in re: cms energy corporation securities litigation 02-cv-72004...
TRANSCRIPT
UNITED STATES DISTRICT COURTORIGINAL
EASTERN DISTRICT OF MICHIGAN
IN RE CMS ENERGY SECURITIESLITIGATION
Civ. No. 02 CV 72004 (GCS)(Consolidated)
HON. GEORGE CARAM STEEH
CLASS ACTION
CONSOLIDATED CLASS ACTIONCOMPLAINT
DEMAND FOR YURY TRIAL
_TJ-17) C )
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TABLE OF CONTENT S
1 . INTRODUCTION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
11 . SUMMARY OF THE ACTION .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
III . JURISDICTION AND VENUE .. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 l
IV. PARTIES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 5
Plaintiffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Defendants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Control Person Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Group Pleading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Duties of the Individual Defendants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Underwriter Defendants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
V. FRAUDULENT SCHEME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
VI. CLASS ACTION ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
VII. FRAUD ON THE MARKET PRESUMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
VIII . THE SAFE HARBOR PROVISION OF THE PSLR AIS INAPPLICABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
IX. BACKGROUND TO THE CLASS PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Description of CMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Marketing, Services and Trading Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Background To Round-Trip Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
False Price Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
X. FALSE AND MISLEADING STATEMENTS AN DOTHER CLASS PERIOD EVENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1
CMS's First Quarter 2000 Financial Statements . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1
Reasons Why the Statements Concerning the First Quarter of 200 0Were False and Misleading At the Time They Were Made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
CMS's Second Quarter 2000 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
CMS's Premium Equity Participating Security Units Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Platt's Second Quarter 2000 Rankings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . 48
September 11, 2000 Form S-3 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
October 6, 2000 Form S-3 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . 49
CMS's 9 718% Senior Notes Offering Prospectus Supplement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
CMS's October 18, 2000 Common Stock Offering Prospectus Supplement . . . . . . . . . . . 5 1Reasons Why the Statements Concerning the Second Quarter of 2000Were False and Misleading At the Time They Were Made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
CMS's Third Quarter 2000 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53Platt's Power Markets Weekly Article . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
I
December 15, 2000 Form S-3 Registration Statement . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
December 22, 2000 Form S-3 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Reasons Why the Statements Concern ing the Third Quarter of 2000Were False and Misleading At the Time They Were Made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
CMS's Fourth Quarter and Year End 2000 Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
CMS's February 23, 2001 Stock Offering Prospectus Supplement . . . . . . . . . . . . . . . . . . . . . . . . . . 59Platt's Power Markets Week 4`h Quarter 2000 Rankings . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 60
CMS's 2000 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 60
CMS's 2000 Annual Repo rt to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 6 1CMS's 8 .5% Senior Notes Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63Reasons Why the Statements Concern ing the Fou rth Quarterand Year End 2000 Were False and Misleading At the Time They Were Made . . . . . . 65
CMS's First Quarter 2001 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Platt's Power Markets Week 1St Qua rter 2001 Rankings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
CMS's 8 .9% Senior Notes Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Reasons Why the Statements Concerning the First Qua rter of 200 1Were False and Misleading At the Time They Were Made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
CMS's Second Quarter 2001 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Platt ' s August 6 , 2001 Art icle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73Reasons Why the Statements Concerning the Second Quarter of 200 1Were False and Misleading At the Time They Were Made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73CMS's Third Qua rter 2001 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
December 11, 2001 Press Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
December 12 , 2001 Form S -3 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Platt's Power Markets Week 3 d Quarter 2000 Rankings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
December 21, 2001 CMS Press Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 8
Reasons Why the Statements Concerning the Third Qua rter of 200 1Were False and Misleading At the Time They Were Made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
CMS's 2001 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
2001 CMS Annual Report to Shareholders . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
CMS Changes Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Reasons Why the Statements Concern ing the Fourth Qua rter andYear End 2001 Were False and Misleading At the Time They Were Made . . . . . . . . . . . . 84
The Truth Is Partially Revealed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
May 15 , 2002 Press Release; CMS Issues Additiona lDisclosures Concerning Its Round-Trip TradingCMS's First Qua rter 2002 10-Q . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Reasons Why the Statements Concern ing the First Quarter of 2002Were False and Misleading At the Time They Were Made. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
11
w , S .- • •
Andersen Disavows Its Prior Audits Of CMS And Formall y
Ends Its Relationship With The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . 104
CMS's Second Quarter 2002 Financial Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107Dynegy Cease & Desist Settlement With the SEC . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . 11 1
Reasons Why the Statements Concerning the Second Quarter of 2002Were False and Misleading At the Time They Were Made . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . 11 2
CMS Announces Results of Special Committee's Round-Trip Investigation . . . . . . . . 11 3CMS's Third Quarter 2002 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . 11 4
Reasons Why the Statements Concerning the Third Quarter of 200 2Were False and Misleading At the Time They Were Made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6Federal Energy Regulatory Commission Investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8
CMS's 2002 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
CMS's "Round-Trip" Energy Trades Materially Inflate d
CMS's Trading Volumes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
XI. POST CLASS PERIOD DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127Restatement of False Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Sale of CMS-MST Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 0
Additional Accounting and Financial Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1XII. SCIENTER ALLEGATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Motive Behind Round-Trip Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 5
Insider Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6Class Period Securities Offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 8
XIIi . VIOLATIONS OF GAAP AND SEC INTERNA LCONTROL REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 9
CMS's Accounting Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 9
CMS Entered Into "Round-Trip" Energy Trades Which Ha dNo Legitimate Business Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
The "Round-Trip" Energy Trades Materially Inflated CMS's Revenues . . . . . . . . . . . . . . 14 1
CMS Failed to Disclose the Details of its Nonmonetary Transactions . . . . . . . . . . . . . . . . . . . 142
Abuse Of Mark-To-Market Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
Breakdown Of CMS's Internal Accounting Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
Violations of SEC Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
FIRST CLAIM
Violation Of Section 10(b) Of The Exchange Act Agains tAnd Rule 1 Ob-5 Promulgated Thereunder Against CMS ,Consumers, And The Individual Defendants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
SECOND CLAIM
Violation Of Section 20(a) Of The Exchange Act Againstthe Individual Defendants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
THIRD CLAIM
iii
Violation of Section 1 I of the Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
(Against CMS, Consumers , the Underwriter Defendantsand Defendants McCormick, Deutch , Duderstadt, Flaherty,Fryling, Holton , Parfet, Pierre, Way, Whipple and Yasinsky) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
FOURTH CLAIM
Violation of Section 15 of the Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 8
(Against Defendants McCormick , Deutch , Duderstadt , Flaherty,Fryling, Holton , Parfet, Pierre, Way, Whipple and Yasinsky) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 8
JURY TRIAL DEMANDED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
iv
UNITED STATES DISTRICT COURTEASTERN DISTRICT OF MICHIGAN
IN RE CMS ENERGY SECURITIESLITIGATION
Civ. No 02 CV 72004 (GCS)(Consolidated)
HON. GEORGE CARAM STEEH
DEMAND FOR JURY TRIAL
CONSOLIDATED CLASS ACTION COMPLAIN T
Lead Plaintiffs , Andover Brokerage , LLC ("Andover") and Herbe rt Steiger
("Steiger"), and Plaintiff Rock Capital Partners LLC ("Rock Capital") (collectively ,
"Plaintiffs"), individually and on behalf of all other persons similarly situated, make th e
following allegations in this Consolidated Class Action Complaint :
1 . INTRODUCTION
I . Plaintiffs bring this action on behalf of themselves and all other person s
and entities who purchased or otherwise acquired the securities of CMS Energy
Corporation ("CMS" or the "Company")' from May 1, 2000 through and including
March 31, 2003 (the "Class Period") . Plaintiffs' allegations herein are based upon
information and belief, except as to those allegations concerning Plaintiffs, which are
alleged upon personal knowledge . Plaintiffs' information and belief are based upon ,
among other things, an extensive investigation conducted by and through their attorneys ,
which has included a review and analysis of a myriad of sources of information ,
including , inter alia, the following :
(a) CMS's filings with the United States Securities and Exchang e
Commission ("SEC" or the "Commission") ;
Unless otherwise indicated, the terms "CMS" and the "Company" refer collectively to CMS, itssubsidiaries, including Defendant Consumers, and the Individual Defendants (defined below) .
I
(b) CMS's press releases and other public statements disseminated by th e
Defendants du ring the Class Period ;
(c) Reports, articles and discussions concerning CMS and the subject matter
of this Complaint contained in print and electronic media and computer databases ;
(d) Documents filed with and by the Federal Energy Regulatory Commissio n
("FERC") ;
(e) Securities analyst reports and advisory opinions which refer to th e
Company, its businesses and markets ;
(f) Interviews conducted with persons having first-hand knowledge of th e
facts alleged herein, including former senior employees of the Company ; and
(g) Complaints filed in other actions pending before FERC and in related
litigation filed in other federal and state courts, as well as other materials filed in thos e
actions .
II. SUMMARY OF THE ACTIO N
2. This action arises out of severe accounting improprieties committed b y
CMS and its wholly owned subsidiary CMS Marketing, Services and Trading Company
("CMS-MST" or "MST") . With the deregulation of the energy industry, utilities and
other independent power producers started to trade energy, creating a national power
market . While this approach would, in theory, create and promote market efficiencie s
and deliver power where it was most needed, the unregulated trading market permitte d
opportunities for market manipulation and exploitation by its participants . Many of these
participants, including CMS, increasingly relied upon "round-trip" or "wash" trades ,
which served no legitimate purpose, other than to artificially increase the Company' s
reported revenues or artificially misrepresent or overstate the current market price o f
2
certain forms of energy. Round-trip trades in this context involve the simultaneou s
buying and selling of power at the same price and quantity with the same counter-party .
As described more fully below, CMS engaged in a fraudulent scheme through the use of
round-trip trading, which artificially inflated the Company's stock price and ultimately
led to one of the largest financial losses inflicted on the investing public . Indeed, the
events leading up to this litigation and the alleged wrongdoing are considered to be
among the most egregious corporate accounting scandals since the Enron Corp . debacle .
See Forbes Corporate Scandal Sheet , Forbes.com, August 26, 2002 . As part of the CMS
scheme, the Company also failed to disclose that it had failed to implement and maintain
an adequate internal accounting control system, or knowingly or recklessly tolerated the
failure to use existing internal controls in a manner that would ensure compliance with
Generally Accepted Accounting Principles ("GAAP") . This failure resulted in severe
inconsistencies with ledger balances, material balance sheet accounts and other materia l
aspects of CMS's accounting systems .
3 . Throughout the Class Period, CMS and the Individual Defendants issued a
series of misstatements, and omitted to state material facts, concerning the Company' s
financial results and condition . Many of these statements revolved around the operations
of the Company's MST division, which was purportedly making dramatic contributions
to CMS's overall revenues quarter after quarter during the Class Period . Indeed, the
Company continuously touted its MST division as an integrated element of its operations,
stating, for example, in its 2001 Annual Report :
Few companies have the intejrated energy asset base of CMS Energy,
and we believe that the earnings from the base can be further enhanced
by our growing and very successful energy marketing, services and
trading company. Our goal for CMS Energy is simply to build our
3
business to become one of North America 's leading asset-based,
integrated energy supply and services companies.
(Emphasis added) . The Company's press release, dated June 26, 2002, further states that
the MST division is one of CMS's "primary" businesses .
4. Additional press releases issued by the Company throughout the Clas s
Period regularly emphasized the success of the MST division and its purported dramati c
increases in revenues . The following statements represent just a few of the reported
results issued by the Company during the Class Period :
[F]or the three months ended September 30, 2000 . . . [t]he volumes ofmarketed natural gas and power traded increased 72 percent and over
1000 percen respectively.
fF]or the nine months ended September 30, 2000 . . . ,Tt]he volumes of
marketed natural gas and power traded increased 65 percent and 546
percent, respectively.
(CMS Third Quarter 2000 10-Q, filed November 14, 2000 (Emphasis added)) ;
Fourth quarter operating revenue totaled $3 .19 billion, compared to
$1.77 billion in the fourth quarter of 1999, up 80% from $1.77 billion in
the fourth quarter of 1999. Consolidated operating revenue for 2000
crew 47 percent to $9.0 billion, from $6.1 billion in 1999, due largely to
significantly lower-margin energy marketing and trading transactions . .
. [The Company's] energy marketing unit made the transition from a
retail to wholesale business, with 614 billion cubic feet of natural gasmarketed, an increase of 31 percent, and 37,781 gigawatt-hours ofelectricity marketed, up 919 percent, in 2000.
(CMS 2000 10-K, filed January 24, 2001 (Emphasis added)) ; and
MARKETING, SERVICES AND TRADING RESULTS OFOPERA TIONS . . .The physical volumes of marketed and managed natural gas and power
traded increased 17 percent and 1,783 percent respectively, due largely
to significantly increased lower margin energy marketing and trading
transactions.
4
(CMS First Quarter 2001 10-Q, filed May 11, 2001) (Emphasis added).
5. CMS-MST' s operating revenues and wholesale energy sales were clearly
a key component of Company's overall financial performance and thus material to th e
Company's investors ; indeed, the commencement of round-trip trading at CMS caused a
dramatic increase in the Company's stock price and ultimately a severe drop in pric e
when the truth about such trading was finally disclosed . As reported by Forbes.com on
May 16, 2002 :
In America, looking busy and productive is itselfa status symbo l.
Some people at CMS Energy, Dynegy [Inc. ("Dynegy")] andReliant wanted to look even bigger, still busier. Thus the shametransactions . . . [T]he deception seems to have worked well,offering a motive for apparent nonsense. After CMS Energy'sshare price took a dive in early 2000 , it took a steady rise front$15 a share to $27 in early 2001
6. Moreover, the recent securities fraud action instituted by the SEC agains t
Dynegy - one of CMS's round-trip trading partners -- indicates that the SEC clearl y
considers a company's use of round-trip trading to be materially misleading when used t o
inflate revenues . Specifically, the SEC complaint, filed September 25, 2002, alleges that :
Dynegy failed to disclose that [its] resulting increases [inrevenues] were materially attributable to the round-trip trades .Because the round-trip trades lack economic substance, Dynegy'spress releases [announcing revenues that included round triptrading] were materially misleading.
SEC Complaint, filed with the U .S. District Court, Southern District of Texas, Septembe r
25, 2002, T 11 .
7. CMS's trading performance played a significant role in the actual ranking
of the Company among its peers in the energy trading business . Many of CMS's round-
trip transactions during the Class Period were with Reliant Resources and/or its parent ,
Reliant Energy, Inc. (collectively, "Reliant"), or Dynegy, as counter-party .
5
4,J
8 . Platt's, a private news service which publishes industry publications an d
reports on electricity and natural gas spot and forward prices and volumes, periodically
publishes rankings for the various participants in the energy trading industry, setting forth
the volume of trades, revenues and gains . During the Class Period, these rankings were
important in the energy trading industry because they allowed particularly large trading
firms to attract larger clients (including public utilities), take on larger trading positions,
and obtain larger amounts of unsecured debt. In the case of CMS, the Company's illicit
use of round-trip trading elevated it to the top tier of energy companies . During the
second quarter of 2000, for example, Platts ranked CMS as 48t" among its competitors in
total power sales for the quarter. As the Company's round-trip trading increased,
however, that rank increased to 20" for the third quarter of 2000 and 18th for the firs t
quarter of 2001 . This ranking was not only reported among the energy industry, but wa s
also reported directly to CMS investors in the Company's 2001 Annual Report, where th e
Company touted its ranking as among the "top 20 U .S. natural gas and power marketers ."
9. Securities analysts also seized on the Company's energy trading busines s
as part of a growth indust ry in an otherwise low growth sector. As a result of this false
impression of energy trading as a growth industry , the common stock price of CMS rose
to inflated levels, reaching a Class Period high of $31 .75 per share on May 1, 2001 . In
addition, the price of CMS PEPS rose to a Class Pe riod high of $29 .40 per PEPS Unit o n
May 1, 2001 .
10. CMS's materially false and misleading statements, contained in its publi c
filings and press releases, resulted from a series of deliberate senior management an d
director decisions designed to conceal the truth regarding the Company's actual operatin g
6
results. According to a former CMS Enterprise International Auditor, on at least one
occasion, Defendant Wright directed the Company's division controllers to revise their
2001 year-end results upwards by a total amount of $2 to $5 billion . Moreover, periodic
reports, including Value at Risk ("VAR") reports, distributed to members of senior
management and CMS's Board of Directors as part of the Company's self-proclaimed
risk management policies demonstrates these executives' knowledge of the Company's
round-trip trading practices. As described more fully below, CMS's financial statements
during the Class Period were false and served to inflate the price of the Company's
securities and defraud investors into purchasing them .
11 . Ultimately, the Company's false and misleading activities came to an
abrupt halt when CMS's own trading partner, Dynegy, became the focus of an SEC
investigation and was forced to disclose that it had engaged in extensive round-trip
trading with CMS . Upon this disclosure, CMS was forced to admit its own wrongdoing .
Specifically, beginning on May 9, 2002, the Company announced that its MST division
had "initiated" electricity trades with Dynegy in November 2001 . The following day,
May 10, 2002, the Company announced that the SEC had asked it to provide information
in connection with an informal inquiry it was conducting into the Company's round-tri p
trading .
12. Shortly thereafter, on May 15, 2002, the Company admitted that it ha d
"entered into `round trip' electricity trades involving simultaneous purchases and sales
with the same counterparties [including Dynegy, Reliant and others], at the same price
from May 2000 through mid-January 2002 ." In the same release, the Company disclosed
that an earlier restatement in its previously released 2001 10-K actually reflected the
7
elimination of $3 .4 billion of previously reported revenue and expenses for the first three
quarters of 2001 . CMS further disclosed, for the first time, that, with regard to 2000, an
additional $ I billion would have to be restated to eliminate revenues and expenses
associated with the Company's round-trip trading during that year.
13 . Also on May 15, 2002, Kelly Farr, a spokesman for CMS stated : "(wfe
admit the mistake, and decided to go to a more conservative method of accounting fo r
2001. We looked at the accounting treatment that we had for round-trip trades and
decided that it would be better not to do those." Alejandro Bodipo-Memba, CMS
Energy Inc. Admits to Inflating Sales , Detroit Free Press, May 16, 2002 .
14. Reaction to the foregoing disclosures was swift and severe . For example,
a Reuters ' article, dated May 15, 2002, entitled , "CMS Admits to $4 .4 billion Worth o f
Bogus Power Trades," stated that CMS admitted it had entered into the subject round-tri p
trades "in an attempt to become a leading energy trader ." Another Reuters article, dated
May 15, 2002, entitled , "For Accountants It's Clear, Wash Trades Are Illegal," stated :
"Recording revenues from round-trip trades would be a species of fraud
because they're overstating revenues," said Robert Waxman, a former
partner at Deloitte & Touche . . .
Accounting experts . . . said the illegality of wash trading boils down tothe basic tenet of financial reporting: You don't book revenue from asale that lacks substance.
(Emphasis added) .
15 . Commenting on additional round-trip trading which took place betwee n
CMS and Reliant during the fourth quarter of 2000, Platt's Power Market Week stated
that such trades "accountedfor 90% of CMS's quarterly sales, boosting its sales volum e
from less than 3 million MWIi to 22.1 million MW!t. In that quarter, the CMS uni t
8
ranked 18"' among wholesale power sellers; without the Reliant transactions, it would
have ranked 5e ." (Emphasis added) .
16 . As further stated by William L . Massey, Commissioner of FERC, in a
speech on August 19, 2002 :
[T]he disclosure of sham round trip trading by several marketparticipants, coupled with highly questionable accounting practices, hasseverely eroded investor confidence in many entities that engage in
trading of gas or electricity.
All of this funny business has called into question the integrity ofenergy marketing and trading. Whether this is fair or not is thesubject ofdebate, but damage has been done . Many states havebacked away from their restructuring plans. Energy tradingstocks have plummeted on Wall Street.
(Emphasis added) .
17 . Moreover, on February 24, 2003, in the Congressional Record, Senato r
Dianne Feinstein (a member of the Senate Energy and Natural Resources Committee )
made the following statement :
Dynegy, Duke Energy, El Paso, Reliant Resources, CMS Energy,and Williams all admitted engaging in false "round-trip" or "wash"
trades .
What is a "round-trip" or "wash" trade, one might ask?"Round-trip" trades occur when one firm sells energy to anotherand then the second firm simultaneously sells the same amount
of energy back to the first company at exactly the same price . No
commodity ever changes hands. But when done on an exchange,
these transactions send a price signal to the market and theyartificially boost revenue for the company. Fraud again.
[C]MS Energy announced 80 percent of its tradefs] in 2001 were"round trip " trades. That means 80 percent of all their tradesthat year were bogus trades where no commodity changed hands,and yet the balance sheets added revenue. If that isn'tfraudulent, I do not know what is.
108th CONG . REC. S2567 (FEB . 24, 2003) (Emphasis added) .
9
Y ,
18. Subsequent admissions by the Company further support the allegations se t
forth herein . Specifically, on May 24, 2002, the Company announced that Defendant
McCormick had resigned as Chairman and Chief Executive Officer of CMS .
McCormick admitted that "[t]here have been significant mistakes in execution ." In the
same announcement, the Company stated that it had set up a special committee to
investigate the Company's round-trip trades (the "Special Committee" or "Committee")
and that it had been served with a subpoena from the U .S. Attorney's Office for the
Southern District of New York in connection with such trading . The Company further
announced that it was expecting a subpoena from the U.S . Attorney's Office for the
Southern District of Texas . Ultimately, the Special Committee concluded on November
4, 2002, that the Company's round-trip trading was "undertaken to raise CMS Marketing,
Services and Trading's profile as an energy marketer with the goal of enhancing its
ability to market its services" and "was an ill-considered, inappropriate marketing
practice that is unacceptable."
19. As of the filing of this Complaint, the common stock of CMS trades a t
approximately $6 .30 per share and the PEPS trade at approximately $13 .00 per PEPS
Unit .
