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U.S. Securities and Exchange Commission

Before the


Release No. 39472 / December 22, 1997


Release No. 997 / December 22, 1997


File No. 3-9515

In the Matter of




The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Presstek, Inc. ("Presstek" or the "Respondent") to determine whether Presstek violated Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder.


In anticipation of the institution of these administrative proceedings, the Respondent has submitted an Offer of Settlement for the purpose of disposing of the issues raised in these proceedings. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, the Respondent, without admitting or denying the findings set forth herein, except that it admits to the jurisdiction of the Commission over it and over the subject matter of these proceedings, consents to the entry of the findings and to the issuance of this Order Instituting Proceedings ("Order").


On the basis of this Order and the Respondent's Offer of Settlement, the Commission finds the following 1 :


Presstek, a Delaware corporation with headquarters in Hudson, New Hampshire, develops and sells products and technology used in the graphic arts industry. Its revenue is derived primarily from sales of printing press equipment and technology to Heidelberger Druckmaschinen A.G. ("Heidelberg"), a German printing press manufacturer. Equipment manufactured by Presstek is installed in Heidelberg's presses, which are then sold to commercial printers. As of February 28, 1997, Presstek had 15,393,996 shares of common stock outstanding that were registered with the Commission pursuant to Section 12(g) of the Exchange Act, and listed for trading on NASDAQ. 2



From 1994 through 1996, Presstek, through its own statements and its widespread distribution of third-party reports, published false and misleading information concerning its sales and business prospects. Specifically, it issued a materially false and misleading press release; distributed a highly promotional financial newsletter published by others that included earnings projections that materially exceeded Presstek's own nonpublic forecasts; its senior management reviewed, edited, and then distributed a research analyst's report which materially overstated Presstek's sales and earnings outlook; and filed periodic reports with the Commission that did not accurately disclose adverse developments in its business relationship with Heidelberg.

Many of these false and misleading disclosures occurred in November 1995, when investors had taken a large short position in Presstek in hopes that the price of the company's stock would fall, and when Presstek's business with Heidelberg had encountered difficulties. Those difficulties centered on technical problems that emerged in the production of the Quickmaster DI ("Quickmaster"), a press manufactured by Heidelberg that incorporated Presstek's technology and equipment. The Quickmaster had been introduced to considerable apparent customer interest in May 1995. By the beginning of November, however, it had been decided that, because of the technical difficulties, commercial production of the Quickmaster would be delayed, and that as a result the number of shipments of Presstek's equipment to Heidelberg would be reduced for 1996.

Nevertheless, in a press release issued on November 7, 1995, Presstek touted the market acceptance of the Quickmaster. Citing "industry sources," Presstek falsely stated that Heidelberg had "sold" more than 500 Quickmaster printing presses. 3 The press release did not disclose the existence of the technical problems that had delayed commercial production, or that Heidelberg had informed Presstek that it should reduce its shipments of systems for the Quickmaster. Nor did it disclose the concomitant delay of sales to purchasers of Quickmaster presses of Presstek's high profit margin consumable products. On November 7, the day of the press release, Presstek's stock closed up $5 per share, a gain of ten percent. Presstek's Form 10-K for 1995, and its Forms 10-Q for the first three quarters of 1996, similarly failed to include in the Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") section the necessary discussion of the material impact of the production delay on its operating results.

Later in November 1995, Robert Howard ("Howard"), Presstek's founder and Chairman, reviewed the draft of a research analyst's report on the company that substantially overstated Presstek's sales and earnings expectations. For example, the report projected sales of another Presstek product, the Pearlsetter, which were materially greater than Presstek's internal projections. Consequently, the report also overstated projected sales of consumable plates that would be used by Pearlsetter customers. Although Howard edited the report before it was published, he did not correct the erroneous Pearlsetter sales projections. Nevertheless, Presstek distributed the report for more than six months to investors without disclaimer. In doing so, Presstek adopted projections which were materially inconsistent with its nonpublic internal projections. On November 27, the first full day of trading following the publication of the analyst's report, Presstek stock closed up $10, a gain of 15 percent.

Earlier, in 1994 and 1995, Presstek distributed copies of a third party's financial newsletter that contained earnings projections that management knew, or was reckless in not knowing, far exceeded Presstek's own internal forecasts. Through such distribution, Presstek implicitly adopted the newsletter's erroneous forecasts.


a.Presstek's Products

Presstek manufactures a system installed on certain Heidelberg presses that permits images to be transferred by laser directly from computer to plates mounted on the printing press. According to Presstek, this digital imaging technology is an advance over the conventional method of imaging printing plates, which involves a messy, time-consuming, chemical process similar to that involved in developing a photograph.

Presstek sells its system to Heidelberg, and Heidelberg installs it on presses that Heidelberg sells to end-users. In May 1995, at a graphic arts trade show known as Drupa, Heidelberg unveiled its newest press, the Quickmaster, a four-color press. Under its contractual agreement with Heidelberg, Presstek receives payment from Heidelberg for each system it sells to Heidelberg, and also receives a royalty for each printing press sold by Heidelberg containing the Presstek system. Presstek disclosed in its 1995 Form 10-K that it "relies on Heidelberg to generate substantially all of its revenues."

