This is surprisingly not true.
This Engadget Article explains.
😱
For complete peace of mind for your data use:
Settings > General > Reset > Erase All Content and Settings
This method wipes the actual flash drive completely, leaving only the firmware in tact.
'Restoring' just re-flashes the flash drive with a new copy of Apple's iPod firmware and apparently leaves the data in tact.
R-Fly