10
III . JURISDICTION AND VENUE
20 . This Court has jurisdiction over the subject matter of this action pursuan t
to 28 U.S.C. §§ 1331, 1337 and 1367, Section 22 of the Securities Act of 1933
("Securities Act") [ 15 U .S.C. 77v] and Section 27 of the Securities Exchange Act of 193 4
("Exchange Act") [15 U.S .C. § 78aa] .
21 . The claims asserted herein arise under and are pursuant to Sections 11 and
15 of the Securities Act [15 U.S .C. §§ 77k and 77o] and Sections I0(b) and 20(a) of th e
Exchange Act [15 U .S.C. §§ 78j(b) and 78t (a)], and Rule lob -5 promulgated thereunder
by the SEC [17 C.F.R. § 240.1 Ob-5] .
22. Venue is proper in this District pursuant to Section 22 of the Securi tie s
Act [15 U .S .C. § 77v], Section 27 of the Exchange Act [15 U.S.C . § 78aa] and 28 U.S .C .
§ 1391(b) . Many of the acts alleged herein, including the preparation and dissemination
to the investing public of the materially false and misleading statements at issue , occurred
in substantial pa rt in this Dist rict , where CMS has its principal place of business .
23 . In connection with the acts, transactions and conduct alleged herein ,
Defendants, directly or indirectly, used the means and instrumentalities of interstate
commerce, including, but not limited to, the United States mails, interstate telephone
communications and the facilities of national securities exchanges and markets . The
following charts indicate particularly significant Class Period events, including
Defendants' false and misleading statements and subsequent disclosures, combined with
a graph of the Company's stock price :
11
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$ 25 .}0
$20 .00
$15 .00
$10 .00
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August 3, 200 0
CMS reporis Second Quarter Earningspei Share of $0 72 . In addition, isopenitmg revenue for the quarter is$1,599 tmllion
t ,!
i
12
CMS 200 1$30 .0 0
$25 .0 0
520 .00 January 24, 200 1
CMS Energy reports 4th Q and year 200 0
earnings per share of 52 53 The company's August I . 200 1higher earnings were largely due to strong CMS Energy announces secon dutility electric and gas sales, independent quarter EPS of SO 40 Operatin g
$15 .00power sales and inarketing and trading income of the marketing, servicedprofits Energy marketing and trading and trading business was $51 millio noperating earnings were increased by more for the second quarter, up from SO 4
October 26 200 1than three times, from $4 million in 1999 to million in the second quartet of 2000,
CMS Energy announces sales by the Company wer e$14 million in 2000 PEPS close trading at PEPS close trading at $26 81 pe
up largely on increased lower margin energy$26 I ft8 per unit uni t
$~~a~ marketing andtrading transactions . Revenue for th e
quarter rose 29% to $3 billion . compared with $2 3
billion in the 3rd Quarter of 2000 PEPS close
trading nn previous day at $25 03 pet Uni t
$5.00
0 0 0 0 0 o a o o ci o 0 o c> o o a o 0 0 0 0 0 0 0O O O O O Q O O O O O O O O O O O O CD O O O O O O
N N N N N N N N N N N N N N N N N N N N N N N N N
N ~D O r'l F~ rl r- O c# 00 N =1 O1 r"i r- ,--• ~ 00 kn O~ M 'O O 't o0M N N N N n N N-- N N M M
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13
CMS 2002Mny 9 200 2
$25.00 Wall Street Journal artrele nCviitls that the SEC is looking nvo allerrlnnns thatDyvergy and CMS e ntered into two round sip trades sal«ed at $1 7 hdiaon on its
on] Inn energy trading system
may 11) 200?
CMS announced tloat el., nadcs nlih DTn Kgy here
bmg tanked taw by fcdcmul mplators
$20 .00 anna y 7, ann zfhIS En pannnu needthat it lions secs Its operating eammgs to the Si 1 a
ra Si 4n per shar, dour horn ns prn +ons atnriat s by so 1 ,4 pus dire R'ot trnber4 20)UCMS annhuled it stortfall to signifi cantly wanner than wrinaf wcalko rut
Junet.tlchigan g1s ii slr truhnn fac lity It bonuses reatlirmrd it outlook
of une 12 2002 Ctils announce l webs o ( Ihe spec
eU It)) 1, E2 9s share for candour n 21)( 11 PEPS close nadmg n
[ 11, Arthur Andersen I .LC has di- ns as year cnmm Itee mresugaunn PEPS close
Ia- at S2a so pernnIt ettd .1 000 and 20 I audits ofCMS Lon v trading at 51 s so per unl l
Crn~
I ~ ' CMS annnunres tic CMS h4arkcur~G Services and T13dmg division wdl
~pn121 111)12 ebmma[e rs apeculahre enagv trading business Ime and cul tts work loran
CMMS Energ' i mruncedthat to Board ofDncclars Otis des derl to change by sO positions of 25"4, PEPS dose trading at $17 2 5 per unit
tied tors from And., Anrk en LLP to audit its financal state itsn[21)02 Anhui Anilcrsen s rngagclne a wnh Ch15 wilt old follow Ong I~ JJJ///
restcu of[he CoojralrysIst puaner Tnapnals PEPS dose Iradng the / 242[1112
~~ pm a on s day al 520 45 pet inn / la Ihant IdcConnick sister
inwn as CEO nl ChMS Energy
Slav I 121)(1 2
Ch4S announced liar ll is eooporahng with the
$S,Dn SEC probe avd,in ouortts time remits nfns
inlrnlati mire PEPS dot-nradnrg Tire next Sin at -
0zl 41) psi 4111 (
N N N N N N N CJ N N N N N fV (V N N N fV fV fJ rV rV PV NO O O O Q G O O o Q Q G O O O Q G O O CD Q G GQ C O O O O p O O C O Q Q G O O O O Q C C O O Q QN N N N N N N N N N N N N N N N N N N = N N 174 N N
N ~D O M I- M r- Q V N Vi OpC2 r- 00 1) G1 i+1 `O O V oC
M N N _ N N rvl N N 0 N N r4. - r N N r1 r~'1 V T '~'1 tiD I~ l~ ow (71 Os .- O N
f E
14
IV. PARTIES
Plaintiffs
24. Lead Plaintiff Andover is one of the largest institutional trading firms i n
the country with over 30 branch offices . It is a fully reporting member of the Nationa l
Association of Securities Dealers and is managed by seasoned professionals with over 6 0
years of collective experience in the securities industry . During the Class Period ,
Andover purchased shares of CMS common stock and was damaged thereby .
25 . Lead Plaintiff Steiger purchased shares of CMS common stock during the
Class Period and was damaged thereby .
26. By Order, dated November 14, 2002, the Court appointed Andover and
Steiger as Lead Plaintiffs for the Class .
27. Plaintiff Rock Capital purchased CMS 7'/% Premium Equity Pa rt icipating
Security Units ("PEPS") during the Class Period and was damaged thereby. Pursuant to
the terms of the PEPS prospectus/registration statement, dated August 17, 2000, each
PEPS Unit includes, inter alia, a purchase contract under which the holder agrees to
purchase from CMS a specific number of shares of CMS common stock no later than
August 18, 2003 .
28 . At the time Plaintiffs acquired CMS secu rities , they were without
knowledge of the facts concerning the false and misleading financial statements filed by
Defendants with the SEC and otherwise published in the markets . Plaintiffs have
sustained substantial damage as a direct and proximate result of Defendants' violations of
the securities laws .
15
Defendants
29. Defendant CMS is a corporation organized under the laws of the State o f
Michigan, with its principal executive offices located in Dearborn, Michigan . CMS is an
energy holding company operating through subsidiaries in the United States and i n
selected markets around the world . Its two principal subsidiaries are Consumers Energy
Company ("Consumers") and CMS Enterprises Company ("Enterprises") . Enterprises ,
through subsidiaries, is engaged in several energy businesses in the United States and i n
selected international markets . CMS trades on the New York Stock Exchange under the
ticker symbol CMS .
30. Defendant Consumers is a public utility that provides natural gas and/o r
electricity to almost 6 million of Michigan's 10 million residents and serves customers i n
all 68 of the state's Lower Peninsula counties .
31 . The following individual persons are named as Defendants herein :
(a) Defendant William T . McCormick, Jr. ("McCormick") was, at al l
relevant times, CMS's Chairman of the Board of Directors, Chief Executive Officer
("CEO") and President of the Company . McCormick also served as Chairman of the
Boards of Directors of Consumers and Enterprises until May 24, 2002 . McCormick
resigned as President of CMS on May 24, 2001 and resigned as CEO on May 24, 2002,
with a $4 million severance package. McCormick remains employed by the Company as
a consultant until June 1, 2004. McCormick signed the following annual reports an d
additional documents which the Company filed with the SEC during the Class Period :
September 11, 2000 Registration Statement, October 6, 2000 Registration Statement ,
December 15, 2000 Shelf Registration Statement, December 22, 2000 Shelf Registratio n
Statement, 2000 10-K, 2000 Annual Report, December 12, 2001 Registration Statement ,
16
2001 10-K, and 2001 Annual Report . During the Class Period, while in possession of
adverse undisclosed information about the Company, McCormick sold 40,000 shares of
his CMS common stock for $1,002,768 .00 in illegal insider trading proceeds .
McCormick's insider selling during the Class Period is shown below :
CMS EnergyDefendant William T. McCormick, Jr. Quarterly Shares Sold (Dollar Volume)
lvia zuuu - iviarcn zuu 3
$30 Summary of Insider Sales $250Class Peri od Shares Sold 46,000Proceeds from Sales S 1 ,O02,768
$25CMS Stock $20 0_ . ~
$20 per
$]50.ccn
~ayL
a $1 5LO
O>ti
$10 0
$10
Insider --~
$50$5
$ $- -
M-00 A-00 N-00 F-0l M-01 A-01 N-01 F-02 M-02 A-02 N-02 F-0 3
(b) Defendant David W. Joos ("Joos") has been President and Chief
Operating Officer ("COO") of CMS and Consumers since October 2001 . Joos has also
been President and COO of Enterprises from 2001 through the present . Prior to serving
as President of CMS and Enterprises, Joos served as Executive Vice President of bot h
17
companies since 2000 . As Executive Vice President, President and COO of Enterprises ,
Joos has directly managed the electric utility, independent power production,
international energy distribution and marketing, services and trading operations of th e
Company. Joos has also served on the Boards of Directors of CMS and Consumers sinc e
2001, and became Chairman of the Board of Enterprises in 2003 . Joos signed the
following annual report and additional documents which the Company filed with the SE C
during the Class Period : December 12, 2001 Registration Statement, 2001 10-K, an d
2001 Annual Report .
(c) Defendant Alan M . Wright ("Wright") served as CMS's Executiv e
Vice President, Chief Financial Officer and Chief Administrative Officer from May 200 1
to August 2002 . Prior to May 2001, Defendant Wright was CMS's Vice President an d
Chief Financial Officer. As CMS's principal financial officer, defendant Wright the
following annual reports and additional documents which CMS filed with the SEC during
the Class Period : May 1, 2000 8-K, First Quarter 2000 10-Q, Second Quarter 2000 10-Q,
October 25, 2000 8-K, Third Quarter 2000 10-Q, September 11, 2000 Registratio n
Statement, October 6, 2000 Registration Statement, December 15, 2000 Shel f
Registration Statement, December 22, 2000 Shelf Registration Statement, February 23 ,
2001 S-K, 2000 10-K, 2000 Annual Report, First Quarter 2001 10-Q, August 1, 2001 8-
K, Second Quarter 2001 10-Q, October 26, 2001 10-Q, Third Quarter 2001 10-Q ,
December 12, 2001 Registration Statement, 2001 10-K, 2001 Annual Report, April 22 ,
2002 8-K, May 1, 2002 8-K, First Quarter 2002 10-Q, August 7, 2002 8-K, and Secon d
Quarter 2002 10-Q. Upon his departure from CMS in August of 2002, Wright received a
$1 .65 million severance package. During the Class Period, while in possession o f
18
adverse undisclosed information about the Company, Wright sold 15,640 shares of his
CMS common stock for $449,658 .60 in illegal insider trading proceeds . Wright's insider
selling during the Class Period is shown below :
CMS EnergyDefendant Alan M . Wright Quarterly Shares Sold (Dollar Volume )
May 2000 - March 200 3
Sumary o1 Insider Salesm
$30 ss Penod Shares Sold 32,740Cla $900
Proceeds iroin Sales 5945,558
$800
$25 CMS Stock
$700
$20 $600 ~y~ +ti^
on
$500I. .$15
$400 a
A a.$10 $300
$200
$5
II $100Inside r
M-00 A-00 N-00 F-01 M-01 A-01 N-01 F-02 M-02 A-02 N-02 F-03
(d) Defendant Tamela Pallas ("Pallas") was President and COO of
CMS-MST from November 1999 until February 2002 . She was subsequently promoted
to President and CEO of CMS-MST, and served in that position until her resignation on
May 16, 2002. At all relevant times, Pallas was in charge of energy trading at CMS .
CMS hired Pallas while she was working at Reliant, where she served as Senior Vic e
19
President from 1997 until November 1999 . Prior to that time, Pallas was employed by
Basis Energy as Senior Vice-President since 1992. As set forth in the Company's Apri l
22, 2002 Proxy Statement on Schedule 14A, Pallas received a bonus of $700,000 base d
upon the performance of the CMS-MST division in 2001 .
(e) Defendant Kenneth L. Way ("Way") has served as a director of
CMS and Consumers since 1998 and currently serves as Chairman of the Specia l
Committee, which was organized on May 31, 2001 to investigate power trades performe d
by the Company's CMS-MST division . Way signed the following annual reports and
additional documents which the Company filed with the SEC during the Class Period :
September 11, 2000 Registration Statement, October 6, 2000 Registration Statement ,
December 15, 2000 Shelf Registration Statement, December 22, 2000 Shelf Registratio n
Statement, 2000 10-K, 2000 Annual Report, December 12, 2001 Registration Statement ,
2001 10-K, and 2001 Annual Report .
(f) Defendant Earl D. Holton ("Holton") has been a director of CM S
and Consumers since 1989, and serves on the Special Committee . Holton also serves as
Chairman of the Board of Steelcase, Inc ., of which Defendant Joos is also a board
member. Holton signed the following annual reports and additional documents which th e
Company filed with the SEC during the Class Period : September 11, 2000 Registratio n
Statement, October 6, 2000 Registration Statement , December 15, 2000 Shelf
Registration Statement, December 22, 2000 Shelf Registration Statement, 2000 10-K ,
2000 Annual Report, December 12, 2001 Registration Statement, 2001 10-K, and 200 1
Annual Report .
20
(g) Defendant Kathleen R . Flaherty ("Flaherty") has been a director o f
CMS and Consumers since 1995 . Flaherty also serves on the Special Committee .
Flaherty signed the following annual reports and additional documents which th e
Company filed with the SEC during the Class Period : September 11, 2000 Registration
Statement, October 6, 2000 Registration Statement, December 15, 2000 Shel f
Registration Statement , December 22, 2000 Shelf Registration Statement , 2000 10-K ,
2000 Annual Report, 2001 10-K, and 2001 Annual Report .
(h) Defendant Kenneth Whipple ("Whipple") has served as Chairma n
of the Board and CEO of CMS since 2002 . Prior that time, he served as a director of
CMS since 1993 . Whipple has also served as a board member of Consumers since 199 3
and is currently a member of the Special Committee . Whipple signed the following
annual reports and additional documents which the Company filed with the SEC durin g
the Class Period : September 11, 2000 Registration Statement, October 6, 200 0
Registration Statement , December 15, 2000 Shelf Registration Statement, December 22 ,
2000 Shelf Registration Statement, 2000 10-K, 2000 Annual Report, December 12, 200 1
Registration Statement , 2001 10-K, and 2001 Annual Report .
(i) Defendant Dennis DaPra ("DaPra") served as Senior Vic e
President of Consumers from 2001 until 2002, and Vice President and Controller o f
Consumers from 1991 until 2001 . DaPra signed the following annual reports and
additional documents which the Company filed with the SEC during the Class Period :
2000 10-K, 2000 Annual Report, 2001 10-K, and 2001 Annual Report .
(j) Defendant John M. Deutch ("Deutch"), has been a director of CM S
and of Consumers since 1997 . Deutch served on the Audit Committee of CMS an d
21
Consumers throughout the Class Period. Deutch signed the following annual reports an d
additional documents which the Company filed with the SEC during the Class Period : .
(k) Defendant James J . Duderstadt ("Duderstadt") has been a director
of CMS and Consumers since 1993 . Duderstadt served on the Audit Committee of CM S
and Consumers throughout the Class Period . Duderstadt signed the following annua l
reports and additional documents which the Company filed with the SEC during th e
Class Period : September 11, 2000 Registration Statement , October 6, 2000 Registration
Statement , December 15, 2000 Shelf Registration Statement , December 22, 2000 Shel f
Registration Statement, 2000 10-K, 2000 Annual Report, December 12, 200 1
Registration Statement, 2001 10-K, and 2001 Annual Report .
(1) Defendant W. U. Parfet ("Parfet") has been a director of CMS an d
of Consumers since 1991 . Parfet chaired the Audit Committee of CMS and Consumer s
throughout the Class Period . Parfet signed the following annual reports and additiona l
documents which the Company filed with the SEC during the Class Period : September
11, 2000 Registration Statement, October 6, 2000 Registration Statement, December 15 ,
2000 Shelf Registration Statement, December 22, 2000 Shelf Regis tration Statement,
2000 10-K, 2000 Annual Report, December 12, 2001 Registration Statement, 2001 10-K ,
and 2001 Annual Report .
(m) Defendant Percy A. Pierre ("Pierre") has been a director of CM S
and of Consumers since 1990 . Pierre served on the Audit Committee of CMS and
Consumers throughout the Class Period . Pierre signed the following annual reports and
additional documents which the Company filed with the SEC during the Class Period :
September 11, 2000 Registration Statement, October 6, 2000 Registration Statement ,
22
December 15, 2000 Shelf Registration Statement, December 22, 2000 Shelf Registration
Statement, 2000 10-K, 2000 Annual Report, December 12, 2001 Registration Statement,
2001 10-K, and 2001 Annual Report .
(n) Defendant John B . Yasinsky ("Yasinsky") has been a director of
CMS and of Consumers since 1994 . Yasinsky served on the Audit Committee of CMS
and Consumers in 2000 and 2001 . Yasinsky signed the following annual reports and
additional documents which the Company filed with the SEC during the Class Period :
September 11, 2000 Registration Statement, October 6, 2000 Registration Statement,
December 15, 2000 Shelf Registration Statement, December 22, 2000 Shelf Registration
Statement, 2000 10-K, 2000 Annual Report, December 12, 2001 Registration Statement,
2001 10-K, and 2001 Annual Report .
(o) Defendant Victor J . Fryling, ("Fryling") was a director of CMS
from 1995 until his early retirement on December 4, 2000. At the time of his retirement,
Fryling had served as Chief Operating Officer of CMS since 1996, Fryling also served as
President of CMS from 1996 until 1990 . Defendant Fryling signed the following
documents which the Company filed with the SEC during the Class Period : September
11, 2000 Registration Statement, October 6, 2000 Registration Statement, December 15,
2000 Shelf Registration Statement and December 22, 2000 Shelf Registration Statement .
(p) Defendant Preston D . Hopper ("Hopper") is currently Executive
Vice President and Chief Financial Officer of CMS Energy, Consumers, Enterprises and
Panhandle Eastern Pipe Line (2002-present) . Defendant Hopper signed the following
annual reports and additional documents which the Company filed with the SEC during
the Class Period: September 11, 2000 Registration Statement, October 6, 2000
23
W. .w✓
Registration Statement, December 15, 2000 Shelf Registration Statement, December 22,
2000 Shelf Registration Statement, 2000 10-K, 2000 Annual Report, December 12, 200 1
Registration Statement, 2001 10-K, and 2001 Annual Report . During the Class period,
while in possession of adverse undisclosed information about the Company, Hopper sold
2,000 shares of his CMS common stock for $52,835 .00 in illegal insider selling proceeds .
CMS EnergyDefendant Preston D . Hopper Quarterly Shares Sold (Dollar Volume)
May 2000 - March 2003
Summary of Insider Sales
$30 Class Penod Shares Sold 2,000 $50
P roceeds from Sales 552 .835
$4544
$45
$25CMS Stock Pnce $40
$3s$20
V $3 0
F.
$15~
$25
$2 0
$10 -$1 5
Insider -~ $ $1 0$5 - snIPQ
$5
I i
M-00 A-00 N-00 F-01 M-0I A-01 N-01 F-02 M-02 A-02 N-02 F-03
32. Defendants McCormick, Joos, Wright, Pallas, DaPra, Deutch, Duderstadt,
Parfet, Pierre, Yasinsky, Fryling, Hopper, Way, Holten, Flaherty and Whipple are
collectively referred to herein as the "Individual Defendants ."
24
Control Person Liability
33 . The Individual Defendants are liable as direct participants with respect t o
the wrongs complained of herein . In addition, the Individual Defendants, by reason of
their status as senior executive officers and/or directors were "controlling persons" within
the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act and
had the power and influence to cause the Company to engage in the unlawful conduc t
complained of herein . Because of their positions of control, the Individual Defendant s
were able to and did, directly or indirectly, control the conduct of CMS's business .
34. Specifically, because of their positions with CMS, the Individual
Defendants possessed the power and authority to control the contents of CMS's annua l
and quarterly reports, press releases and presentations to securities analysts, money and
portfolio managers and institutional investors, i.e., the market. Each of the Individua l
Defendants, by reason of their respective management or board positions, had the ability
and opportunity to review copies of the Company's SEC filings, reports and pres s
releases alleged herein to be misleading, prior to, or shortly after their issuance, and t o
prevent their issuance or cause them to be corrected .