Presstek also sells its technology in the form of a stand-alone laser imaging unit known as the "Pearlsetter." The Pearlsetter uses "computer-to-plate" technology to create images on printing plates off-press. Once imaging is complete, the plates can be used on printing presses. The Pearlsetter is offered through distributors to commercial printers, but its sales have generated far less revenue than have the Quickmaster systems. 4

Presstek also sells the printing press plates used by the Quickmaster and Pearlsetter. The plates are not reusable and, therefore, new plates are required for each printing job. Presstek's revenues from such consumable plate sales thus depend on the number of Quickmaster presses and Pearlsetters in use. The more printing presses and Pearlsetters operating in the field, the more plate sales for Presstek. The inverse, of course, is that poor sales or delays in press or Pearlsetter shipments will result in fewer plate sales.

b.Presstek's Volatile Stock Price

Presstek's stock price has been highly volatile, and has attracted significant short interest. Indeed, Presstek has been the subject of a public tug-of-war between investors with long and short positions in Presstek stock. A financial newsletter known as the Cabot Market Letter has aggressively touted Presstek since early 1994, calling it the "Stock of the Decade," the "Son of Xerox, a stock that increased 100-fold in an eight-year period," and the "best stock we have ever uncovered in our lifetime of searching for super-growth stocks." 5

In contrast, in an apparent effort to depress the price of Presstek, persons have spread negative and sometimes false rumors about Presstek in the financial press and over the Internet. 6

Presstek disseminated many of the false and misleading statements at issue at the beginning of a period during which Presstek's stock price increased significantly, and the aggregate short interest in Presstek's stock declined. The price of Presstek rose from $45 per share on November 1, 1995, to $200 per share on May 20, 1996 -- or 1,111 times its 1995 earnings of $.18 per share. 7 During that same time the total short position steadily fell, from approximately four million shares (27 percent of the total outstanding shares) in November 1995 to approximately 2.65 million shares (17 percent of the outstanding shares) in May 1996.

3.Presstek Disseminates Cabot Newsletters

Presstek distributed several thousand copies of certain editions of the Cabot Market Letter that promoted Presstek stock during 1994 and early 1995. Three of the Cabot letters named Presstek as its "Stock of the Month." One such letter, from April 1994, predicted 1994 earnings of $1.00 per share. Another letter, from April 1995, projected 1995 earnings of $1.10 per share. Each forecast far exceeded Presstek's internal projections at the time. In contrast to a January 1995 Cabot letter, which stated that Presstek could earn $.90 per share from plate sales once the "first 100 machines" using Presstek technology were in the field, a Presstek internal projection prepared four months earlier, which assumed more than 100 such presses in the field by 1996, projected total earnings from all sales of only $.23 per share for that year. Notwithstanding these disparities, Howard directed Presstek to distribute the Cabot letters as part of Presstek's investor packet and to persons on its mailing lists.

4.Heidelberg Postpones Its Initial Shipments

of Quickmaster Presses, And Reduces

Presstek's Production Rate for Quickmaster Systems

Heidelberg introduced the Quickmaster press, employing Presstek's laser imaging system, at the Drupa trade show in May 1995. The introduction attracted positive trade press comment and customer response. Heidelberg received approximately 300 orders for the press during and immediately after the trade show. Heidelberg had commenced "beta" testing of the Quickmaster, and as of the Drupa show planned to begin "serial production" of presses for shipment to customers by the last quarter of 1995. 8 The beta testers, however, reported serious problems with beta test models of the Quickmaster, including scratching of the plate surface when it was cleaned by a mechanical device on the press, problems with the computer software that directed the lasers, and deterioration of laser diodes due to humidity penetration of supposedly air-tight seals. On September 28, 1995, Heidelberg management informed Howard it had decided in an emergency session to postpone shipment of Quickmaster serial production presses until the problems could be fixed. Heidelberg also informed Howard that in view of the large number of orders on hand and positive market response to the Quickmaster, it had decided to expand its production capacity while the problems with the product were being resolved.

Management for Presstek and Heidelberg addressed the problems posed by the production postponement during meetings on October 30-31, 1995, during which they specifically discussed reducing Presstek's rate-of-production for Quickmaster systems for 1996 by 25 percent. By November 9, 1995, the parties agreed that Presstek, which had been shipping 20 Quickmaster systems per month to Heidelberg, would reduce shipments to 15 systems per month beginning in early 1996. Prior to this reduction, Presstek had internally forecast an increase in its shipment of systems to Heidelberg during 1996 to 30 systems per month.

Such a schedule change threatened seriously to disrupt Presstek's operations. Few Pearlsetters had been ordered, so the great majority of Presstek's manufacturing activity was dedicated to building Quickmaster systems for delivery to Heidelberg. A delay in press manufacturing and consequent cut in system shipments posed the immediate prospect of substantially reduced revenues for Presstek. Delay in putting the press in the field also meant sales of plates would be delayed. Even before he learned in September 1995 of Heidelberg's postponement, Howard had complained about Heidelberg's timetable for beginning serial production shipments. In an August 4, 1995 letter to Heidelberg, for example, Howard stated that delays had "eliminated near $1 million in 1995 plate sales which we expected."

Presstek calculated that Heidelberg's delay in shipping Quickmaster presses and its reduction of Presstek's shipment rate would reduce Presstek's 1996 projected earnings by approximately $7-9 million, or approximately $.45 to $.58 per share. Heidelberg agreed to provide monetary concessions to Presstek to help the company maintain capacity and revenues during the production delay. 9 This assistance included $7 million for "engineering services" to be paid Presstek in monthly installments throughout 1996. Although it was referred to in the agreement as payments for "sustaining engineering services," the $7 million payment provision was to compensate Presstek for lost revenue resulting from the Quickmaster schedule change, and not as payment for additional engineering services to be provided by Presstek. In return, Presstek agreed to cap Heidelberg's royalty payment to Presstek at a fixed percentage of the price of each Quickmaster press sold. The companies had previously agreed to increase Presstek's royalty payment for future shipments.

