SEC v. Arthur F. Knapp, Jr., No. 5:15-cv-04598, District of Columbia (Jan. 1, 2015) — Complaint

SEC v. Knapp
Complaint
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KEVIN C. LOMBARDI (DC BAR NO. 474114) ([email protected])
IAN R. DATTNER (NY BAR NO. 4411187) ([email protected])
LISA WEINSTEIN DEITCH (CA BAR NO. 137492) ([email protected])

Attorneys for Plaintiff
SECURITIES AND EXCHANGE COMMISSION
100 F Street, NE
Washington, DC 20549
Telephone:  (202) 551-8753 (Lombardi)
Facsimile:  (202) 772-9291 (Lombardi)

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

 The Securities and Exchange Commission (“Commission”) alleges as follows for its
complaint against defendant Arthur F. Knapp, Jr. (“Knapp”):
SUMMARY OF ALLEGATIONS
1. This case arises out of accounting, disclosure and internal accounting controls
failures from at least June 2010 through July 2012 by Knapp, the former Chief Financial Officer
(“CFO”) of OCZ Technology Group, Inc. (“OCZ”), a now-bankrupt seller of computer memory
storage and power supply devices.
SECURITIES AND EXCHANGE COMMISSION,

  Plaintiff,

 v.

ARTHUR F. KNAPP, JR.,

  Defendant.

COMPLAINT

SEC v. Knapp
Complaint
2. Knapp instituted or maintained several policies and practices that caused OCZ to
record transactions in a manner that was not in accordance with U.S. Generally Accepted
Accounting Principles (“GAAP”) and caused OCZ to report materially inflated revenues and/or
gross profits.  These policies included (1) reclassifying costs of goods sold as research and
development expenses, without sufficient basis to do so; (2) failing to capitalize labor and
overhead costs in OCZ’s inventory costs; (3) recognizing revenues upon product shipment,
rather than upon delivery of the product to OCZ’s customers; and (4) understating OCZ’s
accruals for product returns.
3. 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.  OCZ had put a program in place, called “customer
based programs” or “CBPs,” through which OCZ characterized credits given to customers as
marketing expenses.  Although Knapp knew the criteria that had to be satisfied in order to
classify the expenses as marketing under GAAP, Knapp failed to put controls in place to ensure
the criteria were met.  As a result, OCZ mischaracterized sales discounts, which should have
been reported as revenue reductions, as CBPs, which were improperly reported as marketing
expenses.  As CBP expenses grew to over 5% of revenues and Knapp received information
concerning potentially serious problems with OCZ’s accounting for the programs, he failed to
adequately address these issues.
4. As a result of the accounting errors described above and other accounting errors,
in October 2013, OCZ restated its financial statements to decrease previously reported revenues
and gross profits by over $100 million from the second fiscal quarter of 2011 through the first

SEC v. Knapp
Complaint
fiscal quarter of 2013
1
 — a nearly 20% reduction in previously reported revenues and a
significant reduction in previously reported gross profits.
5. Knapp received profits from the sale of OCZ’s stock and received a bonus during
the period when OCZ’s financial results were improperly inflated in public filings, which he
signed.
6. By engaging in the conduct described in this Complaint, Knapp violated the anti-
fraud provisions of Sections 17(a)(2) and (3) of the Securities Act of 1933 (“Securities Act”)
[15
U.S.C. §§ 77q(a)(2) & (3)]; the internal controls provisions of Section 13(b)(5) of the Securities
Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78m(b)(5)] and Exchange Act Rule
13b2-1 [17 C.F.R. § 240.13b2-1]; the certification provision of Exchange Act Rule 13a-14
[17 C.F.R. § 240.13a-14]; and aided and abetted OCZ’s violations of the reporting, books and
records, and internal controls provisions of Sections 13(a) and 13(b)(2)(A) and 13(b)(2)(B) of the
Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Exchange Act Rules
12b-20, 13a-1, 13a-11, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11 and
240.13a-13].
7. The Commission seeks an order enjoining Knapp from future violations of the
above provisions, requiring him to disgorge his ill-gotten gains with prejudgment interest and
pay appropriate civil money penalties, and imposing upon him an officer and director bar.

1
  OCZ’s fiscal year ended at the end of the month of February.  Accordingly, the second
fiscal quarter of 2011 consisted of the three months ending August 31, 2010, and the first fiscal
quarter of 2013 consisted of the three months ending May 31, 2012.

SEC v. Knapp
Complaint
JURISDICTION AND VENUE
8. This Court has jurisdiction over this action pursuant to Sections 20 and 22 of the
Securities Act [15 U.S.C. §§ 77t and 77v] and Sections 21 and 27 of the Exchange Act
[15 U.S.C. §§ 78u and 78aa].
9. Venue is proper in this judicial district pursuant to Section 22 of the Securities
Act [15 U.S.C. § 77v] and Section 27 of the Exchange Act [15 U.S.C. § 78aa] because certain of
the acts and omissions constituting violations alleged herein occurred in this judicial district.
10. Knapp, directly and indirectly, made use of the mails and of the means and
instrumentalities of interstate commerce in connection with the transactions, acts, practices, and
courses of business described in this Complaint.
11. Intradistrict Assignment.  Assignment to the San Jose Division is appropriate
pursuant to Local Civil Rules 3-2(c) and 3-2(e) because a substantial part of the events which
give rise to the claim occurred in the County of Santa Clara.
DEFENDANT
12. Arthur Knapp, age 66, was CFO of OCZ from November 2005 through
March 2009 and from October 2010 through March 2013.  From March 2009 until October
2010, Knapp was OCZ’s Vice President of Finance.  Prior to joining OCZ, Knapp served as the
CFO of three other publicly-traded technology companies and, prior to that, spent ten years in
public accounting.  Knapp was a licensed Certified Public Accountant in Pennsylvania but
allowed that license to lapse in approximately 1980.  Knapp resides in San Jose, California.
RELEVANT ENTITY
13. OCZ was a Delaware corporation formed in 2002 that was headquartered in San
Jose, California.  OCZ sold computer memory storage and power supply devices primarily to

SEC v. Knapp
Complaint
distributors, e-tailers, and original equipment manufacturers.  Shares of OCZ’s stock traded on
the AIM Market of the London Stock Exchange plc (“AIM”) from June 2006 through
April 2009.  OCZ’s common stock was traded on the OTCBB from February 10, 2010 to
April 22, 2010, when it began trading on the NASDAQ Capital Market.  From 2010 through
2012, OCZ raised over $200 million from the sales of its shares to investors.  OCZ filed for
bankruptcy in December 2013.  On February 24, 2014, OCZ’s common stock was de-listed from
NASDAQ.  On April 16, 2015, the Commission issued an Order Instituting Proceedings, Making
Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities
Exchange Act of 1934.  OCZ has liquidated its assets and is no longer operating.
FACTS
Overview
14. OCZ was founded in 2002 and engaged in a number of computer-related
businesses since its founding.  From approximately 2009 through its dissolution, OCZ primarily
focused upon selling solid state drives (“SSDs”), a new generation of computer storage drives
that OCZ promoted as being superior to traditional hard drives.  OCZ sought to capitalize upon
the expected growth of the SSD market.
15. Statements made to investors in certain filings with the Commission, which were
signed by Knapp, emphasized OCZ’s revenue growth and gross margin improvements.  OCZ
provided guidance concerning revenues and gross margins,  and securities analysts focused on
these metrics.
16. In late 2011, OCZ began negotiating with another technology company about the
possible sale of OCZ.  Revenue growth and gross margin improvements were important metrics
to the potential acquiring company.  Negotiations temporarily ceased, but started once again in