35. By virtue of their positions, the Individual Defendants had access to th e
material adverse non-public information concerning the business and financial conditio n
of the Company. Indeed, the Company 's own risk management polices during the Class
Period demonstrate that the Individual Defendants directly managed or, at a miminum ,
were aware of, the various risk levels associated with the Company's operations ,
including its round-trip trading positions in its MST division . As set forth in the
Company's 2000 Annual Report and repeated in every quarterly filing of CMS throug h
the first quarter of 2002,
25
CMS Energy's derivative [trading] activities are subject to the direction ofthe Executive Oversight Committee, consisting of certain members ofCMS Energy's senior management, and its Risk Committee, consisting ofCMS Energy business unit managers . The goal of the risk management
policy is to measure and limit CMS Energy's overall energy commodityrisk by implementing an enterprise-wide policy across all CMS Energy
business units . . . . The role of the Risk Committee is to review thecorporate commodity position and ensure that net corporate exposures arewithin the economic risk tolerance levels established by the Board ofDirectors .
(Emphasis added) . Moreover, as stated in the Company's quarterly reports for the firs t
quarter of 2000 through the first quarter of 2002 :
CMS Energy and its subsidiaries rely on the experience and judgment ofsenior management and traders to revise strategies and adjust positions asthey deem necessary .
(Emphasis added) .
36. In light of their senior positions with the Company and the policies se t
forth above, the Individual Defendants clearly had access to internal corporate
documents, including CMS's general ledger and internal reports relating to the wholesale
energy trading business' revenue and expenses . These materials included VAR Reports
and other information regularly provided to senior management and the Board o f
Directors in connection therewith, in their capacity as the officers and/or directors o f
CMS. Indeed, as stated in the Company's First Quarter 2001 10-Q and repeated in th e
Second Quarter, Third Quarter and year-end 2001 reports ,
CMS Energy, through its subsidiary CMS MST, engages in tradingactivities. CMS MST manages any open positions within certainguidelines which limit its exposure to market risk and requires timelyreporting to mana eg ment of potential financial exposure. These guidelinesinclude statistical risk tolerance limits using historical price movements tocalculate daily value at risk measurements .
(Emphasis added) .
26
37 . Based upon their respective positions and access to material non-publi c
information, each of the Individual Defendants knew or recklessly disregarded that th e
adverse facts specified herein had not been disclosed to, and were being concealed fro m
the public, and that the positive representations which were being made were then
materially false and misleading .
Group Pleadin g
38. The Individual Defendants are also liable for the false statements in SEC
filings and press releases as such statements represent "group-published" information ,
disseminated to the public as a result of the collective actions of the Individual
Defendants. It is appropriate to treat the Individual Defendants as a group and to
presume that the false and misleading information conveyed in the public filings, pres s
releases and other publications, as alleged herein, are the collective actions of th e
narrowly defined group of Individual Defendants identified above . The Individual
Defendants, by virtue of their high level positions within CMS, directly participated in
the management of the Company, were directly involved with the day-to-day operations
and were privy to confidential non-public information concerning the wholesale energy
trading operations of CMS, as alleged herein . The Individual Defendants were involved
in drafting, reviewing and/or dissemination the false and misleading financial statements
that were issued by CMS, approved or ratified these statements and, therefore, adopte d
them as their own .
Duties of the Individual Defendant s
39. Each of the Individual Defendants had the duty to exercise due care and
diligence and the duty of full and candid disclosure of all material facts relating to th e
financial reporting and results of operations of CMS. To discharge their duties, thes e
27
Defendants were required to exercise reasonable and prudent supervision over th e
dissemination of information concerning the business, operations and financial reportin g
of CMS. By virtue of such duties, these officers and directors were required, inter alia,
to :
(a) conduct and supervise the business of CMS in accordance wit h
federal laws ;
(b) supervise the preparation of the Company's SEC filings and t o
approve any reports concerning the financial reporting and results of CMS ;
(c) ensure that CMS established and followed adequate internal
controls ;
(d) create, enforce and comply with a corporate policy prohibiting
misuse of proprietary corporate information by corporate officers and directors by trading
in CMS stock based on material non-public information ; and
(e) refrain from obtaining personal benefit, at the expense of th e
public purchasers of CMS securities, by misusing proprietary non-public information .
40. As officers, directors and/or controlling persons of a publicly-hel d
company which is registered with the SEC under the federal securities laws and whose
common stock is traded on the New York Stock Exchange ("NYSE"), and governed by
the provisions of the federal securities laws, the Individual Defendants each had a duty to
promptly disseminate accurate and truthful information with respect to the financial
reporting and the publicly reported quarterly annual results of operations of CMS, so that
the market price of the Company's publicly traded securities would be based upon
truthful, accurate and complete information .
28
41 . Under the rules and regulations promulgated by the SEC under the
Exchange Act, specifically Item 303 of Regulation S-K, the Individual Defendants als o
had a duty to report all trends, demands or uncertainties that were reasonably likely t o
impact CMS's (1) revenues ; (2) expenses ; and (3) previously reported financia l
information such that it would not be indicative of future operating results . As set forth
more fully below, the representations of the Individual Defendants during the Clas s
Period violated these specific requirements and obligations .
Underwriter Defendants
42. Defendants Morgan Stanley & Co. Incorporated ("Morgan Stanley") ,
Banc of Ame rica Secu rities LLC ("Banc of America") and Donaldson , Lufkin & Jenrett e
Securities Corporation ("DLJ") are financial services institutions that, through thei r
subsidiaries and divisions, provide commercial and investment banking (includin g
securities underwriting) services and commercial loans to corporate entities . These firm s
(hereinafter, the "Underwriter Defendants") served as the underwriters for the offering o f
the PEPS, which the Company issued on August 17, 2000 . Collectively, the Underwrite r
Defendants earned in excess of $6,900,000 in commissions in connection with the CMS
PEPS initial public offering .
V. FRAUDULENT SCHEME
43 . The Individual Defendants are liable as pa rt icipants in a fraudulent schem e
and course of conduct that operated as a fraud or deceit on purchasers of CMS securitie s
by disseminating materially false and misleading statements and/or concealing materia l
adverse facts . The scheme involved : (i) deceiving the investing public regarding th e
business, operations and management of CMS, including its MST division ; (ii) permitting
CMS to engage in two secondary common stock offerings, pursuant to which CMS sold
29
more than 21 million shares of common stock valued at $608 .25 million; (iii) permitting
CMS to offer various other securities to the investing public which incorporated by
reference false and misleading statements valued at over $1 .643 billion; (iv) permitting
CMS to file two shelf registration statements with the SEC during the Class Period ,
pursuant to which CMS registered securities valued at $2 .7 billion ; (v) permitting
Defendants McCormick, Wright and Hopper to sell a total of 74,740 shares of their CMS
common stock for $2,001,161 .60 in illegal insider trading proceeds ; and (vi) causing
Plaintiffs and members of the Class to purchase CMS's common stock and other
securities at artificially inflated prices .
VI . CLASS ACTION ALLEGATIONS
44. Plaintiffs bring this action as a class action pursuant to Federal Rule of
Civil Procedure 23(a) and (b)(3) on behalf of a class (the "Class"), consisting of all thos e
who purchased the securities of CMS during the Class Period (May 1, 2000 through an d
including March 31, 2003) and who were damaged thereby. Excluded from the Class are
Defendants, the officers and directors of the Company, at all relevant times, members o f
their immediate families and their legal representatives, heirs, successors or assigns an d
any entity in which Defendants have or had a controlling interest .
45. In addition, Plaintiff Rock Capital brings this action on behalf of a sub-
class (the "Sub-Class") consisting of those Class members who purchased CMS PEP S
pursuant to the PEPS prospectus/registration statement, dated August 17, 2000, issued i n
connection with the PEPS .
46. The members of the Class and Sub-Class are so numerous that joinder o f
all members is impracticable . Throughout the Class Period, CMS common shares an d
PEPS were actively traded on the NYSE . While the exact number of Class members an d
30
Sub-Class members is unknown to Plaintiffs at this time and can only be ascertaine d
through appropriate discovery, Plaintiffs believe that there are hundreds or thousands o f
members in the proposed Class and Sub-Class . Record owners and other members of the
Class and Sub-Class may be identified from records maintained by CMS or its transfe r
agent and maybe notified of the pendency of this action by mail, using the form of notice
similar to that customarily used in securities class actions .
47. Plaintiffs' claims are typical of the claims of the members of the Class an d
Sub-Class as all members of the Class and Sub-Class are similarly affected b y
Defendants' wrongful conduct in violation of federal law that is complained of herein .
48. Plaintiffs will fairly and adequately protect the interests of the members of
the Class and Sub-Class and have retained counsel competent and experienced in clas s
and securities litigation .
49. Common questions of law and fact exist as to all members of the Clas s
and Sub-Class and predominate over any questions solely affecting individual member s
of the Class and Sub-Class . Among the questions of law and fact common to the Class
and Sub-Class are : (a) whether the federal securities laws were violated by Defendants'
acts as alleged herein; (b) whether statements made by Defendants to the investing public
during the Class Period misrepresented or omitted material facts about the business an d
operations of CMS; (c) whether the Individual Defendants are liable as control person s
under the federal securities laws ; and (d) whether the members of the Class and Sub-
Class have sustained damages and, if so, the proper measure of such damages .
50. A class action is superior to all other available methods for the fair an d
efficient adjudication of this controversy since joinder of all members is impracticable .
31
Furthermore , as the damages suffered by individual Class members and Sub-Clas s
members may be relatively small , the expense and burden of individual litigation make i t
impossible for members of the Class and Sub-Class to individually redress the wrong s
done to them. There will be no difficulty in the management of this action as a class
action .
32
VII. FRAUD ON THE MARKET PRESUMPTIO N
51 . At all relevant times, the market for CMS's publicly traded securities wa s
an efficient market for the following reasons, among others :
a . the common stock and PEPS of CMS met the requirements for
listing, and were listed and actively traded on the NYSE, a highl y
efficient market ;
b. as a regulated issuer, CMS filed periodic public reports with th e
SEC ;
c. CMS regularly communicated with public investors via establishe d
market communication mechanisms, including through regular
disseminations of press releases on the national circuits of major
newswire services and through other wide-ranging public
disclosures, such as communications with the financial press an d
other similar reporting services ;
d. the market reacted to public information disseminated by CMS ;
C. CMS was followed by several securities analysts employed by
major brokerage firms who wrote reports that were distributed t o
the sales force and certain customers of their respective brokerage
firms. Each of these reports was publicly available and entered th e
public marketplace ;
f. the material misrepresentations and omissions alleged herei n
would tend to induce a reasonable investor to misjudge the valu e
of CMS securities; andwithout knowledge of the misrepresented or
omitted material facts, Plaintiffs and the other members of the
Class purchased or otherwise acquired CMS securities between the
time Defendants made the material misrepresentations an d
omissions and the time the truth was fully revealed, during which
time the price of CMS securities was inflated by Defendants '
misrepresentations and omissions .
33
52. As a result of the foregoing, the market for CMS securities promptl y
digested current information regarding CMS from all publicly available sources and
reflected such information in the price of CMS securities . Under these circumstances, al l
purchasers of CMS securities during the Class Period suffered similar injury through their
purchase of CMS securities at artificially inflated prices and a presumption of reliance
applies .
53. In addition to the foregoing, all class members are entitled to a
presumption of reliance because, as more fully alleged below, Defendants omitted ,
throughout the Class Pe riod , to disclose material information regarding CMS's business,
financial status, financial results and business prospects .
VEII . THE SAFE HARBOR PROVISION OF THE PSLRA IS INAPPLICABL E
54. The statutory safe harbor provided for forward-looking statements unde r
the Private Securities Litigation Reform Act of 1995 (`PSLRA"), which applies to
forward-looking statements, does not apply to any of the allegedly false statements
pleaded in this Complaint . Many of the specific statements pleaded herein were not
identified as "forward-looking statements" when made . To the extent there were an y
forward-looking statements, there were no meaningful cautionary statements identifyin g
important factors that could cause actual results to differ materially from those in th e
purportedly forward-looking statements . Alternatively, to the extent that the statutor y
safe harbor does apply to any forward-looking statements pleaded herein, Defendants are
liable for those false forward-looking statements because at the time each of thos e
forward-looking statements was made, the particular speaker knew that the particular
forward-looking statement was false, and/or the forward-looking statement wa s
34
authorized and/or approved by an executive officer of CMS who knew that those
statements were false when made .
IX. BACKGROUND TO THE CLASS PERIO D
Description of CMS
55 . Formed in Michigan in 1987, CMS is an energy holding compan y
operating through subsidiaries in the United States and in selected markets around th e
world. The Company's two principal subsidiaries are Consumers and Enterprises .
Consumers is a public utility, which provides natural gas and/or electricity to almost 6
million of Michigan's 10 million residents . Enterprises, through subsidiaries, is engaged
in several energy businesses in the United States and in selected international markets ,
including among others the marketing , services and trading operations of the Company .
56. Formed in Michigan in 1968, Consumers is the successor to a corporation
which was organized in Maine in 1910 and conducted business in Michigan from 1915 t o
1968. In 1997, Consumers, formerly named Consumers Power Company, changed it s
name to Consumers Energy Company to reflect its integrated electri city and ga s
businesses .
57. Based on its number of customers, Consumers' electric utility operations ,
if independent, would be the thirteenth largest electric utility company in the United
States. Consumers' electric utility operations include the generation, purchase,
distribution and sale of electricity . Consumers' current electric utility customer base
includes a mix of residential, commercial and diversified industrial customers .
35
Marketing, Services and Trading Division
58. CMS-MST was formed in 1996 and is the surviving entity of a 1997
merger with CMS Gas Marketing Company, which was originally formed in 1987.
CMS-MST was created in order to provide gas, oil, coal and electric marketing, risk
management and energy management services to industrial, commercial, utility and
municipal energy users throughout the United States and internationally . Its customers
included, among others, the University of Utah, Illinois State University, EnerStar Powe r
Corporation , as well as the Michigan South Central Power Agency. From its inception ,
CMS-MST has purportedly grown dramatically . In 1999, CMS-MST acquired an energy
services company in Kansas City, Missouri and an independent energy consulting firm in
Toronto, Canada . These acquisitions expanded CMS-MST's presence in 22 cities in th e
United States and in Oakville, Montreal and Vancouver, Canada . CMS has continuall y
attempted to use CMS-MST to enhance performance of the Company's core assets, suc h
as its gas reserves and power plants .
59. CMS-MST's operations, first and foremost, involved the trading of liquid
natural gas and electricity derivative contracts . In fact, it was the purported success of
the trading operations of CMS-MST that propelled CMS to the ranks of the top twent y
U .S natural gas an power marketers, a figure often highlighted by the Company. CMS
looked to MST as one of the few sources of dynamic growth for the Company . Indeed ,
in a letter to CMS shareholders from Defendants McCormick and Joos, contained in th e
2001 Annual Report, these Defendants state: "we believe that the ea rn ings from [CMS' s
integrated asset] base can be further enhanced by our growing and very successfu l
marketing, services and trading company ." (Emphasis added) .
36
Background To Round-Trip Tradin g
60. Round-trip or wash trades are generally defined as nearly simultaneous ,
pre-arranged buy-sell trades of energy with the same counter-party, at the same price and
volume, and over the same term, resulting in neither profit nor loss to either transactin g
party . FERC staff has maintained that the intent to perform a round trip trade has to be
present for an actual round trip trade to occur. The following are examples of how roun d
trip trades can enhance a company's position in the market :
• Inflate Revenues
Since round-trip trades involve both a "buy" and a "sell", the revenue tha t
is received as a result of the "sell" part of the trade is reported as part o f
total revenues on a company's earnings statement . While there is an off
setting expense that gets repo rted because of the "buy" part of the trade ,
there are definite benefits to a company demonstrating substantial increas e
in revenues even if there are offsetting expenses. Especially in a newly
formed business, substantial increases in revenues can set investors
expectations that the business model is successful . They make the
company appear larger and more stable and can imply that the compan y
has substantial borrowing power .
• Increased Trade Volume
Round trip trades increase trade volume for energy trading companies .
During the energy boom in 1999 and 2000 energy companies
distinguished themselves by being able to show high trade volumes .
Enron, for example, made continuous headlines by boasting that it had by
far the largest trade volume of any energy marketer, and wall street
37
acknowledged that fact when listing Enron as a "strong buy" in thei r
ratings . High trade volumes during the 1999 through 2001 period were
generally considered a sign of strength since they implied doing business
with a high number of counter parties and like increased revenues, were a
sign to Wall Street that the newly developed business model was working .
• Increase the Mark to Market Value of Existing Position s
When a round-trip trade is performed on an electronic exchange or with a
broker, the price the trade is executed forms a portion of the price data tha t
the exchange or broker will use to determine market prices and to
potentially publish market prices . In addition, the price of round-trip
trades may be directly reported to independent publications that would use
these prices in developing their forward price indices for that day . This
influence is even greater in markets where products are very illiquid .
If a round-trip trade at a price opposite of the trader's current position, th e
trade can positively influence the value of the trader's current ope n
position . For example if a trader bought a forward product at $20/MWh
on Monday and then the following day performs a round-t rip trade on the
same forward product at $30, their open $20 position would have
increased in value by $10 . Ifhowever , the trader sold a forward product at
$20/MWh on Monday and then the following day performs a round-t rip
trade on the same forward product at $10, their open position would agai n
have increased in value by $10 .
3S
A company's open positions are typically "marked to market" at the end
of each day based on available market information or trades they
performed if there were no trades in that market for a particular day. So
even if the price of the round-trip trade is not "published' it may serve to
value the position .
To use another example, if an energy company is marking to market a ten
million MWh long position, and a round trip trade was able to increase the
market price reported at a visible reporting index by $2, the company will
report a P&L gain of $20,000,000 . Investors will see this gain on earnings
statements with no offsetting loss . As a result, the company can increase
its value using round-trip trades .
• Manipulate Market Prices for Future Trades
As discussed above, a round-trip trade can impact the prices being
reported in a market, this impact can have more than just a mark to market
value for the company. For instance, if the long or short position is sold or
bought back after the round-trip trade affects the prices reported, then th e
mark to market profit can become realized profit . This is similar to an
illegal insider trading practice where a broker buys or sells a commodity
with his own money right before he is about to conduct a high volume
trade for that same commodity for a client, knowing that the high volume
trade will manipulate the market price one way or the other . In this case a
39
trader manipulates the market price with a round trip trade to increase th e
profitability of a future trade .
False Price Reportin g
61 . False price reporting is essentially a more direct method of influencin g
published prices than conducting round-trip trades . False price reporting may involve th e
total fabrication of trades and pri ces or falsely providing prices for trades that actually
happened . The false price reporting happens through publishers of trade publications ,
such as Platts.
62 . When a power trade is reported to Platts, for example, Platts will use th e
price that the power was traded at, as well as the volume of MW traded to construct an
index price that will then be published in various Platts publications, such as Energ y
Trader, Megawatt Daily, or Power Markets Week. Many energy companies use these
index prices to settle on long-term contracts, as well as mark positions . If a compan y
reports a fabricated high price to Platts, that high price will raise the Platts publishe d
index price and would benefit a company that either had a long term contract to sel l
power at the index price, or a company that held a long position in the market .
63 . The impacts of false price reporting are the same as those indicated unde r
the discussion concern ing round -trip trading within the "Increase the Mark to Market
Value of Existing Positions " and "Manipulate Market Prices for Future Trades "
sections . Repo rt ing false prices is illegal and can further deceive investors by falsely
increasing the value of the company's positions .
40
X. FALSE AND MISLEADING STATEMENTSAND OTHER CLASS PERIOD EVENTS
Overview
64. Throughout the Class Period, CMS and the Individual Defendants issued a
series of misstatements, and omitted to state material facts, concerning the Company' s
financial results and condition . Many of these statements concerned the operations of th e
Company's MST division, which was purportedly contributing dramatically increased
revenues quarter after quarter during the Class Period . Indeed, the press releases issued
by the Company throughout the Class Period regularly touted the success of this divisio n
and the purported increases in revenues . As described more fully below, these and other
related statements were false, and served to defraud investors into purchasing CM S
,ecurities . Indeed, as a result of Defendants' misstatements and omissions, the prices o f
the Company's securities were artificially inflated throughout the Class Period .
Ultimately, the Company's disclosure of its fictitious revenues through its extensiv e
round-trip trading (among other disclosures), caused the Company's stock price to
plummet and investors to suffer enormous financial losses . The Defendants' specific
false and misleading statements and omissions during the Class Period are described in
detail below.
CMS's First Quarter 2000 Financial Statements
65. On May 1, 2000, the Company issued a press release reporting CMS' s
financial results for the first quarter ended March 31, 2000 (the "May 1, 2000 Pres s
Release") . The May 1, 2000 Press Release reported first quarter operating revenue of
$1 .83 billion, up from $1 .54 billion for the first quarter of 1999 . Commenting on the
Company's reported results, Defendant McCormick stated in the press release that
CMS's "continuing [its] asset optimization program is consistent with [its] efforts to
41
achieve more geographic and business focus that will allow CMS to concen trate on it s
more profitable and growing energy business ."
66. The Company also filed on May 1, 2000 its current report on Form 8- K
(the May 1, 2000 8-K") with the SEC, announcing its financial results for the first quarter
ended March 31, 2000. The May 1, 2000 8-K attached the Company's May 1, 2000
Press Release as an exhibit, repeating the same statements contained in the May 1, 2000
Press Release .
67. Defendant Wright signed the May 1, 2000 8-K .
68. On May 15, 2000, CMS filed its Quarterly Report on Form l 0-Q for th e
first quarter ended March 31, 2000 (the "First Quarter 2000 10-Q") . The First Quarter
2000 10-Q repeated the same statements as those contained in the May 1, 2000 Pres s
Release .
69. In addition, CMS and the Individual Defendants represented in the Firs t
Quarter 2000 10-Q that CMS's MST operations reported a pretax operating incom e
(excluding a one-time effect of a 1999 change to mark to market accounting for trading
contracts) increase of $2 million from the same period in 1999 . These Defendants als o
represented that CMS-MST earned operating revenue of $351 million , more than doubl e
the $158 million reported for the same period in 1999 .
70. CMS touted its strategic agenda for CMS-MST, stating :
CMS Energy intends to use its marketing, services and trading business toimprove the return on CMS Energy's other business assets . One method toachieve this goal is to use marketing and trading to enhance performanceof assets, such as gas reserves and power plants . Other strategies includeexpanding CMS Energy's industrial and commercial energy services toenhance our commodity marketing business, using CMS Energy's gasproduction as a hedge to commodity risk in other areas of our business,and developing risk management products that address customer needs .
