared with net revenues of $34.3 million reported in Q1 ’11, and increased 14% compared with the $64.6 million reported in Q4’11
SSD revenues reached a record $69.1 million , an increase of 418% compared
with Q1’11 SSD revenues of $13.3 million, and a 19% increase compared with
Q4’11 SSD revenues of $58.2 million and represented 94% of total revenue
compared to 39% in first quarter of 2011
Gross margin increased to 20.0% versus 12.1% in Q1 ’11, and 16.6% in Q4’11
Non-GAAP operating profit of $1.0 million and non-GAAP net income per
share of $0.01
33. That same day, July 15, 2011, OCZ filed with the SEC its quarterly report on
Form 10-Q for 1Q12, signed by Defendants Petersen and Knapp. The Form 10-Q reported
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OCZ’s earnings results as follows:
1Q12 Form 1 Net Revenue
Gross Profit 115% increase to $73.8 million
254% increase to 14.7 million
34. In addition, the Form 10-Q stated “[t]he increase in net revenue in the first
quarter of fiscal year 2012, compared to the same period of 2011, was due to stronger
worldwide demand for SSD products .” The Company reported net revenues by market area,
showing a 219% increase in net revenues internationally, compared with only a 6% increase
from within the United States.
35. Defendants Petersen and Knapp certified that they personally reviewed OCZ’s
financial statements contained in the 1Q12 Form 10-Q, evaluated OCZ’s disclosure controls,
and evaluated OCZ’s internal controls over financial reporting; and that the Form 10-Q “ fairly
present[ed], in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report[.] ”
36. Defendants’ statements regarding OCZ’s 1Q12 sales, revenue and earnings in ¶¶
30-35 above were false and misleading when made, for reasons including, but not limited to the
following. As set forth in ¶¶ 90, 97, 99, infra, OCZ admitted in its October 10, 2012, December
17, 2012 and January 22, 2013 press releases that it would have to restate its financial results for
the 1Q13 as well as all the results for fiscal 2012 due to “the timing and classification of
customer incentive costs between revenue and operating expenses, the timing and revenue
recognition for certain transactions, and the level of reserves for product returns.” The
announced restatement means that the previously issued financial results were materially false
and misleading when issued. The need to restate demonstrates that the Company lacked proper
accounting controls in 2012 and 1Q13, and that Defendants violated GAAP as well as OCZ’s
internal accounting policies in 2012 and 1Q13. It also means that the statements that OCZ’s
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increase in net revenues was “due to stronger worldwide demand for SSD products,” (¦ 34), was
false and misleading because any increase in net revenues was due to manipulation of customer
incentive programs, not stronger worldwide demand.
37. On October 5, 2011, OCZ issued a press release reporting its 2Q12 financial
results. The press release stated, in relevant part:
Net revenue in Q2’12 was a record $78.5 million , and increased 106% compared with net revenue of $38.0 million reported in Q2’11, and increased 6% compared
with the $73.8 million reported in Q1’12
SSD revenue reached a record $71.1 million , an increase of 252% compared with
Q2’11 SSD revenue of $20.2 million, and a 3% increase compared with Q1’12 SSD revenue of $69.1 million
Gross margin increased to 21.6% compared with 4.3% in Q2’11, and 20.0% in Q1’12
GAAP net income in Q2’12 of $3.2 million or $0.06 per share
38. In the press release, defendant Petersen trumpeted the Company’s 2Q12 results
and “another quarter of record revenue and increased margins ”.
39. That same day, October 5, 2011, following the press release, Defendants held an
earnings conference call with analysts and investors. Defendants Petersen and Knapp were both
present during the call. During the conference call, Defendant Petersen reiterated OCZ’s 2Q12
financial results:
SSD revenue for the second quarter reached a record $71.1 million, and
increased 252% year-over-year . SSD products represented 91% of revenue
versus 53% of revenue in the second quarter of 2011. We believe our recent
revenue growth suggest significant momentum moving into the second half of
the year . As this is our first year with predominantly SSD sales, up the core from
normal protocol to give a bit of color on each of our revenue segments.
Enterprise class SSD revenue increased over 60% sequentially and represented almost 20% of our SSD sales during the quarter. . . . In the second quarter, GAAP
gross margins were 21.6% versus 4.3% for the same quarter last year . And gross margins increased about 160 basis points over the 20% we reported in Q1 . . . .
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The gross margin increases for the quarter were led by a mix shift to higher
margin SSD products and improved supply chain dynamics .
40. On the same call, Defendant Knapp stated the following:
Ryan covered the segment revenues, so I will just add a little additional
information regarding revenue by geographies and detailed financials and
guidance.
Looking at the second quarter revenue by major geographic areas based on shipping destination, North America grew 36% year-over-year representing 33% of revenue. EMEA grew 189% and accounted for 53% of revenue, the rest of
world grew 139% representing 14% of revenue. On a sequential basis, revenue
from North America grew to 24% primarily due to 20% higher SSD revenues.
EMEA grew 2% and the rest of the world declined 10%.
Turning to the detailed financials GAAP gross margins were 21.6% for the second quarter versus GAAP gross margins of 4.3% a year ago and 20% in Q1 . As Ryan mentioned, this improvement was driven by the mixed shift to our
enterprise products and purchasing efficiencies . You heard Ryan describe that
we achieved our goal of a 75% mix of direct purchases, so this will help our margins on a go-forward basis.
41. On October 12, 2011, OCZ filed with the SEC its quarterly report on Form 10-Q
for 2Q12, signed by Defendants Petersen and Knapp. The Form 10-Q reported OCZ’s earnings
results as follows:
Period For the three months ended August 31, 2011 For the six months ended August 31, 2011
2Q12 Form 10-Q Net Revenue 106% increase to $78.5
million 110% increase to $152.2
million
Gross Profit 945% increase to $16.9
million 448% increase to $31.7
million
42. In addition, the Form 10-Q stated that “[t]he in net revenue in the three months
ended August 31, 2011, compared to the same period last year, was due to a significant
increase in the worldwide demand for our SSD products .” Net revenues in the United States
increased 33% from the same period in fiscal year 2011, while net revenues in Canada and
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Germany increased 55% and 254%, respectively. Net revenues for the rest of Europe, the
Middle East, and Africa increased 158% over the same period in 2011 and net revenues in the
I rest of the world increased 139%.
43. Defendants Petersen and Knapp certified that they personally reviewed OCZ’s
financial statements contained in the 2Q12 Form 10-Q, evaluated OCZ’s disclosure controls,
and evaluated OCZ’s internal controls over financial reporting; and that the Form 10-Q “ fairly
present[ed], in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report[.] ”
44. Defendants’ statements regarding OCZ’s 2Q12 sales, revenue and earnings in ¶¶
37-43 above were knowingly false and misleading when made, for reasons including, but not
limited to the following. As set forth in ¶¶90, 97, 99 infra, OCZ admitted in its October 10,
2012, December 17, 2012 and January 22, 2013 press releases that it would have to restate its
financial results for the 1Q13 as well as all the results for fiscal 2012 due to “the timing and
classification of customer incentive costs between revenue and operating expenses, the timing
and revenue recognition for certain transactions, and the level of reserves for product returns.”
The announced restatement means that the previously issued financial results were materially
false and misleading when issued. The need to restate demonstrates that the Company lacked
proper accounting controls in 2012 and 1Q13, and that Defendants violated GAAP as well as
OCZ’s internal accounting policies in 2012 and 1Q13. It also means that the statements
regarding (a) “another quarter of record revenue and increased margins,” (¶ 38), (b) OCZ’s
“significant momentum”, (¶ 39), and (c) that its increase in net revenue was “due to stronger
worldwide demand for SSD products”, (¶ 42), were false and misleading because any increase
in net revenues was due to manipulation of customer incentive programs, not stronger
worldwide demand, significant momentum or increased margins.
45. On January 9, 2012, OCZ issued a press release reporting its 3Q12 financial
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results. The press release stated in relevant part:
Net revenue in Q3’12 was a record $103.1 million , and increased 94% compared
with net revenue of $53.2 million reported in Q3’11, and increased 31%
compared with net revenue of $78.5 million reported in Q2’12.
SSD revenue reached a record $95.5 million , an increase of 130% compared with Q3’11 SSD revenue of $41.5 million, and a 34% increase compared with
Q2’12 SSD revenue of $71.1 million.
On a trailing twelve month basis, SSD revenue was approximately $294 million , up 237% compared with $87 million in the prior trailing twelve months period.
Gross margin increased to 22.5% compared with 14.4% in Q3’11, and 21.6% in Q2’12.
GAAP net loss for Q3’12 was $0.9 million or $0.02 loss per share compared with a GAAP net loss of $8.3 million or $0.29 loss per share in Q3’11.
Non-GAAP net income for Q3’12 was $3.0 million or $0.06 income per share as compared with a non-GAAP net loss for Q3’11 of $0.9 million, or $0.03 loss per
share.
46. In the press release, defendant Petersen added the following: “We are pleased to
report another quarter of record revenue and increased margins . This trend is being driven by
an increase in market adoption of our SSDs , and is supported by OCZ’s substantially increased
investments in R&D and the ability to execute on bringing new leading-edge products to market
ahead of the competition... . Looking forward, we believe OCZ’s momentum positions us well
to continue to increase market share in what is widely regarded as one of the fastest growing
markets in technology.”