SEC v. Knapp
Complaint
the Spring of 2012.  In June 2012, OCZ’s Chief Executive Officer (“CEO”) expressed in an
email to Knapp concerns about the acquiring company’s focus on revenues and gross profits.
The CEO stated, “[i]f we don’t have numbers that look reasonable on a high revenue raise and
good Gross profit margins for q1 we will be lucky to trade over cash value and I am sure they
will withdraw their offer completely.”
17. The merger discussions fell apart in mid-2012.  Shortly thereafter, certain of the
improper accounting practices, which permitted OCZ to report artificially high revenue and gross
profit growth from 2011 through 2013, came to light.  OCZ’s stock price thereafter plummeted.
18. In October 2013, OCZ issued a restatement of its financial results.  As reflected in
the below table, in the period from the second quarter of fiscal 2011 through the first quarter of
fiscal 2013, OCZ reduced revenues by over $102 million, reducing revenues by more than 48%
in the quarter ending May 31, 2012:

19. OCZ’s reduction of its gross profits from the second quarter of fiscal 2011 as part
of the restatement was even more dramatic, reducing gross profits by nearly $120 million from
the second quarter of fiscal 2011 through the first quarter of fiscal 2013 as summarized in the
following table:
Net Revenues (000s)
Quarter EndingAs FiledChangeRestatement% Overstated
8/31/201038,045       ( 3,224)                34,821            9.3%
11/30/201053,222       ( 622)                    52,600            1.2%
2/28/201164,566       ( 5,586)                58,980            9.5%
5/31/201173,794       ( 9,826)                63,968            15.4%
8/31/201178,454       ( 2,058)                76,396            2.7%
11/30/2011103,084     ( 15,424)              87,660            17.6%
2/29/2012110,442     ( 28,306)              82,136            34.5%
5/31/2012113,620     ( 37,128)              76,492            48.5%
Totals635,227     ( 102,174)            533,053         19.2%

SEC v. Knapp
Complaint

20. In early December 2013, OCZ filed for bankruptcy protection.  It has since
liquidated all of its assets and is no longer operating.
21. As detailed further below, Knapp was responsible for a number of the issues that
were restated and that resulted in OCZ’s reporting materially inflated revenues and gross profits
to investors.
OCZ’s Failure to Capitalize Labor and Overhead in Inventory Costs
22. Knapp instituted a policy that caused OCZ to improperly exclude labor and
overhead costs in valuing inventory.
23. Rather than capitalize labor and overhead in inventory costs, and then expense
those costs as part of costs of goods sold (“COGS”) when OCZ sold the inventory, Knapp
expensed the labor and overhead costs as incurred and recorded them as operating expenses (i.e.,
“below” the gross profit line).
24. GAAP provides that “the primary basis of accounting for inventories is cost . . .
cost means . . . the sum of the applicable expenditures and charges directly or indirectly incurred
in bringing an article to its existing condition and location.  It is understood to mean acquisition
Gross Profit (000s)

Quarter EndingAs Filed
Change
Restatement
8/31/20101,620

( 3,372)

 ( 1,752)

11/30/20107,661

 ( 4,310)

3,351

2/28/2011
10,709
 ( 4,940)

 5,769
5/31/201114,744

 ( 9,135)
5,609

8/31/201116,931
( 10,104)

 6,827

11/30/2011
23,175

 ( 22,164)

1,011

2/29/201227,586

( 28,823)

 ( 1,237)

5/31/2012
28,431

( 36,836)

( 8,405)
Totals
130,857      ( 119,684)      11,173

SEC v. Knapp
Complaint
and production cost . . .”  See Accounting Standards Codification (“ASC”) 330-10-30.  Knapp
knew or was reckless in not knowing that OCZ’s failure to capitalize labor and overhead did not
comply with GAAP.
25. As a result of the failure to capitalize labor and overhead, OCZ materially
understated COGS and materially overstated gross profits, in its books and records and on its
financial statements from the second quarter of fiscal 2011 through the first quarter of fiscal
2013.  As part of the restatement, OCZ reclassified the expenses, resulting in a reduction in gross
profits on a quarterly basis of between 8.6% and 86.9%.
OCZ’s Misclassification of Cost of Goods Sold as Research and Development Expenses
26. Knapp improperly reclassified expenses from COGS to research and development
(“R&D”) expenses.  These reclassifications caused gross profits to be inflated because costs that
should have been included in COGS instead were recorded as part of operating expenses.
27. The reclassified R&D expenses had been incurred to produce goods that OCZ
later sold to its customers.  Accordingly, such costs should have been included within COGS
under GAAP.  Knapp knew, was reckless in not knowing, or should have known that the
reclassifications were inconsistent with GAAP.
28. Knapp’s reclassifications allowed OCZ to report higher gross margins in the first
quarter of fiscal 2013.
29. As a result of the reclassifications, OCZ materially understated its COGS and
overstated its gross profits by approximately 23.2% in its books and records and in financial
statements filed with the Commission in the first quarter of fiscal 2013.

SEC v. Knapp
Complaint
OCZ’s Premature Recognition of Revenues
30. Under Knapp’s direction, OCZ’s practice was to recognize revenue at the time of
shipment of its products, even though its shipping terms with most customers provided that OCZ
held title to those products until the customer took delivery.
31. OCZ’s revenue recognition practice was inconsistent with OCZ’s shipping terms
and GAAP, as OCZ had not earned the revenue until the product was delivered.
32. Knapp knew, was reckless in not knowing, or should have known that OCZ’s
revenue recognition upon shipment was improper.
33. In the fourth quarter of fiscal 2012, OCZ’s auditor indicated that OCZ would no
longer be able to recognize all sales upon shipment.  In response, Knapp instructed OCZ’s sales
team that customers who ordered goods at the end of subsequent quarters should sign so-called
“title transfer” letters to purportedly allow OCZ to recognize the revenue upon shipment.  Under
the terms of these letters, however, OCZ retained ownership and therefore revenue recognition
on shipment was not appropriate under GAAP.  Moreover, some of the “title transfer” letters
were signed after the end of the filing period, but were retroactively applied to purportedly
change the terms of goods sold before the period end.
34. As a result of the revenue recognition policies, OCZ materially overstated its
revenues, gross profits, and income in its books and records and in financial statements filed with
the Commission from the second quarter of fiscal 2011 through the first quarter of fiscal 2013.
As part of the restatement, OCZ reversed approximately $9.2 million that had been recorded as
revenue from fiscal 2011 through the first quarter of fiscal 2013 in instances where the goods
were in transit and title had not passed to the customer.