42
71 . The First Quarter 2000 10-Q also included the following representations :
These Condensed Notes and their related Consolidated FinancialStatements should be read along with the Consolidated FinancialStatements and Notes contained in the 1999 Form I 0-K of CMS Energy ,which includes the Reports of Independent Public Accountants . Certainprior year amounts have been reclassified to conform with the presentation
in the current year . In the opinion of management, the unauditedinformation herein reflects all adjustments necessary to assure the fairpresentation of financial position, results of operations and cash flowsfor the periods presented.
(Emphasis added) . Moreover, the Company affirmed the reliability and truthfulness of it s
financial statements, stating, "/t/he financial statements are prepared in conformity with
generally accepted accounting principles and use management's estimates where
appropriate. "
72. Defendant Wright signed the First Quarter 2000 10-Q .
73. In response to the Company's announcement of its financial results for th e
first qua rter of 2000, Morgan Stanley Dean Witter, a subsidiary of Defendant Morgan
Stanley, issued a May 2, 2000 report with a "strong buy" rating for CMS common stock .
Among other things, this report stated :
Over time, we think CMS's goal is now to be seen not just as acompany with high growth potential, but one with a solid balancesheet, potential for stable growth and therefore multiple expansion,and a company that underpromises and overdelivers .
We view the CMS trading operations not as a standalone earningscontributor, but rather as operations that should enhance the valueof the other businesses and are necessary for market knowledge .
43
Reasons Why the Statements Concerning the First Quarter of 2000Were False and Misleading At the Time They Were Mad e
74. The statements identified above in the May 1, 2000 Press Release, th e
May 1, 2000 8-K and the First Quarter 2000 10-Q were false and misleading at the tim e
they were made because :
a . Despite the Company's representation, the subject financia l
statements were not prepared in accordance with GAAP, as
described more fully below in Section XIII ;
b. CMS's revenue, as originally reported, for the year ende d
December 31, 2000, was overstated by $1 billion due to th e
improper recognition of revenue derived from round-trip energ y
trading transactions . CMS, in its May 15, 2002 Press Release ,
indicated that such inclusion was improper . These transactions
should not have been recorded in CMS's financial statement s
because there was no valid business purpose for entering into th e
transactions, other than for the purpose of inflating revenue and th e
trading prices of CMS securities . Moreover, the Company's fiscal
2000 revenues, as originally reported, were inflated an additiona l
$1 .301 billion, according to the Company's 2002 10-K, released on
March 31, 2003 ;
c. CMS failed to disclose that it lacked sufficient internal contro l
mechanisms preventing the Company from sufficiently detectin g
that the accounting staff was not able to keep pace with the growth
of the Company, thus resulting in bookkeeping errors .
44
Additionally, computer interfaces of sub-ledgers to the genera l
ledger were ineffective or lacking. As a result, sub-ledger balances
did not agree to the general ledger and the differences were no t
adjusted ;
d. For the reasons set forth in subparagraphs a through c, above, the
information presented in the subject Form l0-Q did not reflect al l
adjustments necessary to assure the fair presentation of financial
position, results of operations and cash flows for the periods
presented ;
C . As indicated in the Final FERC Report, CMS failed to disclose tha t
it was engaged in the deliberate manipulation of the publishe d
p ri ce indices by providing false data to the trade press; and
f. As later uncovered on May 13, 2002 by Platt's Power Markets
Week from public filings, round-trip transactions between CMS
and Reliant took place during the first quarter of 2000, when CMS
saw its sales jump by over ],100% year-over-year and over 800%
from the previous quarter. These transactions between CMS and
Reliant, among others, should not have been recorded in CMS's
financial statements because there was no valid business purpose
for entering into the transactions, other than for the purpose of
inflating revenues .
CMS's Second Quarter 2000 Financial Statements
75. On August 3, 2000, CMS issued a press release announcing the
Company's financial results for second quarter and six months ended June 30, 2000 (the
45
"August 3, 2000 Press Release"), The August 3, 2000 Press Release reported secon d
quarter operating revenue of $1 .60 billion, up 20 percent from $1 .33 billion in the second
quarter of 1999 .
76. On August 11, 2000, CMS filed its Quarterly Report on Form 10-Q for th e
second quarter ended June 30, 2000 (the "Second Quarter 2000 10-Q") with the SEC .
The Second Quarter 2000 10-Q repeated the same statements as those contained in th e
August 3, 2000 Press Release .
77. The Company repo rted quarterly operating revenue in its MST operation s
of $391 million , up from $146 million in the same period in 1999. The six-month results
for the MST operations were $742 million, up from $304 million for the same period in
1999 .
78 . CMS further stated that:
CMS Energy intends to use its marketing, services and trading business toimprove the return on CMS Energy's other business assets . One method toachieve this goal is to use marketing and trading to enhance performanceof assets, such as gas reserves and power plants . Other strategies includeexpanding CMS Energy's industrial and commercial energy services toenhance our commodity marketing business, using CMS Energy's gas
production as a hedge to commodity risk in other areas of our business,and developing risk management products that address customer needs .
79. The Second Quarter 2000 10-Q also included the followin g
representations :
These Condensed Notes and their related Consolidated FinancialStatements should be read along with the Consolidated FinancialStatements and Notes contained in the 1999 Form 10-K of CMSEnergy, which includes the Reports of Independent Publi cAccountants. Certain prior year amounts have been reclassified toconform with the presentation in the current year . In the opinionof management, the unaudited information herein reflects alladjustments necessary to assure the fairpresentation of financia l
46
position, results ofoperations and cash flows for the periodspresented.
(Emphasis added) . Moreover, the Company affirmed the reliability and truthfulness of it s
financial statements, stating, "[t]he financial statements are prepared in conformity wit h
generally accepted accounting principles and use management's estimates wher e
appropriate ."
80. Defendant Wright signed the Second Quarter 2000 10-Q .
CMS's Premium Equity Participating Security Units Offerin g
81 . On August 17, 2000, CMS filed a Form 424B5 Prospectus Supplemen t
(the "PEPS Registration Statement"), offering to the investing public 8,800,000 PEPS .
The offering was underwritten by Defendants Morgan Stanley, Banc of America and
DLJ .
82. The PEPS Registration Statement incorporated the financial results of th e
first and second quarters of 2000 :
Second quarter operating revenue totaled $1,6 billion, up 20% from $1 .3billion in the second quarter of 1999 . Operating revenue for the first halfof 2000 totaled $3 .4 billion, up 19% from $2 .9 billion in the first half of1999. The second quarter earnings reflect strong operating performanceof our diversified energy businesses, including independent powerproduction, gas transmission and storage, and international energydistribution, as well as gains on the sale of non-strategic assets .
83 . The PEPS Registration Statement also included the following descriptio n
of CMS-MST :
CMS-MST has grown dramatically since its inception . CMS Energyintends to use CMS-MST to enhance performance of CMS Energyassets, such as gas reserves and power plants . CMS-MST marketsannually approximately 470 Bef of natural gas, 3,709 GWh of electricity,23 MMBbls of crude oil and 6 .5 MMBbIs of natural gas liquids .
(Emphasis added) .
47
84. The PEPS were actively trading throughout the Class Period on the Ne w
York Stock Exchange under the symbol "CMS PRM." The PEPS Registration Statemen t
established that the value of the PEPS Units was dependant upon and would fluctuate in
tandem with the market value of the Company's common stock and that, if the commo n
stock of the Company at the time of settlement was below $13 .218 per share, the
aggregate value of the PEPS could result in a substantial loss .
85. The PEPS Registration Statement stated that the sale of PEPS would ne t
proceeds of $213 .1 million to the Company .
Platt's Second Quarter 2000 Ranking s
86. Throughout the Class Period, Platt's reported on a daily basis, the marke t
prices for electricity and natural gas through the process described above . Periodically,
Platt's would publish rankings for the various participants setting forth the volume of
trades, revenues and gains . With regard to CMS, Platt's based its ranking of the
Company on purported sales and trading information, which CMS provided to Platt's
during the Class Period . Such information was based almost entirely on the Company's
round-trip trades and was, therefore, false . Moreover, Platt's ranking of the Company
was completely inaccurate during the Class Period since it was based upon fals e
information .
87. On August 21, 2000, Platt's Power Markets Week, an industry publication ,
reported CMS-MST as marketing 1,361,111 MWh, in the 2°d Quarter of 2000 an d
2,976,832 MWh for year to date . CMS-MST's rank in terms of Total Marketer Sale s
was, for the 2"`' Quarter, 48`x', and 50 1 x' for the year to date, respectively .
48
September 11, 2000 Form S-3 Registration Statement
88. On September 11, 2000, CMS filed a Form S-3 Registration Statement,
registering 9,477,868 shares of common stock, pursuant to the CMS Energy Stock
Purchase Plan (the "September 11, 2000 Registration Statement") . The September 11,
2000 Registration Statement allowed investors to purchase shares of common stock of
CMS directly from the Company, and convert dividends automatically into additional
shares, with nominal brokerage fees .
89. Incorporated by reference into the September 11, 2000 Registratio n
Statement were the First and Second Quarter I0-Qs for 2000 and the May 1, 2000 8-K ,
June 5, 2000 S-K, July 6, 2000 8-K, and August 15, 2000 8-K.
90. Defendants Wright, McCormick and Hopper signed the September 11 ,
2000 Registration Statement . Defendants Deutch, Duderstadt, Flaherty, Fryling, Holton,
Parfet, Pierre, Way, Whipple and Yasinsky signed the document via power of attorney
proffered to Defendant Wright .
October 6, 2000 Form S-3 Registration Statemen t
91 . On October 6, 2000, CMS filed a Form S-3 Registration Statement for
General Term Notes to be offered at future dates worth up to $300 million (the "October
6, 2000 Registration Statement") .
92. Incorporated by reference in the October 6, 2000 Registration Statemen t
were the First and Second Quarter I0-Qs and the May 1, 2000, June 5, 2000, July 6 ,
2000, August 15, 2000, and October 2, 2000 current reports on Forms 8-K .
93 . In addition, the October 6, 2000 Registration Statement touted the futur e
prospects of the Company with the following statements :
OPTIMIZE OUR ASSETS THROUGH THE MARKETING, SERVICESAND TRADING BUSINESS
49
We intend to use our marketing, services and trading business toimprove the return on our other businesses . This means that we plan tocontinue centralizing the marketing of energy products produced by our
various non-utility businesses. Other strategies include expanding ourindustrial and commercial energy services to enhance our commoditymarketing business and developing risk management products that addresscustomer needs .
MARKETING, SERVICES AND TRADINGCMS MST, formed in 1996, provides natural gas, oil, coal and electricmarketing, risk management and energy management services toindustrial, commercial, utility and municipal energy users throughout theUnited States and internationally. CMS MST has grown dramatically
since its inception. CMS Energy intends to use CMS MST to enhanceperformance of CMS Energy assets, such as gas reserves and powerplants .
(Emphasis added) .
94. Defendants Wright, McCormick, and Hopper signed the October 6, 200 0
Registration Statement . Defendants Deutch, Duderstadt, Flaherty, Fryling, Holton ,
Parfet, Pierre, Way, Whipple and Yasinsky signed the document via power of attorne y
proffered to Defendant Wright .
CMS's 9 7/8% Senior Notes Offering Prospectus Supplement
95. On October 12, 2000, CMS filed a Form 424B5 Prospectus Supplement ,
("October 12, 2000 Prospectus Supplement") offering 9 7/8% Senior Notes to the
investing public .
96. The offering was underwritten by DLJ, Morgan Stanley, Barclays Capital ,
Chase Securities and CIBC World Markets .
97. The Prospectus Supplement included the unaudited financial results of th e
Company for the six months ended June 30, 2000 . The Prospectus Supplement, i n
50
particular, referenced CMS's reported consolidated operating revenue of $3 .4 billion ,
EBITDA of $879 million and net income of $161 million .
98. The Prospectus Supplement also highlighted the significance of the MST
division, stating :
Optimize Our Assets Through The Marketing, Services And TradingBusiness
We intend to use our marketing, services and trading business toimprove the return on our other businesses . This means that we plan tocontinue centralizing the marketing of energy products produced by our
various non -utility businesses . Other strategies include expanding ourindustrial and commercial energy services to enhance our commoditymarketing business and developing risk management products that addresscustomer needs .
(Emphasis added) .
99. The Company anticipated net proceeds of $489 million from this offering .
CMS's October 18, 2000 Common Stock Offering Prospectus Supplemen t
100. On October 18, 2000, CMS filed a Form 42485 Prospectus Supplement ,
("October 18, 2000 Prospectus Supplement") offering the sale of I 1 million shares o f
common stock .
101 . The underwriter of the offering was Credit Suisse First Boston .
102. CMS anticipated net proceeds of $305 million from the offering .
103 . The Prospectus Supplement included the financial results of the Company
for the six-months ended June 30, 2000. The Prospectus Supplement, in particular,
referenced CMS's reported consolidated operating revenue of $3 .4 billion for the six-
month period ended June 30, 2000 .
104. The Prospectus Supplement also included the following results for CMS' s
MST operations :
51
CMS Marketing, Services and Trading marketed 470 Bcfof gas, 3,709 GWh of electricity, 23 MMBb1s of crude oiland 6 .5 MMBb1s of natural gas liquids ; . . .
105. The Prospectus Supplement also contained the following statement,
highlighting the significance of its MST division :
Optimize Our Assets Through The Marketing, Services And TradingBusiness
We intend to use our marketing, services and trading business toimprove the return on our other businesses . This means that we plat to
continue centralizing the marketing of energy products produced by ourvarious non -utility businesses. Other strategies include expanding ourindustrial and commercial energy services to enhance our commoditymarketing business and developing risk management products thataddress customer needs.
(Emphasis added) .
Reasons Why the Statements Concerning the Second Quarter of 2000Were False and Misleading At the Time They Were Mad e
106. The statements identified above in the August 3, 2000 Press Release ,
Second Quarter 2000 10-Q, PEPS Registration Statement , September 11, 2000
Registration Statement , October 6, 2000 Registration Statement , October 12, 200 0
Prospectus Supplement and October 18, 2000 Prospectus Supplement were false an d
misleading at the time they were made for the same reasons set forth above in 1 74 a
through f. To the extent such documents incorporate by reference the Company's earlie r
filings with the SEC during the Class Period, they are also false and misleading for th e
reasons stated above. In addition, these statements were false and misleading at the tim e
they were made because :
a. As later uncovered on May 13, 2002 by Platt's Power Markets
Week, CMS total sales in the third quarter of 2000 were
approximately 12.6 million MWh, up from approximately 1 . 4
52
million MWh in the second quarter of 2000, while Reliant 's total
sales were approximately 69 MWh, up from approximately 37 . 3
million MWh in the second quarter of 2000. These transactions
between CMS and Reliant, among others, should not have been
recorded in CMS's financial statements because there was no vali d
business purpose for entering into the transactions, other than fo r
the purpose of inflating revenues .
107. The October 6, 2000 Registration Statement was also false and misleadin g
at the time it was made because CMS-MST had not grown dramatically since it s
inception, but rather was ostensibly growing only as a result of fictitious round trip
trades .
CMS's Third Quarter 2000 Financial Statements
108. On October 25, 2000, CMS issued a press release announcing th e
Company's financial results for the third quarter ended September 30, 2000 (the October
25, 2000 Press Release") . Specifically, the Company announced that CMS's reported
consolidated operating revenues totaled $2 .4 billion for the third quarter, up 63% from
$1 .47 billion in the same period in 1999, due mainly to increased lower-margin energy
marketing revenues . In addition, the Company reported that operating revenues for the
first nine months of 2000 totaled $5 .82 billion, up 34% from $4.34 billion in the first nin e
months of 1999, primarily due to increased oil and gas, pipeline and lower-margin energ y
marketing revenues .
109. Also on October 25, 2000, the Company filed its current report on Form 8-
K (the "October 25, 2000 8-K"), announcing in part, the same financial results for th e
Third Quarter ended September 30, 2000 as those described above.
53
110. Defendant Wright signed the October 25, 2000 8-K .
111 . On November 8, 2000, Deutsche Bank Alex Brown initiated its coverag e
of CMS common stock with a "Buy" rating . In so doing, the analyst remarked :
We are initiating coverage on CMS Energy with a Buy rating,given the company's attractive valuation and a handful of near-term catalysts. The company has recently resolved a number of
items that significantly reduce regulatory uncertainty and mitigateearnings volatility . We believe the company is well on its way tocompleting its restructuring objectives, which would result in astrategically focused, more financially sound company with feweruncertainties and greater earnings visibility.
CMS management is increasingly focused on shareholder value, inour opinion .
112 . On November 14, 2000, CMS filed its Quarterly Report on Form 10-Q fo r
the third quarter ended September 30, 2000 (the "Third Quarter 2000 10-Q") . The Third
Quarter 2000 10-Q repeated the same statements contained in the October 25, 2000 Pres s
Release .
113 . CMS also reported operating revenues of $1 .034 billion from it s
marketing, serv ices and trading business as compared to $216 million in the same period
in 1999. The Company also included the following information, which touted its MS T
division as follows :
MARKETING, SERVICES AND TRADING RESULTS OFOPERATIONS
PRETAX OPERATING INCOME : Pretax operating income forthe three months ended September 30, 2000 decreased $2 millionfrom the comparable period in 1999. The decrease primarilyreflects decreased earnings from power trading activities , primarilydue to cooler than normal summer weather in Michigan , partiallyoffset by increased earnings from wholesale gas activities, whichbenefited from natural gas market p ri ce increases . The volumes ofmarketed natural gas and power traded increased 72 percent andover X,000 percent, respectively . Pretax operating income for thenine months ended September 30, 2000 increased $2 million from
54
the comparable period in 1999 as a result of increased wholesalegas earnings due to capturing gains from natural gas price marketvolatility, increased LNG [Liquified Natural Gas] sales an d
earnings benefits from an energy management services acquisitionmade in late 1999. The volumes of marketed natural gas andpower traded increased 65 percent and 546 percent, respectively.Partially offsetting these increases were decreased earnings from
power trading activities, primarily due to cooler than normalsummer weather in Michigan .
(Emphasis added . )
114. The Third Quarter 2000 10-Q also included the following representations :
These Condensed Notes and their related Consolidated Financia lStatements should be read along with the Consolidated FinancialStatements and Notes contained in the 1999 Form IO-K of CMS Energy,which includes the Reports of Independent Public Accountants . Certainprior year amounts have been reclassified to conform with the presentationin the current year. In the opinion of management, the unauditedinformation herein reflects all adjustments necessary to assure the fair
presentation of financial position, results of operations and cash flows forthe periods presented .
115 . The Company also affirmed the reliability and truthfulness of its financia l
statements, stating, "[t]he financial statements are prepared in conformity with generall y
accepted accounting principles and use management's estimates where appropriate ."
116. Defendant Wright signed the Third Quarter 2000 l 0-Q.
Platt's Power Markets Weekly Articl e
117. A November 13, 2000 article in Platt's Power Markets Week, entitled ,
"Volumes Climb Again, Up 16% For Quarter, Thanks In Part To Volatility In The West, "
noted CMS-MST's rapid climb in rank . Specifically, the article stated ,
an upgrade of a trading unit is allowing a new participant into thehigher rankings. CMS Energy, ranked now 20th in total sales in thethird quarter, at 12.6 million MWh, had only 3 million MWh in sales afterthe first half of this year. It took until July, according to Tamela Pallas,president of marketing, service and trading, to get CMS's power tradingteam fully operational in Houston . Before the third quarter, CMS wastrading its unregulated power through a third party . Now, the tradin g
55
team, which is 90% assembled, is focusing on the Eastern grid and theMidwest .
(Emphasis added) . Thus, by the time of this article, CMS had risen to 20'u' in total sales
for the quarter.
December 15, 2000 Form S-3 Regis tration Statemen t
118. On December 15, 2000, CMS fi led a Form S-3 Shelf Registration
Statement for $2 billion in various types of securities to be offered at future dates (the
"December 15, 2000 Shelf Registration Statement")
119. Incorporated by reference into the December 15, 2000 Shelf Registratio n
Statement were the First, Second and Third Quarter 2000 10-Qs, as well as the May 1 ,
2000, June 5, 2000, July 6, 2000, August 15, 2000, and October 2, 2000, October 12 ,
2000, November 1, 2000 and December 11, 2000 current reports on Forms 8-Ks .
120. Defendants Wright, McCormick, and Hopper signed the December 15 ,
2000 Shelf Registration Statement . Defendants Deutch, Duderstadt, Flaherty, Fryling,
Holton, Parfet, Pierre, Way, Whipple and Yasinsky signed the document via power o f
attorney proffered to Defendant Wright .
December 22, 2000 Form S-3 Registration Statemen t
121 . On December 22, 2000, CMS filed a Form S-3 Shelf Registratio n
Statement , for various secu rities to be offered at future dates worth up to $700 million
(the "December 22, 2000 Shelf Registration Statement") .
122. Incorporated by reference into the December 22, 2002 ShelfRegistration
Statement were the First, Second and Third Quarter 2000 10-Qs, as well as the May 1 ,
2000, June 5, 2000, July 6, 2000, August 15, 2000, October 2, 2000, October 12, 2000 ,
November 1, 2000 and December 11, 2000 current reports on Forms 8-K .
56
123. Defendants Wright, McCormick, and Hopper signed the December 22 ,
2000 Shelf Registration Statement . Defendants Deutch , Duderstadt , Flaherty, Fryling,
Holton, Parfet, Pierre, Way, Whipple and Yasinsky signed the document via power o f
attorney proffered to Defendant Wright .
124. On December 22, 2000, the Company issued a press release, stating :
[CMS] filed with the Securities and Exchange Commission an S-3Registration Statement for $700 million of debt and equitysecurities that may be issued only upon the conversion ofoutstanding convertible preferred securities . CMS Energy willreceive no cash proceeds from these issuances and will incur noadditional liabilities . On Dec . 15, 2000, CMS Energy filed withthe Securities and Exchange Commission another S-3 Registration
Statement for the issuance of up to $2 billion of debt and equitysecurities . This shelf registration statement is intended to provideflexibility for CMS Energy to issue a wide range of debt, preferredand common equity securities from time to time in the future . BothRegistration Statements on Form S-3 incorporated by reference theQuarterly Reports on Form I 0-Q for the second and third quartersof 2000.