47. That same day, January 9, 2012, following the press release, Defendants held an
earnings conference call with analysts and investors. Defendants Petersen and Knapp were both
present during the call. On the conference call, defendant Petersen reiterated OCZ’s false 3Q12
results:
We’re very pleased with our achievements this quarter as we reported record
revenue of $103.1 million for the third quarter, an increase of about 94% over
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our third quarter offiscal ‘11 . SSD revenue in the quarter reached $95.5 million,
a sequential increase of approximately 35% and an increase of 130% year over
year. On a trailing 12-month basis, SSD revenue was approximately $294
million , compared to a trailing 12-months as of Q3 of last year of $87 million,
representing 237% SSD growth.
* * *
To be clear, we continue to strategically build inventory based on our growing
business pipeline and account for additional manufacturing turn time , insuring our ability to execute on these large opportunities and to reduce our costs. As a
result of our procurement decisions, we expect to see increased traction and
gross margins related to the use of our own OCZ-branded NAND flash in the
beginning of our fiscal year .
* * *
We’ve recently announced a multitude of new client wins. However, in the
interest of remaining brief, I won’t go into detail on this call. Our OEM and
enterprise pipeline is stronger than ever. From laptop and server makers to Fortune 500 companies, we continue to rapidly expand our client base across
segments, and our OEM clients continue to ramp, becoming an increasingly large
percentage of our business.
48. On the same call, defendant Knapp stated the following:
Thanks Ryan. As you mentioned, we’re really pleased with the continued
business progress this quarter. Our trailing 12-month revenue is now about $320
million , of which nearly $295 million is SSD-related, so there has been
tremendous growth in those products. Ryan covered the segment revenue, so I’ll
just add a little additional information regarding revenue by geography, some
detailed financials, and the guidance.
Looking at the third quarter revenue by major geographies based on shipping
destination that you saw in the press release, North America grew 96% year over
year and represented 34% of revenue. EMEA grew 79% and accounted for 53%
of revenue, while the rest of the world grew 174%, representing 13% of revenue.
On a sequential basis, the revenue growth was consistently strong, as revenue
from North America grew 34%, EMEA grew 29%, and the rest of the world grew
32%. All shows consistent SSD growth of about 35%, so the revenue success
this quarter was very widespread .
Turning to the detailed financials, GAAP gross margins were 22.5% for the third
quarter versus GAAP gross margins of 14.4% a year ago and 21.6% in Q2 . This
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improvement continues to be driven by purchasing efficiencies, migration to our
in-house controller, and favorable product mix, driven by the revenue growth in
enterprise.
Our operating expenses were $20.8 million on a GAAP basis and $19.9 million
on a non-GAAP basis after adjustments for costs associated with stock based
compensation. This $19.9 million compares to $10.6 million of non-GAAP
operating expenses in Q3 last year and $18.1 million in Q2 . * * *
During Q3, we drew down approximately $23 million of our credit facility in
order to finance the working capital as we continue to grow the business.
Throughout the quarter, we have been working closely with Wells Fargo to put a
more robust credit facility in place. We are pleased to announce today that we
signed a proposal letter with Wells Fargo Capital Finance for a $50 million credit
facility that can expand to $75 million if certain conditions are met. This new
credit facility is subject to receivable based borrowing base calculations,
finalizing a definitive agreement, and the final approval by Wells Fargo, but we
expect it to be available in February 2012. This will help increase our debt
capacity while lowering our financing cost.
The fair value adjustments of warrants issued with our initial equity financing in
Q1 last year resulted in a $3 million noncash loss, principally due to the stock
price variance. This theoretical noncash adjustment is removed as part of the non-GAAP presentation. GAAP net loss for the quarter was $0.9, or a loss of $0.02
per share compared to a net loss of $8.3 million, or a loss of $0.29 per share in
last year’s third quarter .
On a non -GAAP basis, net income for the quarter was $3 million, or $0.06 per
share, versus a net loss of $0.9 million, or $0.03 per share last year . Included in today’s financial release is a table which shows the reconciliation of GAAP to
non-GAAP measures, as well as the related calculations.
Turning to the Q3 balance sheet, we continued to use working capital to grow our
business. Our cash was approximately $39 million, a decrease of $7 million from
Q2. Inventory levels increased by $19 million to $78 million, compared to $59
million in Q2, but only $16 million in the year ago quarter.
With the higher level of sales, our accounts receivable increased by $20 million
from Q2 , although our receivable days decreased slightly to 48 versus 51 in Q2.
Inventory days were 82 versus 76, with the strategic inventory increase noted, and
payable days were 70 versus 75 in Q2. our capex for Q3 was $1.3 million, making a total of approximately $2.3 million invested the past three quarters, mostly
related to the factory expansion, with SMT machines and other related items. We
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expect that our equipment-related capex investment will continue at these levels
as we invest in our continued expansion throughout the next year.
For our shares outstanding, with the SANRAD acquisition we now have
approximately 54 million shares outstanding and 10 million shares subject to
warrants and options. Weighted basic shares are estimated to be 53 million in Q4
and weighted diluted shares are estimated to be approximately 56.5 million at the
current price levels.
Turning to guidance, we are starting some quarterly revenue and gross margin
guidance. We expect that our fourth quarter ended February 29 to be in the range
of $105 million to $120 million, and revenue for our fiscal year ending Feb 29 to
be in the range of $360 million to $375 million. GAAP gross margins are
expected to be between 23.5% and 25.5% in the fourth quarter.
* * *
Finally, last quarter we raised our gross margin long term target to be between
30% and 40% . We still expect gross margins to reach this target model range
during the latter part of next fiscal year.
49. On January 17, 2012, OCZ filed with the SEC its quarterly report on Form 10-Q
for 3Q12, signed by defendants Petersen and Knapp. The Form 10-Q reported OCZ’s 3Q12
earnings results as follows:
3Q12 Form 10-Q Period
Net Revenue
Gross Profit For the three months ended
94% increase to $95.5 million
203% increase to 23.2 million
November 30, 2011 For the nine months ended
103% increase to $235.7
308$ increase to 54.9 million
November 30, 2011
million
50. In addition, the Form 10-Q stated that “[t]he increase in net revenue in the three
months ended November 30, 2011, compared to the same period last year, was due to a
significant increase in the worldwide demand for our SSD products .” Reported net revenues
during the third quarter 2012 increased considerably over the third quarter 2011, with net
revenues increasing 109% in the United States, 20% in Canada, 93% in Germany, 69% in the
rest of Europe, the Middle East and Africa, and 174% in the rest of the world.
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51. The Form 10-Q also stated that net revenues also increased considerably from
the second quarter 2012 to the third quarter 2012, increasing 40% in the United States, 40% in
Germany, 23% in the rest of Europe, the Middle East and Africa, 31% in the rest of the world
and decreasing 5% in Canada.
52. Defendants Petersen and Knapp certified that they personally reviewed OCZ’s
financial statements contained in the 3Q12 Form 10-Q, evaluated OCZ’s disclosure controls,
and evaluated OCZ’s internal controls over financial reporting; and that the Form 10-Q “ fairly
present[ed], in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report[.] ”
53. Defendants’ statements regarding OCZ’s 3Q12 sales, revenue and earnings in ¶¶
45-52 above were knowingly false and misleading when made, for reasons including, but not
limited to the following. As set forth in ¶¶ 90, 97 99, infra, OCZ admitted in its October 10,
2012, December 17, 2012 and January 22, 2013 press releases that it would have to restate its
financial results for the 1Q13 as well as all the results for fiscal 2012 due to “the timing and
classification of customer incentive costs between revenue and operating expenses, the timing
and revenue recognition for certain transactions, and the level of reserves for product returns.”
The announced restatement means that the previously issued financial results were materially
false and misleading when issued. The need to restate demonstrates that the Company lacked
proper accounting controls in 2012 and 1Q13, and that Defendants violated GAAP as well as
OCZ’s internal accounting policies in 2012 and 1Q13. Moreover, it also means that the
statements concerning (a) “increase in market adoption of our SSDs,” (¶ 46), (b) “another
quarter of record revenue and increased margins ,” (¶ 46), (c) “growing business pipeline,” (¶
47), (d) “increased traction,” (¶ 47) , and (e) “significant increase in worldwide demand,” (¶ 50),
were false and misleading because any increase in net revenues was due to manipulation of
customer incentive programs, not stronger worldwide demand, increased market adoption,
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growing business pipeline, increased margins or increased traction with customers.
54. On May 1, 2012, OCZ issued a press release reporting its 4Q12 and year-end
fiscal 2012 financial results. The press release stated, in relevant part:
Fiscal year 2012, net revenue increased 92% to $365.8 million compared with fiscal year 2011 net revenue of $190.1 million. Net revenue in Q4’12 was a
record $110.4 million , and increased 71% compared with net revenue of $64.6
million reported in Q4 ’11.
Fiscal year 2012, SSD revenue was $338.9 million , up 154% compared with $133.2 million in fiscal year 2011. Q4’12 SSD revenue reached a record $103.2
million ; an increase of 77% compared with Q4’11 SSD revenue of $58.2 million.
Fiscal year 2012 gross margins increased to 22.5% compared to 12.7% with fiscal year 2011. Q4’12 gross margin increased to 25.0% compared with 16.6% in Q4’11, and 22.5% in Q3’12.
Net loss for Q4’12 was $10.9 million or $0.19 loss per share compared with a net loss of $9.3 million or $0.27 loss per share in Q4’11.