SEC v. Knapp
Complaint
OCZ’s Understatement of Accruals for Product Returns
35. Under Knapp’s direction, OCZ understated accruals for product returns.
36. From the second quarter of fiscal 2011 through the second quarter of fiscal 2012,
rather than recording an accrual against revenues equal to the sales value associated with the
expected product returns, OCZ recorded an accrual only for the estimated gross margins
associated with those sales.  As a result, OCZ’s sales return accruals were approximately 20% of
the value that they should have been.
37. Knapp knew or was reckless in not knowing that this practice was inconsistent
with GAAP.  In fact, Knapp sent an email in December 2011 attaching a spreadsheet that
referred to OCZ’s methodology as “non-GAAP.”
38. In the third quarter of fiscal 2012, OCZ’s auditor informed OCZ that it should
change its methodology concerning its product return accruals so that it accrued the sales value
associated with the expected product return.  Knapp subsequently instituted the change.
39. As a result of the improper methodology for product return accruals, OCZ
overstated its revenues, gross profits, and income in its books and records and in financial
statements filed with the Commission from the second quarter of fiscal 2011 through the second
quarter of fiscal 2012.
Mischaracterization of Sales Discounts as Marketing Expenses
40. In approximately 2010, OCZ’s CEO instituted a program that he termed
“customer based programs” or “CBPs,” pursuant to which OCZ would purportedly offer short-
term marketing programs to its customers.  Under these marketing programs, OCZ would
purportedly pay its customers, by crediting the customers’ accounts, for marketing OCZ’s
products.  The marketing credits, however, did not represent amounts that OCZ would have

SEC v. Knapp
Complaint
actually paid in independent transactions for the marketing performed.  CBPs were often nothing
more than sales discounts, which OCZ should have recorded as reductions to revenue instead of
marketing expenses.
41. CBP expenses grew substantially between late 2010 and September 2012.  In
fiscal 2011, total CBP expenses were approximately $6 million.  In the fourth quarter of fiscal
2012 alone, CBP expenses totaled over $4.7 million and in the first quarter of fiscal 2013, CBP
expenses totaled approximately $7.5 million.  By mid-2012, virtually all sales discounts were
classified as CBPs and reported as marketing expenses, rather than reductions to revenue.
42. GAAP provides that when a vendor, such as OCZ, provides consideration to a
customer, including marketing credits, the consideration must be recorded as a reduction of
revenue unless two criteria are met: (1) the vendor receives an identifiable benefit for
consideration that is sufficiently separable from the recipient’s purchase of the vendor’s products
such that the benefit could have been obtained from a party other than the purchaser of the
product; and (2) the vendor can reasonably estimate the fair value of the benefit.  See ASC 605-
50-45.
43. OCZ’s accounting for CBPs failed to meet this standard because (a) the purported
marketing was not separable from customers’ purchase of OCZ goods; and (b) the fair value of
the purported marketing did not equal the consideration paid to OCZ’s customers.  Indeed, some
customers that received CBP “credits” performed no marketing in exchange.
44. Knapp knew the GAAP that applied to marketing programs such as the CBPs.
However, Knapp did not put adequate policies in place to ensure that OCZ properly recorded
CBPs as sales discounts and not as marketing expenses.  Although OCZ’s auditor identified the
lack of accounting policies concerning marketing and incentive programs as a deficiency in June

SEC v. Knapp
Complaint
2011 and recommended that “[s]pecific accounting policies and methodology used in
determining the sales and marketing programs (and related income statement classification)
should be formally documented and reconciled to the appropriate accounting literature,” Knapp
failed to implement sufficient accounting policies concerning valuation of the marketing
activities or to otherwise ensure that CBPs were properly recorded within OCZ’s books and
records.
45. Knapp ignored the significant growth in CBP expenses and corresponding
decrease in sales discounts and other significant red flags indicating that the programs were
being misused as a means to disguise sales discounts.  For example, i n a June 2012 email, Knapp
was warned that advanced CBP funds promised to customers (for marketing that customers
would purportedly provide in the future) “appear[ ] as an incentive for current sales” which
would result in a “[h]uge revenue recognition . . . issue.”  (emphasis added).  Notwithstanding
these issues, Knapp failed to determine whether OCZ’s financial statements needed to be
corrected, and he failed to improve OCZ’s internal controls.
46. Knapp’s failure to put adequate internal accounting controls in place in
connection with CBPs allowed OCZ to improperly report sales discounts as marketing expenses
in its filings with the Commission.  Moreover, in the first quarter of fiscal 2013, Knapp knew,
was reckless in not knowing, or should have known that sales discounts had been
mischaracterized as CBPs in OCZ’s books and records.  Nevertheless, Knapp signed and
certified the Form 10-Q for the first quarter of fiscal 2013 ending May 31, 2012, which
overstated net revenues and gross profits as a result of the mischaracterization.

SEC v. Knapp
Complaint
Misrepresentations in Commission Filings
47. Knapp’s actions, as described above, resulted in material misrepresentations in the
following OCZ filings with the Commission:
a. OCZ’s annual reports on Form 10-K for the years 2011 and 2012, each of
which was signed and certified by Knapp;
b. OCZ’s quarterly reports on Form 10-Q for the periods ending August 31,
2010, November 30, 2010, May 31, 2011, August 31, 2011, November 30,
2011 and May 31, 2012, each of which was signed and certified by Knapp;
c. OCZ’s current reports on Form 8-K, filed on July 10, 2012, May 1, 2012,
January 9, 2012, October 5, 2011, July 6, 2011, May 3, 2011, January 10,
2011 and October 12, 2010, each of which was signed by Knapp;
d. OCZ’s Form S-8 dated December 22, 2010, which was signed by Knapp, and
incorporated by reference one or more of the misstated financial statements;
e. OCZ’s Form S-8 dated October 14, 2011, which was signed by Knapp, and
incorporated by reference one or more of the misstated financial statements;
and
f. OCZ’s Form S-3 dated December 1, 2011, which was signed by Knapp, and
incorporated by reference one or more of the misstated financial statements.
48. Knapp also falsely certified in OCZ’s quarterly reports for the period ending
August 31, 2010 through the period ending May 31, 2012 and in OCZ’s annual reports for 2011
and 2012 that, he reviewed each of the reports and that he designed internal control over
financial reporting, or caused such internal control over financial reporting to be designed under

SEC v. Knapp
Complaint
his supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with GAAP.
FIRST CLAIM FOR RELIEF
Fraud in the Offer or Sale of Securities: Violating Sections 17(a)(2) and (3) of the Securities
Act [15 U.S.C. §§ 77q(a)(2) & (3)]

49. Paragraphs 1 through 48 are realleged and incorporated by reference herein.
50. Knapp, by engaging in the conduct described above, directly or indirectly, in the
offer or sale of securities by the use of means or instruments of transportation or communication
in interstate commerce or by the use of the mails:
a. obtained money or property by means of untrue statements of material fact or
by omitting to state material facts necessary in order to make the statements
made, in light of the circumstances under which they were made, not
misleading; and
b. engaged in transactions, practices, or courses of business which operated or
would operate as frauds or deceits upon the purchasers.
51. By engaging in the conduct described above, Knapp violated, and unless
restrained and enjoined, will in the future violate, Section 17(a)(2) and (3) of the Securities Act
[15 U.S.C. §§ 77q(a)(2) & (3)].
SECOND CLAIM FOR RELIEF
Failure to Implement Controls: Violating Section 13(b)(5) of the Exchange Act
[15 U.S.C. § 78m(b)(5)]
52. Paragraphs 1 through 48 are realleged and incorporated by reference herein.
53. Knapp, by engaging in the conduct described above, knowingly failed to
implement a system of internal accounting controls.

