Berke, et al. v. Presstek, et al. CV-96-347-M 03/30/99 UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

Bill Berke, et al.. Plaintiffs

v. Crvrl No. 96-347-M MDL No. 114 0 Presstek, Inc., et al.. Defendants

ORDER ON MOTION TO DISMISS

Plaintiffs bring this prospective class action1 on behalf of

all persons who purchased or otherwise acquired the common stock

and/or options to purchase the common stock of defendant

Presstek, Inc. ("Presstek") between November 7, 1995, and June

20, 1996, inclusive (the "Class Period"). Plaintiffs' Second

Consolidated Amended Class Action Complaint (the "Second Amended

Complaint" or the "complaint") alleges that Presstek and a number

of its officers and directors2 (the "individual defendants")

1A class has not yet been certified.

2Defendant Robert Howard is the founder of Presstek and has served as a director since its founding in September, 1987, and Chairman of the Board since June, 1988. Defendant Lawrence Howard, Robert Howard's son, has served as a director of Presstek since its founding, and as Vice Chairman of the board from November, 1992, until February, 1996. Defendant Richard C. Williams was, at the start of the class period. Chief Operating Officer and Executive Vice President. From February 23, 1996, through the end of the class period, Williams was Presstek's Vice Chairman and Chief Executive Officer. Defendant Robert E. Verrando was, as of the commencement of the class period to February 23, 1996, Executive Vice President of Presstek; thereafter, he was Presstek's President and Chief Operating Officer. Defendant Frank G. Pensavecchia was Presstek's Vice President during all times relevant to this action. Defendant Glenn J. DiBenedetto is a certified public accountant and was, at all relevant times. Chief Financial Officer of Presstek. Defendants Bert Depamphilis and Harold N. Sparks were, at all engaged in a scheme to defraud purchasers of Presstek stock in

violation of Sections 1 0 (b), 2 0 (a) and 20A of the Securities

Exchange Act of 1934 (the "Exchange Act") (

8 (j)(b),

78t(a) and 78t-l), Rule 10b-5 promulgated by the Securities

Exchange Commission ("SEC") (

.10b-5), and New

Hampshire common and statutory law. More specifically,

plaintiffs allege that the defendants,3 through material

misrepresentations and omissions, artificially and fraudulently

inflated the price of Presstek common stock during the class

period, and that the individual defendants engaged in illegal

insider trading during the class period. Presently before the

court is defendants' motion to dismiss pursuant to Rules 12(b) (6)

and 9(b) of the Federal Rules of Civil Procedure.

Standard of Review

A Rule 12(b)(6) motion is "one of limited inguiry, focusing

not on 'whether a plaintiff will ultimately prevail but whether

the claimant is entitled to offer evidence to support the

relevant times, directors of Presstek.

31he complaint also named as defendants the Cabot Market Letter ("CML"), an investment newsletter; its publisher, Cabot Heritage Corporation ("CHC"); CML's editor and CHC shareholder and control person Carlton G. Lutts; and Carlton Lutts's son Timothy W. Lutts, who was also a shareholder and control person of CHC and an author and editor of CML. Some or all of these parties are sometimes referred to in the several complaints at issue as the "Cabot Newsletter Defendants" or the "Cabot Defendants." The claims against these defendants were dismissed without prejudice on plaintiffs' motion, granted May 18, 1998. Thus, the only defendants remaining in this action are Presstek and the individual defendants. Presstek and the individual defendants are sometimes referred to in the several complaints at issue as the "Presstek Defendants."

2 claims.'" Schaffer v. Timberland Co.,

(D.N.H. 1996) (quoting Scheuer v. Rhodes,

(1974)). Dismissal is generally appropriate only when the

plaintiff appears able to prove no set of facts that would

entitle him to relief. See Suna v. Bailey Corp.,

(1st Cir. 1997). In ruling on a motion to dismiss, the court

takes the allegations in the complaint as true and draws all

inferences therefrom in favor of the plaintiffs. See Lucia v.

Prospect Street High Income Portfolio,

(1st Cir.

1994) .

Because plaintiffs' complaint alleges fraud, it must meet

the heightened requirements of Federal Rule of Civil Procedure

9(b). See Schaffer,

. Rule 9(b) requires

that "[i]n all averments of fraud or mistake, the circumstances

constituting fraud or mistake shall be stated with particularity.