5.Presstek Issues a False and Misleading

Press Release Announcing Sales

Of More Than 500 Quickmasters

Although fully informed of the plate scratching and other problems with the Quickmaster presses, as well as Heidelberg's plans to cut back the delivery schedule of Quickmaster systems and delay production of Quickmasters, Presstek issued a press release on November 7, 1995 ("November 7 release") that falsely claimed over 500 Quickmaster sales and extolled the press's immediate success. The release, drafted by Robert Verrando ("Verrando"), then a Presstek executive vice president, stated in part:

The wide acceptance of the Heidelberg Quickmaster DI, which had its first public showing in Europe in May, and according to industry sources has sold over 500 units, is a harbinger of the growing acceptance of its imaging technology. (Emphasis added.)

Verrando testified that the number "500" signified the number of orders received by Heidelberg, not presses built and shipped by Heidelberg. Although trade journals had reported as industry rumor that Heidelberg had "sold" 500 presses, Presstek management knew those reports were erroneous. In fact, Presstek management knew that Heidelberg had not even built 500 presses, because Presstek had shipped no more than 88 Quickmaster systems to Heidelberg by November 7, 1995. 10

On November 8, 1995, the first full trading day following the November 7 release, Presstek's stock price rose five points to close at $54.50 per share, on volume more than four times that of the previous day.

6.Presstek's Form 10-K for 1995 Includes

an Incomplete and Misleading Disclosure

About the Reduced Quickmaster Schedule

Presstek's 1995 Form 10-K, filed on March 29, 1996, disclosed only the following about the reduced production schedule and related financial concessions:

In November 1995 the Company and Heidleberg 11 agreed to certain other arrangements whereby the Company was provided with incremental engineering revenue, certain price increases, and modifications of the Quickmaster DI royalty billing and payment terms by Heidelberg. These arrangements were made as a result of a schedule change requested by Heidelberg for the PEARL imaging systems manufactured by the Company for Heidelberg. The Company also provided Heidelberg with a fixed royalty rate on the Quickmaster DI. (See Form 10-K at 10.) (Emphasis added.) 12

The Form 10-K did not disclose that the "schedule change" reduced Presstek's production by twenty-five percent. Nor did the filing disclose that the cutback would reduce 1996 production by fifty percent from what Presstek was internally forecasting. The Form 10-K also failed to disclose that Presstek's management believed that the "schedule change" would reduce internally projected earnings by $7-$9 million, or that Heidelberg had demanded the delay because of technical problems. 13

7.Pennsylvania Merchant Group

Issues Favorable Research Report

on Presstek in November 1995

On November 24, 1995, an investment banking firm called Pennsylvania Merchant Group, Ltd. ("PMG") published a research report on Presstek ("PMG Report") that recommended Presstek stock and, in doing so, described Presstek's technology and growth potential in glowing terms.

a.Howard and Verrando Help

Prepare The PMG Report

Verrando and Howard assisted a PMG analyst in preparing the PMG Report. Prior to publication, in November 1995, the analyst visited Presstek and met with Verrando. During their meeting, in response to the PMG analyst's inquiry as to how many Pearlsetters Presstek expected to sell, Verrando said "we'll be lucky if we do a couple hundred" units during 1996.

Consistent with his typical practice, the analyst then provided Howard with a draft of the PMG Report, requesting that he review it for any inaccuracies. On November 20, 1995, Howard gave the analyst numerous handwritten revisions to the draft's narrative portion, and revisions to certain of its revenue and earnings projections. Howard also generated a typed errata sheet identifying his revisions. Some of these changes rendered the PMG Report more consistent with Presstek's internal earnings projections. Others, however, made statements in the report more misleading, and yet other misleading information remained in the report uncorrected by Howard.

Specifically, at least four days before Howard reviewed the draft report, Presstek's controller prepared a revised internal forecast for 1996 that projected the lost revenue that would result from the Quickmaster schedule change. The forecast, generated on or before November 16, 1995, also reflected Presstek's sharply reduced projections for Pearlsetter sales for 1996. Howard typically received a copy of Presstek's internal projections.

Howard's edits of the draft report did not reflect the reduced Pearlsetter sales forecast. As a result of Howard's editing and failure to make corrections, the PMG Report was far more optimistic than Presstek's own 1996 and 1997 internal projections. For example:

o In the draft's narrative, Howard left intact the PMG Report's attribution to "management" of "a few 100" projected Pearlsetter sales for 1996. He attempted to dignify the inaccurate forecast by attributing it to "industry experts." 14 The forecast, which was based on the information Verrando had previously provided, was more than twice Presstek's revised projection of only 90 Pearlsetter sales in 1996.

o In a separate tabular section that projected sales and earnings, Howard revised some Quickmaster sales forecasts, but did not change the projection of 200 Pearlsetter sales for 1996. Howard also failed to correct the projected 1996 Pearlsetter revenues of $26 million (which was based on the sales forecasts and price information provided by Verrando), and which more than doubled Presstek's revised revenue projection of only $10 million. 15

o Howard failed to correct the report's projected 1996 plate revenue of $33.2 million, which contrasted with Presstek's revised forecast of just $8.7 million. The report's plate revenue projections were based, in part, on the erroneous 1996 Pearlsetter sales projections provided by Presstek's management.