SEC v. Knapp
Complaint
54. By engaging in the conduct described above, Knapp violated, and unless
restrained and enjoined, will in the future violate Section 13(b)(5) of the Exchange Act
[15 U.S.C. § 78m(b)(5)].
THIRD CLAIM FOR RELIEF
Falsified Books, Records, or Accounts: Violating Rule 13b2-1 of the Exchange Act
[17 C.F.R. § 240.13b2-1]

55. Paragraphs 1 through 48 are realleged and incorporated by reference herein.
56. Knapp, by engaging in the conduct described above, directly or indirectly,
falsified or caused to be falsified OCZ’s books, records, and accounts subject to
Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)].
57. By engaging in the conduct described above, Knapp violated, and unless
restrained and enjoined, will in the future violate Rule 13b2-1 of the Exchange Act [ 17 C.F.R.
§ 240.13b2-1]  .
FOURTH CLAIM FOR RELIEF
False Certifications: Violating Rule 13a-14 of the Exchange Act
[17 C.F.R. § 240.13a-14]

58. Paragraphs 1 through 48 are realleged and incorporated by reference herein.
59. Knapp falsely certified in OCZ’s quarterly reports for the period ending
August 31, 2010 through the period ending May 31, 2012 and in OCZ’s annual reports for 2011
and 2012 that he reviewed each of the reports and that he designed internal control over financial
reporting, or caused such internal control over financial reporting to be designed under his
supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with GAAP.

SEC v. Knapp
Complaint
60. By engaging in the conduct described above, Knapp violated, and unless
restrained and enjoined, will in the future violate Rule 13a-14 of the Exchange Act [ 17 C.F.R.
§ 240.13a-14].
FIFTH CLAIM FOR RELIEF
Reporting Violations: Aiding and Abetting OCZ’s Violations of Section 13(a) and
Rules 12b-20, 13a-1. 13a-11 and 13a-13 of the Exchange Act
[15 U.S.C. § 78m(a) and 17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11 and
240.13a-13]
61. Paragraphs 1 through 48 are realleged and incorporated by reference herein.
62. OCZ violated Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)], and
Rules 12b-20, 13a-1, and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1 and
240.13a-13], by filing with the Commission materially false and misleading periodic reports,
including annual and quarterly reports on Forms 10-K and 10-Q from the period ending
August 31, 2010 through the period ending May 31, 2012.  OCZ also violated Rule 13a-11 of the
Exchange Act [ 17 C.F.R. § 240.13a-11], by filing with the Commission false and misleading
current reports on Forms 8-  K reporting false and misleading financial results for the period
ending August 31, 2010 through the period ending May 31, 2012.
63. Knapp, by engaging in the conduct described above, knowingly or recklessly
provided substantial assistance to OCZ’s violation of Section 13(a) of the Exchange Act [15
U.S.C. § 78m(a)], and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder [17 C.F.R. §§
240.12b-20, 240.13a-1, 240.13a-11 and 240.13a-13].
64. By engaging in the conduct described above,  and pursuant to Section 20(e) of the
Exchange Act [15 U.S.C. § 78t(e)], Knapp aided and abetted OCZ’s violations, and unless
restrained and enjoined, will in the future aid and abet violations of Section 13(a) of the

SEC v. Knapp
Complaint
Exchange Act [15 U.S.C. § 78m(a)], and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder
[17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11 and 240.13a-13].
SIXTH CLAIM FOR RELIEF

Internal Controls / Recordkeeping Violations: Aiding and Abetting OCZ’s
Violations of Sections 13(b)(2)(A) and (B) of the Exchange Act
[15 U.S.C. §§ 78m(b)(2)(A) and (B)]

65. Paragraphs 1 through 48 are realleged and incorporated by reference herein.
66. OCZ violated Section 13(b)(2)(A) of the Exchange Act [15 U.S.C.
§ 78m(b)(2)(A)], by failing to make or keep books, records,  and accounts that in reasonable
detail accurately and fairly reflected its transactions and disposition of its assets.  OCZ violated
Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)], by failing to devise and
maintain a system of internal accounting controls sufficient to provide reasonable assurances that
transactions were recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain accountability of assets.
67. Knapp, by engaging in the conduct alleged above, knowingly or recklessly
provided substantial assistance to OCZ’s violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of
the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)].
68. By engaging in the conduct described above,  and pursuant to Section 20(e) of the
Exchange Act [15 U.S.C. § 78t(e)], Knapp aided and abetted OCZ’s violations, and unless
restrained and enjoined, will in the future aid and abet violations of Sections 13(b)(2)(A) and
13(b)(2)(B) of the Exchange Act [ 15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)].

SEC v. Knapp
Complaint
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court:
A. Permanently enjoin Knapp from (i) violating Sections 17(a)(2) and (3) of the
Securities Act [ 15 U.S.C. § 77q(a)(2) and (3)], Section 13(b)(5) of the Exchange Act [15 U.S.C.
§ 78m(b)(5)], and Exchange Act Rules 13a-14 [17 C.F.R. § 240.13a-14] and 13b2-1 [17 C.F.R.
§ 240.13b2-1]; and (ii) aiding and abetting violations of Exchange Act Sections 13(a),
13(b)(2)(A) and 13(b)(2)(B) [15 U.S.C. §§ 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B)] and
Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1,
240.13a-11 and 240.13a-13];
B. Order that Knapp disgorge his ill-gotten gains obtained as a result of the conduct
alleged in this Complaint, with prejudgment interest;
C. Order that Knapp pay civil money penalties pursuant to Section 20(d) of the
Securities Act [15 U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)]
in an amount to be determined by the Court;
D. Order that Knapp be permanently prohibited from acting as an officer or director
of any issuer that has a class of securities registered pursuant to Exchange Act Section 12
[15 U.S.C. § 78l], or that is required to file reports pursuant to Exchange Act Section 15(d)
[15 U.S.C. § 78o(d)]; and

SEC v. Knapp
Complaint
E. Retain jurisdiction of this action in accordance with the principles of equity and
the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders
and decrees that may be entered, or to entertain any suitable application or motion for additional
relief within the jurisdiction of this Court.

Date:   October 6, 2015    /s/ Kevin Lombardi________________________
      Kevin Lombardi, Trial Attorney
      District of Columbia Bar No. 474114
      Division of Enforcement
      Securities and Exchange Commission
      100 F Street, N.E.
      Washington, D.C. 20549
      Tel:  (202) 551-8753
      Fax: (202) 772-9292
      Email: [email protected]

Of Counsel:
Lisa Weinstein Deitch
California Bar No. 137492
Ian R. Dattner
New York Bar No. 4411187
Division of Enforcement
Securities and Exchange Commission

- 1 - SEC v. Knapp 
Complaint 

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KEVIN C. LOMBARDI (DC BAR NO. 474114) ([email protected]) 
IAN R. DATTNER (NY BAR NO. 4411187) ([email protected]) 
LISA WEINSTEIN DEITCH (CA BAR NO. 137492) ([email protected]) 

 
Attorneys for Plaintiff 
SECURITIES AND EXCHANGE COMMISSION 
100 F Street, NE 
Washington, DC 20549 
Telephone:  (202) 551-8753 (Lombardi) 
Facsimile:  (202) 772-9291 (Lombardi) 

 
 
 
 

UNITED STATES DISTRICT COURT 
 

NORTHERN DISTRICT OF CALIFORNIA 
 

SAN JOSE DIVISION 
 
 

 
 The Securities and Exchange Commission (“Commission”) alleges as follows for its 

complaint against defendant Arthur F. Knapp, Jr. (“Knapp”):  

SUMMARY OF ALLEGATIONS 

1. This case arises out of accounting, disclosure and internal accounting controls 

failures from at least June 2010 through July 2012 by Knapp, the former Chief Financial Officer 

(“CFO”) of OCZ Technology Group, Inc. (“OCZ”), a now-bankrupt seller of computer memory 

storage and power supply devices.   