Non-GAAP net loss for Q4’12 was $6.0 million or $0.11 loss per share as compared with a non-GAAP net loss for Q4’11 of $0.8 million or $0.02 loss per
share.
55. Defendant Petersen also reiterated in the press release that he was pleased with
the “increased SSD revenues.”
56. That same day, May 1, 2012, following the press release, Defendants held an
earnings conference call with analysts and investors. Defendants Petersen and Knapp were both
present during the call. During the conference call, defendant Petersen reiterated OCZ’s 4Q12
and fiscal year 2012 results, and highlighted the “ incredible year for OCZ ”, stating in relevant
part:
Our fiscal ‘12 revenues increased 92% to $365.8 million compared to fiscal ‘11
net revenue of $190.1 million. Revenue in the fourth quarter was a record of
$110.4 million, an increase of 71% compared with net revenue of $64.6 million
reported in Q4 ‘11. Our SSD revenue was $338.9 million for the year, up 154%
year-over-year compared with a $133.2 million.
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I will for once, spare the listeners the long list of technological advances, we have
made over the past year as our revenue and margin really speaks for itself . To encapsulate things in short, we feel we now have a sustainable reason in terms of
SSD technologies and that this will help ensure our success as we move forward.
In recapping our R&D strength, it’s worth bringing up that we’ve recently
accelerated our product roadmap across the board.
* * *
And we expect that these relationships will continue to grow as we expand our
product offering and as we grow our sales and support organization to provide on
the ground support at the manufacture site. Now moving on and before turning it
over to Art, I want to take a moment to comment on our annual and quarterly revenue guidance. Art will provide a little bit more detail in regards to expense
guidance during his commentary and we are guiding – so to move on, we’re
guiding our net revenues for the fiscal quarter to be in a range of $110 million
to $120 million and annual revenues to $630 million to $700 million for our
fiscal ‘13 .
It’s key to note that we expect about 60% to 65% of our revenues to occur in the
second half of the year. This is in line with our normal seasonality. As a midpoint,
growth is approximately 80%. In regards to our visibility on annual revenues , I wanted to take the time to remind our audience that our initial guidance at the
beginning of fiscal ‘12 was $300 million to $330 million and we closed the year
at $366 million .
57. Defendant Knapp also reiterated the Company’s numbers and its “ transformative
Ryan covered product area revenues, so looking at the fourth quarter revenues by
major geographies based on shipping destination, North America grew 94% year-over-year representing 38% of revenue. EMEA grew 51% accounting for 47% of revenue and rest of world grew 92% representing 15% of revenue.
Turning to the detailed financials, gross margins were at record 25% for the
fourth quarter versus gross margins of 16.6% a year ago and 22.5% in Q3. We expect that going forward, gross margin should grow 100 to 250 basis points
per quarter . To reiterate Ryan’s earlier comments, we are starting to see the
benefits to our financial model from the combination of a mix shift towards the
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enterprise, the vertical integration of our technology and stronger more effective
purchasing power.
* * *
To our guidance. Continuing the quarterly outlook we started last quarter, we are
now also providing some commentary on expenses. Ryan mentioned that we
expect net revenue for Q1 to be in the range of $110 million to $120 million and
$630 million and $700 million for the year with a heavier weighting to the last
half of the year . Our non-GAAP gross margins are expected to be slightly up
from Q1 and to exit the year in excess of 30%. We have typical sequential gross margin increases of 100 to 250 basis points per quarter throughout the remainder
of the fiscal year subject to changes in product mix as the SSD landscape
continues to evolve.
We expect non-GAAP operating expenses to be in the range of $37 million to $39
million for Q1 and then exiting the year at between $43 million and $47 million for a quarter, as we continue to aggressively invest in R&D and sales and
marketing to help achieve our ongoing growth objectives. In regards to our
operating expense guidance, Ryan mentioned that in Q1 we have cost related to
two unannounced controller platforms, which we have yet to include in our
revenue guidance.
58. On May 14, 2012, OCZ filed its 2012 Form 10-K with the SEC, signed by
Defendants Petersen and Knapp. The Form 10-K reported OCZ’s 2012 earnings results as
follows:
2012 Form 10-K Net Revenue Gross Profit
92% increase to $365.8 million 241% increase to 82.4 million
59. In the Form 10-K, the Company broke out net revenue growth by major
geographic area. Net revenues from end of the fiscal year 2011 to end of the fiscal year 2012
increased 61% in the United States, 56% in Canada, 123% in Germany, 97% in the rest of
Europe, the Middle East and Africa, and 145% in the rest of the world.
60. Defendants Petersen and Knapp certified that they personally reviewed OCZ’s
financial statements contained in the Form 10-K, evaluated OCZ’s disclosure controls, and
evaluated OCZ’s internal controls over financial reporting; and that the Form 10-K “ fairly
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present[ed], in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report[.] ”
61. Defendants’ statements regarding OCZ’s 4Q12 and fiscal 2012 sales, revenue
and earnings in ¦¦ 54-60 above were knowingly false and misleading when made, for reasons
including, but not limited to the following. As set forth in ¦¦ 90, 97, 99, infra, OCZ admitted in
its October 10, 2012, December 17, 2012 and January 22, 2013 press releases that it would have
to restate its financial results for the 1Q13 as well as all the results for fiscal 2012 due to “the
timing and classification of customer incentive costs between revenue and operating expenses,
the timing and revenue recognition for certain transactions, and the level of reserves for product
returns.” The announced restatement means that the previously issued financial results were
materially false and misleading when issued. The need to restate demonstrates that the
Company lacked proper accounting controls in fiscal year 2012 and 1Q13, and that Defendants
violated GAAP as well as OCZ’s internal accounting policies in 2012 and 1Q13.
62. On July 10, 2012, OCZ issued a press release reporting its 1Q13 financial results.
With regard to OCZ’s revenues and earnings, the press release stated:
Net revenue in Q1’13 was a record $113.6 million, and increased 54%
compared with net revenue of $73.8 million reported in Q1’12 .
Q1’13 SSD revenue reached a record $106.5 million; an increase of 54%
compared with Q1’12 SSD revenue of $69.1 million .
Gross margin in Q1’13 25.0% compared with 20.0% in Q1’12 .
Net loss for Q1’13 was $6.3 million or $0.09 loss per share compared with a net
loss of $9.1 million or $0.20 loss per share in Q1’12 .
Achieved Record Bookings in Q1 ’13.
Non-GAAP gross margin was 25.2% compared with 20.0% in Q1 ’12 .
Non-GAAP net loss for Q1’13 was $11.5 million or $0.17 loss per share as
compared with a non-GAAP net profit for Q1’12 of $0.5 million or $0.01 per
share .
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I results:
call:
63. That same day, July 10, 2012, following the press release, defendants held an
During the first quarter we again reported record revenue and we saw
significantly accelerated bookings of nearly $140 million. Our first quarter
revenue increased 54% to $113.6 million, compared with Q1 of ‘12 revenue of
$73.8 million . Our SSD revenue reached $106.5 million for the quarter up 54%
year-over-year, compared with $69 million in Q1 ‘12 .
Revenue from our power supply and other category was $7.1 million in the first
quarter. It’s important to note that our power supply business is experiencing
significant headwinds in terms of both revenue and gross margins, as sales of
desktop PCs which use these products continue to dwindle. As such, our power
supply revenue and gross margin during the quarter were well below our
expectations.
Regarding our revenue trajectory overall, we achieved record bookings during the
quarter of approximately $140 million and successfully launched the first two
families of drives based on the Indilinx Everest 2 platform, Vertex 4 and Agility
4. We shipped over 100,000 units in the first quarter.
I think it’s important to note that bookings are normally immaterial and we’re
reporting bookings this quarter to highlight that we experienced the temporary
shortage of power regulators late in the quarter. This also experienced the increase
in OpEx in comparison to our previously guided range. These supply chain issues
were recently resolved.
Our non-GAAP gross margins increased slightly in the first quarter to 25.2%
versus 25% in the fourth quarter, and increased significantly from the 20%
reported in Q1 ‘12 .
* * *
In regards to growth of our customer base, I’ll simply state this time that we’re
extremely pleased with the continuing development. From consumers to OEMs
and enterprises, we continue to gain meaningful traction. Our transition into the
OEM and enterprise arenas continues to go well as we add numerous clients each
quarter.
64. Defendant Knapp also reiterated OCZ’s 1Q13 results on the earnings conference
earnings conference call with investors and analysts. Defendants Petersen and Knapp were both
present during the call. During the conference call, Defendant Petersen reiterated OCZ’s 1Q13
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Thanks, Ryan. I’ll also point out that our 10-Q for the first quarter is now on file
with the typical additional details and disclosures. As Ryan mentioned, we are
very pleased with the continued record revenues that we reported for the first quarter and the demand we are seeing for our new products. We thank all of our
employees for their dedication and commitment to our success.
Ryan covered revenue by our product groups, so looking at the first quarter
revenue by major geographies based on shipping destination. North America
grew 120% year-over-year , representing 40% of revenue. EMEA grew 27% , accounting for 46% of revenue, and rest of world grew 33% , representing 14% of revenue. The increase in growth in North America is generally associated with
the growth of some of our OEM clients, both server and PC .
Turning to the detailed financials, non-GAAP gross margins increased to 25.2%
for the first quarter versus 25% in the fourth quarter and gross margins of 20%
a year ago .