o Howard also failed to correct the report's projected 1996 total revenues of $71.4 million (compared to Presstek's revised projection of $52.8 million), and projected total pre-tax profits of $39.5 million (compared to Presstek's revised projection of $12.8 million). 16

On Monday, November 27, 1995 -- the first trading day following the release of the PMG Report -- Presstek's stock price increased nearly fifteen percent to close at $77 per share, on volume nearly nine times greater than the volume the prior trading day.

b.Presstek Distributes the PMG Report

From Late-1995 Through Mid-1996

Despite the fact that the PMG Report included forecasts for 1996 and beyond that were dramatically more optimistic than Presstek's, the company distributed the PMG Report for the next six to seven months to hundreds of investors and persons within the printing and securities industries. Although the PMG Report included some cautionary language expressing the author's uncertainty as to whether Presstek would achieve the projected results, Presstek distributed the report without any disclaimer, thus placing the company's imprimatur on the report and undercutting the reservations included in the report. Presstek distributed the PMG Report, in part, to respond to requests from outsiders for an earnings forecast -- even though the company declined to make public its own forecasts because it believed they were unreliable. 17 Indeed, on several occasions Presstek's board discussed whether to make public the company's internal sales and earnings projections, but unanimously decided against doing so because the company did not believe it could make reliable forecasts. That decision was based, in part, on the fact that Presstek depended heavily on other entities, such as Heidelberg and Presstek's distributors. 18

In May 1996, Presstek's controller again revised the internal projections for 1996 and 1997, and disseminated them to attendees of its May 28, 1996 Board meeting, just minutes before Presstek's annual shareholders meeting. These forecasts further reduced projected revenues and earnings for 1996 and 1997. For example, the projected 1997 earnings per share forecast was lowered from $1.34 to $1.06. Thus, Presstek's updated forecasts diverged even more dramatically from the PMG Report's projections for 1996 and 1997 (which included a projected 1997 earnings per share of $2.42, more than twice what Presstek's management believed was reasonable). Nevertheless, Presstek distributed the PMG Report to the approximately 300 persons at its annual shareholders meeting, at which no Presstek internal projections were disclosed.

Based on conversations with Verrando in June 1996, the PMG analyst revised his analysis of Presstek, substantially reducing the PMG Report's sales projections and acknowledging in a memorandum that the quality of the estimates in his November report was "extremely low." Yet, Presstek persisted in distributing the PMG Report until late June or early July 1996. Presstek eventually ceased distribution after it was obvious the PMG Report had become a focus of the Commission's investigation.


1.Applicable Law

Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit the use of manipulative and deceptive practices in connection with the purchase or sale of a security. Section 13(a) of the Exchange Act requires all issuers with securities registered under Section 12 of the Exchange Act to file such periodic reports as the Commission shall prescribe by its rules and regulations. Rules 13a-1 and 13a-13 require issuers to file annual and quarterly reports, respectively. Inherent in Section 13(a)'s reporting requirement is the requirement that all reports be complete and accurate. A violation of Section 13(a) occurs if annual or quarterly reports contain materially false or misleading information. Moreover, Rule 12b-20 requires that such periodic reports contain, in addition to all expressly required disclosures, such other information as is necessary to ensure that the statements made in the report are not materially misleading. Item 303 of Regulation S-K requires an MD&A section as part of periodic reports filed pursuant to Section 13(a). Item 303 mandates that the MD&A include "information that the registrant believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations." See Item 303(a) of Regulation S-K, 17 C.F.R. § 229.303(a).

2.Liability for False and Misleading

Disclosure in the November 7 release

Presstek violated the antifraud provisions by falsely stating in its November 7 release that Heidelberg "has sold over 500" Quickmasters, when in fact Heidelberg had merely received that many orders. The erroneous reference to 500 presses "sold" not only falsely implied that Presstek had received revenue and royalties for 500 Quickmaster systems, but also created the false impression that there existed a market of at least 500 new purchasers of Presstek printing plates. 19 In addition to its literal falsity, the November 7 release was materially misleading in that it created an optimistic picture of Quickmaster sales at the very time Heidelberg had delayed its initial Quickmaster shipments due to technical problems with the press, which, in turn, reduced Presstek's rate of production for 1996. The false and misleading statements and omissions in the November 7 release were material because they concerned the sale of those products that accounted for nearly all of Presstek's revenue at the time -- Quickmaster systems, plate sales and royalties. Full disclosure of the Quickmaster schedule change and the circumstances surrounding it was necessary to make the November 7 release not misleading.

3.Liability for Inaccurate Projections

And False Statements by Others

a.Entanglement Liability

An issuer is liable for inaccuracies in a research report published by someone else if it "sufficiently entangled itself" with such information to render them attributable to the issuer. Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 163 (2d Cir. 1980). As the Second Circuit stated in Elkind:

We have no doubt that a company may so involve itself in the preparation of reports and projections by outsiders as to assume a duty to correct material errors in those projections. This may occur when officials of the company have, by their actions, made an implied representation that the information they have reviewed is true or at least in accordance with the company's views.