Malice, intent, knowledge, and other condition of mind of a

person may be averred generally." Fed.R.Civ.P. 9(b). But see 15

U.S.C.A. § 78u-4(b)(2)(requiring, in certain cases, the pleading

of specific facts giving rise to inference that defendant acted

with the state of mind required for the particular violation of

the securities laws alleged).

Plaintiffs' complaint must also meet the requirements of the

Private Securities Litigation Reform Act, codified at 15 U.S.C.

§ 78u-4, which provides in part:

(1) Misleading statements and omissions

In any private action arising under this chapter in which the plaintiff alleges that the defendant -

3 (A) made an untrue statement of a material fact; or (B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading; the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.

(2) Reguired state of mind

In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the reguired state of mind.

15 U.S.C.A. § 78u-4(b)(1)-(2) (West 1997).

Background

The following facts are alleged in the complaint. Presstek,

a Delaware corporation with its main executive offices in Hudson,

New Hampshire, is engaged in the development of printing

technology. It claims to have developed a non-photographic

digital imaging and printing plate technology, called PEARL(R),

that allows direct scanning of images from a computer onto a

printing plate, making the generally-used chemical developing

process unnecessary. The primary customer for Presstek's imaging

technology is Heidelberger Druchmaschinen A.G. ("Heidelberg"), a

printing press manufacturer.

In May 1995, Heidelberg began marketing a new printing

press, called Quickmaster, which utilized the PEARL(R)

4 technology. After customers testing Quickmaster reported

problems, Heidelberg told Robert Howard that it would delay mass

commercial distribution of Quickmaster until the problems could

be solved. Accordingly, the parties agreed that Presstek would

reduce its shipment of PEARL(R) systems to Heidelberg. Because

this reduction in sales would reduce Presstek's anticipated

earnings by roughly 7 to 9 million dollars, Heidelberg agreed, in

addition to other adjustments to the terms of the parties'

dealings, to pay Presstek $7 million (in monthly installments) in

1996.

Plaintiffs allege that defendants artificially inflated the

price of Presstek stock during the class period by making a

number of false statements, or misleading statements, or

omissions. The statements or omissions are alleged to have been

misleading due to one or more of the following: (1) failure to

disclose problems test users had encountered with Quickmaster;

reduction in shipments to Heidelberg; or, the accommodating $7

million payment from Heidelberg to Presstek; (2) failure to

disclose the nature, depth and targets of an SEC investigation

into dealings in Presstek stock; and (3) reporting revenue and

net income figures that were not developed in accordance with

generally accepted accounting principles ("GAAP") and that were

overstated as compared to GAAP-compliant figures.

A number of the allegedly misleading statements or omissions

were published in issues of the CML or in a research report

distributed on November 24, 1995, by the investment firm

5 Pennsylvania Merchant Group, Ltd. (the "PMG report"). The PMG

report was based in part on information obtained in an interview

of Verrando. A draft of the report was reviewed and revised by

Robert Howard. Robert Howard also caused Presstek to distribute

the PMG report, without any disclaimer, to hundreds of persons on

its mailing list, and as part of an information packet sent to

investors and others.

Discussion

Defendants move to dismiss all counts in plaintiffs' Second

Amended Complaint except those concerning Presstek's disclosure

of its relationship with Heidelberg. Defendants concede that the

complaint states a claim against Verrando and Robert Howard with

respect to Heidelberg, but say that the Second Amended Complaint

fails to state a claim against any of the other individual

defendants. Defendants have not moved to dismiss claims against

the individual defendants based on alleged violations of § 20A of

the Exchange A c t .

1. The Entanglement Claims.

Defendants seek dismissal of plaintiffs' "entanglement

claims," i.e., the claims asserting defendants' liability for

misstatements or omissions in the CML and PMG report, on grounds

that such claims are barred by the statute of limitations.

Defendants do not argue that the original complaints, filed in

June and July, 1996, and subseguently consolidated in this

6 action4 were not timely filed. Rather, they argue that

plaintiffs abandoned any entanglement claims when they filed, on

April 4, 1997, a Substituted Consolidated Amended Class Action

Complaint (the "First Amended Complaint")5 because that pleading

did not assert an entanglement theory. Defendants then argue

that the statute of limitations on plaintiffs' abandoned

entanglement claims ran before plaintiffs attempted to reassert

them in the Second Amended Complaint, filed February 20, 1998.

Accordingly, defendants argue, plaintiffs' attempt to revive such

claims in their Second Amended Complaint is barred by the statute

of limitations.