65. Defendant Petersen continued on the same call to state the Company’s guidance:
Thanks, Art. Moving to guidance, we expect our net revenue in Q2 to be in the
range of $130 million to $140 million, and $630 million to $700 million for the
year. To add clarity here, as in years past, we expect 60% to 65% of our revenue
will occur in the second half of the year.
We expect sequential gross margins, I’m sorry, we expect sequential gross margin
increases with typical increases in the 100 to 250 basis points per quarter range
throughout the remainder of the fiscal year and to exit the year in excess of 30%.
This is, of course, subject to any changes in product mix as the SSD landscape
continues to evolve.
We expect non-GAAP operating expenses to be in the range of $38 million to $41
million for Q2 and to exit the year between $43 million and $47 million as we
continue to aggressively invest in building out the business and strengthening our
leadership position.
66. On the same day, OCZ filed with the SEC its quarterly report on Form 10-Q for
1Q13, signed by Defendants Petersen and Knapp. The Form 10-Q reported OCZ’s earnings
results as follows:
1Q13 Form 1 Net Revenue
Gross Profit 54% increase to $113.6 million
93% increase to 28.4 million
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67. The Company compared net revenues for the first quarter fiscal year 2013 to the
first quarter 2012. Net revenues in the United States increased 130%, net revenues in Canada
increased nearly 63%, net revenues in Germany increased nearly 75%, net revenues in the rest
of Europe, the Middle East and Africa decreased 2%, and net revenues in the rest of the world
I increased 33%.
68. Defendants Petersen and Knapp certified that they personally reviewed OCZ’s
financial statements contained in the 1Q13 Form 10-Q, evaluated OCZ’s disclosure controls,
and evaluated OCZ’s internal controls over financial reporting; and that the Form 10-Q “ fairly
present[ed], in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report[.] ”
69. Defendants’ statements regarding OCZ’s 1Q13 sales, revenue and earnings in ¶¶
62-68 above were knowingly false and misleading when made, for reasons including, but not
limited to the following. As set forth in ¶¶ 90, 97, 99, infra, OCZ admitted in its October 10,
2012, December 17, 2012 and January 22, 2013 press releases that it would have to restate its
financial results for the 1Q13 as well as all the results for fiscal 2012 due to “the timing and
classification of customer incentive costs between revenue and operating expenses, the timing
and revenue recognition for certain transactions, and the level of reserves for product returns.”
The announced restatement means that the previously issued financial results were materially
false and misleading when issued. The need to restate demonstrates that the Company lacked
proper accounting controls in 2012 and 1Q13, and that Defendants violated GAAP as well as
OCZ’s internal accounting policies in 2012 and 1Q13.
Defendants’ 2012 Revenue Statements Were Also Materially False and/or Misleading
Because They Violated GAAP
70. In addition to falsely reporting revenue, Defendants’ practices as set forth in ¶¶
30-35, 37-43, 45-52, 54-60, and 62-68, above, violated basic accounting principles as well as
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OCZ’s own stated policies. Defendants’ significant GAAP violations during the Class Period
further evidences their knowledge of the Company’s improper revenue recognition practices
and falsely reported revenue. Financial Accounting Standards Board Statement of Financial
Accounting Concepts No. 5 (“FASCON 5”) clearly and concisely states that revenue cannot be
recognized until it is both realized (or realizable) and earned. SEC Staff Accounting Bulletin
(“SAB”) No. 104 (“SAB 104”) has further clarified revenue rules under GAAP by requiring that
revenue can be recognized only when all of the following criteria are met:
(a) persuasive evidence of an arrangement exists;
(b) delivery has occurred or services have been rendered;
(c) the seller’s price to the buyer is fixed or determinable; and
(d) collectability is reasonably assured.
71. Defendants acknowledged these requirements in OCZ’s 2012 Form 10-K and
told investors that the Company’s consolidated financial statements “have been prepared in
accordance with accounting principles generally accepted in the United States of America
(‘GAAP’).” The Company also stated its revenue recognition policy was one of its most critical
accounting policies. The Company stated it recognizes revenue “when there is persuasive
evidence of an arrangement, product shipment by a common carrier has occurred, risk of loss
has passed, the terms are fixed and collection is probable” (emphasis added).
72. OCZ’s sales violated these basic accounting standards, including but not limited
to the following. First, OCZ’s sales transactions failed to meet the SAB 104 requirement of
“the seller’s price to the buyer is fixed or determinable” because the Company’s incentive
program ensured that the price recognized was not the price the Company would actually
receive.
73. Second, the sales transactions failed to meet the SAB 104 requirement that
“[c]ollect[a]bility is reasonably assured” as well as the Company’s requirement that collection
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be probable, because the Company could not be assured it would receive the full price of its
goods, but rather some lesser amount after accounting for the customer discounts.
74. Finally, GAAP requires that uncertainties and risks inherent in business be
adequately considered and conservatism be used as a prudent reaction to any uncertainty
regarding financial reporting. See Statement of Financial Accounting Concepts (“SFAC”) No.
2, ¦¦ 95, 97. In other words, defendants should err on the side of not recognizing revenue in the
face of any uncertainty. Because OCZ’s discount and revenue recognition practices clearly
violated GAAP, Defendants should not have recognized revenue on these sales discounts.
75. As detailed herein, in order to improperly inflate OCZ’s revenue, Defendants
caused the Company to falsely report its financial results included in OCZ’s publicly issued
financial statements and related earnings releases during the Class Period. These financial
results were materially false and misleading and in violation of GAAP , for reasons including,
but not limited to the following:
(a) OCZ improperly recognized premature, inflated and fictitious revenue on
I its sales; and
(b) OCZ improperly accounted for several other items product return
reserves and the timing of revenue recognition.
76. On December 17, 2012, the Company announced its financial results for the first
quarter fiscal year 2013, the full fiscal year 2012, and certain quarters in fiscal year 2012 should
no longer be relied upon and would need to be restated, and confirmed that it would restate all
financial results for fiscal 2012 and 1Q13 on January 22, 2013.
77. The restatement of previously issued public financial statements is a material
event. The accounting rules governing correction of errors or fraud in previously issued
financial statements do not allow a registrant any discretion or election in deciding whether or
not to retroactively restate the previous financial statements. GAAP only permits (and requires)
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restatements of previously issued financial statements to correct material errors, resulting from
either: (a) mathematical mistakes, mistakes in the application of GAAP or oversight or misuse
of facts that existed at the time the financial statements were prepared ; or (b) a change in
accounting principle or change in the reporting entity. See Statement of Financial Accounting
Standards (“SFAS”) No. 154, Accounting Changes and Error Corrections, ¦¦ 2, 4-10, 25-26. In
this case, OCZ admits the restatements are “primarily related to the timing of revenue
recognition, the classification of certain customer incentive costs and for the level of reserves
for product returns.” Therefore, OCZ’s restatement of its previous financial statements is an
admission that: (i) OCZ’s financial results originally issued during the Class Period and
Defendants’ public statements regarding those results were materially false ; and (ii) OCZ’s
financial statements reported during the Class Period were incorrect based on information
available to defendants at the time the results were originally reported .
DEFENDANTS FALSE STATEMENTS REGARDING OCZ’S REVENUE RECOGNITION AND INTERNAL CONTROLS
78. In each quarter from OCZ’s 1Q12 through 1Q13, the Company made false and
misleading statements in its Forms 10-Q and Forms 10-K filed with the SEC regarding
disclosure controls and procedures.
79. Regarding OCZ’s disclosure controls and procedures, the Company’s 1Q12,
2Q12, 3Q12 and 4Q12 Forms 10-Q, filed on July 15, 2011, October 12, 2011, January 17, 2012
and July 10, 2012, respectively, and the Company’s 2012 Form 10-K, filed on May 14, 2012,
stated that for each of those quarters “the Company’s disclosure controls and procedures (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) were effective” for the
applicable periods.
80. In addition, the Forms 10-Q and Form 10-K contained certifications pursuant to
the Sarbanes-Oxley Act of 2002 (“SOX”) signed by Defendants Petersen and Knapp, who
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I certified:
1. I have reviewed this quarterly report on Form 10-Q of OCZ Technology
Group, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities , particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrantÕs disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control qua
over financial reporting that occurred during the registrant ’s most recent fiscal rter
has (the registrant ’s fourth fiscal quarter in the case of an annual report) that
materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting;
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5. The registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control over
financial reporting.
81. Defendants’ statements regarding OCZ’s controls and procedures were
materially false and misleading when made, including but not limited to the reasons that follow.
As detailed in herein, Defendants caused the Company to falsely report its financial results
included in OCZ’s publicly issued financial statements and related earnings releases during the
Class Period in order to improperly inflate OCZ’s revenue, income from operations, net income
and earnings per share. The Company has admitted in its December 17, 2012 press release “that
the Company should restate the results for the first quarter of fiscal 2013, as well as results for
certain quarters of fiscal 2012 and for the fiscal year 2012,” and further stated in its January 22,
2013 release that it would be restating “the results for the first quarter of fiscal 2013, as well as
the results for fiscal 2012.” A restatement is necessarily the result of a material weakness in
OCZ’s internal controls.
INVESTORS BEGIN TO LEARN THE TRUTH
82. On August 9, 2012, the Company announced that defendant Knapp had suddenly
decided to retire from the Company and would stay on until a replacement could be found.