Id.; see also Schaffer v. The Timberland Co., 924 F. Supp. 1298, 1310 (D.N.H. 1996) (liability may attach to an analyst's statements where the defendants "have expressly or impliedly adopted the statements, placed their imprimatur on the statements, or have otherwise entangled themselves with the analysts to a significant degree"); Eisenstadt v. Allen, 1997 U.S. App. LEXIS 9587 at * 45 (9th Cir. April 28, 1997); In re ICN/Viratek Securities Litigation, Fed. Sec. L. Rep. (CCH) ¶99,213 (S.D.N.Y. 1996) (a claim for primary liability under Section 10(b) lies where an issuer reviews an analyst's report before publication and makes some corrections but fails to correct other statements known to be erroneous). Once an analyst's statement is imputed to the defendants, they may be found liable "as if they made the statement themselves or if, at a later time, the defendants 'failed to correct false and misleading information' contained in the statements even though they possess the knowledge to do so." Schaffer, 924 F. Supp. at 1310-11 20.

b.Liability Through Post-Publication

Adoption of Analyst's Reports

An issuer may also be liable for false statements contained in a third-party report if it adopts, expressly or impliedly, the statements after they are published, even if management had no role in preparing the reports. Such adoption occurs "when a company conveys the suggestion that the analysts' forecasts are accurate or at least in accordance with its views." In re Cypress Semiconductors, 891 F. Supp. 1369, 1377 (N.D. Cal. 1995), aff'd sub nom. Eisenstadt v. Allen, 1997 U.S. App. LEXIS 9587 (9th Cir. April 28, 1997).

By distributing misleading projections to investors, an issuer can be held liable for having impliedly adopted such misleading information. See Cypress Semiconductors, 891 F. Supp. at 1377 ("21istributing analysts' reports to potential investors may, depending on the circumstances, amount to an implied representation that the reports are accurate"); see also Strassman v. Fresh Choice, 1995 U.S. Dist. LEXIS 19343 (N.D. Cal. Dec. 7, 1995). Liability for post-publication adoption of third-party reports is distinct from the entanglement theory, which requires some evidence of the defendant's pre-publication involvement with the report. See Schaffer, 924 F. Supp. at 1314, n.15; Strassman v. Fresh Choice, 1995 U.S. Dist. LEXIS 19343 (N.D. Cal. Dec. 7, 1995) (in addition to pre-publication entanglement, issuer may be liable if it ratifies an analyst's report after publication); Cypress Semiconductors, 891 F. Supp. at 1377.

The Commission is mindful that certain judicial decisions addressing liability for third party misstatements do not clearly distinguish between pre-publication entanglement and post-publication adoption theories of liability, and that some decisions suggest that an issuer's pre-publication involvement with a third-party report is necessary to hold the issuer liable for misstatements made in the report. In one such opinion, Eisenstadt v. Allen, 1997 U.S. App. LEXIS 9587 (9th Cir. April 28, 1997), the Ninth Circuit affirmed the district court's opinion in Cypress Semiconductors without commenting on the lower court's express recognition of a distinct post-publication theory of liability. Instead, Eisenstadt stated simply that a plaintiff seeking to hold an issuer liable for an analyst's predictions must show, among other things, that the issuer provided misleading information to the analyst. Id. at * 44.

In the Commission's view, under certain circumstances an issuer that disseminates false third party reports may adopt the contents of those reports and be fully liable for the misstatements contained in them, even if it had no role whatsoever in the preparation of the report. If an issuer knows, or is reckless in not knowing, that the information it distributes is false or misleading, it cannot be insulated from liability because management was not actively involved in the preparation of that information.

c.Presstek's Liability For Projections in PMG Report

By providing forecasts that were incorporated into the initial draft PMG report, editing the report prior to publication, and then distributing it to hundreds of investors, Presstek is liable for the report's material misrepresentations under both the entanglement and post-publication adoption theories, and, accordingly, had a duty to correct its material misrepresentations. Presstek's management directly participated in preparing a report that it knew, or was reckless in not knowing, included forecasts that were far more optimistic than Presstek's contemporaneous internal projections. For example, the PMG Report quoted management's projection of "a few 100" Pearlsetter sales for 1996. However, Howard and Verrando knew, or were reckless in not knowing, that Presstek's internal forecasts projected only half as many Pearlsetter sales for 1996 as were forecast in the PMG Report. Moreover, in an effort to give added weight to the inaccurate Pearlsetter forecast, Howard falsely attributed it to "industry experts." Howard also failed to lower the PMG Report's 1996 or 1997 revenue forecasts to conform them to Presstek's contemporaneous internal projections. Although Howard edited the PMG Report's 1996 EPS projection, he did not correct its 1997 EPS projection ($2.42), which far exceeded Presstek's internal projection ($1.34). By revising certain forecasts concerning Presstek's revenues and earnings, Howard impliedly represented to PMG that those he did not revise were accurate. Through Howard's editing, Presstek ratified those projections prior to publication. See Alfus v. Pyramid Technology Corp., 764 F. Supp. 598, 603 (N.D.Cal. 1991) ("where a company undertakes to pass on earnings forecasts through analysts' reports, it must correct figures that are incorrect"); In re Cypress Semiconductors, 891 F. Supp. 1369, 1377 n.6 (N.D. Cal. 1995), aff'd sub nom. Eisenstadt v. Allen, 1997 U.S. App. LEXIS 9587 (9th Cir. April 28, 1997) (company's review of analyst's report and failure to comment on certain forecasts, when the company had no policy of not commenting on such projections, could constitute implicit representation that forecasts were accurate). Such involvement by management in the preparation, review, and editing of the PMG Report establishes Presstek's liability for the report's forecasts. See In re ICN/Viratek Securities Litigation, Fed. Sec. L. Rep. (CCH) ¶99,213 (S.D.N.Y. 1996) (defendants entangled themselves with report by reviewing and amending final draft).