The argument is similar to that made, and rejected, in Ross

v. Philip Morris Co.,

(W.D. Mo. 1958). There

the plaintiff sued defendant for personal injuries allegedly

caused by the defendant's product. The original complaint

alleged "negligence, willful misrepresentation, breach of

warranty, and violation of certain State statutes" as theories of

recovery. JCd. at 685. Plaintiff later amended his complaint to

allege only breach of warranty. Plaintiff then brought a third

4This action consolidated the following cases: Tonia Alfonso, et al. v. Presstek, Inc., et al., D.N.H., C-96- 352-M; Bill Berke v. Presstek, Inc., et al., D.N.H., C-96-347-M; Sidney Gellman, et al. v. Presstek, Inc., et al., D.N.H., 96-373- JD; Joseph C. Barton v. Presstek. Inc., et al., S.D.N.Y., 96- 5172; F. Brock Walter v. Presstek, Inc., et al., D.N.H. 96-377-M; Multi-Measurements, Inc., et al. v. Presstek, Inc., et al., D.N.H. 96-411-JD.

5A Consolidated Class Action Complaint was filed on March 14, 1997, but was returned to plaintiffs; The First Amended Complaint was filed in its place.

7 amended complaint alleging three counts: (1) implied warranty;

(2) negligence; and (3) fraud and deceit. Defendant moved for

summary judgment on counts two and three arguing that plaintiff

had "abandoned such claims two years and five months ago, and,

since such abandonment, the statute of limitation has run and

plaintiff cannot now reassert such claim." I_d. at 689. The

court held:

A change of the legal theory of an action is not to be accepted as a voluntary non-suit of a claim under federal procedure. "Basically, the general wrong suffered and the general conduct causing the wrong are the controlling considerations." That being so, then it is manifest that at no time has plaintiff ever abandoned the original claim he has here asserted against defendant. To abandon a claim can only mean that one gives it up with the intent of never claiming one's right or interest in it thereafter. Plaintiff has changed his theories of claim in respect to his cause of action against defendant, but, he has never abandoned it. Though counts two and three, supra, may, present new issues of law, the evidence which will be offered by plaintiff in support thereof will not be materially different from that which could have been adduced under the original, or any subseguent, complaint filed herein.

Id. (citations omitted).

Plaintiffs' position in this case is even stronger than in

Ross, for while plaintiffs may have asserted different legal

theories in the Second Amended Complaint,6 they never ostensibly

abandoned the claims made in the original complaints. In Barton,

for example, the plaintiffs pled a pre-publication entanglement

theory, alleging that defendants disseminated misinformation to

investors by feeding false statements to publishers of market

6But see the discussion on relation back infra. newsletters, who then published the misinformation to their

subscribers.7 In the First Amended Complaint, plaintiffs

alleged:

Presstek regularly communicated with the investing public through the dissemination of various reports, participated in meetings and conferences with investors and securities analysts and through other customary means of communicating such as use of major newswire services for the dissemination of press releases and providing information and interviews about the Company to the business media including, without limitation, to the Cabot Newsletter Defendants.8

The court cannot agree that plaintiffs abandoned their

entanglement claims when they filed the First Amended Complaint.

The real guestion is whether the entanglement claims pled in

plaintiffs Second Amended Complaint relate back to one or more of

the original complaints. Whether an amended complaint relates

7See, e.g.. Barton compl. at 5 39: "As part of their scheme to defraud purchasers of Presstek common stock during the Class Period, certain officers and directors of Presstek, including the Presstek Defendants, communicated regularly with publishers of market letters to discuss, among other things, the Company's prospects, operating results and expected revenues, and to provide detailed 'guidance' and direction to these editors with respect to the Company's business and projected revenues and earnings. Presstek and the Presstek Defendants knew that by participating in these regular periodic communications with publishers of market letters, they could disseminate false information to the investment community and that investors, including the members of the plaintiff class would rely and act upon such information. Certain of the Presstek Defendants had communications with publishers of market letters in order to cause or encourage them to issue favorable reports on Presstek and used these communications to falsely present Presstek's prospects to the marketplace to artificially inflate the market price of Presstek common stock."

8First Amended Complaint at 5 77c;

9 back to the original complaint for statute of limitations

purposes is determined according to Federal Rule of Civil

Procedure 15(c). Rule 15(c) provides, in pertinent part: "An

amendment of a pleading relates back to the date of the original

pleading when . . . (2) the claim or defense asserted in the

amended pleading arose out of the conduct, transaction, or

occurrence set forth or attempted to be set forth in the original

pleading." Fed.R.Civ.P. 15(c). "The test for determining

whether the amendment should relate back is whether the original

complaint sufficiently put the defendants on notice regarding the

claim raised in the amended pleading." Ripley v. Childress,

(D.N.M. 1988).