SECURITIES AND EXCHANGE COMMISSION, 
 
  Plaintiff, 
 
 v. 
 
ARTHUR F. KNAPP, JR., 
 
  Defendant. 
 

 
 
 
COMPLAINT 

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2. Knapp instituted or maintained several policies and practices that caused OCZ to 

record transactions in a manner that was not in accordance with U.S. Generally Accepted 

Accounting Principles (“GAAP”) and caused OCZ to report materially inflated revenues and/or 

gross profits.  These policies included (1) reclassifying costs of goods sold as research and 

development expenses, without sufficient basis to do so; (2) failing to capitalize labor and 

overhead costs in OCZ’s inventory costs; (3) recognizing revenues upon product shipment, 

rather than upon delivery of the product to OCZ’s customers; and (4) understating OCZ’s 

accruals for product returns. 

3. 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.  OCZ had put a program in place, called “customer 

based programs” or “CBPs,” through which OCZ characterized credits given to customers as 

marketing expenses.  Although Knapp knew the criteria that had to be satisfied in order to 

classify the expenses as marketing under GAAP, Knapp failed to put controls in place to ensure 

the criteria were met.  As a result, OCZ mischaracterized sales discounts, which should have 

been reported as revenue reductions, as CBPs, which were improperly reported as marketing 

expenses.  As CBP expenses grew to over 5% of revenues and Knapp received information 

concerning potentially serious problems with OCZ’s accounting for the programs, he failed to 

adequately address these issues.   

4. As a result of the accounting errors described above and other accounting errors, 

in October 2013, OCZ restated its financial statements to decrease previously reported revenues 

and gross profits by over $100 million from the second fiscal quarter of 2011 through the first 

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Complaint 

fiscal quarter of 20131 — a nearly 20% reduction in previously reported revenues and a 

significant reduction in previously reported gross profits.   

5. Knapp received profits from the sale of OCZ’s stock and received a bonus during 

the period when OCZ’s financial results were improperly inflated in public filings, which he 

signed.  

6. By engaging in the conduct described in this Complaint, Knapp violated the anti-

fraud provisions of Sections 17(a)(2) and (3) of the Securities Act of 1933 (“Securities Act”) 

[15 U.S.C. §§ 77q(a)(2) & (3)]; the internal controls provisions of Section 13(b)(5) of the Securities 

Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78m(b)(5)] and Exchange Act Rule 

13b2-1 [17 C.F.R. § 240.13b2-1]; the certification provision of Exchange Act Rule 13a-14 

[17 C.F.R. § 240.13a-14]; and aided and abetted OCZ’s violations of the reporting, books and 

records, and internal controls provisions of Sections 13(a) and 13(b)(2)(A) and 13(b)(2)(B) of the 

Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Exchange Act Rules 

12b-20, 13a-1, 13a-11, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11 and 

240.13a-13]. 

7. The Commission seeks an order enjoining Knapp from future violations of the 

above provisions, requiring him to disgorge his ill-gotten gains with prejudgment interest and 

pay appropriate civil money penalties, and imposing upon him an officer and director bar.   

                                                           
1  OCZ’s fiscal year ended at the end of the month of February.  Accordingly, the second 
fiscal quarter of 2011 consisted of the three months ending August 31, 2010, and the first fiscal 
quarter of 2013 consisted of the three months ending May 31, 2012. 

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JURISDICTION AND VENUE 

8. This Court has jurisdiction over this action pursuant to Sections 20 and 22 of the 

Securities Act [15 U.S.C. §§ 77t and 77v] and Sections 21 and 27 of the Exchange Act 

[15 U.S.C. §§ 78u and 78aa]. 

9. Venue is proper in this judicial district pursuant to Section 22 of the Securities 

Act [15 U.S.C. § 77v] and Section 27 of the Exchange Act [15 U.S.C. § 78aa] because certain of 

the acts and omissions constituting violations alleged herein occurred in this judicial district. 

10. Knapp, directly and indirectly, made use of the mails and of the means and 

instrumentalities of interstate commerce in connection with the transactions, acts, practices, and 

courses of business described in this Complaint. 

11. Intradistrict Assignment.  Assignment to the San Jose Division is appropriate 

pursuant to Local Civil Rules 3-2(c) and 3-2(e) because a substantial part of the events which 

give rise to the claim occurred in the County of Santa Clara. 

DEFENDANT 

12. Arthur Knapp, age 66, was CFO of OCZ from November 2005 through 

March 2009 and from October 2010 through March 2013.  From March 2009 until October 

2010, Knapp was OCZ’s Vice President of Finance.  Prior to joining OCZ, Knapp served as the 

CFO of three other publicly-traded technology companies and, prior to that, spent ten years in 

public accounting.  Knapp was a licensed Certified Public Accountant in Pennsylvania but 

allowed that license to lapse in approximately 1980.  Knapp resides in San Jose, California. 

RELEVANT ENTITY 

13. OCZ was a Delaware corporation formed in 2002 that was headquartered in San 

Jose, California.  OCZ sold computer memory storage and power supply devices primarily to 

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distributors, e-tailers, and original equipment manufacturers.  Shares of OCZ’s stock traded on 

the AIM Market of the London Stock Exchange plc (“AIM”) from June 2006 through 

April 2009.  OCZ’s common stock was traded on the OTCBB from February 10, 2010 to 

April 22, 2010, when it began trading on the NASDAQ Capital Market.  From 2010 through 

2012, OCZ raised over $200 million from the sales of its shares to investors.  OCZ filed for 

bankruptcy in December 2013.  On February 24, 2014, OCZ’s common stock was de-listed from 

NASDAQ.  On April 16, 2015, the Commission issued an Order Instituting Proceedings, Making 

Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities 

Exchange Act of 1934.  OCZ has liquidated its assets and is no longer operating. 

FACTS 

Overview 

14. OCZ was founded in 2002 and engaged in a number of computer-related 

businesses since its founding.  From approximately 2009 through its dissolution, OCZ primarily 

focused upon selling solid state drives (“SSDs”), a new generation of computer storage drives 

that OCZ promoted as being superior to traditional hard drives.  OCZ sought to capitalize upon 

the expected growth of the SSD market.   

15. Statements made to investors in certain filings with the Commission, which were 

signed by Knapp, emphasized OCZ’s revenue growth and gross margin improvements.  OCZ 

provided guidance concerning revenues and gross margins, and securities analysts focused on 

these metrics.   