83. On September 5, 2012, OCZ issued a press release announcing its preliminary
revenue for 2Q13. In the press release the Company announced that it “expects preliminary
revenue for the second fiscal quarter of 2013 to be approximately $110 to 120 million compared
to the previously guided revenue range of $130 to $140 million. This preliminary revenue range
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compares to $113.6 million for the first fiscal quarter of 2013 and $78.5 million for the second
fiscal quarter of 2012.
84. In the same press release, Defendant Petersen stated: “Despite achieving
bookings in excess of our expectations for our second fiscal quarter, we were not able to meet
our previously stated revenue guidance due primarily to constraints in NAND flash supply ..
. . During the month of August we experienced a significant shortage on certain NAND flash
components, based on industry wide tightening of supply, leaving OCZ with an undersupply
of the 2xnm MLC NAND used in our Vertex and Agility Line of products . . . . While we
believe that the situation will resolve itself, subject to market conditions, we plan to hasten our
transition to new process nodes in order to help ease these supply constraints.”
85. On this news, the Company’s stock dropped nearly 19% from a close of $5.36
per share on September 5, 2012 to a close of $4.35 per share on September 6, 2012 on volume
of nearly 23 million shares in one day.
86. The statements made by Defendant Petersen in ¦ 84 concerning the reason OCZ
were materially false and misleading, including but not limited to for the reasons that follow.
As set forth in ¦¦ 90, 97, 99, infra, the Company announced on October 10, 2012 that the
missed guidance was “principally due to the impact of customer incentive programs” which
materially affected the Company’s revenues, not constraints in NAND flash supply.
87. On September 17, 2012, the Company unexpectedly announced that its CEO
defendant Petersen was stepping down and being replaced by Interim CEO Alex Mei, former
Executive Vice President and Chief Marketing Officer of OCZ, effective immediately.
88. As a result of this news, the Company’s stock dropped from a close of $4.46 per
share on September 17, 2012 to a close of $4.13 per share.
89. On October 10, 2012, the Company announced the appointment of Ralph
Schmitt as the Company’s president and CEO, effective immediately.
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90. Also on October 10, 2012, the Company issued a press release which further
disclosed the underlying problems with the Company’s lowered guidance—in stark contrast to
the misleading disclosures made by Defendant Petersen on September 5, 2012—and announced
that it would have to delay the filing of its 2Q13 financial results. The press release stated in
relevant part:
SAN JOSE, CA – October 10, 2012 – OCZ Technology Group, Inc. (Nasdaq:
OCZ) a leading provider of high-performance solid-state drives (SSDs) for
computing devices and systems, today announced that it will file a Form 12b-25,
Notification of Late Filing, with the Securities and Exchange Commission that
allows the Company to extend the deadline to file its Form 10 -Q for the second quarter of fiscal year 2013 (Q2’13), which ended on August 31, 2012. With this
extension, if the Form 10-Q is filed by October 15, 2012, the Form 10-Q will be deemed to be timely filed.
The Company’s financial statements are still under review. The Q2’13 revenue
will be materially lower than the September 5th preliminary revenue range of
$110 to $120 million. This new revenue estimate and filing delay is principally
due to the impact of customer incentive programs which were discovered
subsequent to the preliminary announcement during the normal close process,
and which the Company will be reporting as a material weakness in its Form
10-Q. The Company also expects to report negative gross margins and a
significant net loss for Q2’13 and will hold a conference call today at 7:00am
Pacific Time (10:00am Eastern Time).
The financial information for Q2’13 presented in this press release is preliminary
and remains subject to management ’s review of the results and also review by the
Company’s independent accounting firm. The Company will now host its Q2’13
earnings call in conjunction with the filing of its Form 10-Q and has postponed the previously scheduled conference call.
91. As a result of this news, the Company’s shares declined $1.27 per share, or over
40%, to close at $1.88 per share on October 10, 2012 on unusually heavy trading volume.
92. Furthermore, on October 11, 2012, after the market closed, the Company filed a
Form NT 10-Q with the SEC disclosing a further delay in filing its Form 10-Q for the quarter
ended August 31, 2012. In the release, the OCZ disclosed:
As previously reported, OCZ Technology Group, Inc. (the “Company”) will delay
the filing of its Form 10-Q for the quarter ended August 31, 2012. As disclosed in
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the Company’s Form 8-K filed October 10, 2012 (the “Form 8-K”), following an
internal assessment, the Company’s filing delay is principally due to the impact of
customer incentive programs which were discovered during the normal close
process. The Company requires additional time for compilation and review to
insure adequate disclosure of certain information. The Company continues to
work diligently to complete the accounting review. However, the Company
cannot currently estimate the exact filing date of the Form 10-Q for the quarter
ended August 31, 2012.
93. On the same day, October 11, 2012, the Company held a conference call to
discuss the recent events and the delay in filings its 2Q13 results. Newly-appointed CEO
Schmitt conducted the call, and stated the following in relevant part:
I want to first of all thank the board for their confidence and trust in my ability to
take OCZ through the next phase of the company’s development. For me, this is
amazing opportunity to lead a company that has quickly become a leader in one of
the fastest growing markets in the technology sector.
The tenets of our business moving forward will be simple. Our actions will be
based on innovation, quality and profitability. The DNA of OCZ is in a steadfast focus on time to market and performance. That’ll remain unchanged as we
continue to use that focus to drive our efforts into the marketplace. We will
innovate to continue to differentiate our products. Our focus will be to further
penetrate the OEMs and especially the enterprise market.
OCZ has a polarizing image. There are relentless fans and equally relentless
detractors. It is my goal to continue to do the things that make people so
passionate about this company. We will b uild the highest performing and reliable
products in our target markets. We’ll fix the things that have been the source of
our very vocal detractors.
Credibility and consistency will be paramount , and we’ll talk less and execute
better. My approach is to empower our employees to take the appropriate risks,
make decisions and be accountable for their actions. When they succeed as
individuals, we will succeed as a company.
* * *
So, besides my quick introduction, the purpose of this call is to give investors
some insight as to the press release this morning in which we filed for an
extension to deliver our Form 10-Q. My first day’s a challenging one, as I’m trying to ensure an appropriate start by being transparent, but have some inexact
33 Case No. 3:12-cv-05265-RS
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news to share with investors. As I stated, credibility is the key to building a
relationship between the company and its investors . We felt it necessary to pass along information that was material as soon as we believe it could be quantified.
The September 5 updated revenue guidance cannot be relied upon. There will
be material changes due to customer incentives that were in excess of what was
normal and customary in the past. While the good news is our control
procedures found the issue before reporting, it however was not sufficient
enough to prevent this from happening .
There was such an emphasis in Q2 for management to grow market share at all
cost, hence extraordinary incentives were undertaken. We need additional time to ensure that all the proper accounting treatment has been applied to this event.
These incentives will also have a significant impact on our gross margins and
will make our loss much larger than is expected. Of course you should assume
that our cash position has also declined and we’ve accessed our credit facility . We will clearly discuss specific numbers once the earnings call is rescheduled. It
is our goal to file our Q and have the call as expeditiously as possible.
94. Due to this disclosure, the Company’s shares declined an additional $0.39 or
20.97%, to close at $1.47 per share on October 12, 2012.
95. On October 17, 2012, the Company also announced the departure of its Chief
Sales Officer Richard Singh, effective October 12, 2012.
96. On November 21, 2012, OCZ issued a press release stating that on November 15,
2012 it received a letter and subpoena from the SEC regarding the Company’s press releases on
September 5, 2012 and October 10, 2012. The press release stated in relevant part:
SAN JOSE, CA – November 21, 2012 – OCZ Technology Group, Inc. (Nasdaq: OCZ), a le ading provider of high-performance solid-state drives (SSDs) for
computing devices and systems, today announced that on November 15, 2012,
OCZ Technology (the “Company”) received a letter from the Securities and
Exchange Commission (“SEC”) indicating that they are conducting an investigation. As part of this notification, the Company also received a
subpoena requesting certain documents and information generally related to its
press releases on September 5, 2012 and October 10, 2012, and the financial
reporting for customer incentive programs, among other matters.
Ralph Schmitt, president and chief executive officer, noted that, “since we
delayed the filing of our second quarter 10-Q, we had proactively contacted the
Commission and have been expecting them to conduct an investigation. We
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intend to cooperate fully regarding this non-public, fact-finding inquiry and are
also continuing with our own internal investigation as previously announced.”
The SEC has informed the Company that this inquiry should not be construed as an indication that any violations of law have occurred or that the SEC has any
negative opinion of any person, entity or security. The Company is unable to
predict what action, if any, might be taken in the future by the SEC as a result of
the matters that are the subject of the subpoena. The Company does not intend to
comment further on this matter unless and until this matter is closed or further
action is taken by the SEC which, in the Company’s judgment, merits further
comment or public disclosure.
97. On December 17, 2012, the Company announced that its reporting issues
extended well beyond its 1Q13 results, stating that it would be restating its 1Q13 results as well
as “certain quarters of fiscal 2012 and for the fiscal year 2012”. The press release stated in
relevant part:
“[w]hile there continue to be various matters requiring further investigation. . . .
the Company should restate the results for the first quarter of fiscal 2013, as
well as the results for certain quarters of fiscal 20 12 and for the fiscal year
2012. The restatements primarily relate to the timing of revenue recognition, the
classification of certain customer incentive costs and for the level of reserves for
product returns . . . . Until the restatements are released, in addition to the
financial statements for the periods referenced above, related press releases and
shareholder communications describing our financial statements and the report
of Crowe Horwath LLP related to the financial statements as of andfor the year
ended February 29, 2012 should no longer be relied upon .”