125. On December 29, 2000, CMS common stock reached $28 .26 per share .
CMS PEPS reached a high of $28 .88 per PEPS Unit on that date .
Reasons Why the Statements Concerning the Third Quarter of 2000Were False and Misleading At the Time They Were Made
126 . The statements identified above in the October 25, 2000 Press Release, th e
October 25, 2000 8-K, the Third Quarter 2000 l 0-Q, the December 15, 2000 Shelf
Registration Statement and the December 22, 2000 Shelf Registration Statement wer e
false and misleading at the time they were made for the same reasons set forth above in ¶
74 a through f, as well as ¶ 106a and 107. To the extent such documents incorporate by
reference the Company's earlier fi lings with the SEC during the Class Period, they are
also false and misleading for the reasons stated above.
57
127. In addition, the Third Quarter 2000 10-Q was false and misleading
because :
a . The volumes of marketed natural gas and power traded did no t
increase 72 percent and over 1,000 percent, respectively during the
third quarter of 2000 . Moreover, the volumes of natural gas and
power traded did not increase 65 percent and 546 percent,
respectively, for the nine months ended September 30, 2000 .
CMS's Fourth Quarter and Year End 2000 Financial Results
128. On January 24, 2001, CMS issued a press release reporting the Company' s
financial results for the fourth quarter and year ended December 31, 2000 (the "Januar y
24, 2001 Press Release") .
129. The press release stated , in part :
Fourth quarter operating revenue totaled $3 .19 billion, compared to$1 .77 billion in the fourth quarter of 1999, up 80% from $1 .77billion in the fourth quarter of 1999 . Consolidated operatinjrevenue for 2000 _erew 47percent to $9.0 billion , from $6.1billion in 1999, due largely to significantly increased lower-margin energy marketing and trading transactions .
Signi ficant developments for CMS Energy in 2000 included :
increasing energy marketing and trading operating earnings bymore than three times, to $14 million in 2000 from $4 million in
1999, as the energy marketing unit made the transition from aretail to wholesale business, with 614 billion cubic feet of naturalgas marketed, an increase of 31 percent, and 37, 7,781 gigawatt-hours of electricity marketed, up 919 percent in 2000 ;
(Emphasis added . )
130. The analyst community quickly embraced the Company's positiv e
portrayal of its fourth quarter 2000 financial results . Reiterating its "Buy" rating o n
CMS, Banc of America Securities Equity Research, a subsidiary of Defendant Banc o f
America, issued a report on January 24, 2001, remarking :
58
Marketing , Services, and Trading business reported significantlyimproved results with a 200% increase in operating income. Resultswere driven from increased volumes combined with higher gas and NGLmargins, which more than offset higher operating expenses .
131 . Similarly, Merrill Lynch & Co . issued a January 29, 2001 report advising
investors to "accumulate" CMS securities and noting that "[h]igher gas and NGL margin s
and overall better volumes offset power trading losses and overhead ."
132. A January 30, 2001 Equity Research Report, issued by Morgan Stanle y
Dean Witter, a subsidiary of Defendant Morgan Stanely, maintained its Outperform
rating on CMS shares . The report stated :
Excellent trading results - results tripled in the 4Q versus theyear prior period proving the company is able to take advantage ofcommodity price volatility through its niche position . Newmanagement appears to be working out well . . . . . We view CMStrading operations as not only a stand-alone earnings contributor(only I % of EBIT), but rather as operations that should enhancethe value of other businesses and are necessary for marketknowledge . '
133. The Company also fi led on February 23, 2001 its current report on Form
8-K (the "February 23, 2001 8-K") with the SEC, announcing its financial results for th e
fourth Quarter and year ended December 31, 2000, repeating the financial result s
disclosed in the January 24, 2001 Press Release .
134. Defendant Wright signed the February 23, 2001 8-K .
CMS's February 23, 2001 Stock Offering Prospectus Supplement
135. On February 23, 2001, CMS announced that it had sold ten million share s
of common stock pursuant to a block trade . Pursuant to a Prospectus Supplement, (the
"February 23, 2001 Prospectus Supplement) the Company sold ten million shares of
CMS common stock on February 28, 2001 to Banc of America, for proceeds of
approximately $295.6 million .
59
136. The Prospectus Supplement incorporated certain 2000 financial results :
Year 2000 consolidated operating revenue totaled approximately $9billion, up 47% from $63 billion in 1999. Operating revenue for thefourth quarter 2000 totaled $3.19 billion, up 80% from $1 .77 billion inthe fourth quarter 1999 . . . . The growth in fourth quarter 2000consolidated operating revenue primarily reflects increased lower -margin energy marketing and trading transactions.
(Emphasis added) .
137. The Prospectus Supplement incorporated by reference the financial result s
as reported in the Forms 10-Q for the quarters ending March 31, 2000, June 30 , 2000, an d
September 30, 2000, as well as the current reports on Forms 8 -K filed, February 1, 2000 ,
May 1, 2000, June 5, 2000, July 6, 2000, July 6, 2000, August 15, 2000, October 2, 2000 ,
October 12, 2000, November 1, 2000, and December 11, 2000 .
Platt's Power Markets Week 4"' Quarter 2000 Ranking s
138. On February 26, 2001, Platt's Power Markets Week noted that CMS-
MST's 4`h Quarter 2000 wholesale sales were 22,154,184 MWh, number 17 among all
power marketers, a 1,626% rise from the 411 Quarter in 1999 and a 75.5% increase
from the 3rd Quarter of 2000. For the year 2000, CMS was ranked 271' of all power
marketers, a rise of 1,452% from 1999, selling 37,779,969 MWh in 2000 .
139. On March 19, 2001, Platt's Power Markets Week, listed CMS-MST's 4th
Quarter 2000 power sales as 22,154,184 MWh, ranking it 18"' overall .
CMS's 2000 Financial Statements
140. On March 23, 2001, CMS filed its year-end report on Form 10-K for the
fourth quarter and year ended December 31, 2000 (the "2000 10-K") . The 2000 10-K
repeated the same statements contained in the January 24, 2001 Press Release .
60
141 . Additionally, CMS reported $1 .157 billion in operating revenue from its
energy marketing and trading business , compared with $524 million in operating revenue
for 1999 .
142. CMS further disclosed that CMS-MST marketed elect ric power of 37.78 1
billion KWh in 2000, compared with 3 .709 billion KWh in 1999 .
143. The 2000 10-K included the following additional disclosure :
CMS MST has grown dramatically since its inception. CMSEnergy intends to use CMS MST to enhanceperformance ofCMS Energy assets, such as gas reserves and power plants.
In 2000, CMS-MST's operating revenue was $3.3 billion.
MARKETING, SERVICES AND TRADING RESULTS OFOPERATIONS PRETAX OPERATING INCOME : For the year2000, pretax operating income increased $10 million from thecomparable period in 1999. The increase reflects increasedearnings from wholesale gas trading, increased LNG sales, andearnings from an energy management services business acquired inlate 1999 . The volumes of marketed natural gas and powertraded increased 31 percent and 919 percent, respectively.
(Emphasis added) .
144 . The 2000 10-K was signed by Defendants McCormick , Wright, Flaherty,
Holton, Way, Whipple, DaPra, Deutch, Duderstadt, Parfet, Pierre and Yasinsky .
145 . On March 23, 2001, CMS common stock opened at $24 .84 per share ,
reaching an intraday high of $25 .35 per share. On the same day, CMS PEPS traded a t
$27.30 per PEPS Unit .
CMS's 2000 Annual Report to Shareholder s
146 . On March 30, 2001, CMS released its Annual Report (the "2000 Annual
Report") to its shareholders. Attached to the 2000 Annual Report was the 2000 10-K.
61
147. The 2000 Annual Repo rt included a letter from McCormick highlighting
various aspects of the Company's performance in the year 2000 . Included in the letter
was a glowing reference to the performance of the trading operations of CMS-MST :
Our marketing and trading business successfully made the transition froma retail to a wholesale business . It traded 614 bcf of natural gas, anincrease of 31 percent from 1999, and 37,800 gigawatt-hours ofelectricity, up more than 900 percent .
(Emphasis added) .
148 . The 2000 Annual Report further touted its CMS-MST's operations, stating
in pertinent part :
[T]he company has expanded its wholesale trading operation . About 50employees are part of the operation, which trades natural gas, electricityand NGL . . . . In 2000, CMS marketed 614 bcf of physical gas, or about30 percent more than in the previous year . In addition, CMS traded gasfinancial instruments totaling 3 .7 trillion cubic feet . CMS also marketedor managed 37,800 gigawatt-hours (GWh) of electricity, 31 million barrelsof oil and 9 million barrels of liquids .
149. The 2000 Annual Report also touted the effect of the CMS-MST' s
operations with regard to the consolidated financial results of the Company, stating :
In 2000 operating revenues increased $3 .396 billion (45 percent) andoperating expenses increased $3 .422 billion (55 percent) . Of theseincreases, $3.122 billion and $3.112 billion, respectively, are attributableto the increased business activity in the marketing , services and tradingbusiness, including its unconsolidated subsidiary, Texon . CMS Energy'sproportionate share of Texon's operating revenues and operating expensesincreased by $545 million and $541 million, respectively.
Of the $1 .234 billion increase in 1999 revenue, $240 million (19 percent)is attributable to increased trading revenues in the marketing, services andtrading business (primarily representing a full year of CMS MST's Texon
operations), and an increase of $63 million (5 percent) in operatin grevenue associated with operations of investments in the natural gastransmission segment. The $967 million increase in operating expensesincludes $239 million (25 percent) related to increased trading activity inthe marketing, services and trading segment of business . The $256 million
62
increase in fixed charges includes $23 million (9 percent) of interestcharges associated with international energy investments .
(Emphasis added) .
150. The 2000 Annual Report also included the following chart, touting the
increased volumes of gas and electricity that CMS-MST marketed :
The company has increased the volumes itsmarkets . Electricity marketed, in particular,showed significant gains in 2000 as a result of anincreased emphasis on wholesale trading .
Gas Electricity
Marketed Marketed
(bet) 614 (GWh) 37.800
47 0
370
7 .0)0
4uno
98 99 00 98 99 00
151 . Moreover, the Company affirmed the reliability and truthfulness of its
financial statements, stating, "ft]lhe financial statements are prepared in conformity with
generally accepted accounting principles and use management 's estimates where
appropriate."
152. The 2000 Annual Report was signed by Defendants McCormick, Wright,
Flaherty, Holton, Way, Whipple, DaPra, Deutch, Duderstadt, Parfet, Pierre and Yasinsky .
CMS's 8.5% Senior Notes Offering
153. On March 28, 2001, CMS announced the successful pricing of $350
million of 8 .5% Senior Notes, due 2011 ("8 .5% Senior Notes"), proceeds of which were
63
to be used to repay outstanding debt of the Company . The Company expected net
proceeds of $337,375, 500 from the sale of the 8 .5% Senior Notes .
154. The underwriters for the offering were ABN Amro Inc., Banc of America,
Barclays Capital , CIBC World Markets, JP Morgan, Salomon Smith Barney , Scoti a
Capital, and SG Cowen .
155 . On the same day, CMS filed a Form 424B5 Prospectus Supplement ,
("March 28, 2001 Prospectus Supplement") offering to the investing public the 8 .5%
Senior Notes . The Prospectus Supplement incorporated by reference the Company' s
2000 10-K, and highlighted the following financial results for 2000 :
- CMS marketing, Services and Trading marketed 614 Bcf of gas,37,781 GWh of electricity, 31 MMBbls of crude oil and 9 .0 MMBbIsof natural gas liquids;
- In 2000 , we had consolidated operating revenue of $8 .998 billion,earn ings before interest , taxes, depreciation and amortization of $1 .693billion and net income of $36 million.
156 . On April 20, 2001, CMS common stock opened at $27 .50 per share,
reaching a high of $28 .21 per share in intraday trading on May 1, 2001 . On the same
day, CMS PEPS traded at $27 .92 per PEPS Unit .
64
Reasons Why the Statements Concerning the Fourth Quarter and Year End 2000Were False and Misleading At the Time They Were Mad e
157. The statements identified above in the January 24, 2001 Press Release, the
February 23, 2001 8-K, the 2000 10-K, 2000 Annual Report and March 28, 200 1
Prospectus Supplement were false and misleading at the time they were made for th e
same reasons set forth above in ¶ 74 a through f, as well as ¶ 106 a, 107 a and 127 a . To
the extent such documents incorporate by reference the Company's earlier filings with
the SEC during the Class Period, they are also false and misleading for the reasons state d
above .
158. In addition, these statements were false and misleading at the time the y
were made because :
a. As later uncovered by Platt's Power Markets Week, CMS sold
Reliant 19.8 million MWh at prices ranging from $27 .35 to $76
per MWh at the Cinergy, Entergy, PJM West and TVA trading
hubs. Reliant sold CMS 19 .7 MWh at prices ranging from $24 to
$64 MWh at the Cinergy, Entergy, PJM West and TVA hubs .
CMS total sales in the fourth quarter of 2000 were approximatel y
22.1 million MWh, while Reliant's total sales were approximately
70.5 million MWh. Without the transactions they did with each
other, CMS would have had 2.3 million MWh in sales ; Reliant
would have had 50 million MWh in sales volume . These
transactions between CMS and Reliant, among others , should not
have been recorded on CMS's financial statements because there
65
+r r-~
was no valid business purpose for entering into the transactions ,
other than for the purpose of inflating revenues .
159. In addition, the January 24, 2001 Press Release and 2001 Annual Repor t
were false and misleading because CMS's energy marketing unit did not market 61 4
cubic feet of natural gas, nor did it market 37,781 gigawatt-hours of electricity .
CMS's First Quarter 2001 Financial Statement s
160. On April 30, 2001, the Company issued a press release reporting CMS' s
financial results for the first quarter ended March 31, 2001 (the "April 30, 2001 Pres s
Release"). The April 30, 2001 Press Release repo rted that first quarter operating revenu e
"totaled $4.13 billion, an increase of126 from $1.83 billion in the first quarter of
2000, due largely to significantly increased lower-margin energy marketing an d
trading transactions. " (Emphasis added) .
161 . In reaction to the Company's announcement of its financial results for th e
first quarter of 2001, Bane of America Securities, a subsidiary of Defendant Banc of
America, issued a research report on April 30, 2001 that contained a "Buy"
recommendation . The report also raised its analyst price target for the Company from
$34 per share to $40 per share based, in part, upon a recognition that "non-regulated
activity should represent about 50% of earnings in 2003, up from 30% in 1999 ."
162. On May 11, 2001, CMS filed its Quarterly Report on Form 10-Q for th e
first quarter ended March 31, 2001 (the "First Quarter 2001 10-Q") . The First Quarter
2001 10-Q repeated the same statements as those incorporated in the April 30, 2001 Pres s
Release .
163 . In addition the First Quarter 2001 10-Q reported that CMS-MST' s
operating revenues for the first quarter of 2001 were $2.344 billion, up from a mere $344
66
million in the same period in 2000 , and that CMS-MST's operating expenses for the
Company's MST operations increased from $40 million in first quarter of 2000, to
$1 .444 billion in the same period in 2001 .
164. The Company included the following additional disclosure in its Firs t
Quarter 2001 10-Q :
MARKETING, SERVICES AND TRADING RESULTS OFOPERATIONS PRETAX OPERATING INCOME: For the three
months ended March 31, 2001 . . . The physical volumes ofmarketed and managed natural gas and power traded increased17 percent and 1,383 percent, respectively, due largely tosignificantly increased lower-margin energy marketing andtrading transactions.
MARKETING, SERVICES AND TRADING OUTLOOK : CMSEnergy intends to use its marketing, services and trading businessto focus on wholesale customers such as municipals, cooperativesand large industrial customers in the central United States whereCMS Energy's existing assets are concentrated. CMS Energy'smarketing, services and trading business also intends to contract
for use of significant gas transportation and storage assets in thecentral United States to provide a platform for wholesalemarketing, trading, and physical arbitrage . CMS Energy also seeksto continue developing importing and marketing opportunities forLNG. CMS Energy plans to capitalize on favorable marketconditions for energy performance contracting through expanding
its services business in selected markets .
(Emphasis added) .
165 . The First Quarter 2001 10- Q also included the following representations :
In management's opinion, the unaudited information contained inthis report reflects all adjustments necessary to assure the fair
presentation of financial position, results of operations and cashflows for the periods presented . The Condensed Notes toConsolidated Financial Statements and the related ConsolidatedFinancial Statements should be read in conjunction with theConsolidated Financial Statements and Notes to ConsolidatedFinancial Statements contained in CMS Energy's Form 10-K forthe year ended December 31, 2000, which includes the Reports ofIndependent Public Accountants .
67
166. In addition, the First Quarter 2001 10-Q included the following caveat :
The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses
during the reporting period .
167. The First Quarter 2001 10-Q was signed by Defendant Wright .
Platt 's Power Markets Week 1" Quarter 2001 Rankings
168. On June 4, 2001, Platt's Power Markets Week noted that CMS-MST's 15 1
Quarter 2001 power sales gained 1,379% above its sales in the first quarter of 2000 . The
article also noted that "CMS and Reliant traded about 20 million MWh, lifting CMS u p
from the rank of 56`x' a year ago to 18']' for the first-quarter of 2001 ."
CMS's 8.9% Senior Notes Offerin g
169. On June 22, 2001, CMS filed a Form 424B5 Prospectus Supplemen t
("June 22, 2001 Prospectus Supplement") offering to the investing public 8 .9% Senior
Notes due 2008 . The Company expected net proceeds of $265,887,670 from the offerin g
of the 8 .9% Senior Notes .
170. The underwriters for the offering were Bane One Capital Markets ,
Comerica Securities, Deutsche Bank Alex Brown, TD Securities, Tokyo-Mitsubish i
International PLC, Fleet Securities, and Williams Capital Group, L .P .
171 . The Prospectus Supplement incorporated by reference the Company' s
2000 10-K, and highlighted the following financial results for 2000 :
- CMS marketing , Services and Trading marketed 614 Bcf of gas,37,781 GWh of electricity, 31 MMBbls of crude oil and 9.0 MMBblsof natural gas liquids ;
68
In 2000, we had consolidated operating revenue of $8.998 billion,earnings before interest, taxes, depreciation and amortization of $1 .693billion and net income of $36 million .
172. The Prospectus Supplement also incorporated the first quarter ende d
March 31, 2001 financial results including the Company' s operating revenue of $4 .126
billion in operating revenue .
Reasons Why the Statements Concerning the First Quarter of 2001Were False and Misleading At the Time They Were Made
173. The statements identified above in the April 30, 2001 Press Release, Firs t
Quarter 2001 10-Q and June 22, 2001 Prospectus Supplement were false and misleading
at the time they were made for the same reasons set forth above in ¶ 74 a through f, as
well as IT 106 a, 107, 127 a, 158a and 159 . To the extent such documents incorporate by
reference the Company's earlier filings with the SEC during the Class Period, they are
also false and misleading for the reasons stated above .
174. In addition, these documents were false and misleading because :
a. CMS's revenue, as restated, for the year ended December 31 ,
2001, revealed that CMS overstated its revenue by $4 .205 billion
from improperly recording revenue in round-trip energy trading
transactions and an additional $1 .534 billion recently included in
the 2002 10-K relating to round-trip energy trading transactions .
These transactions should not have been recorded in CMS' s
financial statements because there was no valid business purpose
for entering into the transactions, other than for the purpose o f
inflating revenue ;
69
b. As revealed in quarterly filings in 2002, CMS's first quarter 200 1
revenues were overstated by $1 .231 billion and expenses were
overstated by $1 .232 billion; and
c. As later uncovered by Platt's Power Markets Week, CMS sold
Reliant 20.8 million MWh at prices ranging from $ 27.35 to $
65 .25/MWh at the Cinergy, Entergy, PJM West and TVA hubs .
Reliant sold CMS 20 .8 MWh at prices ranging from $ 28.52 to $
59/MWh at the Cinergy, Entergy, and PJM West hubs, CMS total
sales in the first quarter of 2001 were approximately 23 .9 million
MWh; Reliant's total sales were approximately 76 .8 million MWh .
Without the sales to Reliant , CMS volume would have been 3 . 1
million MWh . These transactions between CMS and Reliant ,
among others, should not have been recorded in CMS's financial
statements because there was no valid business purpose for
entering into the transactions, other than for the purpose of
inflating revenues .
175. In addition, the First Quarter 2001 10-Q was false and misleading at th e
time it was issued because the physical volumes of marketed and managed natural gas
and power traded did not increase 17 percent and 1,383 percent, respectively, during th e
quarter.
CMS's Second Quarter 2001 Financial Statements
176. On August 1, 2001, the Company issued a press release reporting CMS' s
financial results for the second quarter ended June 30, 2001 ("August 1, 2001 Pres s
Release")
70
177. The Company also filed on August 1, 2001 its current report on Form 8-K
(the "August 1, 2001 8-K") . The August 1, 2001 8-K attached the Company's August 1 ,
2001 Press Release .
178. Defendant Wright signed the August 1, 2001 8-K .
179. In reaction to the Company' s announcement of its second quarter 200 1
financial results, analysts at Morgan Stanley Dean Witter, a subsidiary of Defendan t
Morgan Stanley, remarked on August 1, 2001 :
We expect the company's marketing and trading business to continue todeliver strong results given increased volumes, volatility and solid tradingtalent . Importantly, a majority of the company's marketing and tradingbusiness is in structured deals, which limits CMS's risk exposure . Wenote the company has recently moved to become a top-20 power and gastrader as compared to its top-30 ranking last year. We estimate this unitwill deliver $24 million in 2002 operating income and generate 15% to20% annual growth .