Defendants contend that even if plaintiffs did not abandon

their entanglement claims, the claims in the Second Amended

Complaint do not relate back because they are based on different

operative facts. Defendants argue that the Second Amended

Complaint bases its entanglement claim on "facts and theories

never alleged in any of the prior complaints and of which the

[defendants] had no notice."9 Specifically, defendants assert

that while the Alfonso and Barton complaints alleged that the

defendants provided false information to the Cabot Newsletter

Defendants before the misleading CMLs were published, the Second

Amended Complaint abandoned that theory and instead alleged that

the defendants adopted the CMLs' misleading statements post­

publication by distributing CMLs to investors.

9Defendants' brief at 24.

10 The claims before and after consolidation are not so

distinct. The Second Amended Complaint continues to allege that

Presstek communicated with the public by providing information to

analysts who presumably would then convey it:

Presstek regularly communicated with the investing public through the dissemination of various reports, including without limitation, the [CML] and the [PMG report], participating in meetings and conferences with investors and securities analysts, and through other customary means of communicating such as use of major newswire services for the dissemination of press releases, and filings with the SEC.10

Conversely, allegations in the original Gellman complaint could

be read to allege post-publication ratification of misleading

statements: the Gellman complaint alleged that the individual

defendants "were involved in drafting, producing, reviewing

and/or disseminating the false and misleading statements alleged

herein, were aware that the false and misleading statements were

being issued regarding the Company and approved or ratified these

statements, in violation of the federal securities laws."11 It

also alleged that "Presstek regularly communicated with the

investing public through the dissemination of various reports /A 12

That the Second Amended Complaint more specifically alleges

that Presstek distributed copies of a particular report (e.g.,

the CML) in investor packets andto persons onits mailing list

10Second Amended Complaintat 5 67c; see alsoGellman compl. at 5 42c.

11Gellman compl. at 5 26.

12Gellman compl. at 5 42c.

11 does not fatally alter the complaint. "[I]f the original

pleading gives fair notice of the factual situation from which

the claim or defense arises, an amendment which merely makes more

specific what has already been alleged . . . will relate back

even if the statute of limitations has run in the interim." Mann

v. Duke Mfg. Co.,

(E.D. Mo. 1996).

Under the same reasoning, the allegations in the Second

Amended Complaint regarding the PMG report relate back to one or

more of the original complaints even though the PMG report had

never before been mentioned by name.13 Defendants had notice all

along that plaintiffs sought to hold them liable for misleading

statements contained in various reports including, but not

limited to, the CML. More specific factual allegations naming

one of those reports properly relate back to one or more of the

original complaints. See id.

2. Adoption of analysts' reports.

Defendants argue that they did not adopt the misleading

statements or omissions in the CMLs by merely distributing them.

The First Circuit "has not yet decided whether statements in an

analyst's report may be attributable to a defendant company."

Suna,

(assuming, without deciding, that such a

claim is cognizable). Other courts, however, have recognized

13Although the date on which the PMG report was issued does not fall within the Barton class period, the Barton complaint contains allegations of conduct by defendant, including reviewing and approving drafts of market letters not limited to the CML, that closely match the PMG report allegations in the Second Amended Complaint. See Barton compl. at 55 36-44.

12 that a company may "sufficiently entangle[] itself with the

analysts' forecasts [so as] to render those predictions

'attributable to it.'" Elkind v. Liqqet & Myers, Inc.,

(2d Cir. 1980). Liability may be premised on pre­

publication or post-publication involvement with the analyst's

report. In the case of post-publication ratification, "in

contrast to pre-publication entanglement, liability does not

depend upon imputing the analysts' statements to the company.

Rather, the corporation's implied representation that the

analysts' forecasts are accurate is itself actionable. This is a

subtle, yet important distinction between pre-publication

adoption and post-publication ratification." In re Cypress

Semiconductor Sec. Litiq.,

(N.D. Cal.

1995). Thus to the extent that defendants' argument may be taken

to suggest that post-publication distribution of an outside

analyst's report cannot constitute sufficient involvement to hold

the corporation liable, the court disagrees. See

("Distributing analysts' reports to potential investors may,

depending on the circumstances, amount to an implied

representation that the reports are accurate."); cf. In re

RasterQps Corp. Sec. Litiq.,

(N.D. Cal.) at * 3

(finding allegations that corporation circulated analyst reports,

together with allegations of pre-publication entanglement,

sufficient to plead adoption of the reports).