98. The Company also announced that as a result, it has been in default of its credit
facility with Wells Fargo Capital Finance (“Wells Fargo”)
99. The truth concerning Defendants false and/or misleading statements was further
revealed on January 22, 2013, when the Company issued an update on the matters surrounding
the restatement and disclosing that it had received a letter from NASDAQ that it was not in
compliance with the filing requirements for continued listing, announcing that it would be
restating all of fiscal 2012 and 1Q13. The press release stated in relevant part:
SAN JOSE, CA.— January 22, 2013 - OCZ Technology Group, Inc.
(Nasdaq:OCZ), a leading provider of high-performance solid-state drives (SSDs)
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for computing devices and systems, today announced that that the Audit
Committee’s investigation has been completed. As noted in the Company’s
December 17 th press release, the Company is working with Crowe Horwath
LLP, the independent auditors, regarding the restatements of the results for the
first quarter of fiscal 2013, as well as the results for fiscal 2012. The
restatements primarily relate to the timing and classification of customer
incentive costs between revenue and operating expenses, the timing of revenue
recognition for certain transactions, and the level of reserves for product
returns . The restatement of prior periods will be provided as soon as practical.
In addition, because of the delayed filing with the SEC of the Form 10-Q for the
period ending November 30, 2012 (the “Form 10-Q”), the Company, as
anticipated, received a letter from The Nasdaq OMX Group (“Nasdaq”) indicating
that the Company is not in compliance with the filing requirements for continued
listing under Nasdaq Listing Rule 5250(c). As previously announced, the Listing
Qualifications Staff at Nasdaq, based on the Company’s compliance plan, granted
the Company an exception until February 28, 2013 to file its Form 10-Q for the
period ended August 31, 2012.
This recent Nasdaq letter notes that the Company is required, by February 1,
2013, to submit an update to this original plan to regain compliance. Nasdaq is
permitted to grant an extension of up to 180 days from the initial delinquent
filing, or until April 8, 2013, for the Company to regain compliance.
As previously stated, the Company continues to work diligently to complete the
financial audit and quarterly reviews along with any necessary restatements.
While this will hopefully be completed in the near future, the exact date cannot
currently be estimated.
On January 15, 2013 the Company amended its credit facility agreement with
Wells Fargo Capital Finance to, among other things, reduce the maximum loan
amount to $20 million from the prior $35 million. At December 31, 2012 the
outstanding loan balance was approximately $7 million compared to
approximately $15 million at November 30, 2012 and $20 million at August 31,
2012. This amendment specifies certain reporting requirements and liquidity
minimums, but also provides the Company with an operating structure to support
its business needs while the Company is in technical default of certain covenants.
A summary of the material terms of the amendment will be filed today in a Form
8-K.
“The independent investigation has been completed and the findings were highly
consistent with the Company’s internally identified issues. The Company has
already eliminated certain customer incentive programs and made people and
process changes to improve overall business operations and continue moving the
Company in a positive direction,” stated Ralph Schmitt, CEO of OCZ
Technology. “We continue to focus on making operational improvements and
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have significantly reduced our channel inventory to less than $50 million. This
puts our sales channel in excellent position to properly support our customers
while also efficiently managing our total inventory. The Company has
successfully settled the two previously disclosed product and patent litigation
contingencies, removing the potential for significant, unforeseen liabilities to the
Company.”
100. The Company has not yet filed its 2Q13 financial results or the restatements for
the fiscal year 2012 and 1Q13 and, accordingly, the full scope of the misstatements contained in
OCZ’s previously issued financial statements has not been disclosed. As such, Plaintiffs intend
to seek leave of the Court to amend this Complaint to add additional allegations which will only
be known once the Company reports its restatements for fiscal 2012 and 1Q13, as well as its
2Q13 financial results.
ADDITIONAL SCIENTER ALLEGATIONS
101. As alleged herein, Defendants acted with scienter in that they knew (or recklessly
disregarded) that the public documents and statements issued or disseminated by OCZ were
materially false and misleading, knew that such statements or documents would be issued or
disseminated to the investing public, and knowingly and substantially participated or acquiesced
in the issuance or dissemination of such statements or documents as primary violators of the
federal securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their
receipt of information reflecting the true facts concerning OCZ and their control over and/or
receipt and/or modification of OCZ’s allegedly materially misleading misstatements, were
knowing participants in the fraudulent scheme alleged herein.
102. OCZ has admitted that it misstated its revenues and net earnings during the Class
Period as a result of its (i) failure to recognize customer incentive programs that included
significant discounting, (ii) improper timing of revenue recognition, and (iii) understated level
of product return reserves. These practices were the product of affirmative (and improper)
conduct and were not due to error or rule misinterpretation. Indeed, revenues do not recognize
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themselves. The types of revenue recognition gimmicks employed by Defendants, alone,
strongly suggests Defendants’ intentional misconduct.
The Individual Defendants, By Reason of SSD Sales Being a Core Product of the
Company, Were Aware that the Statements Made Were False and/or Misleading When
Made.
103. The misleading financial statements, press releases and conference calls
I referenced above reflect the core operations of OCZ. The Individual Defendants Petersen and
Knapp, as the CEO and CFO respectively of the Company, were the OCZ employees primarily
responsible for monitoring and disclosing the financial performance of the Company.
Therefore, it can be inferred that Defendants Petersen and Knapp knew about the
misrepresentations in the Company’s financial results. Indeed, the Company’s Form 10-K
stated that “[w]e are particularly dependent on the continued service of Ryan M. Petersen, our
Chief Executive Officer, Arthur F. Knapp, our Chief Financial Officer, Alex Mei, our Chief
Marketing Officer, Bumsoo Kim, our President Semiconductor Division and Chief Executive
Officer and President of Indilinx, and Hyun Mo Chung, our Senior Vice President of R&D and
Chief Technology Officer of Indilinx.”
104. Because the sale of SSD, flash and power supply products is an essential, core
I operation for the Company, the Individual Defendants were well aware that the statements made
during the Class Period about its reported sales figures and increased SSD demand driving its
growth were materially false and/or misleading when made.
105. Sales of SSDs were of particular importance to the Company. The Company’s
I May 15, 2012 Form 10-K acknowledges that the Company’s growth is dependent upon
expanding its presence in the SSD market, which is highly competitive.
106. Sales of the Company’s products—in particular SSD products—was clearly a
core operation for the Company. Thus, the only plausible explanation is that the Individual
Defendants, who were both senior management, were aware of any and all significant
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developments related to the Company’s sales efforts, customer incentive programs, and
accounting practices.
The Contradictory Explanation for The Company’s Missed Guidance During the 2Q13.
107. On September 5, 2012, the Company reported that it was unable to meet
guidance “due primarily to constraints in NAND flash supply.” However, just over a month
later, on October 10, 2012, the Company completely reversed course and, for reasons unrelated
to constraints in NAND flash supply, further lowered guidance due to customer incentive
programs that severely impacted the Company’s operating margins. This is evidence that the
Defendants knew about the negative results due to the customer incentive programs when it
disclosed the lowered guidance on September 5, but concealed those programs and their impact
on revenues and earnings from the investing public, instead blaming temporary supply
disruptions.
The Breadth of OCZ’s Expected Restatement Also Supports a Strong Inference of
Scienter.
108. As described above, on December 17, 2012, OCZ’s disclosures concerning
restatements for fiscal year 2012, certain quarters of fiscal year 2012, and the first quarter of
2013 are an admission that OCZ’s financial statements originally issued during the Class Period
and Defendants’ public statements regarding those results were materially false and misleading.
109. In addition to being false (as set forth in ¦¦35, 43, 52, 60, 68), the Individual
Defendants’ SOX certifications attached to OCZ’s Forms 10-Q and Forms 10-K also support an
inference of scienter. As set forth in ¦ 80, defendants Peterson and Knapp certified that they
had reviewed OCZ’s financial statements, evaluated OCZ’s disclosure controls and evaluated
OCZ’s internal controls over financial reporting. Such reviews and evaluations would have
undoubtedly alerted defendants to the presence of OCZ’s glaring accounting misstatements and
material weaknesses in internal and disclosure controls described herein. Additionally, Peterson
and Knapp certified that the various reports did not contain any untrue statements or omissions
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of material fact. Thus, the Individual Defendants either: (i) knew of the material misstatements
in the financial statements, the ineffectiveness of the disclosure controls, and the material
weaknesses in internal controls; or (ii) knowingly failed to carry out the required review of the
financial statements, evaluation of internal controls and evaluation of disclosure controls and
falsely represented that they had. In either case, Defendants knew or recklessly disregarded that
the SOX certifications defendants Peterson and Knapp signed were false and misleading.
Fraudulent Reports to Support Credit Facility.