180. In reaction to the Company' s second quarter 2001 financial results, Banc
of America Securities, a subsidiary of Defendant Banc of America, issued an August 2 ,
2001 research report, stating :
The largest increase in operating income was seen in this businesssegment [Marketing Services & Trading] with operating income of $51million compared to no earnings contribution in the year ago period .
181 . On August 14, 2001, CMS filed its quarterly report on Form I0-Q for th e
second quarter ended June 30, 2001 ("Second Quarter 2001 10-Q") with the SEC ,
incorporating the financial results released by CMS on August 1, 2001 .
182, In addition , the Second Quarter 2001 10-Q reported operating revenues of
$3 .089 billion from its energy marketing and trading business for the quarter, up from
$391 million in the same period in 1999, a 690% increase .
71
183. Additionally, CMS-MST reported operating expenses for its purchase d
and interchange power of $1 .555 billion, compared with $71 billion for the same period
in 2000, a 290% increase .
184. The Second Quarter 2001 10-Q included the following additiona l
disclosure:
MARKETING, SERVICES AND TRADING OUTLOOK: CMS
Energy intends to use its marketing, services and trading businessto focus on wholesale customers such as municipals, cooperatives
and large industrial customers in the central United States whereCMS Energy's existing assets are concentrated. CMS Energy'smarketing, services and trading business also intends to contractfor use of significant gas transportation and storage assets in thecentral United States to provide a platform for wholesalemarketing, trading, and physical arbitrage . CMS Energy also seeksto continue developing importing and marketing opportunities for
LNG. CMS Energy plans to capitalize on favorable marketconditions for energy performance contracting through expandingits services business in selected markets .
185. The Second Quarter 2001 10-Q also included the followin g
representations :
In management's opinion, the unaudited information contained inthis report reflects all adjustments necessary to assure the fairpresentation of financial position, results of operations and cashflows for the periods presented . The Condensed Notes toConsolidated Financial Statements and the related ConsolidatedFinancial Statements should be read in conjunction with theConsolidated Financial Statements and Notes to ConsolidatedFinancial Statements contained in CMS Energy's Form l0-K forthe year ended December 31, 2000, which includes the Reports ofIndependent Public Accountants .
186. In addition, the Second Quarter 2001 10-Q included the following caveat :
The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expensesduring the reporting period .
72
187. The Second Quarter 2001 10-Q was signed by Defendant Wright .
Platt's August 6, 2001 Article
188. In article in Platt's Power Markets Week, dated August 6, 2001, Platt' s
noted that while the CMS overall was experiencing declining income, its MST operation s
surged . The article stated :
CMS Energy marketing, services , and trading operating income was $ 51-million, up from zero , on revenue of $ 3.09-billion, up 690%. Powervolume surged 1,683.6% to 24,545 GWh, and gas 331 .7% to 354 Bcf.
Operating expenses leaped 198 .8% to $ 4.17-billion, led by a 2,090% risein power bought for marketing, services, and trading, to $ 1 .55-billion.Gas bought for that segment jumped 349% to $ 1 .36-billion .
(Emphasis added) .
Reasons Why the Statements Concerning the Second Quarter of 2001Were False and Misleading At the Time They Were Made
189. The statements identified above in the August 1, 2001 Press Release, th e
August 1, 2001 8-K and in the Second Quarter 2001 10-Q were false and misleading at
the time they were made for the same reasons above in ¶ 74 a through f, as well as ¶¶
106a, 107, 127a, 158a, 159, 174a through c, and 175 . To the extent such documents
incorporate by reference the Company's earlier filings with the SEC during the Class
Period, they are also false and misleading for the reasons stated above . In addition, these
documents were false and misleading because :
a. As later uncovered by Platt's Power Markets Week, CMS sold
Reliant 21 million MWh at p rices ranging from $21 .75 to $78 .50
MWh at the Cinergy, Entergy, PJM West and TVA trading hubs .
Reliant sold CMS 21 million MWh at prices ranging from $23 .25
to $78.75 MWh at the Cinergy, Entergy, PJM West and TVA hubs .
73
CMS total sales in the second quarter of 2001 were approximatel y
24.9 million MWh, while Reliant's total sales were approximatel y
87.5 million MWh. Without the transactions they did with each
other, CMS would have had 3.9 million MWh in sales . These
transactions between CMS and Reliant, among others, should not
have been recorded in CMS's financial statements because there
was no valid business purpose for entering into the transactions ,
other than for the purpose of inflating revenues; and
b. As revealed in quarterly filings in 2002, CMS's second quarter
2001 revenues were overstated by $2 .166 billion and expenses
were overstated by $2 .147 billion .
CMS's Third Quarter 2001 Financial Statements
190. On October 26, 2001, CMS issued a press release reporting th e
Company's financial results for the third quarter ended September 30, 2001 (the "October
26, 2001 Press Release" )
191 . The October 26, 2001 Press Release stated, in part :
Third quarter operating revenue totaled $3.0 billion, up 29 percentfrom $2.32 billion in the third quarter of 2000, due largely toincreased lower margin energy marketing and tradingtransactions.
(Emphasis added) .
192. CMS also reported that its, "operating revenue in the first nine months of
2001 totaled $11 .47 billion compared to $5 .62 billion in the first nine months of 2000 ,
due to increased lower margin energy marketing and trading transactions. "
(Emphasis added) .
74
193 . The Company also filed on October 26, 2001 its current report on Form 8-
K (the "October 26, 2001 8-K") with the SEC announcing its financial results for the
third quarter ended September 30, 2001 . The October 26, 2001 8-K attached the
Company's October 26, 2001 Press Release as an exhibit, repeating the same statements
contained in the October 26, 2001 Press Release .
194. The October 26, 2001 8-K was signed by Defendant Wright .
195. On October 29, 2001, Merrill Lynch & Co. issued a report advisin g
investors to accumulate and noting, among other things :
Management outlined its strategic vision to be a "premier integrated NorthAmerican energy supply and services company" . Growth will be focusedon the "natural gas value chain" as well as "gas and electricity marketingand end-user services". Staying integrated is an important component ofthis vision as CMS intends to be asset-based with a balanced portfolio ofregulated and unregulated businesses .
The MS&T segment was the main positive driver in Q3 with operatingincome increasing by $22m to $20m . Factors cited were higher gas andelectric trading volumes and margins, plus increased long-term powersales contracts. These were partially offset by higher operating expenses,some net trading losses and other factors .
196. On November 14, 2001, CMS filed its Quarterly Report on Form 10-Q fo r
the third quarter ended September 30, 2001 (the "Third Quarter 2001 10-Q") with th e
SEC. The Third Quarter 2001 10-Q repeated the same statements as contained in th e
October 26, 2001 Press Release .
197. In addition, the Third Quarter 2001 10-Q reported the CMS-MST' s
operating revenues were $1 .743 billion, up from $1 .034 billion in the same period in
2000 .
75
198. Furthermore, the Third Quarter 2001 10-Q included the followin g
statement relating to the Company :
OUTLOOK
CMS Energy's vision is to be an integrated energy company with astrong asset base, supplemented with an active marketing, services
and trading capability. CMS Energy intends to integrate the skillsand assets of its business units to obtain optimal returns and toprovide expansion opportunities for its multiple existing
businesses . To achieve this vision, CMS Energy announced inOctober 2001, significant changes in its business strategy in orderto strengthen its balance sheet, provide more transparent and
predictable future earnings, and lower its business risk by focusingits future business growth primarily in North America .
199. The Third Quarter 2001 10-Q also included the following additiona l
representations :
In management's opinion, the unaudited information contained inthis report reflects all adjustments necessary to assure the fairpresentation of financial position, results of operations and cashflows for the periods presented . The Condensed Notes toConsolidated Financial Statements and the related ConsolidatedFinancial Statements should be read in conjunction with theConsolidated Financial Statements and Notes to ConsolidatedFinancial Statements contained in CMS Energy's Form 10-K forthe year ended December 31, 2000, which includes the Reports ofIndependent Public Accountants .
200. In addition , the Third Quarter 2001 10-Q included the following caveats :
The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expensesduring the reporting period .
201 . The Third Quarter 2001 10-Q was signed by Defendant Wright .
76
December 11, 2001 Press Releas e
202. On December 11, 2001, CMS-MST announced that it has signed an
agreement with Gas Natural Trading of Spain whereby CMS-MST would become Ga s
Natural's exclusive agent to market cargoes of LNG into North America. The Press
Release also announced that :
CMS-MST markets annually more than 600 billion physical cubic feet of
natural gas, 3 .7 trillion cubic feet of financial gas, 37,781 gigawatt-hoursof electricity , 31 million barrels of oil and 9 million barrels of liquids .
CMS Energy Corporation has annual sales of $15 billion and assets of $16billion throughout the U .S. and in selected foreign markets with businessesin electric and natural gas utility operations; independent powerproduction ; natural gas pipelines, gathering, processing and storage ; LNGimportation; oil and gas exploration and production; and energymarketing, services and trading.
December 12, 2001 Form S-3 Registration Statemen t
203 . On December 12, 2001 filed a Form S-3 Registration Statement for
General Term Notes to be offered at future dates worth up to $300 million (the
"December 12, 2001 Registration Statement")
204. Incorporated by reference in the December 12, 2001 Registratio n
Statement are the 2000 10-K, the First, Second, and Third Quarter 2001 10-Qs, an d
February 23, 2001 , May 17, 2001, June 22 , 2001, July 12, 2001 , August 1 , 2001, Augus t
31, 2001 , October 26 , 2001 and November 2, 2001 current repo rts on Forms 8-K.
205 . The December 12, 2001 Registration Statement included the financia l
results for the first nine months of 2001 , reporting operating revenues of $11 .472 billion
up from $5.620 billion for the first nine months of 2000, a dramatic 196% increase.
206. Defendants Wright, McCormick, and Hopper signed the December 12 ,
2001 Registration Statement . Defendants Deutch , Duderstadt, Flaherty, Holton, Joos,
77
Parfet, Pierre, Way, Whipple and Yasinsky signed via power of attorney proffered t o
Defendant Wright .
Platt's Power Markets Week 3"d Quarter 2000 Ranking s
207. On December 17, 2001, Platt's Power Markets Week, noted that CMS-
MST ranked 17th in the 3r`1 Quarter in terms of total sales among power sellers, sellin g
28,577,317 MWh in the quarter . These results represented a 15% increase front th e
previous quarter and a 126% increase from the same quarter in 2000. The article noted
that its total sales to date for 2001, 77,339,273 MWh, ranked it 18t°' among its peers in
terms of total power sold, representing a 394% increase from the previous year .
December 21, 2001 CMS Press Releas e
208. On December 21, 2001, Defendant Pallas was named as one of the 50 Key
Women in Energy in the world by Commodities Now magazine. The press release issued
by the Company, announcing the purported distinction stated :
Under her leadership, she has grown CMS-MST to a significant regionaltrading group with expansion underway to the West Coast .
CMS Marketing, Services and Trading, which ranks in the top 50 "BestPlaces to Work" in Houston by the Houston Business Journal, serves11,000 customers throughout the eastern and central United States andCanada. CMS-MST markets annually more than 600 billion physical cubicfeet of natural gas, 3 .7 trillion cubic feet of financial gas, 37,781 gigawatt-hours of electricity, 31 million barrels of oil and 9 million barrels ofliquids .
CMS Energy Corporation has annual sales of $15 billion and assets of $16billion throughout the U .S . and in selected foreign markets . In the U .S .,
where it has 85 percent of its assets, it owns and operates . . . a leadingenergy marketing, trading and services company handling four billioncubic feet per day ofnatural gas and 100 million megawatt-hours ofelectricity annually.
78
(Emphasis added) .
Reasons Why the Statements Concerning the Third Quarter of 2001
Were False and Misleading At the Time They Were Mad e
209 . The statements made in the October 26, 2001 Press Release, October 26 ,
2001 Press Release, Third Quarter 2001 10-Q, December 11, 2001 Press Release ,
December 12, 2001 Registration Statement , December 12, 2001 Press Release an d
December 21, 2001 Press Release were false and misleading at the time they were mad e
for the same reasons above in ¶ 74 a through f, as well as 11106 a, 107 a, 127 a, 158 a ,
159, 174 a-c, and 175 . To the extent such documents incorporate by reference th e
Company's earlier filings with the SEC during the Class Period, they are also false an d
misleading for the reasons stated above .
210. In addition, these statements were false and misleading because :
a. As later uncovered by Platt's Power Markets Week, CMS sold
Reliant 20 .9 million MWh at p ri ces ranging from $19 to $13 6
MWh at the Cinergy, Entergy and PJM West trading hubs . Relian t
sold CMS 21 .2 MWh at prices ranging from $24 to $123 MWh at
the Cinergy, Entergy and PJM West hubs . CMS total sales in th e
third qua rter of 2001 were approximately 28.9 million MWh, while
Reliant's total sales were approximately 108 .8 million MWh.
Without the transactions they did with each other, CMS woul d
have had 8 million MWh in sales ; Reliant would have had 87 .6
million MWh in sales volume. These transactions between CM S
and Reliant, among others, should not have been recorded i n
CMS's financial statements because there was no valid business
79
purpose for entering into the transactions, other than for th e
purpose of inflating revenues; and
b. As revealed in quarterly filings in 2002, CMS's third quarter 200 1
revenues were overstated by $1 .602 billion and expenses were
overstated by $1 .236 billion .
CMS's 2001 Financial Statements
211 . On February 4, 2002, the Company issued a press release reporting CMS' s
financial results for the fourth quarter and year ended December 31, 2001 (the "February
4, 2002 Press Release") .
212 . The Company also filed on February 4, 2002, its current report on Form 8-
K (the "February 4, 2002 8-K") with the SEC, announcing its financial results for the
fourth quarter and year ended December 31, 2001 . The February 4, 2002 8-K attached
the Company's February 4, 2001 Press Release as an exhibit, repeating the sam e
statements contained in the February 4, 2001 Press Release .
213 . Defendant Wright signed the February 4, 2002 8-K .
214. On March 29, 2002, CMS filed its report on Form I 0-K for the year ended
December 31, 2001 (the "2001 10-K") . The 2001 10-K repeated the same statements as
those contained in the February 4, 2002 Press Release . In addition, CMS reported
revenues of $4 billion for the year ended December 31, 2001 from its energy marketing ,
services and trading business and included the following additional statements :
MARKETING, SERVICES AND TRADING CMS-MST providesgas, oil, and elect ric marketing, risk management and energymanagement services to industrial , commercial , utility andmunicipal energy users throughout the United States and abroad .CMS-MST has grown dramatica lly since its inception in 1996 .CMS Energy intends to use CMS-MST to focus on wholesalecustomers such as municipals , cooperative elect ric companies and
80
industrial and commercial customers . In 2001, CMS-MSTmarketed approximately 750 bef of natural gas, 51,790 GWh ofelectricity, 33 million barrels of crude oil and 11 million barrels ofnatural gas liquids annually . From 1997 through 2001, CMS-MSTalso performed 300 energy management services projects . AtDecember 31, 2001, CMS-MST had more than 10,300 customers,transported gas on more than 40 gas pipelines and was active inmost of the 50 states and Canada. In 2001, CMS-MST's operatingrevenue was $4 .0 billion.
MARKETING, SERVICES AND TRADING OUTLOOK : CMSEnergy intends to use its marketing, services and trading businessto focus on customers such as LDC's, municipals, cooperativeelectric companies, and industrial and commercial businesses inselected locations in North America . CMS Energy's marketing andtrading business also intends to contract for use of significant gastransportation and storage assets as well as energy and generatingcapacity in North America to provide a platform for wholesalemarketing, trading, and physical arbitrage . CMS Energy also seeks
to continue developing importing and marketing opportunities forLNG. CMS Energy plans to capitalize on favorable marketconditions for energy performance contracting by expanding itsservices business in selected markets .
215. Buried in the 2001 10-K was the following caveat to the reported financia l
results :
RECLASSIFICATIONS : During 2001, CMS Energy entered into severalenergy trading contracts with counterparties . The impact of thesetransactions increased operating revenue with a corresponding increase in
operating expenses . During the fourth quarter of 2001, it was determinedthat under SFAS No . 133 and related interpretations, these transactionsshould have been recorded on a net basis . First, second and third quarteroperating revenue and operating expenses have been restated from theamounts previously reported to reflect these transactions on a net basis .There was no impact on previously reported consolidated net income .CMS Energy has reclassified certain prior year amounts for comparativepurposes . These reclassifications did not affect consolidated net incomefor the years presented .
216. In addition, the 2001 10-K included the following caveat : "The
preparation offinancial statements in conformity with generally accepted accounting
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4 ,.
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. " The 2001 10-K also included the following
affirmation : "The results of operations, as presented above, are based on th e
application of generally accepted U.S. accounting principles. "
217. The 2001 10-K was signed by Defendants McCormick, Wright, Flaherty ,
Holton, Joos, Way, Whipple, Hopper, Deutch, Duderstadt, Parfet, Pierre and Yasinsky .
2001 CMS Annual Report to Shareholders
218. CMS's 2001 Annual Report (the "2001 Annual Report") was released by
the Company on March 31, 2002 . The 2001 Annual Report contained a letter from
Defendants McCormick and David Joos to shareholders of the Company touting th e
performance of the Company' s trading operations , stating "Few companies have th e
integrated energy asset base of CMS Energy, and we believe that the earnings from the
base can be further enhanced by our growing and very successful energy marketing,
services and trading company. Our goal for CMS Energy is simply to build ou r
business to become one of North America's leading asset-based, integrated energy
supply and services companies ."
219. The 2001 Annual Report also highlighted the following concerning CMS-
MST :
Marketing, Services and Trading
CMS Marketing, Services and Trading (CMS-MST) had the best year inits history in 2001 . CMS-MST now serves about 10,300 customersthroughout the United States and Canada .
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The company posted record annual sales, with gas sales to wholesale and
retail customers growing 22 percent to 0 .7 trillion cubic feet . Electricitysales grew by more than one-third to 51,800 gigawatt-hours .
CMS-MST uses state-of-the-art risk management systems, policies andprocedures. CMS Energy's chief risk officer provides independentverification of CMS MST's financial results, which include conservativereserves for credit, operational and market price exposures .
(Emphasis added) .
220. In addition , the 2001 Annual Report included the following caveat : "The
preparation offinancial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period." The 2001 Annual Report also included the
following affirmation : "The results of operations, as presented above, are based on the
application of generally accepted U.S. accounting principles. "
221 . The 2001 Annual Report was signed by Defendants McCormick and Joos .
CMS Changes Auditors
222. On April 22, 2002, CMS filed a Press Release (the "April 22, 2002 Pres s
Release") announcing that the Boards of Directors of CMS and Consumers, upon th e
recommendation of their respective Audit Committees, voted to discontinue the use o f
Arthur Andersen LLP ("Andersen") as auditor of the Company 's financial statements for
the year ended December 31, 2002 .
223 . The Company also fi led on April 22, 2002, its current report on Form 8-K
("April 22, 2002 8-K"), which incorporated the statements contained in the April 22 ,
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2002 press.release. Defendant Wright signed the April 22, 2002 8-K. The April 22, 200 2
8-K attached as an exhibit a letter from Andersen to the SEC regarding the change i n
certifying accountant and affirming the statements contained in the Ap ri l 22, 2002 Press
Release .
224. The Company's definitive proxy statement filed on April 22, 2002 stated :
The audit committee recently concluded that the ability of Andersen toserve as independent auditors for the year ending Dec. 31, 2002 isadversely affected by well publicized recent developments and
recommended to the board the replacement of Andersen as independentauditors .
Reasons Why the Statements Concerning the Fourth Quarter and Year End 2001Were False and Misleading At the Time They Were Made
225 . The statements identified above in the February 4, 2002 Press Release,
February 4, 2002 8-K, 2001 10-K and 2001 Annual Report were false and misleading at
the times they were made because :
a. The financial statements were not prepared in accordance with
GAAP, as described more fully below in Section XIII ;
b. CMS's "reclassification" of quarterly statements of operation wa s
false and misleading as it did not disclose that approximately $4 .2
billion in restated revenues related to illicit round-trip trading at the
Company, according to the Company's May 15, 2002 Press
Release ;
c . As stated above, according to a former CMS Enterpris e
International Auditor, Defendant Wright directed the Company' s
division controllers to revise their 2001 year-end results upwards
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by a total amount of $2 to $5 billion . Accordingly, such result s
were materially overstated .
d. CMS failed to disclose that the Company lacked sufficient internal
control mechanisms preventing the Company from sufficiently
detecting that the accounting staff was not able to keep pace with
the growth of the Company, thus resulting in bookkeeping errors .
Additionally, computer interfaces of sub-ledgers to the general
ledger were ineffective or lacking . As a result, sub-ledger balances
did not agree to the general ledger and the differences were not
adjusted;
d. CMS failed to disclose that senior management, the Audi t
Committee of the Board of Directors and Andersen were aware of
the internal control problems and were conducting a plan of
remediation, which included the replacement of key personnel, as
reported in the Company's 2002 10-K; and
e. As indicated in the Final FERC Report, CMS failed to disclose that
it was engaged in the deliberate manipulation of the publishe d
price indices by providing false data to the trade press .
226. To the extent such documents incorporate by reference the Company's
earlier filings with the SEC during the Class Period, they are also false and misleading fo r
the reasons stated above .
CMS's First Quarter 2002 Financial Results
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227 . On May 1, 2002, the Company issued a press release reporting CMS' s
financial results for the first quarter ended March 31, 2002 (the May 1, 2002 Pres s
Release") . The May 1, 2002 Press Release stated, in part :
First quarter operating revenue totaled $2 .5 billion, versus $2 .9billion in the first quarter of 2001, due to decreased electric andnatural gas utility sales and natural gas transmission revenuesresulting from near record warm winter weather and continuedweak economic conditions .
CMS Energy, which has 85 percent of its assets in the UnitedStates, owns an operates . . . a leading energy marketing, tradingand services company marketing 750 million cubic feet of naturalgas and 52 million megawatt-hours of electricity annually .
228 . The Company also filed on May 1, 2002 its cu rrent report on Form 8-K
(the "May 1, 2002 8-K"). The May 1, 2002 8-K attached the Company's May 1, 200 2
Press Release as an exhibit, repeating the same statements as those contained in the Ma y
1, 2002 Press Release.
