SEC Charges Former Tech Execs with Accounting Fraud
A scheme to materially inflate OCZ’s revenues and gross margins
|Friday, October 9, 2015|
By Michael Cohn, Editor-In-Chief, AccountingToday.Com
The Securities and Exchange Commission has charged two former top executives at OCZ Technology Group Inc. for accounting failures at the now-bankrupt seller of computer memory storage and power supply devices.
In a complaint filed in the Northern District of California, the SEC alleges that OCZ’s former CEO Ryan Petersen engaged in a scheme to materially inflate OCZ’s revenues and gross margins from 2010 to 2012. It separately charged OCZ’s former chief financial officer Arthur Knapp for certain accounting, disclosure, and internal accounting controls failures at OCZ. Knapp agreed to settle the SEC’s charges without admitting or denying the allegations against him. The SEC’s litigation continues against Petersen.
OCZ, based in San Jose, is now part of Toshiba, a company that has been shaken by a high-profile accounting scandal this year that has led to the departures of a series of top executives (see Toshiba Says 30 More Executives Named in Accounting Scandal). However, the SEC charges appear to be unrelated to Toshiba’s accounting woes. Toshiba acquired OCZ’s assets in late 2013 for $35 million after OCZ filed for bankruptcy.
According to the SEC’s complaint, Petersen’s scheme allegedly included mischaracterizing sales discounts as marketing expenses and having employees create false documentation to conceal the scheme, channel-stuffing OCZ’s largest customer by shipping more goods than the customer could sell in the normal course of business, and concealing large product returns from OCZ’s finance department and OCZ’s auditor so that those returns would not be recorded in OCZ’s books and records. Petersen allegedly signed and certified portrayed the company in a way that was a far cry from its true operational and financial condition in OCZ’s financial filings. The SEC said Petersen personally profited from his misstatements by selling shares of OCZ stock and receiving a bonus during the period when OCZ’s public filings contained inflated financial results.
Knapp allegedly instituted or maintained policies that caused OCZ to record transactions in a manner that was not in accordance with U.S. GAAP, according to the SEC. These policies included reclassifying costs of goods sold as research and development expenses without sufficient basis for doing so, failing to capitalize labor and overhead costs in OCZ’s inventory costs, recognizing revenues upon product shipment rather than upon delivery of the product to OCZ’s customers, and understating OCZ’s accruals for product returns.
As CFO, Knapp had responsibility for OCZ’s internal accounting controls and procedures. Nevertheless, he failed to implement sufficient internal accounting controls to prevent OCZ from misclassifying sales discounts as marketing expenses and significantly overstating its revenues and gross profits.
“CEOs and CFOs are responsible for reporting accurate financial information,” said Antonia Chion, associate director of the SEC’s Division of Enforcement, in a statement. “When those high-level executives participate in accounting fraud and failures, as we allege Petersen and Knapp have done, they will be held accountable.”
The SEC charged Petersen with violating the antifraud, certification, books and records, internal controls, and clawback provisions of the federal securities laws. It also charged him with lying to accountants and aiding and abetting OCZ’s violations of the reporting, books and records and internal controls provisions. The complaint seeks a permanent injunction, payment of his allegedly ill-gotten gains plus prejudgment interest, a civil penalty, an officer and director bar, and forfeiture of Petersen’s stock sales profits and bonus.
The SEC charged Knapp with violating certain antifraud provisions, and the certification, and internal controls provisions, and with aiding and abetting OCZ’s violations of the reporting, books and records, and internal controls provisions. Knapp agreed to be permanently enjoined from violating or aiding and abetting violations of these provisions, to be barred from acting as an officer or director of a public company, to pay a total of $130,000 in disgorgement, prejudgment interest, and civil penalties, and to forego any claims against OCZ for $170,000 in unpaid compensation. The settlement is subject to court approval.