16. In late 2011, OCZ began negotiating with another technology company about the 

possible sale of OCZ.  Revenue growth and gross margin improvements were important metrics 

to the potential acquiring company.  Negotiations temporarily ceased, but started once again in 

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the Spring of 2012.  In June 2012, OCZ’s Chief Executive Officer (“CEO”) expressed in an 

email to Knapp concerns about the acquiring company’s focus on revenues and gross profits.  

The CEO stated, “[i]f we don’t have numbers that look reasonable on a high revenue raise and 

good Gross profit margins for q1 we will be lucky to trade over cash value and I am sure they 

will withdraw their offer completely.”   

17. The merger discussions fell apart in mid-2012.  Shortly thereafter, certain of the 

improper accounting practices, which permitted OCZ to report artificially high revenue and gross 

profit growth from 2011 through 2013, came to light.  OCZ’s stock price thereafter plummeted. 

18. In October 2013, OCZ issued a restatement of its financial results.  As reflected in 

the below table, in the period from the second quarter of fiscal 2011 through the first quarter of 

fiscal 2013, OCZ reduced revenues by over $102 million, reducing revenues by more than 48% 

in the quarter ending May 31, 2012:  

 

19. OCZ’s reduction of its gross profits from the second quarter of fiscal 2011 as part 

of the restatement was even more dramatic, reducing gross profits by nearly $120 million from 

the second quarter of fiscal 2011 through the first quarter of fiscal 2013 as summarized in the 

following table:    

Net Revenues (000s)   

Quarter Ending As Filed Change Restatement % Overstated
8/31/2010 38,045       (3,224)                34,821            9.3%

11/30/2010 53,222       (622)                    52,600            1.2%
2/28/2011 64,566       (5,586)                58,980            9.5%
5/31/2011 73,794       (9,826)                63,968            15.4%
8/31/2011 78,454       (2,058)                76,396            2.7%

11/30/2011 103,084     (15,424)              87,660            17.6%
2/29/2012 110,442     (28,306)              82,136            34.5%
5/31/2012 113,620     (37,128)              76,492            48.5%

Totals 635,227     (102,174)            533,053         19.2%

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20. In early December 2013, OCZ filed for bankruptcy protection.  It has since 

liquidated all of its assets and is no longer operating.   

21. As detailed further below, Knapp was responsible for a number of the issues that 

were restated and that resulted in OCZ’s reporting materially inflated revenues and gross profits 

to investors.  

OCZ’s Failure to Capitalize Labor and Overhead in Inventory Costs 

22. Knapp instituted a policy that caused OCZ to improperly exclude labor and 

overhead costs in valuing inventory.   

23. Rather than capitalize labor and overhead in inventory costs, and then expense 

those costs as part of costs of goods sold (“COGS”) when OCZ sold the inventory, Knapp 

expensed the labor and overhead costs as incurred and recorded them as operating expenses (i.e., 

“below” the gross profit line).   

24. GAAP provides that “the primary basis of accounting for inventories is cost . . . 

cost means . . . the sum of the applicable expenditures and charges directly or indirectly incurred 

in bringing an article to its existing condition and location.  It is understood to mean acquisition 

Gross Profit (000s)  

Quarter Ending As Filed Change Restatement
8/31/2010 1,620           (3,372)           (1,752)            

11/30/2010 7,661           (4,310)           3,351              
2/28/2011 10,709         (4,940)           5,769              
5/31/2011 14,744         (9,135)           5,609              
8/31/2011 16,931         (10,104)         6,827              

11/30/2011 23,175         (22,164)         1,011              
2/29/2012 27,586         (28,823)         (1,237)            
5/31/2012 28,431         (36,836)         (8,405)            

Totals 130,857      (119,684)      11,173            

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- 8 - SEC v. Knapp 
Complaint 

and production cost . . .”  See Accounting Standards Codification (“ASC”) 330-10-30.  Knapp 

knew or was reckless in not knowing that OCZ’s failure to capitalize labor and overhead did not 

comply with GAAP.   

25. As a result of the failure to capitalize labor and overhead, OCZ materially 

understated COGS and materially overstated gross profits, in its books and records and on its 

financial statements from the second quarter of fiscal 2011 through the first quarter of fiscal 

2013.  As part of the restatement, OCZ reclassified the expenses, resulting in a reduction in gross 

profits on a quarterly basis of between 8.6% and 86.9%. 

OCZ’s Misclassification of Cost of Goods Sold as Research and Development Expenses 

26. Knapp improperly reclassified expenses from COGS to research and development 

(“R&D”) expenses.  These reclassifications caused gross profits to be inflated because costs that 

should have been included in COGS instead were recorded as part of operating expenses.   

27. The reclassified R&D expenses had been incurred to produce goods that OCZ 

later sold to its customers.  Accordingly, such costs should have been included within COGS 

under GAAP.  Knapp knew, was reckless in not knowing, or should have known that the 

reclassifications were inconsistent with GAAP. 

28. Knapp’s reclassifications allowed OCZ to report higher gross margins in the first 

quarter of fiscal 2013.   

29. As a result of the reclassifications, OCZ materially understated its COGS and 

overstated its gross profits by approximately 23.2% in its books and records and in financial 

statements filed with the Commission in the first quarter of fiscal 2013.  

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OCZ’s Premature Recognition of Revenues 

30. Under Knapp’s direction, OCZ’s practice was to recognize revenue at the time of 

shipment of its products, even though its shipping terms with most customers provided that OCZ 

held title to those products until the customer took delivery.   

31. OCZ’s revenue recognition practice was inconsistent with OCZ’s shipping terms 

and GAAP, as OCZ had not earned the revenue until the product was delivered.   

32. Knapp knew, was reckless in not knowing, or should have known that OCZ’s 

revenue recognition upon shipment was improper.   

33. In the fourth quarter of fiscal 2012, OCZ’s auditor indicated that OCZ would no 

longer be able to recognize all sales upon shipment.  In response, Knapp instructed OCZ’s sales 

team that customers who ordered goods at the end of subsequent quarters should sign so-called 

“title transfer” letters to purportedly allow OCZ to recognize the revenue upon shipment.  Under 

the terms of these letters, however, OCZ retained ownership and therefore revenue recognition 

on shipment was not appropriate under GAAP.  Moreover, some of the “title transfer” letters 

were signed after the end of the filing period, but were retroactively applied to purportedly 

change the terms of goods sold before the period end. 

34. As a result of the revenue recognition policies, OCZ materially overstated its 

revenues, gross profits, and income in its books and records and in financial statements filed with 

the Commission from the second quarter of fiscal 2011 through the first quarter of fiscal 2013.  

As part of the restatement, OCZ reversed approximately $9.2 million that had been recorded as 

revenue from fiscal 2011 through the first quarter of fiscal 2013 in instances where the goods 

were in transit and title had not passed to the customer.   

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OCZ’s Understatement of Accruals for Product Returns 

35. Under Knapp’s direction, OCZ understated accruals for product returns.   

36. From the second quarter of fiscal 2011 through the second quarter of fiscal 2012, 

rather than recording an accrual against revenues equal to the sales value associated with the 

expected product returns, OCZ recorded an accrual only for the estimated gross margins 

associated with those sales.  As a result, OCZ’s sales return accruals were approximately 20% of 

the value that they should have been.   