Presstek also distributed the PMG Report to persons on its mailing list, and included it in the information packet it sent to hundreds of investors and persons in the printing press industry, from approximately December 1995 through June or July 1996. As Presstek's distribution of the PMG Report continued, the disparity between Presstek's internal projections for 1996 and 1997, and those in the PMG Report increased. By distributing the report without disclaimer, Presstek impliedly represented "that the analyst's forecasts were accurate." Strassman v. Fresh Choice, 1995 U.S. Dist. LEXIS 19343 at * 32. Through such distribution, Presstek adopted the report's misleading projections, and is liable under the post-publication adoption theory.

d.Presstek's Liability for Distributing Cabot

Market Letters Containing Earnings Projections

That Far Exceeded Presstek's Internal Forecasts

Presstek also violated the antifraud provisions by disseminating various Cabot Market Letters. Two such Cabot letters distributed by Presstek predicted 1994 and 1995 earnings per share of $1.00 and $1.10 per share, respectively. Another letter distributed by Presstek, dated January 1995, stated that plate sales could contribute about $.90 per share to earnings once 100 presses were operating. Presstek management knew that the company's contemporaneous internal earnings projections -- which it chose not to disseminate -- were materially below those in the Cabot letters. Even disregarding uncertainties inherent in the production and sale of presses, it was apparent that the Cabot letters assumed a level of earnings from the sale of plates on a per machine basis that was far in excess of Presstek's.

By distributing without disclaimer Cabot letters that contained earnings projections that management knew, or was reckless in not knowing, greatly exceeded Presstek's own forecasts and lacked a reasonable basis, Presstek adopted those projections. An issuer's widespread dissemination of a third party's projections, especially when such forecasts are distributed along with other company materials, such as its annual report and press releases, can evidence its implicit adoption of such projections. As one California court stated:

The act of circulating the reports amounts to an implied representation that the information contained in the reports is accurate or reflects the company's views. 22 argues that merely disseminating the reports, without an accompanying statement that the corporation stands behind them or attests to their accuracy, shows only that 23 served as a distribution medium and does not suggest adoption or endorsement. 24 attempt to relegate itself to the status of mailcarrier or glorified delivery boy is unconvincing. By passing out the favorable analyst reports, 25 was clearly implying that the company agreed with the forecasts contained in the reports. Explicit ratification was not necessary to get the point across. The tacit message concomitant to a company circulating analyst reports goes something like this: "Look at how well we are doing and look at what we are going to do next year. You should invest now."

In re RasterOps Corporation Sec. Litig., 26 Fed. Sec.L. Rep (CCH) ¶ 98,467 at 91,195 (N.D. Cal. 1994, Oct. 31, 1994).

Presstek regularly distributed editions of the Cabot letters together with its own materials, knowing that the Cabot materials included forecasts of annual financial performance and earnings assumptions for a particular product that exceeded its own. Given that Presstek had deliberately declined to release its own projections or earnings assumptions, there was no corporate information in the market to compete with the inaccurate information in the Cabot report. Under these circumstances, investors would reasonably infer that Cabot's information bore Presstek's endorsement.

5.Reporting Violations

a.1995 Form 10-K's Incomplete and Misleading

Reference to Quickmaster "Schedule Change"

Presstek violated Section 13(a) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder, as well as the antifraud provisions, by providing an incomplete and materially misleading disclosure in its 1995 Form 10-K concerning Heidelberg's delayed shipments of Quickmaster presses and Presstek's reduced production schedule. The Form 10-K, in a section describing Presstek's contractual arrangements with Heidelberg, referred merely to a "schedule change requested by Heidelberg for the PEARL imaging systems manufactured by the Company for Heidelberg." (Emphasis added.) The disclosure was materially misleading in that it failed to describe the "schedule change" as a reduction, much less disclose that Presstek's production rate was being reduced by twenty-five percent. 27 The disclosure also omitted any reference to Heidelberg's delayed shipments of the Quickmaster presses, a decision which prompted the "schedule change" and reduced Presstek's anticipated plate sales for 1996. The omissions were material because they concerned reduced sales by Presstek of products that were its major sources of revenue. A more complete disclosure of the Quickmaster schedule change was necessary to make the Form 10-K not misleading.

Additionally, Item 303 of Regulation S-K requires MD&A sections to disclose "known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations." See Item 303 of Regulation S-K, 17 C.F.R. § 229.303(a)(3)(ii); see also Exchange Act Release No. 34-26831 ("Interpretative Release"), 43 SEC Docket 1577 (May 18, 1989) ("Required disclosure is based on currently known trends, events, and uncertainties that are reasonably expected to have material effects.") (Emphasis added.)

