The suit, filed Tuesday in Federal District Court in Chicago, is the first such action the SEC has taken since the 1980s, according to Peter Chan, assistant regional director of the SEC's Midwest office.
"The reason this doesn't happen too often is that the company knows what our concern is before we file a lawsuit," Chan said. Most companies comply with the law without becoming the subject of an enforcement action, he said.
The Eau Claire-based small appliance manufacturer has been under investigation by the SEC for three years. The probe followed scrutiny of the company's practices by the New York Society of Security Analysts and a shareholder lawsuit contending that Presto's huge stash of cash, which constituted more than 80% of the company's assets, made Presto subject to the reporting requirements of an investment company.
An additional administrative action directed at Presto chairman emeritus Melvin Cohen and his daughter, chief executive officer Maryjo Cohen, is expected to be filed soon by the SEC.
In anticipation of the lawsuit and the action against the Cohens, Presto issued a statement Monday claiming that the SEC's enforcement action would be based on "allegedly excessive assets" that "are wildly inaccurate."
In an interview Wednesday, Presto executive vice president and secretary Jim Bartl pointed out that the suit repeatedly lists Presto's assets as being approximately $2.9 billion. During the time period referenced in the suit, he said, the company's financial statements list assets of just less than $300 million.
The company also said that settlement efforts were fruitless, because the company would have had to accept the SEC's contentions as factual and agree to withdraw its representations to the contrary.
"Those statements are absolutely outlandish," Chan said. "I suppose that's a reflection of the weakness of their position."
Presto could have settled with the SEC by neither admitting nor denying guilt, Chan said. But the agency won't settle a case if the company issues denials afterward, he said.
Bartl said Wednesday that the company's board of directors had voted unanimously to defend the suit, but that Presto was still willing to settle.
Under the Investment Act, a company is subject to the same requirements as a financial institution if 40% of its assets are in cash or marketable securities and if senior management is heavily involved in investment activity.
The suit contends that Presto has been an investment company since 1994. In the suit, the SEC is asking the court to order the company either to register as an investment company and comply with regulations that apply to such businesses, or to restructure its assets in such a way as to not be subject to investment company regulations.
The suit does not allege fraud on the part of Presto, nor does it seek any financial penalties.
If the SEC prevails in the suit and Presto chooses not to restructure its assets, the company would have to report where its money was invested and appoint independent directors to its board.
"We are offering the company choices," Chan said. "You can't have your cake and eat it, too."
According to Keith Ringberg, director of equities at Sentry Investment Management Inc. in Stevens Point, which holds 100,000 shares of Presto stock, "We have our attorneys looking at it for implications. National Presto is an extremely conservative company. They've held lots of cash for a long time. The chairman's family are conservative people. Beyond the letter of the law, I don't believe this is a pseudo-mutual fund."
Ringberg said his fund was invested in Presto because the current share price, $28.85 at the market's close Wednesday, was reflective of the approximate total of Presto's cash assets.
"We're getting the manufacturing operation for nothing," he said.
Presto's managers have been criticized by analysts for more than a decade for not investing the cash in an additional business that would generate a higher return than the company's conservative investments. Presto accumulated the cash from the sale of some of its subsidiaries in the late 1970s and early 1980s.
The New York Society of Security Analysts put Presto under a microscope in 1999 with a study project on corporate governance. The society was critical of the company's use of its cash and questioned whether shareholders had the ability to influence management's policies.
The company said the study and surrounding publicity brought Presto to the attention of the SEC, which resulted in the suit filed Tuesday.
But Gary Lutin, a New York investment banker who co-sponsored the security analysts' society project, said it is appropriate for the SEC to take enforcement actions against both large companies and small ones such as Presto. Without SEC scrutiny, he said, operators of small companies would be free to get away with anything because no one cares.
"People should understand that enforcing these rules should enhance shareholder value," Lutin said.
In the case of Presto, analysts who participated in the study said at the time that the company should be worth $50 a share, Lutin said, adding that Presto could distribute its cash to shareholders and still sell the manufacturing business for $10 to $20 a share.
The security analysts' society dropped its corporate governance study program after sell-side analysts took over the organization, Lutin said.
Presto was the first company chosen for a project, at the urging of institutional investors who held the stock in their small cap index funds. The investors were frustrated at the stock's lack of movement. After the study project was initiated, Presto's shares slid from around $40 to about $30.
Other cases studied by the security analysts' society include Dunn & Bradstreet, Amazon.com and a corporate raider battle between two packaging companies, Chesapeake Corp. and Shorewood Packaging.
Appeared in the Milwaukee Journal Sentinel on July 18, 2002.