110. OCZ was also motivated to fraudulently report OCZ’s revenue to maintain its
credit facility with Wells Fargo. The need to maintain its credit facility with Wells Fargo
supports a strong inference of scienter because it was imperative for OCZ to represent a
profitable image of the Company so as to not imperil its existing credit line. The Company has
had problems maintaining a sufficient cash position. As stated in the Company’s May 14, 2012
Form 10-K, the Company has “historically not generated sufficient cash from operations and
have relied upon equity offerings and debt financing . . . .” In May 2012, the Company entered
into a credit agreement with Wells Fargo to alleviate the problems of an insufficient cash
position. In order to maintain its credit facility, however, OCZ was subject to certain financial
covenants, including maintaining a minimum EBITDA and a minimum fixed charge coverage
ratio. Following OCZ’s October 10, 2012 disclosure, the Company revised its agreement with
Wells Fargo to provide for weekly rather than monthly monitoring of minimum liquidity
requirements. On January 15, 2013, because OCZ has been unable to meet minimum EBITDA
requirements, the Company entered into a second revision of its agreement with Wells Fargo
that provided the credit agreement would terminate by February 15, 2013.
111. Further, OCZ’s officers’ and employees’ scienter can be imputed to OCZ. As
outlined above, the Individual Defendants knew (or recklessly disregarded) that OCZ was
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improperly accounting for customer incentive programs and that its financial statements
I violated GAAP.
The Company Had Substantial Motivation to Make False and/or Misleading Statements.
112. According to the Company’s May 31, 2011 Form 10-K/A, the Company had
incurred net losses for each of the previous three fiscal years, and as of February 28, 2011, it
had an accumulated deficit of approximately $55.5 million. The Form 10-K/A stated in relevant
part: For our fiscal years ended February 28, 2011, February 28, 2010 and February
28, 2009, our net sales were $190.1 million, $144 million and $156 million
respectively, and our net loss was $30.0 million, $13.5 million and $11.7 million, respectively.
* * *
We have experienced losses on a quarterly and annual basis in the past. We have
expended, and will continue to expend, substantial funds to pursue engineering,
research and development projects, enhance sales and marketing efforts and
otherwise operate our business. We may not be profitable on a quarterly or
annual basis in the future.
113. Moreover, according to the Company’s July 15, 2011 Form 10-Q, the Company
was reliant on equity offers and debt financings to support its growth:
We have historically not generated sufficient cash from operations and have
relied upon equity offerings and debt financings such as receivable factoring,
increased trade terms from vendors, and bank lines of credit as we have grown.
* * *
We anticipate increasing working capital as we continue to expand our business.
We intent to fund this continued expansion through the combination of cash
generated by operations, increase debt facilities, and potential future equity
offerings.
114. Therefore, during the Class Period, Defendants were motivated to make
materially false and/or misleading statements in order to be able to raise millions of dollars
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through various financings. For example, the Company’s fiscal 2012 Form 10-K stated the
following:
On May 10, 2012, we signed an agreement with Wells Fargo Capital Finance (“WFCF”) for a $35 million senior secured credit facility to replace the SVB
Agreement, which expired on May 6, 2012. As in the SVB Agreement, borrowings under the WFCF facility are limited to the borrowing base based on our receivables. The WFCF facility has a 5-year term and provides for a
committed expansion of up to $60 million of cumulative borrowings and for a
potential further expansion to $100 million of total borrowings if certain
conditions are met. The WFCF facility contains minimum liquidity levels and
certain financial covenenats if these levels are not met. There are also two
interest rate options using either a “Base Rate” or a “L IBOR Rate” as defined, both of which contain an “Applicable Margin” spread ranging from 1.25% to
2.75% depending on the “Excess Availability” as defined. We may incur
additional debt in the future, subject to certain limitations contained in our debt
instruments.
* * *
In February 2012, we consummated a follow-on offering pursuant to which we
issued 12,000,000 shares of common stock at $9.00 per share. We received
approximately $101 million in net proceeds from the offering, after deducting
underwriting discounts and commissions and offering expenses of approximately
$7.3 million. On March 13, 2012, the underwriters of the February 2012 follow-on offering have partially exercised their over-allotment option to purchase an
additional 1,013,991 primary shares. The net proceeds from the over-allotment option exercise are approximately $8.0 million, bringing the total net proceeds
from the offering to approximately $109 million, after deducting underwriting
discounts and commissions and estimated offering expenses.
115. According to the Company, the proceeds of these offerings and debt financings
would be used to fund working capital and capital expenditures.
//
//
//
//
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The Individual Defendants had Substantial Motivation to Make the False and/or
Misleading Statements.
116. The Individual Defendants were also motivated by various financial incentives
benefitting them personally to make the materially false and/or misleading statements about the
Company.
117. The Company’s June 28, 2012 DEF 14A spelled out the new compensation
program instituted in fiscal year 2012. The DEF 14A stated, in relevant part:
OCZ’s compensation program is structured to pay for performance and deliver
rewards that encourage executives to think and act in the interests of our
stockholders, both short- and long-term. The majority of total compensation for
our executives comes in the form of variable cash and equity compensation.
Variable cash is tied to the short-term performance of the company, and the
value of equity is tied to the long -term performance of the company. We believe
our compensation program holds our executives accountable for the financial and
competitive performance of OCZ.
Fiscal year 2012 Compensation Decisions for the Chief Executive Officer: • Base pay was unchanged from fiscal year 2011 • The Chief Executive Officer declined equity grants in fiscal year 2012 to
conserve options available for grants to other employees
• The bonus decision was based primarily on the following performance
results from fiscal year 2012 • Revenue growth from $190.1M in fiscal year 2011 to $365.8M in
fiscal year 2012 • Gross Profit growth from 12.7% in fiscal year 2011 to 22.5% in
fiscal year 2012 • Improved Operating Income/Loss from ($8.9M) in fiscal year
2011 to ($3.3M) in fiscal year 2012 • Year-on-Year Change in Chief Executive Officer bonus from fiscal year
2011 to fiscal year 2012 was 100% since this is the first year OCZ has
paid a discretionary bonus to the Chief Executive Officer
* * *
Near Term Compensation Element Purpose Strategy Terms
Base Salary Stable, least variable Pay slightly below market median in order to weight Paid twice monthly form of compensation total compensation to the performance-based
elements described below in this chart.
Performance To motivate executives Determined primarily on the basis of the company’s Decided by the
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Bonus and reward them performance during the fiscal year on certain Committee and paid according to both the measures (i.e., revenue growth percent and gross
in a single payment company’s performance margin) as compared to competitors and on our after the and the executive’s strategic progress in other significant areas (i.e., performance fiscal individual performance product development, acquisitions, and growth in year
key markets). These factors were chosen to reflect
our near-term financial performance as well as our progress in building long-term stockholder value.
The Committee aims to pay total cash compensation
(base salary and bonus) appropriately above the
median if company performance is above that of
competitors, and pay total cash compensation appropriately below the median if company performance is below competitors.
The Committee does not rely on formulas or performance targets or thresholds. Instead it uses its
judgment based on its assessment of the factors
described above.
118. Therefore, Defendant’s misrepresentations and omissions to the market about the
Company’s revenue recognition and customer incentive programs made it possible for them to
meet certain corporate objectives, as well as certain individual objectives (that tied their
compensation to performance measures intended to promote the continued the growth of the
company), in order to increase their compensation. Fiscal year 2012 was the first year that the
Company offered performance-based compensation, a fact which significantly incentivized the
Individual Defendants to make materially false and/or misleading statements and omit material
facts to ensure that the Company achieved its corporate objectives so that the Individual
Defendants would also receive their financial benefits.
119. To illustrate, in fiscal year 2012, Defendant Peterson was paid $830,000 in total
compensation, consisting of $415,000 in base salary and $415,000 in bonus payments, whereas
in fiscal year 2011, Peterson was paid $415,000 in total compensation, consisting solely of base
salary.
120. Similarly, in fiscal year 2012, Defendant Knapp was paid $375,000 in total
compensation, consisting of $275,000 in base salary and $100,000 in bonus payments. In fiscal
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year 2011, Knapp was paid $735,610 in total compensation, consisting of $228,494 in base
salary and $507,116 in non-qualified stock option awards.
The Resignation of the Individual Defendants and Another Senior Officer During the
Class Period Supports a Strong Inference of Scienter.
121. OCZ’s active reorganization of OCZ’s senior management during the Class
Period further evidences the Defendants’ knowledge of its improper revenue recognition
practices and internal control problems. Less than one month prior to the first partial corrective
disclosure on September 5, 2012, defendant Knapp suddenly announced his intention to retire
from the Company. Then, less than two weeks after the September 5 disclosure, it was
announced that defendant Petersen had resigned effective immediately. Yet another senior
executive resigned following the second partial corrective disclosure on October 10, 2012. On
October 17, 2012, it was announced that the Company’s Chief Sales Officer Richard Singh had
resigned effective October 12, 2012, two days after the second partial corrective disclosure.
122. The Individual Defendants’ departures from the Company—both expected and
unexpected—at the end of the Class Period strongly suggests their knowledge of its accounting
improprieties and material misrepresentation of revenue due to improper recognition of
customer incentive practices.
LOSS CAUSATION/ECONOMIC LOSS
123. By misrepresenting its financial results and condition, Defendants presented a
misleading picture of OCZ’s business and prospects. Thus, instead of truthfully disclosing
during the Class Period that due to (i) the timing and classification of customer incentive costs
between revenue and operating expenses, (ii) the timing of revenue recognition for certain
transactions, and (iii) the proper level of reserves for product returns, Defendants falsely
reported the Company’s business condition and financial results.
124. On September 5, 2012, the Company partially disclosed that projected financial
results for the 2Q13 will be $10-20 million below guidance due to a temporary supply problem.