229 . Defendant Wright signed the May 1, 2002 8-K .
The Truth Is Partially Reveale d
230. On May 9, 2002, an article appeared in The Wall Street Journal, entitled
"Dynegy Trades Draw SEC Scrutiny ." The article stated, in pertinent pa rt, as follows :
The Securities and Exchange Commission is widening its probe of the bigenergy company Dynegy Inc ., examining two pairs of massive electric-power trades last fall -- executed at precisely the same moment for exactlythe same price -- that canceled each other out and didn't yield any profitsfor Dynegy or its trading partner. The trades, which appear to havesignificantly boosted Dynegy's trading volume last year, were meant tohelp burnish the company's public image just as it was seeking to takeover the dominant position in online energy trading from Enron Corp .,according to people familiar with the situation .
86
Dynegy's partner on the trades was a unit of CMS Energy Corp . ofDearborn, Mich . The transactions, valued internally by Dynegy at a
combined $1 .7 billion, would have accounted for 13% of the total fourth-
quarter value traded on Dynegydirect and more than half of the increase intrading values between the third and fourth quarters, according to peoplefamiliar with the trades and Dynegy's disclosed volume numbers forDynegydirect .
Kelly Farr, a CMS spokesman , said the company conducted the tradesas a favor to Dynegy. Mr. Farr also said such deals were commonplace in
the energy business. In 1997, for example, Occidental Petroleum Corp .drew an informal inquiry from the SEC for a slew of trades that producedno profits, and which the company later conceded were made in large partfor appearances. No action has been taken against Occidental .
Mr. Farr said CMS has conducted a number of such trades. "They weredone for the convenience of our trading partners, and we stopped doingthem late last year because they became too much trouble, " he said.
Both Dynegy and CMS said they received no financial benefits from thetrades . "We did not book these trades to revenue or income, "saidCMS's Mr. Farr.
"Looking at the trades at face value, it's hard to understand the purpose
other than to increase the volume of trading activity," said Patti Harper-Slaboszewicz, senior industry analyst at San Jose, Calif ., consulting firmFrost & Sullivan .
Dynegy President Steve Bergstrom said the electricity trades with theCMS unit were conducted "to fulfill a customer requirement" and to
"stress test" Dynegydirect because the platform had been "havingproblems with large transactions . "
The two pairs of trades with the CMS unit took place on Nov . 15, just asDynegy was in the middle of merger negotiations with Enron -- talks that
ultimately failed because of what Dynegy said were Enron's breaches ofits merger agreement .
Here's how the trades worked, according to Dynegy documents reviewedby The Wall Street Journal . At 10:08 a.m. CST, Dynegy bought a month'sworth of electric capacity at $25 .50 per megawatt hour. At exactly thesame time, Dynegy sold CMS the same amount at the same price . Twentyminutes later, at 10:28 a .m. CST, Dynegy conducted another trade t o
87
simultaneously buy and sell a year's worth of electric capacity from CMS,at a price of $34 per megawatt hour . When energy companies tradecapacity, they buy or sell the promise to deliver a stream of electric powerat a fixed price for a set period of time .
(Emphasis added) .
231 . In response to the May 9, 2002 Wall Street Journal article, CMS issued a
press release on the same date, regarding its trades with Dynegy , stating:
CMS Energy Corporation announced that an article in today's Wall StreetJournal on energy trading transactions in November 2001 between itsenergy marketing unit, CMS Marketing, Services and Trading ("CMS-
MST") and Dynegy, Inc ., incorrectly characterized the trades, whichgenerated no profit or loss, as being initiated at the request of Dynegy .CMS Energy clarified today that two November 15, 2001 electricitytrades between CMS MST and Dynegy were initiated by CjWS-MST.CMS Energy did not record any revenue or income to its financialstatements as a result of these trades . CMS Energy stopped engaging in
such transactions late last year .
(Emphasis added) .
232. The next day, May 10, 2002, CMS announced that the SEC wa s
conducting an informal inquiry regarding its "round-trip" trading practices . The pres s
release stated , in pertinent part, as follows :
CMS Energy Corporation announced today that the U.S. Securitiesand Exchange Commission (SEC) staffhas asked it to provideinformation in connection with an informal inquiry intosimultaneous purchases and sales of electricity with the samecounterparties at the same price . These transactions, whichinvolved no profit or loss, are of the type which were the subject ofrecent press reports. CMS Energy is cooperating fully with theSEC in this matter .
233. On May 13, 2002, Reliant disclosed it had engaged in "round-tri p
trading," which had boosted its revenues by more than 10% during its fiscal 1999, 200 0
and 2001 . Reliant identified CMS as the counter-party with which it had conducted th e
majority of its round-trip trading .
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234. Also on May 13, 2002, Platt's Power Markets Week, published an article,
entitled "Reliant, CMS Review Trading ; Pattern Of Dealmaking Suggests `Wash
Trading,"' by Jeffrey Ryser. Specifically, the article stated :
Analysis of trading data for Reliant and the CMS trading unit shows thatthe companies sold each other more than 97 million MWh from the thirdquarter of 2000 through the fourth quarter of 2001 . The data, reportedquarterly to the Federal Energy Regulatory Commission, is aggregatedrather than transaction-specific, so it does not allow transactions to be
matched up by date and price .
The transactions between the companies gave them a huge boost in tradingvolume that they could report to shareholders and analysts .
For example, in the fourth quarter of 2000, Reliant and CMS sold each
other 19.7 million MWh . Those trades accounted for 90% of CMS'squarterly sales, boosting its sales volume from less than 3 million MWhto 22.1 million MWIi. In that quarter, the CMS unit ranked 18th amongwholesale power sellers; without the Reliant transactions, it would haveranked 50th . The deals boosted Reliant's volume by almost 40%, fromless than 51 million MWh to 70 .5 million MWh, keeping it among the topfive wholesale sellers .
So-called wash trading involves essentially false trades in whichcounterparties do transactions that balance out financially, allowing them -- without taking any risk of altering their positions -- to create theappearance of an active market, to boost companies' trading volumes, or toaccomplish other purposes, including boosting revenue figures in financialstatements .
The practice is prohibited on trading exchanges regulated by theCommodity Futures Trading Commission , but it is not explicitly barredon electronic trading platforms or in bilateral trading. The power tradingmarket , because of the growing use of online trading platforms, issusceptible to wash trading . Some market part icipants say they suspectthe practice is being used to push up p rices and trading volumes onelectronic trading platforms , and one part icular sequence of trades on theInterContinentalExchange has been pointed to as a possible example ofwash trading to push up prices (PMW, 22 April, 1) .
CMS and Reliant started doing a large number of high-volume deals inmid-2000 after a senior executive at Reliant's trading operation joine d
89
CMS to lead its new trading unit . In late 1999, Tamela Pallas, senior vice
president of Reliant's Wholesale Marketing and Trading Group, leftReliant's trading operation in Houston to become president and CEO ofCMS Marketing, Services and Trading, hired by CMS to build fromscratch that company's trading operations in a new office in Houston . Thenew operations in Houston took several months into 2000 to becomeoperational .
Deals between CMS and Reliant first appeared in the first quarter of 2000,when CMS saw its sales jump by over 1,100 % year-over-year and over800% from the previous quarter .
In the third quarter of 2000, CMS sold Reliant 10 .2 million MWh at pricesranging from $ 22 .50 to $ 122/MWh at the Cinergy, Entergy and PJM
West trading hubs. Reliant sold CMS 10 .2 million MWh at prices rangingfrom $ 33 .75 to $ 122/MWh at delivery points Cinergy, Entergy and PJM
West .
CMS total sales in the third quarter of 2000 were about 12 .6 millionMWh, up from about 1 .4 million MWh in the second quarter of 2000,while Reliant's total sales were about 69 million MWh, up from about 37 . 3million MWh in the second quarter of 2000 .
In the fourth quarter of 2000, CMS sold Reliant 19 .8 million MWh atprices ranging from S 25.75 to $ 76/MWh at the Cinergy, Entergy, PJM
West and TVA trading hubs . Reliant sold CMS 19 .7 MWh at pricesranging from $ 24 to $ 64/MWh at the Cinergy, Entergy and PJM Westhubs .
CMS total sales in the fourth quarter of 2000 were about 22 .1 millionMWh, while Reliant 's total sales were about 70 .5 million MWh. Withoutthe transactions they did with each other, CMS would have had 2 .3 millionMWh in sales ; Reliant would have had 50 million MWh in sales volume .
In the first quarter of 2001, CMS sold Reliant 20 .8 million MWh at pricesranging from $ 27 .35 to $ 65.25/MWh at the Cinergy, Entergy, PJM Westand TVA hubs. Reliant sold CMS 20 .8 MWh at prices ranging from $28 .52 to S 59/MWh at the Cinergy, Entergy, and PJM West hubs .
CMS total sales in the first quarter of 2001 were about 23.9 millionMWlt; Reliant's total sales were about 76.8 million MWh. Without thesales to Reliant, CMS volume would have been 3.1 million MWh .Reliant sales would have fallen to 56 million without the CMS deals .
90
In the second quarter of 2001, CMS sold Reliant 21 million MWh at pricesranging from $ 21 .75 to $ 78.50/MWh at the Cinergy, Entergy and PJMWest hubs . Reliant sold CMS 21 million MWh at prices ranging from S23 .25 to $ 78 .25/MWh at the Cinergy, Entergy and PJM West hubs. CMS
total sales in the second quarter were about 24 .9 million MWh ; Reliant'stotal sales were about 87 .5 million MWh .
Without the Reliant deals, CMS volume would have fallen to 3 .9 million
MWh. Reliant's volume would have dropped to 66 .5 million MWh .
In the third quarter of 2001, CMS sold Reliant 20 .9 million MWh at pricesranging from $ 19 to $ 136/MWh at the Cinergy, Entergy and PJM Westhubs. Reliant sold CMS 21 .2 million MWh at prices ranging from $ 24 to$ 123/MWh at the Cinergy, Entergy and PJM West hubs . CMS sales inthe third quarter of 2001 totaled about 28 .9 million MWh; Reliant's totalsales were about 108.8 million MWh.
Without the sales to Reliant, CMS sales for the quarter would have been 8
million MWh ; Reliant's volume would have been about 87 .6 million MWh
without the sales to CMS .
(Emphasis added) .
235. A follow-up article in The Wall Street Journal on May 13, 2002, entitled ,
"Trade Disclosures Shake Faith In Damaged Electricity Market," by Mitchell Benson ,
Chip Cummins and Jathon Sapsford, further addressed the wash trades :
It's not clear why firms would have made the trades, or whether they mayhave broken any laws . The Securities and Exchange Commission islikely to investigate whether companiesfraudulently claimed revenuefrom trades that didn 't net any profits. If not aimed at booking extrarevenue, such trades also could have helped companiesexaggerate their market share in a drive to be perceived as biggerplayers and bring in more business. Dynegy, for its part, said its tradewith CMS was only intended to test the movement of large volumes ofenergy; Reliant declined to give any details about its trades until aconference call with analysts scheduled for today .
More broadly, the latest revelations about trading behavior suggest that thetorrid growth in the three-year-old wholesale electricity market, whichunderpinned huge revenue growth and fat profits at these companiesthrough much of 2000 and 2001, could have been exaggerated -- no oneknows by how much. The revelations also are renewing suspicions amongfederal and state investigators that bogus trades may have been at least
91
partly behind electricity prices soaring as much as 460% in Californiaearly last year.
It's not clear how this kind of trading activity may have influenced marketprices. Traders say that it is possible to use such "round-tripping" trades,in which the same amount of energy is swapped in both directions, to helpset a higher benchmark price for a particular contract so that other orfuture buyers would have to pay more . It can also be used to make themarket for a contract look more liquid than it actually is . It's also unclearhow prevalent the practice was. The electricity trading market isn'ttransparent -- it consists of a handful of big players doing business amongthemselves .
What is clear is that the wholesale electricity market grew exponentially invery short order. Sales of megawatt hours nearly doubled from one billionin the fourth quarter of 2000 to 1 .97 billion in the same period of 2001,during which Enron filed for bankruptcy protection . Some observersbelieve fresh damage maybe done to the credibility of electricityderegulation, which was supposed to bring consumers more choice andlower prices . At this point "the arguments against markets are clear," saysFederal Energy Regulatory Commission member William Massey :"California is strike one, and Enron is strike two . My God, we don't needstrike three . "
A "third strike," adds Mr. Massey "is if consumers and state policy makerslose confidence in the market-based approach and feel like there are a lotof funny games going on in the market that they don't understand . "
Right out of the gate, trading volumes shot through the roof. Companieslike Enron, Dynegy, Reliant Resources and Mirant trumpeted the hugegrowth in their "merchant" energy businesses, saying that the increasinglyliquid national electricity market was allowing them to make the kind ofprofits that old-style utility operations -- with their highly regulatedpricing -- never could . Wall Street loved the story ; several utilities spunoff their unregulated units in lucrative initial public offerings . Severalindependent producers and big trading operations such as Enron andDynegy saw their stock prices shoot higher .
In trading electricity contracts that called for physical delivery of powermonths or years down the road, these companies had lots of leeway in bowthey valued the contracts . Using so-called mark-to-market accounting, theenergy companies booked a profit or loss on the value of contracts theyheld based on the market price at a given moment . When electricity price s
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shot upward in the Western U .S . in the first half of 2001 due to supplyshortfalls in California, the companies reaped huge gains .
The opaque nature of these accounting practices were taken on faith whentimes were good but came under intensified scrutiny as Enron collapsed ;now creditors and investors get spooked quickly when questions abouttrading practices are raised publicly .
Analysts question the explanation . Art Gelber, a former energy executivewho now runs the Houston consulting firm Gelber & Associates, say suchtrades are typically done to create the impression that a given company ---and in this case, a trading platform -- is drawing more activity than others .At the time of the trades, Enron was sinking fast and a number of rival
platforms were seeking to capture the business once held by its subsidiaryEnronOnline . "It's a question of looking like the busiest guy around,"said Mr. Gelber, who calls the practice "competing for brag-a-watts . "
Round-tripping isn't illegal in power markets . On regulated stock andfutures exchanges, where the practice is known more commonly as"wash " trading, it is specifically restricted. For years, regulators have
prosecuted traders who have sought to inflate trading activity in asecurityfor the sake of manipulating the price or creating the falseimpression that the security is trading in a liquid market.
(Emphasis added) .
236. An article in the Houston Chronicle , dated May 13, 2002, entitled "Phon y
trades common?" indicated that CMS was the party that had initiated the "round-trip "
trades with Dynegy . The article stated in pertinent part as follows : "Last week, Dynegy
and CMS confirmed that they did round-trip trades with each other. The deals were don e
at CMS's request, and Dynegy said one reason it wanted to conduct them was to test it s
computer systems for handling large trades . "
237. On May 13, 2002, the Equity Research depa rtment of Morgan Stanley
Dean Witter, a subsidiary of Defendant Morgan Stanely, downgraded its rating of th e
Company's common stock and stated :
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We are downgrading CMS Energy to Equal-weight fromOverweight as we believe the risks related to an energy tradingbusiness do not provide an attractive risk/reward balance for
investors in this levered mid-cap company .
The SEC launched an informal inquiry on 5/10 into simultaneouspurchases and sales of electricity CMS entered into with the samecounterparties at the same price . CMS reported these trades didnot result in any profit or loss . The company says these tradeswere conducted to increase trading volumes .
Financial Impact? - CMS Restated 1-3Q01 Revenue
During the first three quarters of 2001, CMS recorded all revenuesand costs associated with the aforementioned trades . In the 4Q2001, it was determined that under SFAS 133 these trades shouldhave been recorded on a net basis, and the previous three quarterswere restated . Net income was not affected.
238. Upon disclosure of the extent of CMS's trading practices and its multipl e
counter-parties, CMS common stock fell from a high of $19 .23 on May 10, 2002 to a low
of $15 .07 on May 13, 2002, or a single-day decline of more than 22% on high volume,
and down more than 45% from the Class Period high . Also as a result of these
disclosures, CMS PEPS fell from $25 .00 per PEPS Unit on May 10, 2002 to $23 .12 per
PEPS Unit on May 13, 2002, and then to $20 .22 per PEPS Unit on May 17, 2002 . This
drop constituted a decline of almost 20% in five consecutive trading days . As of May 17,
2002, the PEPS had declined more than 31% from the Class Period high of $29 .40 per
PEPS Unit on May 1, 2001 .
May 15, 2002 Press Release ; CMS Issues Additional Disclosures Concerning ItsRound-Trip Tradin g
239. On May 15, 2002, CMS finally provided certain details with respect to it s
"roundtrip" trading practices. In a press release (the "May 15, 2002 Press Release"),
CMS stated in pertinent part as follows :
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CMS Energy Corporation today reported the preliminary results ofan internal review indicating its energy marketing unit, CMSMarketing, Services and Trading (CMS-MST), entered into "roundtrip" electricity trades involving simultaneous purchases and saleswith the same counterparties at the same price from May 2000through mid-January 2002 . Thirteen of the trades accounted forabout 98 percent of the volume . All such CMS trades were witheither Dynegy Power Marketing, Inc . or Reliant Energy Services,Inc. These simultaneous transactions, in which electricity was soldand re-purchased without profit, loss or cash flow impact to CMSEnergy, had the effect of increasing trading volumes . Afterinternally concluding that the cessation of such trades was in the
Company's best interests, CMS stopped such trades in January2002 . CMS-MST has not participated in any electricity trading inCalifornia's energy market, accordingly none of the round triptrades involved California.
CMS Energy decided after the third quarter of 2001 that notrecording these trades in either revenue or expense was a moreappropriate representation of the nature ofthese transactions.Therefore, no revenue or expense was recorded in its financialstatements in the fourth quarter of 2001 from such trades.Revenue and expense were re-statedfor the first three quarters of2001 to eliminate $3.4 billion ofpreviously reported revenue andexpense. The Company's Annual Report on Form 10-K for2001, issued in March, reflects only $5 million revenue andexpense from such trades, which was inadvertently included.For 2000, these trades represented $1.0 billion of revenue andexpense. The trades had no effect on the Company 's earnings,cash flow or balance sheet for 2001 or 2000.
CMS' internal review found that these trades included 79 .3 millionmegawatt-hours in 2001 and 29 .6 million megawatt-hours in 2000 .With these trades subtracted, electric trading volumes for 2001totaled 31 million megawatt-hours and for 2000 totaled 8 .3 millionmegawatt-hours.
(Emphasis added) .
240. Kelly Farr, a CMS spokesman, stated, "[wJe admit the mistake, and
decided to go to a more conservative method ofaccountingfor 2001. We looked at the
accounting treatment that we had for round-trip trades and decided that it would b e
better not to do those ."
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241 . A Reuters' article, dated May 15 , 2002, entitled "CMS admits to $4.4
billion worth of bogus power trades" provided additional information . The article stated
in pe rt inent part as follows :
CMS Energy Corp. on Wednesday said it entered into boguselectricity trades that inflated revenues and expenses by $4.4billion over 18 months in an attempt to become a leading energy
trader . Dearborn, Michigan-based CMS said it stopped "wash"trades, in which traders buy and resell electricity without profit orloss, in mid-January . The company said an internal review found
the bogus trades accounted for nearly 80 percent of electricitytraded in 2001, and more than 70 percent the year before .
The company also said it restated revenues and expensesdownward by $3.4 billion for the first three quarters of 2001,which was reflected in its annualfiling done in March.
CMS said it did 13 trades, which accounted for 98 percent of thecompany's volume, from May 2000 until raid-January . All thetrades were done with units of Dynegy Inc . and CMS Inc .
CMS said the bogus trades had no effect on its earnings, cash flowor balance sheet for 2001 or 2000 . CMS said after the third quarterof 2001 it decided not to record revenue or expense for thesetrades, as that would more appropriately reflect the nature of the
transactions.
(Emphasis added) .
242. Another Reuters art icle dated May 15, 2002, entitled "For accountants it's
clear, wash trades are illegal " provided additional detail with respect to CMS' s trading
practices . The article stated, in pertinent part, as follows :
The bogus trades that have the likes of energy traders Dynegy Inc .and CMS Energy Corp . in hot water didn't just push the envelopeof accounting laws, they were outright illegal, accounting expertssay. The disclosure of round-trip or "wash" trades, the buying andreselling of a commodity to boost revenue and trading volumewithout financial risk, has shocked investors still smarting from thedemise of Enron Corp .
"Recording revenuesfrom round-trip trades would be a speciesof fraud because they're overstating revenues, " said Robert
96
Waxman, a formerpartner at Deloitte & Touche, who heads uphis own accountingfirm now.
Accounting experts, however, said the illegality of wash tradingboils down to the basic tenet of financial reporting: You don'tbook revenuefrom a sale that lacks substance. A substantivesale would have to transfer at least some benefit or risk -- of adrop in prices, for example - between the parties trading, saidWaxman, who is also a member of the New York State Society ofCertified Public Accountants. "It's pretty much a matter ofcommon sense," said Jack Ciesielski, an accountant whopublishes the widely read Analyst's Accounting Observer. "If thetransaction lacks any substance, why would you record it?"
MATERIALLY MISSTATING STATEMENTS
The Financial Accounting Standards Board, the accounting bodythat sets accounting rules in the United States, and probably the
ultimate authority on the issue, seems to agree .
"It would seem unjustified to book revenue , " said SheriThompson, a spokeswoman for FASB. "Ifyou have anarrangement or a prearrangement in place with another party,whereyou're going to be selling something and then buying thatsame thing back and there 's an agreed upon price between theparties where you 're creating essentially a wash, it's really not asubstantive transaction . "
In any case, companies aren't supposed to knowingly engage in"conduct that materially misstates financial statements," asproclaimed by the Securities Exchange Act of 1934, Waxman said .That act addresses the financial reporting requirements of publiccompanies .
CMS acknowledged the wash trades it entered into were not in thecompany's best interests, and stopped such trading in January .
(Emphasis added) .