Defendants also argue that plaintiffs' allegations regarding

the CMLs fail to satisfy the specificity reguirements of Federal

13 Rule of Civil Procedure 9 (b) . "Rule 9 (b) requires that

plaintiffs (1) specify the statements that the plaintiff contends

were fraudulent, (2) identify the speaker, (3) state where and

when the statements were made, and (4) explain why the statements

were fraudulent." Suna, 107 F.2d at 73 (internal quotation marks

omitted). Plaintiffs must also alleqe facts "suqqestinq that the

defendants knew or should have known that the statement was false

or misleadinq, i.e., evidence of scienter." Schaffer,

.

In paraqraph 72 of the Second Amended Complaint, plaintiffs

identify three editions of the CML which contained earninqs

projections that "far exceeded" Presstek's internal projections:

April, 1994, edition, predictinq earninqs of $1.00 per share;

January, 1995, edition, predictinq $0.90 per share; and April,

1995, edition, predictinq $1.10 per share). The complaint then

alleqes:

Robert Howard knew, or was reckless in not knowinq, that Presstek's contemporaneous internal projections were materially below those in the [CMLs] identified above. Indeed, a Presstek internal projection prepared four months before the [January, 1995] CML published its projections of income from plate sales, and which assumed more than 100 such presses in the field by 1996, projected that the company would have total earninqs from all sales of only $0.23 per share for that year. Nevertheless, in 1994 and 1995, Robert Howard directed Presstek to distribute several thousand copies of these and other editions of the CML in an "investor packet" and to persons on Presstek's mailinq lists without disclaimer.14

14Compl. at I 73.

14 These conclusory allegations are not sufficient to satisfy Rule

9(b). Cf. In re Silicon Graphics, Inc. Sec. Litiq.,

(N.D. Cal. 1997) (noting, with respect to pleading

scienter, that the Second Circuit has held "that unsupported

general claims of the existence of internal reports are

insufficient to survive a motion to dismiss"). Nor can one infer

a source of contrary knowledge from other factual allegations in

the complaint. These editions of the CML predate the

circumstances alleged in the complaint (such as the Heidelberg

problems that began after May, 1995) that gave Presstek insiders

reason to know that earnings prospects were limited.15

Plaintiffs fail to state how the defendants knew or should have

known that the projections were, as they allege, false, reckless

or baseless. See In re Verifone Sec. Litiq.,

(N.D. Cal. 1992), aff'd,

(1993).

Plaintiffs allegations regarding CMLs issued in February,

1996, and thereafter are also deficient. With respect to some of

the CMLs, plaintiffs fail to state with any specificity why the

statements made therein are fraudulent.16 With respect to

others, plaintiffs fail to state how statements allegedly known

by the Cabot Newsletter Defendants to be false were also known,

or should have been known, to be false by the defendants

herein.17 Moreover, plaintiffs fail to specifically allege that

15They also predate the Class Period.

16See, e.g., compl. at 55 120, 125, 128

17See, compl. at 55 157, 160-61.

15 any of these later CMLs were circulated by Presstek, or to

articulate any other bases on which defendants might be liable

for the statements made therein. Therefore, plaintiffs' claims

regarding all of the CMLs are dismissed for failure to state a

claim.

3. The SEC investigation.

Defendants next argue that disclosures they made regarding

the SEC's investigation into certain dealings in Presstek stock

were sufficient as a matter of law. The court disagrees. While

Presstek disclosed that the SEC had commenced an investigation,

its disclosure implied that Presstek did not know who was

targeted in the investigation. The complaint alleges that

Presstek made the following statement in its 1995 Annual Report:

"The Company has been advised that the [SEC] has entered a formal order of private investigation with respect to certain activities by certain unnamed persons and entities in connection with the securities of the Company. In that connection, the Company has received subpoenas duces tecum reguesting it to produce certain documents and has complied with the reguests. The Company has not been advised by the Staff of the [SEC1 that the Staff intends to recommend to the [SEC1 that it initiate a proceeding against the Company in connection with the foregoing investigation."18

Assuming that the defendants knew that they were targets of the

investigation, which the complaint seemingly attempts to

allege,19 the disclosure is misleading.

18Compl. at 5 163(b).

191he complaint alleges that the defendants engaged in a scheme to "conceal[] . . . the fact that the SEC was investigating Presstek insiders, including defendants named herein, for fraud." Compl. at 5 2(e).