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This partial disclosure caused the stock to lose $1.01 per share, or 19%, to close at $4.35 per
share on September 6, 2012 on volume of nearly 23 million shares.
125. This was followed by the news on September 17, 2012 that defendant Petersen
was resigning from the Company effective immediately, causing the stock to drop from $4.43
per share to $4.13 per share .
126. Then, on October 10, 2012 the Company reported that it would delay the filing
of its 2Q13 financial results, reiterated the lowered guidance, and stated that its financial
statements were “under review”, causing the stock to decline another $1.27 per share, or over
40%, to close at $1.88 per share on volume of over 23 million shares.
127. The next day, on October 11, 2012, the Company announced the delay in the
filing of its 2Q13 financial results, which caused the stock to decline an additional $0.39 per
share or 20.97%, to close at $1.47 per share on October 12, 2012.
128. The truth, however, concerning the Company’s improper accounting practices
and need to restate its financial results for all of fiscal 2012 and 1Q13 was further revealed in
press releases on December 17, 2012 and January 22, 2013.
129. These false financial results caused and maintained the artificial inflation in
OCZ’s stock price throughout the Class Period until the truth began to be revealed to the market
as alleged above and as reflected on the following chart:
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$8.00
Cl)
$6.00
$4.00
$12.00
$10.00
$2.00
$0.00
80.00% OCZ
Russell 3000
60.00% - NASDAQ
120.00%
100.00%
40.00%
20.00%
0.00%
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CLASS ACTION ALLEGATIONS
130. Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal
Rules of Civil Procedure on behalf of all persons who purchased or otherwise acquired OCZ
publicly traded common stock and call options during the Class Period (the “Class”). Excluded
from the Class are defendants, the officers and directors of the Company, at all relevant times,
members of their immediate families and their legal representatives, heirs, successors or assigns,
and any entity in which defendants have or had a controlling interest.
131. The members of the Class are so numerous that joinder of all members is
impracticable. The disposition of their claims in a class action will provide substantial benefits
to the parties and the Court. OCZ has over 67 million shares of stock outstanding, many of
which were acquired during the Class Period, by hundreds if not thousands of persons.
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132. There is a well-defined community of interest in the questions of law and fact
involved in this case. Questions of law and fact common to the members of the Class which
predominate over questions which may affect individual Class members include:
(a) whether Defendants violated the Exchange Act;
(b) whether Defendants omitted and/or misrepresented material facts;
(c) whether Defendants’ statements omitted material facts necessary to make
the statements made, in light of the circumstances under which they were made, not misleading;
(d) whether Defendants knew or deliberately disregarded that their
statements were false and misleading;
(e) whether the prices of OCZ publicly traded securities were artificially
inflated; and
(f) the extent of damage sustained by Class members and the appropriate
measure of damages.
133. Plaintiffs’ claims are typical of those of the Class because Plaintiffs and the Class
sustained damages from Defendants’ wrongful conduct.
134. Plaintiffs will adequately protect the interests of the Class and has retained
counsel who are experienced in class action securities litigation. Plaintiffs have no interests
which conflict with those of the Class.
135. A class action is superior to other available methods for the fair and efficient
adjudication of this controversy.
APPLICABILITY OF PRESUMPTION OF RELIANCE:
FRAUD ON THE MARKET DOCTRINE
136. At all relevant times, the market for OCZ securities was an efficient market for
the following reasons, among others:
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(a) OCZ securities met the requirements for listing, and was listed and
actively traded on the NASDAQ Capital Market, a highly efficient and automated market;
(b) As a regulated issuer, OCZ filed periodic reports with the SEC and the
I NASDAQ;
(c) OCZ regularly communicated with public investors via established
market communication mechanisms, including through regular disseminations of press releases
on the national circuits of major newswire services and through other wide-ranging public
disclosures, such as communications with the financial press and other similar reporting
services; and
(d) OCZ was followed by several securities analysts employed by major
brokerage firms who wrote reports which were distributed to the sales force and certain
customers of their respective brokerage firms . Each of these reports was publicly available and
entered the public marketplace.
137. As a result of the foregoing, the market for OCZ securities promptly digested
current information regarding OCZ from all publicly available sources and reflected such
information in the prices of the securities. Under these circumstances, all purchasers of OCZ
securities during the Class Period suffered similar injury through their purchase of OCZ
securities at artificially inflated prices, and a presumption of reliance applies.
NO SAFE HARBOR
138. The statutory safe harbor provided for forward -looking statements under certain
circumstances does not apply to any of the allegedly false statements pleaded in this complaint.
Many of the specific statements pleaded herein were not identified as and were not “forward-
looking statements” when made. To the extent there were any forward-looking statements,
there were no meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those in the purportedly forward-looking statements.
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Alternatively, to the extent that the statutory safe harbor does apply to any forward-looking
statements pleaded herein, defendants are liable for those false forward-looking statements
because at the time each of those forward-looking statements was made, the particular speaker
knew that the particular forward-looking statement was false, and/or the forward-looking
statement was authorized and/or approved by an executive officer of OCZ who knew that those
I statements were false when made.
COUNT I
For Violation of Section 10(b) of the Exchange Act and Rule 10b-5(a), (b) & (c)
Against All Defendants
139. Plaintiffs incorporate ¶¶ 1-138 by reference.
140. During the Class Period, Defendants participated in the preparation of and/or
disseminated or approved the false statements specified above, which they knew or deliberately
disregarded were misleading in that they contained misrepresentations and failed to disclose
material facts necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading.
141. Defendants violated § 10(b) of the Exchange Act and Rule 10b-5(a) and (c) in
that they employed devices, schemes and artifices to defraud and engaged in acts, practices and
a course of business that operated as a fraud or deceit upon Plaintiffs and others similarly
situated in connection with their purchases of OCZ publicly traded securities during the Class
Period.
142. Defendants also violated § 10(b) of the Exchange Act an d Rule 10b-5(b) in that
they made untrue statements of material facts or omitted to state material facts necessary in
order to make the statements made, in light of the circumstances under which they were made,
not misleading.
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143. Defendants, individually and together, directly and indirectly, by the use, means
or instrumentalities of interstate commerce and/or the mails, engaged and participated in a
I continuous course of conduct to conceal the truth and/or adverse material information about the
business, operations and future prospects of OCZ as specified herein.
144. Defendants employed devices, schemes and artifices to defraud, while in
possession of material, adverse, non-public information and engaged in acts, practices, and a
course of business which operated as a fraud and deceit upon the purchasers of OCZ securities
during the Class Period.
145. Defendants had actual knowledge of the misrepresentations and omissions of
material fact set forth herein, or recklessly disregarded the true facts that were available to them.
Defendants’ misconduct was engaged in knowingly or with reckless disregard for the truth, and
for the purpose and effect of concealing OCZ’s true financial condition from the investing
public and supporting the artificially inflated price of OCZ’s securities.
146. Plaintiffs and the Class have suffered damages in that, in reliance on the integrity
of the market, they paid artificially inflated prices for OCZ publicly traded securities. Plaintiffs
and the Class would not have purchased OCZ publicly traded securities at the prices they paid,
or at all, had they been aware that the market prices for OCZ’s securities had been artificially
inflated by defendants’ materially false and misleading statements.
COUNT II
For Violation of Section 20(a) of the Exchange Act
Against the Individual Defendants
147. Plaintiffs incorporate ¦¦ 1-146 by reference.
148. The Individual Defendants acted as controlling persons of OCZ within the
I meaning of § 20(a) of the Exchange Act. By reason of their positions with the Company, and
I their ownership of OCZ securities, the Individual Defendants had the power and authority to
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cause OCZ to engage in the wrongful conduct complained of herein. OCZ controlled the
Individual Defendants and all of its employees. By reason of such conduct, the Individual
Defendants are liable pursuant to § 20(a) of the Exchange Act.
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs pray for judgment as follows:
A. Declaring this action to be a proper class action pursuant to Fed. R. Civ. P. 23;
B. Awarding Plaintiffs and the members of the Class damages, including interest;
C. Awarding Plaintiffs reasonable costs and attorneys’ fees; and
D. Awarding such equitable/injunctive or other relief as the Court may deem just
and proper.
JURY TRIAL DEMANDED
Plaintiffs hereby demand a trial by jury.
Dated March 5, 2013
PUNZALAN LAW, P.C.
By: /s/ Mark Punzalan Mark Punzalan
600 Allerton St., Suite 201 Redwood City, CA 94063 Tel: (650) 362-4150 Fax: (650) 362-4151 Email: [email protected]
Nicholas I. Porritt Thomas M. Gottschlich LEVI & KORSINSKY LLP 1101 30th Street NW, Suite 115 Washington, DC 20007 Tel: (202) 524-4290 Fax: (202) 337-1567
Attorneys for The OCZ Investor Group and
Lead Counsel for the Class
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CONSOLIDATED AMENDED CLASS ACTION COMPLAINT 28 Case No. 3:12-cv-05265-RS
Case3:12-cv-05265-RS Document38 Filed03/05/13 Page53 of 53
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BROWER PIVEN A Professional Corporation
Charles J. Piven Yelena Trepetin 1925 Old Valley Road Stevenson, MD 21153 Telephone: (410) 332-0030 Fax: (410) 685-1300
Additional Counsel for the OCZ Investor Group
53 Case No. 3:12-cv-05265-RS
CONSOLIDATED AMENDED CLASS ACTION COMPLAINT
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