In re OCZ Technology Group, Inc. Securities Litigation 12-CV-05265-Consolidated Amended Class

Case3:12-cv-05265-RS Document38 Filed03/05/13 Page1 of 53

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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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CONSOLIDATED AMENDED CLASS ACTION COMPLAINT 28 Case No. 3:12-cv-05265-RS


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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%.







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


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


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.








limited to the following. As set forth in ¶¶ 90, 97 99, infra, OCZ admitted in its October 10,








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


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.


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

CONSOLIDATED AMENDED CLASS ACTION COMPLAINT 28

21 Case No. 3:12-cv-05265-RS


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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


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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%.








limited to the following. As set forth in ¶¶ 90, 97, 99, infra, OCZ admitted in its October 10,








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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25 Case No. 3:12-cv-05265-RS


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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

26



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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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


Documents

In re OCZ Technology Group, Inc. Securities Litigation 12-CV-05265-Consolidated Amended Class