16 Defendants' arguments that disclosure of potential

litigation was not reguired are beside the point. If named

defendants were then current targets of an SEC investigation into

fraud in connection with the company's securities, that

information would be material to a reasonable investor. See

Freschi v. Grand Coal Venture,

(2d Cir. 1985)

("Any reasonable investor would be interested in knowing that the

SEC was concerned about possible fraud in connection with a

securities offering which the offeror himself described as

'basically similar' to the one under consideration for

investment."), vacated on other grounds,

(1986);

modified in other respects on remand,

(2d Cir.

1986), modified in other respects,

(2d Cir. 1986);

New Equity Sec. Holders Committee For Golden Gulf, Ltd. v.

Phillips,

(E.D. Ark. 1989). Therefore, the

court cannot say at this juncture that defendants' disclosure was

sufficient as a matter of law.

Defendants do correctly point out, however, that the

complaint fails to allege that "at any time during the Class

Period, the [defendants] were advised that they were the target

of the SEC investigation."20 Thus, plaintiffs have failed to

plead scienter with particularity. Accordingly, plaintiffs' SEC

allegations are also dismissed for failure to state a claim.

4. Scienter.

20Defendants' brief at 11.

17 Defendants argue that plaintiffs have failed, with respect

to each of the individual defendants (again, excepting Verrando

and Robert Howard) to allege scienter with sufficient

particularity. In a § 10(b) action, " [p]laintiffs must plead

specific facts giving rise to a 'strong inference' of fraudulent

intent." Maldonado v. Dominguez,

(1st Cir. 1998).21

Plaintiffs attempt to plead scienter by alleging that defendants

engaged in a scheme to defraud and engaged in insider trading.

A. Scheme to Defraud and The Group Pleading Doctrine.

With the exception of Verrando and Robert Howard, plaintiffs

have failed to allege with sufficient particularity any

defendant's role in the alleged scheme to defraud. Defendants

point out that where "multiple defendants are involved, each

defendant's role in the fraud must be particularized."

Manchester Mfg. Acquisitions, Inc. v. Sears, Roebuck & Co.,

(D.N.H. 1992) (internal guotations omitted).

Plaintiffs counter that they are entitled to rely on the "group

pleading doctrine," which posits that "[i]n cases of corporate

fraud where the false or misleading information is conveyed in

prospectuses, registration statements, annual reports, press

releases, or other 'group-published information,' it is

reasonable to presume that these are the collective actions of

the officers." Wool v. Tandem Computers Inc.,

,

211he court in Maldonado noted that it did not interpret the standard imposed by the Private Securities Litigation Reform Act of 1995 "to differ from that which this court has historically applied." J-d. at 9 n.5.

18 1440 (9th Cir. 1987). A defendant may rebut the presumption by

showing that he was not involved in creating the false or

misleading document. See Silicon Graphics,

.

While it has not explicitly adopted the group pleading

doctrine wholesale, the First Circuit has cited Wool in holding

that "[t]he acceptance of responsibility for the contents of the

Annual Report, demonstrated by defendants' signatures, combined

with specific allegations that they knew of conflicting

conditions, establishes a sufficient link between the defendants

and the alleged fraud to satisfy Rule 9 (b)'s particularity

reguirement." Serabian v. Amoskeaq Bank Shares, Inc.,

(1st Cir. 1994). The group pleading doctrine will be

applied here.

The plaintiffs have failed to allege, however, with one

exception detailed below, enough specific facts to take advantage

of the group pleading presumption. Plaintiffs allege that

Williams and DiBenedetto signed the November 14, 1995, and the

May 10, 1996, Form 10-Q, the March 29, 1996, Form 10-K, and the

April 5, 1996, and May 28, 1996, Form S-3s; that Lawrence Howard,

Depamphilis and Sparks signed the March 29, 1996, Form 10-K, and

the April 5, 1996, and May 28, 1996, Form S-3s; and that

Pensavecchia signed the March 29, 1996, Form 10-K, and the April

5, 1996, Form S-3. However, with one exception, the complaint

does not specifically allege that those defendants knew or had

reason to know that the statements contained in those documents

were false or misleading. See Serabian,

-68

19 (finding that sufficient connection between the defendants and

the fraud was pled where the signing of documents and the

knowledge of contrary facts were alleged).