Presstek's MD&A in its 1995 Form 10-K failed to discuss Heidelberg's delayed Quickmaster shipments or the consequential reduction in Presstek's system shipments, events that Presstek management knew by mid-November 1995 would have a material unfavorable impact on its net sales of both systems and plates in 1996. Accordingly, the production delay and the nature of the delivery schedule change should have been discussed in the 1995 Form 10-K MD&A. See Item 303 of Regulation S-K, 17 C.F.R. § 229.303(a)(3)(ii). 28

b.Nondisclosure in Presstek's Forms 10-Q

For the First Through Third Quarters of 1996

The MD&A in Presstek's Forms 10-Q for the first, second and third quarters of 1996 also failed to make required disclosures concerning Presstek revenues that resulted from the Quickmaster schedule change. 29 Item 303 of Regulation S-K requires registrants to disclose "any unusual or infrequent events or transactions or any significant economic changes that materially affected the amount of reported income from continuing operations." See Item 303 of Regulation S-K, 17 C.F.R. § 229.303(a)(3)(i). 30 The section also requires description of "any other significant components of revenues . . . that, in the registrant's judgment, should be described in order to understand the registrant's results of operations." (Emphasis added.) See Item 303 of Regulation S-K, 17 C.F.R. § 229.303(a)(3)(i). Finally, Item 303(a)(3)(iii) states that if a financial statement discloses material increases in net sales or revenues, a narrative discussion must explain "the extent to which such increases are attributable to increases in the volume or amount of goods or services being sold . . ." (Emphasis added.)

Pursuant to its November 1995 agreement with Heidelberg, Presstek received approximately $583,000 per month for 1996 (approximately $1.75 million per quarter) from Heidelberg as compensation for projected losses from the Quickmaster schedule change. Such payments accounted for fourteen to fifteen percent of Presstek's total revenues for each of the first, second and third quarters. The MD&A in its Forms 10-Q for the first, second and third quarters states that Presstek's royalties and fees include "increased revenues earned for engineering services under the Company's agreements with Heidelberg." The MD&A for each quarter failed to explain, however, that fifty percent, forty-four percent and thirty-nine percent of such royalties and fees for the first, second and third quarters, respectively, resulted not from actual engineering services provided by Presstek, but from Heidelberg's concessions in connection with the Quickmaster schedule change. 31 Such one-time payments were "unusual or infrequent" events that should have been explained further in the MD&A of Presstek's Forms 10-Q for the first, second, and third quarters of 1996. See Section 229.303(a)(3)(i). 32 Further, the MD&A sections for these quarters failed to explain the full "extent to which" Presstek's increases in revenue for each period were (or were not) attributable to actual increases in engineering services being sold. See Section 229.303(a)(3)(iii). Presstek's failure to disclose such matters violated Section 13(a) and Rules 13a-1, 13a-13 and 12b-20, as well as Section 10(b) and Rule 10b-5. 33



On the basis of this Order and the Offer of Settlement submitted by the Respondent, the Commission finds that

Presstek violated Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder.


In view of the foregoing, the Commission has determined it is in the public interest to accept the Respondent's Offer of Settlement. Accordingly, IT IS HEREBY ORDERED, effective immediately, that

Presstek, pursuant to Section 21C of the Exchange Act, cease and desist from committing or causing any violation and any future violation of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder.

By the Commission.

Jonathan G. Katz




The findings herein are made pursuant to Presstek's Offer of Settlement and are not binding on any other person or entity in these or any other proceedings.


Presstek announced a 2-for-1 stock split effective July 1997. The price and share figures used in this Order are pre-split.


Although Heidelberg had received more than 500 orders for Quickmasters, few or none had been manufactured (except for testing purposes) much less sold. Presstek's management knew 500 Quickmasters had not been sold, because each Quickmaster contained one Presstek "system", and by November 7 Presstek had shipped no more than 88 systems to Heidelberg.


In a Form 10-Q filed for the period ended June 28, 1997, Presstek disclosed that market acceptance of the Pearlsetter "is developing more slowly than the Company originally anticipated," and no sales of the Pearlsetter occurred during that quarter.


The Cabot newsletter has more than 30,000 subscribers. In addition to the newsletter, Cabot publishes affiliated fax bulletins and maintains a telephone hotline. Cabot's touting of Presstek has emphasized Presstek's consumable plate sales and its expected "recurring income" (referred to as the "razor blade factor"), which Cabot has repeatedly described as the "key" to the company's expected continued growth.


In one story apparently prompted by a short-seller's tip, the New York Times, in a story published on October 27, 1994, questioned whether Howard actually was Howard Finkelstein, a felon convicted of securities law violations. After Howard voluntarily submitted his fingerprints, the Federal Bureau of Investigation concluded that Howard was not Howard Finkelstein. The New York Times retracted its story on October 28, 1994, and later published another article reporting that the fingerprint analysis had shown that Robert Howard and Howard Finkelstein were not the same person. In a later incident, a bogus memorandum dated October 16, 1996, and printed on what purported to be the letterhead of the Commission's Northeast Regional Office, referred to supposed "pending actions against Presstek and involved parties" by the Commission and stated that there had been a decision to "move up our strike date by two weeks." The memorandum was faxed to at least two Presstek marketmakers from fax machines available for public use in a photography studio and a print shop in Connecticut.


The price of Presstek then plunged to $40 per share in June 1996. The decline occurred shortly after the Wall Street Journal reported that Howard and another officer had filed forms with the Commission disclosing their intent to sell some of their Presstek holdings, and after the Cabot Market Letter disclosed that it had produced information as part of the Commission's investigation.


"Serial production" presses are those intended for permanent commercial use. Serial production is preceded by manufacture of beta presses which are installed at customer facilities for testing. Customers with beta presses agree to monitor press performance and report problems to Heidelberg. Serial production presses eventually replace beta presses if the customer wants to buy one.


Heidelberg agreed to the payment, in part, because Heidelberg's arrangement with Presstek gave Heidelberg certain exclusive rights to manufacture and sell Quickmasters that incorporated Presstek's technology.