37. Knapp knew or was reckless in not knowing that this practice was inconsistent 

with GAAP.  In fact, Knapp sent an email in December 2011 attaching a spreadsheet that 

referred to OCZ’s methodology as “non-GAAP.” 

38. In the third quarter of fiscal 2012, OCZ’s auditor informed OCZ that it should 

change its methodology concerning its product return accruals so that it accrued the sales value 

associated with the expected product return.  Knapp subsequently instituted the change. 

39. As a result of the improper methodology for product return accruals, OCZ 

overstated its revenues, gross profits, and income in its books and records and in financial 

statements filed with the Commission from the second quarter of fiscal 2011 through the second 

quarter of fiscal 2012.  

Mischaracterization of Sales Discounts as Marketing Expenses  

40. In approximately 2010, OCZ’s CEO instituted a program that he termed 

“customer based programs” or “CBPs,” pursuant to which OCZ would purportedly offer short-

term marketing programs to its customers.  Under these marketing programs, OCZ would 

purportedly pay its customers, by crediting the customers’ accounts, for marketing OCZ’s 

products.  The marketing credits, however, did not represent amounts that OCZ would have 

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actually paid in independent transactions for the marketing performed.  CBPs were often nothing 

more than sales discounts, which OCZ should have recorded as reductions to revenue instead of 

marketing expenses.  

41. CBP expenses grew substantially between late 2010 and September 2012.  In 

fiscal 2011, total CBP expenses were approximately $6 million.  In the fourth quarter of fiscal 

2012 alone, CBP expenses totaled over $4.7 million and in the first quarter of fiscal 2013, CBP 

expenses totaled approximately $7.5 million.  By mid-2012, virtually all sales discounts were 

classified as CBPs and reported as marketing expenses, rather than reductions to revenue.   

42. GAAP provides that when a vendor, such as OCZ, provides consideration to a 

customer, including marketing credits, the consideration must be recorded as a reduction of 

revenue unless two criteria are met: (1) the vendor receives an identifiable benefit for 

consideration that is sufficiently separable from the recipient’s purchase of the vendor’s products 

such that the benefit could have been obtained from a party other than the purchaser of the 

product; and (2) the vendor can reasonably estimate the fair value of the benefit.  See ASC 605-

50-45. 

43. OCZ’s accounting for CBPs failed to meet this standard because (a) the purported 

marketing was not separable from customers’ purchase of OCZ goods; and (b) the fair value of 

the purported marketing did not equal the consideration paid to OCZ’s customers.  Indeed, some 

customers that received CBP “credits” performed no marketing in exchange.   

44. Knapp knew the GAAP that applied to marketing programs such as the CBPs.  

However, Knapp did not put adequate policies in place to ensure that OCZ properly recorded 

CBPs as sales discounts and not as marketing expenses.  Although OCZ’s auditor identified the 

lack of accounting policies concerning marketing and incentive programs as a deficiency in June 

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2011 and recommended that “[s]pecific accounting policies and methodology used in 

determining the sales and marketing programs (and related income statement classification) 

should be formally documented and reconciled to the appropriate accounting literature,” Knapp 

failed to implement sufficient accounting policies concerning valuation of the marketing 

activities or to otherwise ensure that CBPs were properly recorded within OCZ’s books and 

records. 

45. Knapp ignored the significant growth in CBP expenses and corresponding 

decrease in sales discounts and other significant red flags indicating that the programs were 

being misused as a means to disguise sales discounts.  For example, in a June 2012 email, Knapp 

was warned that advanced CBP funds promised to customers (for marketing that customers 

would purportedly provide in the future) “appear[ ] as an incentive for current sales” which 

would result in a “[h]uge revenue recognition . . . issue.”  (emphasis added).  Notwithstanding 

these issues, Knapp failed to determine whether OCZ’s financial statements needed to be 

corrected, and he failed to improve OCZ’s internal controls.  

46. Knapp’s failure to put adequate internal accounting controls in place in 

connection with CBPs allowed OCZ to improperly report sales discounts as marketing expenses 

in its filings with the Commission.  Moreover, in the first quarter of fiscal 2013, Knapp knew, 

was reckless in not knowing, or should have known that sales discounts had been 

mischaracterized as CBPs in OCZ’s books and records.  Nevertheless, Knapp signed and 

certified the Form 10-Q for the first quarter of fiscal 2013 ending May 31, 2012, which 

overstated net revenues and gross profits as a result of the mischaracterization.   

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Misrepresentations in Commission Filings  

47. Knapp’s actions, as described above, resulted in material misrepresentations in the 

following OCZ filings with the Commission: 

a. OCZ’s annual reports on Form 10-K for the years 2011 and 2012, each of 

which was signed and certified by Knapp; 

b. OCZ’s quarterly reports on Form 10-Q for the periods ending August 31, 

2010, November 30, 2010, May 31, 2011, August 31, 2011, November 30, 

2011 and May 31, 2012, each of which was signed and certified by Knapp; 

c. OCZ’s current reports on Form 8-K, filed on July 10, 2012, May 1, 2012, 

January 9, 2012, October 5, 2011, July 6, 2011, May 3, 2011, January 10, 

2011 and October 12, 2010, each of which was signed by Knapp; 

d. OCZ’s Form S-8 dated December 22, 2010, which was signed by Knapp, and 

incorporated by reference one or more of the misstated financial statements; 

e. OCZ’s Form S-8 dated October 14, 2011, which was signed by Knapp, and 

incorporated by reference one or more of the misstated financial statements; 

and 

f. OCZ’s Form S-3 dated December 1, 2011, which was signed by Knapp, and 

incorporated by reference one or more of the misstated financial statements. 

48. Knapp also falsely certified in OCZ’s quarterly reports for the period ending 

August 31, 2010 through the period ending May 31, 2012 and in OCZ’s annual reports for 2011 

and 2012 that, he reviewed each of the reports and that he designed internal control over 

financial reporting, or caused such internal control over financial reporting to be designed under 

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Complaint 

his supervision, to provide reasonable assurance regarding the reliability of financial reporting 

and the preparation of financial statements for external purposes in accordance with GAAP.   

FIRST CLAIM FOR RELIEF 

Fraud in the Offer or Sale of Securities: Violating Sections 17(a)(2) and (3) of the Securities 
Act [15 U.S.C. §§ 77q(a)(2) & (3)] 

 
49. Paragraphs 1 through 48 are realleged and incorporated by reference herein. 

50. Knapp, by engaging in the conduct described above, directly or indirectly, in the 

offer or sale of securities by the use of means or instruments of transportation or communication 

in interstate commerce or by the use of the mails: 

a. obtained money or property by means of untrue statements of material fact or 

by omitting to state material facts necessary in order to make the statements 

made, in light of the circumstances under which they were made, not 

misleading; and 

b. engaged in transactions, practices, or courses of business which operated or 

would operate as frauds or deceits upon the purchasers. 

51. By engaging in the conduct described above, Knapp violated, and unless 

restrained and enjoined, will in the future violate, Section 17(a)(2) and (3) of the Securities Act 

[15 U.S.C. §§ 77q(a)(2) & (3)].   

SECOND CLAIM FOR RELIEF 

Failure to Implement Controls: Violating Section 13(b)(5) of the Exchange Act  
[15 U.S.C. § 78m(b)(5)] 

52. Paragraphs 1 through 48 are realleged and incorporated by reference herein. 

53. Knapp, by engaging in the conduct described above, knowingly failed to 

implement a system of internal accounting controls.   