Plaintiffs here allege generally:

Because of the Individual Presstek Defendants' positions with the Company, they had access to the adverse, non-public information about Presstek's business, finances, products, markets and present and future business prospects via access to internal corporate documents (including the Company's operating plans, budgets and forecasts, reports of actual operations compared thereto, its revenue and expense recognition procedures and its communications, negotiations and agreements with Presstek's only significant customer, Heidelberg), via conversations with other corporate officers and employees, attendance at management and Board of Directors meetings and committees thereof and via reports and other information regularly provided to them in connection therewith in their capacity as the officers and directors of Presstek.22

These allegations may well prove true — defendants likely did

have access to information, but the allegations do not meet the

particularity reguirements of Rule 9 (b). While plaintiffs have

pled "the right buzz words," their allegations "are merely

conclusory and as such are insufficient." In re Aetna Inc. Sec.

Litiq.,

(E.D. Pa. Feb. 2, 1999).23

22Compl. at 5 53; see also compl. at 55 131-33.

23In an apparent attempt to meet the group pleading doctrine's reguirement that an outside director must have "either participated in day-to-day corporate activities, or had a special relationship with the corporation," Aetna,

(internal guotation marks omitted), the complaint alleges: The Individual Presstek Defendants, by virtue of their high level positions with the Company, directly participated in the management of the Company, were directly involved in the day to day operations of the Company at the highest levels and were privy to

20 Plaintiffs have pled particular facts with respect to

DiBenedetto's knowledge of the accounting deficiencies in the May

10, 1996, Form 10-Q. Plaintiffs allege that DiBenedetto was

specifically advised by Presstek's auditor of the correct

accounting procedures for the tax benefit Presstek received from

the exercise of certain stock options.24 Thus the group pleading

doctrine applies to DiBenedetto with respect to the May 10, 1996,

Form 10-Q, only. In all other respects, plaintiffs' group

pleading allegations fail.

B . Insider Trading.

The First Circuit has recognized that while "the mere fact

that insider stock sales occurred does not suffice to establish

scienter . . . [,] allegations of insider trading in suspicious

amounts or at suspicious times may permit an inference that the

trader - and by further inference, the company - possessed

material nonpublic information at the time." Shaw v. Digital

Equipment Corp.,

(1st Cir. 1996) (citation and

internal guotation marks omitted). Plaintiffs' complaint details

each sale made by each individual defendant during the class

period, stating the number of shares sold, the price received and

the total proceeds from the sale. Plaintiffs allege that the

confidential proprietary information concerning the Company and its operations, finances, financial condition, products and business prospects as alleged herein. Compl. at 5 55. These conclusory allegations similarly fail to meet the particularity reguirement.

24See compl. at 55 200-208.

21 proceeds from those sales "[were] dramatically greater than their

other compensation from their positions with Presstek."25

Finally, plaintiffs allege:

The stock sales by defendants during the Class Period were contrary to their prior trading practices and constituted a significant portion of their individual stock holdings. . . .

. . . The sales occurred in amounts suspiciously larger than these defendants' prior sales and at suspicious times in the course of the materially false and misleading statements alleged herein.26

Defendants say the complaint fails to plead any specific

facts tending to show that the sales were suspicious or unusual.

Defendants then attempt to demonstrate, through SEC filings by

the individual defendants, that, in fact, the insider sales

during the Class Period were both consistent with sales volume

prior to the Class Period, and constituted an insignificant

percentage of the individual defendants' holdings of Presstek

stock. The court need not decide, however, whether such

extraneous evidence can be considered on a motion to dismiss, cf.

Silicon Graphics,

(discussing whether court

may review, on a motion to dismiss, SEC filings not part of the

pleadings), because the issue can be resolved on the pleadings

alone. Having failed to allege any supportive facts tending to

reveal the unusual or suspicious nature of individual defendants'

trading activity in Presstek stock, other than comparatively

25Compl. at 5 214.

26Compl. at 55 219-21.

22 large amounts of money involved, plaintiffs have failed to plead

with sufficient particularity facts supporting an inference of

scienter.

5. Controlling Person Liability.

With respect to the individual defendants (other than

Verrando and Robert Howard) , plaintiffs claim that they are

control persons within the meaning of § 2 0 (a) of the Exchange Act

fail to state a claim. In this context, control "generally means

'the possession, direct or indirect, of the power to direct or

cause the direction of the management and policies of [an

entity], whether through the ownership of voting securities, by

contract or otherwise.'" Rand v. M/A-Com, Inc.,

(D. Mass. 1992) (guoting

(1990)). As

the Rand court noted, the First Circuit has not yet addressed

what elements must be pled to state a prima facie case of control

person liability. JCd. at 262. In particular, the First Circuit

has not addressed whether control person liability reguires some

culpable participation in the fraudulent acts with which the

defendant is charged. I_d. In the absence of specific circuit

guidance, the court adopts the position taken by the court in

Wells v. Monarch Capital Corp.,

at *11 (D. Mass.),

that "[t]he plaintiff need not establish . . . culpable

participation in his pleadings."