Verrando testified he viewed "orders" and "sales" as fungible for press release purposes, and drafted the release to announce, among other things, the success that Heidelberg was having with the Quickmaster. Although Presstek and Heidelberg used the terms "orders" and "sales" interchangeably, the press release's reference to 500 Quickmasters having been "sold" misled the public, which did not know the Quickmaster sales situation. Presstek did not ship its 500th Quickmaster system until May 1997.




The disclosure was in a portion of the Form 10-K which described Presstek's contractual agreements with Heidelberg. The MD&A section did not mention the schedule change or its impact on Presstek's operating results. Presstek did append the Heidelberg financial concessions agreement to the Form 10-K. The agreement, however, fails to reveal that the engineering fees were to compensate Presstek for the schedule change, and fails even to mention the schedule change. It would have therefore been impossible to conclude from the Form 10-K and its exhibits that there was any relationship between the financial concessions and the schedule change.


On September 9, 1996, Presstek filed a second amended Form 10-K that explained, at the prompting of the Commission's Division of Corporation Finance, that the schedule change was requested by Heidelberg in November 1995 " to reduce the number of PEARL imaging systems being manufactured by the Company each month for Heidelberg from the amount then being produced. " (Emphasis added.)


The draft PMG report's narrative included the following sentence: "Management is comfortable forecasting 'a few 100' unit sales next year, hopefully a conservative goal." Based on Howard's revisions, the final version of the sentence read: "Management is comfortable forecasting 'a few 100' unit sales next year, hopefully a conservative goal according to industry experts ." (Emphasis added.)


The PMG analyst interpreted Howard's failure to revise the draft's projections for Pearlsetter sales for 1996 (both in the narrative and numerical forecast sections) as an implicit endorsement of them. The analyst also expected Howard would have revised the Pearlsetter forecasts if Presstek's contemporaneous internal projections forecast fewer than 100 unit sales.


The PMG Report's 1997 forecasts were even less consistent with Presstek's internal forecasts. For example, the PMG Report projected earnings per share of $2.42 for 1997; Presstek's earnings per share projection at the time was only $1.34. Nevertheless, Howard did not revise a single 1997 projection in the draft PMG report, except for Quickmaster sales. The PMG Report expressly reduced Presstek's total projected pretax profits by 50 percent to account for uncertainties in the earnings projections. The resulting profit projections, which accordingly appeared to be extremely conservative, still exceeded the company's internal projections.


Presstek also distributed the PMG Report because it included an extensive narrative discussion of the industry and Presstek's technology.


Presstek's distribution of the PMG Report was not the first time it had disseminated positive forecasts prepared by third parties. Presstek distributed copies of PMG's initial August 1994 report on Presstek to all persons on Presstek's mailing list, to satisfy requests for an independent analysis of the company. Unlike the November 1995 PMG Report, the August 1994 report admonished that Presstek's management "will not make, endorse or comment on any earnings forecasts." Also, as mentioned supra , Presstek distributed copies of the Cabot Market Letter.


The importance of printing plate revenue had previously been communicated to the market, in part, through Presstek's distribution of several Cabot Market Letters that emphasized plate revenues as the key to Presstek's future success. ( See supra at 4-6).


citation omitted<












1994-95 Transfer Binder


Presstek's Second Amended Form 10-K -- filed in September 1996 -- disclosed that the schedule change involved a reduction ( see supra at 9, n.12), but still failed to disclose the extent to which Presstek's manufacturing schedule was reduced.


Full disclosure of the Quickmaster schedule change, and its financial impact on Presstek, was necessary even though Presstek was compensated by Heidelberg for the projected earnings losses that Presstek estimated would result from the schedule change. Nondisclosure of these events rendered investors unable "to look at the company through the eyes of management," see Interpretative Release, (43 SEC Docket at 1578), which is the purpose of MD&A
29 Item 303(b) of Regulation S-K states that the MD&A in filings for interim periods "shall include a discussion of material changes in those items specifically listed in paragraph (a) of this Item," except for the impact of inflation and changing prices on operations. See Item 303 of Regulation S-K, 17 C.F.R. 229.303(b).


An instruction to Item 303 states that the MD&A shall focus specifically on material events known to management "that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This would include descriptions and amounts of . . . matters that have had an impact on reported operations and are not expected to have an impact upon future operations." See Item 303 of Regulation S-K, Instructions to Paragraph 303(a).


Presstek's Form 10-K for 1996 revised the misleading descriptions in its Forms 10-Q. The Form 10-K's MD&A explained that Presstek's increased royalties and engineering fees were based " primarily on amounts annually agreed upon between the Company and Heidelberg. " (Emphasis added.)


In a recently filed Form 10-Q for the period ended June 28, 1997, Presstek stated that no significant engineering fees have been negotiated for 1997, and "there can be no assurance that the Company will receive any significant fees from Heidelberg" this year.


Another statement in the Forms 10-Q for the first three quarters of 1996 compounded the misleading nature of the MD&A section's discussion concerning Presstek's "engineering fees." In a section describing Presstek's contractual agreements with Heidelberg, the Forms 10-Q stated that these agreements "provide that during 1996 the Company will . . . be reimbursed for certain engineering and development work provided to Heidelberg ." (Emphasis added.) While accurate with respect to actual engineering services provided to Heidelberg, the statement fails to disclose that a material amount of such engineering fees were concessionary payments by Heidelberg, and not reimbursement for services provided by Presstek. In its Form 10-K for 1996, Presstek revised the aforementioned description to state that Presstek's engineering fees and other revenue from Heidelberg during 1996 were " based upon a previously negotiated amount ." (Emphasis added.)