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54. By engaging in the conduct described above, Knapp violated, and unless 

restrained and enjoined, will in the future violate Section 13(b)(5) of the Exchange Act 

[15 U.S.C. § 78m(b)(5)].  

THIRD CLAIM FOR RELIEF 

Falsified Books, Records, or Accounts: Violating Rule 13b2-1 of the Exchange Act  
[17 C.F.R. § 240.13b2-1] 

 
55. Paragraphs 1 through 48 are realleged and incorporated by reference herein. 

56. Knapp, by engaging in the conduct described above, directly or indirectly, 

falsified or caused to be falsified OCZ’s books, records, and accounts subject to 

Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)].  

57. By engaging in the conduct described above, Knapp violated, and unless 

restrained and enjoined, will in the future violate Rule 13b2-1 of the Exchange Act [17 C.F.R. 

§ 240.13b2-1]. 

FOURTH CLAIM FOR RELIEF 

False Certifications: Violating Rule 13a-14 of the Exchange Act  
[17 C.F.R. § 240.13a-14] 

 
58. Paragraphs 1 through 48 are realleged and incorporated by reference herein. 

59. Knapp falsely certified in OCZ’s quarterly reports for the period ending 

August 31, 2010 through the period ending May 31, 2012 and in OCZ’s annual reports for 2011 

and 2012 that he reviewed each of the reports and that he designed internal control over financial 

reporting, or caused such internal control over financial reporting to be designed under his 

supervision, to provide reasonable assurance regarding the reliability of financial reporting and 

the preparation of financial statements for external purposes in accordance with GAAP.     

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60. By engaging in the conduct described above, Knapp violated, and unless 

restrained and enjoined, will in the future violate Rule 13a-14 of the Exchange Act [17 C.F.R. 

§ 240.13a-14]. 

FIFTH CLAIM FOR RELIEF 

Reporting Violations: Aiding and Abetting OCZ’s Violations of Section 13(a) and 
Rules 12b-20, 13a-1. 13a-11 and 13a-13 of the Exchange Act  

[15 U.S.C. § 78m(a) and 17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11 and 
240.13a-13] 

61. Paragraphs 1 through 48 are realleged and incorporated by reference herein.  

62. OCZ violated Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)], and 

Rules 12b-20, 13a-1, and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1 and 

240.13a-13], by filing with the Commission materially false and misleading periodic reports, 

including annual and quarterly reports on Forms 10-K and 10-Q from the period ending 

August 31, 2010 through the period ending May 31, 2012.  OCZ also violated Rule 13a-11 of the 

Exchange Act [17 C.F.R. § 240.13a-11], by filing with the Commission false and misleading 

current reports on Forms 8-K reporting false and misleading financial results for the period 

ending August 31, 2010 through the period ending May 31, 2012. 

63. Knapp, by engaging in the conduct described above, knowingly or recklessly 

provided substantial assistance to OCZ’s violation of Section 13(a) of the Exchange Act [15 

U.S.C. § 78m(a)], and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder [17 C.F.R. §§ 

240.12b-20, 240.13a-1, 240.13a-11 and 240.13a-13]. 

64. By engaging in the conduct described above, and pursuant to Section 20(e) of the 

Exchange Act [15 U.S.C. § 78t(e)], Knapp aided and abetted OCZ’s violations, and unless 

restrained and enjoined, will in the future aid and abet violations of Section 13(a) of the 

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- 17 - SEC v. Knapp 
Complaint 

Exchange Act [15 U.S.C. § 78m(a)], and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder 

[17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11 and 240.13a-13]. 

SIXTH CLAIM FOR RELIEF 
 

Internal Controls / Recordkeeping Violations: Aiding and Abetting OCZ’s 
Violations of Sections 13(b)(2)(A) and (B) of the Exchange Act  

[15 U.S.C. §§ 78m(b)(2)(A) and (B)] 
 

65. Paragraphs 1 through 48 are realleged and incorporated by reference herein. 

66. OCZ violated Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. 

§ 78m(b)(2)(A)], by failing to make or keep books, records, and accounts that in reasonable 

detail accurately and fairly reflected its transactions and disposition of its assets.  OCZ violated 

Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)], by failing to devise and 

maintain a system of internal accounting controls sufficient to provide reasonable assurances that 

transactions were recorded as necessary to permit preparation of financial statements in 

conformity with GAAP and to maintain accountability of assets. 

67. Knapp, by engaging in the conduct alleged above, knowingly or recklessly 

provided substantial assistance to OCZ’s violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of 

the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)]. 

68. By engaging in the conduct described above, and pursuant to Section 20(e) of the 

Exchange Act [15 U.S.C. § 78t(e)], Knapp aided and abetted OCZ’s violations, and unless 

restrained and enjoined, will in the future aid and abet violations of Sections 13(b)(2)(A) and 

13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B)]. 

  

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- 18 - SEC v. Knapp 
Complaint 

PRAYER FOR RELIEF 

WHEREFORE, the Commission respectfully requests that the Court: 

A. Permanently enjoin Knapp from (i) violating Sections 17(a)(2) and (3) of the 

Securities Act [15 U.S.C. § 77q(a)(2) and (3)], Section 13(b)(5) of the Exchange Act [15 U.S.C. 

§ 78m(b)(5)], and Exchange Act Rules 13a-14 [17 C.F.R. § 240.13a-14] and 13b2-1 [17 C.F.R. 

§ 240.13b2-1]; and (ii) aiding and abetting violations of Exchange Act Sections 13(a), 

13(b)(2)(A) and 13(b)(2)(B) [15 U.S.C. §§ 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B)] and 

Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13 [17 C.F.R. §§ 240.12b-20, 240.13a-1, 

240.13a-11 and 240.13a-13];  

B. Order that Knapp disgorge his ill-gotten gains obtained as a result of the conduct 

alleged in this Complaint, with prejudgment interest; 

C. Order that Knapp pay civil money penalties pursuant to Section 20(d) of the 

Securities Act [15 U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)] 

in an amount to be determined by the Court;  

D. Order that Knapp be permanently prohibited from acting as an officer or director 

of any issuer that has a class of securities registered pursuant to Exchange Act Section 12 

[15 U.S.C. § 78l], or that is required to file reports pursuant to Exchange Act Section 15(d) 

[15 U.S.C. § 78o(d)]; and 

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- 19 - SEC v. Knapp 
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E. Retain jurisdiction of this action in accordance with the principles of equity and 

the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders 

and decrees that may be entered, or to entertain any suitable application or motion for additional 

relief within the jurisdiction of this Court. 

 

Date: October 6, 2015    /s/ Kevin Lombardi________________________ 
      Kevin Lombardi, Trial Attorney 
      District of Columbia Bar No. 474114 
      Division of Enforcement 
      Securities and Exchange Commission 
      100 F Street, N.E.   
      Washington, D.C. 20549 
      Tel:  (202) 551-8753 
      Fax: (202) 772-9292     
      Email: [email protected] 
 
Of Counsel: 
Lisa Weinstein Deitch  
California Bar No. 137492 
Ian R. Dattner  
New York Bar No. 4411187 
Division of Enforcement 
Securities and Exchange Commission 

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