A complaint must allege "at a minimum the control status of

the defendant[;] that the controlling person directly or

indirectly held the power to exercise control over the primary

23 violator," Schaffer,

(internal quotation

marks omitted). At least one court has noted, however, that

"[t]he burden of showing control status is not particularly

onerous." In re Bausch & Lomb, Inc. Sec. Litiq.,

(W.D.N.Y. 1996). Thus, while "mere status or position

in a company does not conclusively show control status,"

courts have recognized that a position as a high ranking officer

"strongly suggest[s]" possession of "power to direct the

management and policies" of the corporation and "involve[ment] as

well in the preparation and review of [the corporation's] public

statements." Food and Allied Service Trades Dep't, AFL-CIO v.

Millfeld Trading Co.,

(S.D.N.Y. 1994).

Courts have at least been reluctant to resolve the issue on a

motion to dismiss. See Bausch & Lomb,

.

Thus, although the issue is close, defendants' motion to dismiss

the § 2 0 (a) claims against Williams, Pensavecchia, DiBenedetto

and Lawrence Howard is denied.

Depamphilis and Sparks, however, were not officers of the

company. While director status may be a "'red light' to the

court," Kaplan v. Rose,

(9th Cir. 1994), "a

bare allegation of director status, without more, is

insufficient" to plead control person liability. Food and Allied

Service,

. Other than conclusory allegations

of involvement in the affairs of the company, plaintiffs have

pled nothing to support Depamphilis and Sparks' liability as

24 control persons. Plaintiffs' § 20(a) claims against Depamphilis

and Sparks are dismissed.

6. State Law Claims.

Finally, defendants argue that plaintiffs' state law claims

should be dismissed for failure to state a claim. Defendants

argue that plaintiffs' fraud and negligent misrepresentation

claims are inadeguate because plaintiffs fail to plead "actual

reliance," relying instead on a fraud-on-the-market theory. The

court agrees. Actual reliance by the plaintiff is an element of

both fraud and negligent misrepresentation causes of action under

New Hampshire law. See Snow v. American Morgan Horse Assoc.,

(1996); Hvdraform Prods. Corp. v. American Steel &

Alum. Corp.,

(1985). The New Hampshire Supreme

Court has not adopted (and is not likely to adopt) the fraud-on-

the-market theory of reliance for common law fraud or negligent

misrepresentation, and, absent contrary guidance from that court,

the federal courts should decline to do so. See, e.g.. Wells,

at *13. Accordingly, plaintiffs' state law claims

for fraud and negligent misrepresentation are dismissed.

Defendants also move to dismiss plaintiffs' New Hampshire

Blue Sky Law claims for all of the reasons warranting dismissal

of plaintiffs' §§ 10(b) and 20(a) claims. However, defendants

devote no more than a single sentence of their brief to this

argument. Because the argument is inadeguately briefed, and is

undeveloped, the defendants' motion is denied.

Conclusion

25 For the foregoing reasons, defendants' motion to dismiss

(document no. 128) is granted in the following respects and

denied in all other respects:

1. Plaintiffs' claims relating to editions of the CML are

dismissed;

2. Plaintiffs' claims related to the SEC investigation

disclosure are dismissed;

3. Plaintiffs' § 10(b) and Rule 10b-5 claims are dismissed as to

all individual defendants except Verrando, Robert Howard and,

with respect to the accounting allegations only, DiBenedetto;

4. Plaintiffs' controlling person claims are dismissed as to

defendants Depamphilis and Sparks; and

5. Plaintiffs' state law claims based on fraud and negligent

misrepresentation are dismissed.

SO ORDERED.

Steven J. McAuliffe United States District Judge

March 30, 1999

cc: Edward F. Haber, Esg. George R. Moore, Esg. Patricia I. Avery, Esg. Kevin E. Sharkey, Esg. Paul D. Young, Esg. Mark L. Mallory, Esg. Patricia D. Howard Solomon Cera, Esg. Barrie L. Brejcha, Esg. Kenneth A. Cossingham, Esg. Thomas J. Pappas, Esg. R. Bruce McNew, Esg.

26