243 . Additionally, on May 15, 2002, CMS announced that it was cooperatin g
with the pending SEC probe. As CMS spokesman , Dan Bishop , stated : "[t]he SEC will
provide us with written questions and we'll respond to them ." The Company fu rther
announced that it was subject to an investigation conducted by the Commodity Futures
Trading Commission ("CFTC"), which had requested that CMS fu rn ish information on
the subject of round-t rip trading .
97
CMS's First Quarter 2002 10-Q
244. On May 15, 2002, CMS filed its Quarterly Report on Form 10-Q for the
first quarter ended March 31, 2002 (the "First Quarter 2002 10-Q") . The First Quarter
2002 10-Q repeated the same statements as those contained in the May 1, 2002 Pres s
Release . In addition, the Company made the following disclosure relating to its round-
trip trading:
Recent press reports have been examining so-called "round trip"commodity trades involving simultaneous purchases and sales with thesame counter -parties at the same price . CMS Energy disclosed thatCMS MST entered into such transactions during the period of May2000 through mid-January 2002 . Thirteen of the trades accounted forabout 98 percent of the volume. All such CMS MST trades were witheither Dynegy Power Marketing, Inc . or Reliant Energy Services, Inc .These simultaneous transactions, in which electricity was sold andrepurchased without profit, loss or cash flow impact to CMS Energy, hadthe effect of increasing trading volumes . After internally concluding thatthe cessation of such trades was in the CMS Energy's best interests, CMSMST stopped such trades in January 2002 . CMS Energy decided after thethird quarter of 2001 that not recording these trades in either revenue orexpense was a more appropriate representation of the nature of thesetransactions. Therefore, no revenue or expense was recorded in itsfinancial statements in the fourth quarter of 2001 from such trades .Revenue and expense were restated for the first three quarters of 2001to eliminate $3.4 billion of previously reported revenue and expense .The Company's Annual Report on Form 10-K for 2001, issued in March
2002, reflects only $5 million revenue and expense from such trades,which was inadvertently included . For 2000, these trades represented $1 .0billion of revenue and expense . The trades had no effect on theCompany's earnings , cash flow or balance sheet for 2001 or 2000 .CMS Energy's internal review found that these trades included 79 .3million megawatt-hours in 2001 and 29 .6 million megawatt-hours in2000 . With these trades subtracted, electric trading volumes for 2001totaled 31 million megawatt-hours and for 2000 totaled 8 .3 millionmegawatt-hours . CMS Energy announced on May 10, 2002 that theSecurities and Exchange Commission had asked it to provide informationin connection with an informal inquiry into these types of industrytransactions. CMS Energy is cooperating with the informal inquiry by theSecurities and Exchange Commission and is also cooperating with theCommodity Futures Trading Commission, which has requested that theCompany furnish information on the same general subject . Although
98
CMS Energy believes its actions were appropriate, the Company is unableto predict the outcome of these ongoing inquiries .
(Emphasis added) .
245. In addition , CMS reported operating revenues for CMS-MST of $985
million, compared with $1 .113 billion for the same period in 2001 . The Company' s
reference to its second quarter 2001 results however, was not consistent with earlier
reported results . Specifically, in the First Quarter 2001 10-Q, CMS-MST reported $2 .344
billion in operating revenue, or $1 .231 billion more than the amount reported for that
quarter in the First Quarter 2002 10-Q . The First Quarter 2002 10-Q also reported
that CMS-MST incurred operating expenses of $881 million, compared with $994
million in the same period in 2001 . However, in the First Quarter 2001 10-Q, CMS-MS T
reported operating expenses of $2.226 billion, or S1 .232 billion more than the amount
previously reported for that quarter in 2001 .
246. Despite these inconsistencies, the Company re-affirmed the reliability an d
truthfulness of its financial statements, stating, "/t/he financial statements are prepared
in conformity with generally accepted accounting principles and use management' s
estimates where appropriate . "
247. Defendant Wright signed the First Quarter 2002 10-Q .
248. On May 16, 2002, Moody's Investor Service revised its ratings outlook for
CMS from positive to stable.
249. Also on May 16, 2002, CMS announced that Defendant Pallas resigne d
over the electricity trading practices of CMS-MST . CMS stated Pallas, "expressed regret
over the controversy that has resulted from this trading activity, and her belief that it was
in the best interest of CMS Energy for her to step down ."
99
250. On May 17, 2002, Banc of America Securities Equity Research, a
subsidiary of Defendant Banc of America, issued a Research Brief that commented on th e
wash trade disclosures . This report noted the following:
CMS stock has declined approximately 25% since news about its
round-trip trading activities surfaced late last week .
CMS indicated that wash trades accounted for approximately 72%of its total trading volumes in 2001 and 78% in 2000, clearlyshowing that the trades were designed to boost marketing claims,in our opinion .
We note that in its recent 10-K filing, the company did lower itsreported revenues and expenses for the first three months of FY01for a total of $3 .4 billion, which leads us to believe that the onlybenefit was volume "pumping ."
251 . By May 20, 2002, the Company had admitted that round-trip trade s
accounted for nearly 72% of its reported volume in 2001, and 78% of reported volum e
in 2000 .
252. On May 20, 2002, Merrill Lynch & Co . issued a FlashNote containing th e
following observations :
CMS continues to be weighed down by its involvement with "washtrades" in the energy marketing and trading business (MS&T) . Thecompany has released preliminary results of an internal reviewwhich showed these trades to have represented a significantportion of the trading activity at MS&T in both 2001 and 2000 .
CMS specifically disclosed that wash trades amounted to 79 .3million MWh in 2001 and 29 .6 million MWh in 2002. Thesefigures were equivalent to 72% of total volumes in 2001 and 78%in 2000. The individual trades were large, with just 13 transactionsaccounting for 98% of the volumes in question . All of the CMSwash trades were made with either Dynegy (DYN ; D-3-3-7; $7.02)or with Reliant Energy Services .
100
- a~
The issue has clearly damaged investor confidence and last weekCMS announced the resignation of Tamela Pallas, who had beenhead of MS&T since late 1999 and was formerly with Reliant .Management indicated with this announcement that they arecommitted to ensuring that such trading practices are not repeated .
253. Despite the Company' s earlier disclosures concerning the false an d
misleading nature of its round-trip trading, it continued to withhold the entire truth fro m
investors . Specifically, on May 21, 2002, Defendant McCormick , said in an interview
with the Detroit Free Press that : "I think as people are getting more of the facts abou t
this situation, I think they're getting more comfortable that there's no big problem here .
It's overblown ."
254. In response to the previous disclosures of CMS and others' round-tri p
trading, on May 21, 2002, FERC issued an order to 143 companies, including CMS, t o
confirm or deny under oath their involvement in round-trip trading .
Reasons Why the Statements Concerning the First Quarter of 2002Were False and Misleading At the Time They Were Mad e
255. The statements identified above in the May 1, 2002 Press Release, May 1 ,
2002 8-K, and First Quarter 2002 10-Q were false and misleading at the times they wer e
made because :
a. The financial statements were not prepared in accordance wit h
GAAP , as described more fully below in Section XIII ;
b. CMS failed to disclose that the Company lacked sufficient interna l
control mechanisms preventing the Company from sufficiently
detecting that the accounting staff was not able to keep pace with
the growth of the Company, thus resulting in bookkeeping errors .
Additionally, computer interfaces of sub-ledgers to the genera l
101
ledger were ineffective or lacking . As a result , sub-ledger balances
did not agree to the general ledger and the differences were no t
adjusted;
c. CMS failed to disclose that senior management , the Audi t
Committee of the Board of Directors and Andersen were aware o f
the internal control problems and were conducting a plan o f
remediation, which included the replacement of key personnel, as
reported in the Company's 2002 10-K; and
d. As indicated in the Final FERC Report, CMS failed to disclose tha t
it was engaged in the deliberate manipulation of the publishe d
price indices by providing false data to the trade press .
May 24, 2002 Press Release; Resignation of McCormick and Appointment of th e
Special Committe e
256. On May 24, 2002, CMS announced that Defendant McCormick ha d
resigned as Chairman and Chief Executive Officer of CMS . At that time, Defendant
McCormick admitted that, "There have been significant mistakes in execution ." CMS
also announced that it had formed a Special Committee of independent directors to
investigate the Company's round-trip trades . CMS further stated that it expected to
eliminate $1 billion in revenue from 2000 and that :
$900 million of revenue and expense that was [previously] reclassifiedresulted from an incomplete round trip gas trade . The restatement willalso adjust the year end 2001 balance sheet for offsetting receivable andpayable amounts of $122 million related to round trip trades, and willrestate 2001 revenue and expense of $5 million inadvertently missed in the2001 restatement .
102
The Company further announced it had received a subpoena from the U .S. Attorney's
Office for the Southern District of New York relating to the Company's round-tri p
trading, and that it expected to receive a subpoena from the U .S. Attorney's Office for th e
Southern District of Texas .
257. On May 28, 2002, the Equity Research department of Morgan Stanle y
Dean Witter, a subsidiary of Defendant Morgan Stanley, issued a Company Update on
CMS and McCormick' s resignation . The foregoing report stated :
Summary and Investment Conclusio n
CMS Energy's CEO Bill McCormick somewhat unexpectedlyresigned at the company's annual meeting on May 24th .McCormick will remain on the CMS board of directors .
The board will also establish a special committee of independentdirectors to investigate matters surrounding round trip trades . Thespecial committee will retain outside counsel to assist in th einvestigation .
We view the management change as a positive for CMS shares .Generally, shares of companies with new management outperform .We especially note ETR and CEG shares' outperformance whenexternal new management was named, although ETR had aconcurrent corporate restructuring that raised $4 billion in proceeds(see exhibits 1&2) .
However, CMS has a number of issues weighing against it over theintermediate -term mitigating the potential benefits from amanagement change . We remain equal-weight on CMS shares, aswe do not see shares trading better than a 7- 7 .5% yield, or $19-21,over the intermediate -term . The company remains committed to itsannual $ 1 .46 dividend .
Further, the company's high leverage and continued presence inriskier energy trading and E&P businesses presents a difficult
operating environment . We would view an exit from these
businesses favorably and a realistic possibility coming out of the
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upcoming late June analyst meeting. CMS has sold its two largestE&P positions - Equatorial Guinea and Powder River .
On 5/24, S&P placed CMS on Creditwatch with negativeimplications reflecting the heightened unce rtainty related to thecompany's round trip energy trades .
We-see potential for downward revision to our 2003 EPS estimateof $1 .95.
The company is currently under investigation by the SEC, FERCand CFTC related to round trip trades . Further, the company wasserved subpoenas from the U .S . Attorney's Offices for theSouthern District of New York and Houston, which also isinvestigating round trip trades . We do not know what jurisdictionthe U.S. Attorney's are operating under, but believe there arelooking for evidence to call for a grand jury indictment . Lastly, thecompany has had a number of shareholder lawsuits filed against it .We believe the pending criminal and civil liabilities associatedwith these civil/legal investigations/proceedings would deter anypotential near-term strategic transactions involving CMS.
(Emphasis added) .
258 . On May 31, 2002, CMS announced the members of the Specia l
Committee . As set forth above, the Committee's Chairman is Defendant Way and th e
other members of the Committee include Defendants Whipple (Chairman and CEO o f
CMS), Flaherty and Holton .
Andersen Disavows Its Prior Audits Of CMS And Formally Ends ItsRelationship With The Compan y
259. On June 11, 2002, CMS announced that Andersen ended its relationshi p
with the Company, disavowing its 2000 and 2001 audits . Andersen also stated that it
would not assist CMS in its investigation into the Company's round-trip trading . In a
letter to the Company, dated June 10, 2002, Andersen stated that its auditor reports
relating to CMS for 2000 and 2001 could not be relied upon, and that it would not be able
to issue an opinion on the proposed restated financial statements for those years .
104
260. Commenting on developments at CMS , Merrill Lynch & Co. issued a Jun e
14, 2002 report lowering its rating on CMS stock :
We would advise investors to underweight CMS Energy until thecompany resolves its liquidity problems . Continued uncertaintyaround its bank facility, the recent three-notch downgrade byMoody's, headline risks and limited options for financing, allcontribute, in our view, to a liquidity crunch and continuedvolatility in bond prices. In a span of two days, the CMS 8 .5 ofI I's went from trading at $92 (translates into +498 bps spread) to$77 (+804 bps) . It is currently bid at $79 (+759 bps) .
Financials -Ongoing investigations by the FERC and SEC, theabsence of audited financial statements and a recent very harshdowngrade by Moody's has effectively closed access to the capitalmarkets for CMS Energy . Because of regulatory considerationsCMS does not intend to borrow at the Consumers level . At thispoint, CMS's most viable option to mitigate an imminent liquiditycrunch may be to do a financing at the Panhandle level andupstream the proceeds to the parent .
The current liquidity crisis facing CMS has its origin in thedisclosure last month that CMS had engaged in a substantialamount of wash trades over a period of one and one-half years .Indeed, CMS acknowledged that roughly 75% of its power tradingvolumes during 2001 were from those wash trades . This led to aneed for CMS to restate its 2000 and 2001 financial statements . Italso led to the departure of CMS' long-time CEO, BillMcCormick .
Most troubling for CMS, this also led to formal notice last week
from Arthur Andersen that Andersen's historical opinions for theperiods being restated cannot be relied upon . Like many othercompanies, CMS has replaced Andersen as its auditor, but the newauditors from Ernst & Young [LLP ("Ernst & Young")] are not yetin a position to complete their own audit . The timing of this latestdevelopment was unfortunate as it occurred just as the companywas hoping to finalize the rollover of its bank facility that iscoming due on June 17 .
261 . On June 26, 2002, CMS announced that the Special Committee ha d
selected Winston & Strawn to conduct an investigation into the round-trip energy trade s
105
carried out by CMS-MST . CMS confirmed its status as "an integrated energy compan y
which has its primary business operations an electric and natural gas utility, natural ga s
pipeline systems, independent power generation, oil and gas exploration and productio n
and energy marketing, services and trading." (Emphasis added) .
262. On July 1, 2002, the Equity Research department of Morgan Stanley Dea n
Witter, a subsidiary of Defendant Morgan Stanley, i ssued another research report , stating:
Industry View : In-LineRelative valuation is moderately attractive, but uncertaintysurrounding trading issues could last for some time - plus it will bedifficult for this group to outperform in an improving economy .
Although management previously stated they were committed toprotecting the dividend , the company 's liquidity issues may betaking a higher priority . With the banks in control of thediscussions , we feel there is a greater than 50% chance of at least a50% dividend reduction .
With cash requirements as early as mid-July, this facility may bethe only source of financing for CMS until it has audited financials90-120 days from now, after its internal board committeecompletes its `wash' trade investigation . The company cannotissue public market securities at any of its subsidiaries, even thosewith audited financials (Consumers Energy and Panhandle), untilthis time, as it cannot obtain a comfort letter .
At a 13% dividend yield, we feel CMS shares fairly reflect thepotential fora 50% dividend cut-and thus we maintain our Equal-
Back to the Basics
CMS is exiting the speculative energy trading business as part ofits "back-to-basics" strategy . It will focus on its core NorthAmerican electric utility and gas infrastructure businesses, as wellas African and Middle Eastern IPP investments .
106
Trading & Marketing - Still in the Game?? ?
Although the company is planning to exit from pure speculativetrading, it still views the trading and marketing business as vital foroptimization of their assets, specifically LNG, Michigan retail, andpower origination (munis and co-ops) . We do not view thisbusiness as a core competency for CMS, and would like to see afurther pullback from trading to decrease its risk profile . Inaddition, the speculative book has an average duration of roughly 21/2 years, but exposure to changes in commodity prices isimmaterial .
Management stated that its has an earnings neutral forecast fromtrading operations, and that it should have modest positive cashflow contribution . The outstanding credit at this business should bereduced by 50% to $500 million. VAR should also be reduced 50%to $3 million .
CMS's Second Quarter 2002 Financial Results
263 . On August 7, 2002, CMS issued a press release reporting the Company's
financial results for the second quarter ended June 30, 2002 ("August 7, 2002 Pres s
Release") . The August 7, 2002 Press Release reported operating revenues of $2.4 billion ,
compared with $2 .2 billion for the same period in 2001 .
264. The Company also filed on August 7, 2002, its current report on Form 8- K
("August 7, 2002 8-K") with the SEC, announcing its financial results for the second
quarter ended June 30, 2002 . The August 7, 2002 8-K attached the Company's August 7,
2002 Press Release as an exhibit, repeating the same statements contained in the August
7, 2002 Press Release .
265. Defendant Wright signed the August 7, 2002 8-K .
266. On August 7, 2002, CMS named Thomas J . Webb ("Webb") as the new
CFO to replace Defendant Wright, who was leaving the Company after 12 years at CMS .
In addition, Whipple announced that he would be unable to certify the 2001 Form I 0-K
107
or the June 2002 Form 10-K by August 14, 2002 . The Company announced its intentio n
to have its audited financial statements ready by October 2002 . In addition, the Company
admitted that it would restate approximately $5.3 billion in revenue for 2000 and 2001
to reflect the artificial growth in revenuefrom round-trip trading.
267. The August 7, 2002 8-K stated in pertinent part :
CEO AND CFO CERTIFICATION S
CMS Energy does not plan to fi le with the Securities and ExchangeCommission the certificates required by our CEO and CFO relating to thefinancial statements included in the CMS Energy Form 10-K for 2001,
which includes financial statements for 2000 as well, and in the Form 10-Q to be filed on or about August 14, 2002, which will contain the 2001and 2002 quarterly and semiannually financial statements for the periodended June 30, 2002 .
The 2000 and 2001 financial statements need to be restated primarily asa result of the reported revenues and expenses for round trip trades andrelated balance sheet adjustments. The restatements cannot be completeduntil the Special Investigative Committee of CMS Energy's Board ofDirectors completes its investigation of round trip trading and relatedissues and CMS Energy's newly appointed independent publicaccountants, Ernst & Young LLP have completed a re-audit of the 2000and 2001 financial statements and their reviews of the current quarterlyand semi-annual statements for these years .
For the similar reasons, the CEO and CFO of CMS Energy, ConsumersEnergy and Panhandle will not be able to make the statements requiredby the Sarbanes-Oxley Act of 2002 with respect to the Form 10-Q for theperiod ended June 30, 2002 .
268. In response to the Company's announcement of its financial results for th e
second quarter of 2002, Merrill Lynch & Co. issued an August 8, 2002 report, which
stated :
Marketing, Services & Tradinj: The MS&T segment showed anoperating loss of $18m versus income of $33m in Q2 last year .This was before restructuring charges which were classified asnon-operating . The total CMS charge was $7m ($0 .06) and webelieve that most of this related to the MS&T business and it s
108
reorganization in the wake of the ongoing wash tradinginvestigation saga. Main negative operating variance factors citedwere lower electric margins ($24m) and lower gas margins($22m). There were also mark-to-market losses on inter-companypositions, but these are reversed out at the parent segment onconsolidation. The losses relate to contracts with other CMSentities where MS&T was acting as the hedging agent. Excludingthese inter-company losses, adjusted income for the segment wasactually $3m positive. The main offset for lower margins wasattributed to lower operating expenses and other items ($16m) .
In their discussion of MS&T, management indicated that the creditconstraints in the industry - and for MS&T specifically - areseverely constraining their ability to optimize existing positions orsource new business . They did note, however, that MS&T is in theprocess of entering an agreement under which a third party willoffer A-rated credit support to them (on a transaction-specificbasis) . This is designed to enable MS&T to continue with itsorigination activities targeting smaller municipal and cooperativeutility customers .
269. On August 14, 2002, CMS filed its Quarterly Report on Form 10-Q for the
second qua rter ended June 30, 2002 (the "Second Quarter 2002 10-Q") . The Second
Quarter 2002 l0-Q repeated the same statements as contained in the May 1, 2002 Press
Release . In addition, CMS reported operating revenues for CMS-MST of $1 .167 billion,
compared with $923 million for the same period in 2001 . The Company 's reference to its
second quarter 2001 results however, was not consistent with earlier reported results .
Specifically, in the Second Quarter 2001 10-Q, CMS-MST reported $3 .089 billion in
operating revenue, or $2.166 billion more than the amount reported for that quarter
in the Second Quarter 2002 10-Q. The Second Quarter 2002 10-Q also reported that
CMS-MST incurred operating expenses of $1 .130 billion, compared with $768 million in
the same period in 2001 . However, in the Second Quarter 2001 10-Q, CMS-MST
reported operating expenses of $2 .915 billion, or $2 .147 billion more than the amount
previously reported for that quarter in 2001 .
109
270. The Second Quarter 2002 10-Q also attached as exhibits the resignation
agreements of Defendants Pallas, McCormick, and Wright .
271 . The Company also proffered the following regarding its ri sk management
of its power and gas trading :
CMS Energy's derivative activities are subject to the direction of theExecutive Oversight Committee, which is comprised of certain membersof CMS Energy's senior management, and its Risk Committee, which iscomprised of CMS Energy business unit managers and chaired by the
CMS Chief Risk Officer. The purpose of the risk management policy is tomeasure and limit CMS Energy's overall energy commodity risk byimplementing an enterprise-wide policy across all CMS Energy businessunits . This allows CMS Energy to maximize the use of hedges among itsbusiness units before utilizing derivatives with external parties . The roleof the Risk Committee is to review the corporate commodity position andensure that net corporate exposures are within the economic risk tolerancelevels established by the Board of Directors . Management employsestablished policies and procedures to manage its risks associated with
market fluctuations, including the use of various derivative instrumentssuch as futures, swaps, options and forward contracts . When managementuses these derivative instruments, it intends that an opposite movement inthe value of the hedged item would offset any losses incurred on thederivative instruments .
CMS Energy has performed sensitivity analyses to assess the potential lossin fair value, cash flows and earnings based upon hypothetical 10 percentincreases and decreases in market exposures . Management does no tbelieve that sensitivity analyses alone provide an accurate or reliablemethod for monitoring and controlling risks ; therefore, CMS Energy andits subsidiaries rely on the experience and judgment of senior managementand traders to revise strategies and adjust positions as they deemnecessary. Losses in excess of the amounts determined in the sensitivityanalyses could occur if market rates or prices exceed the 10 percent shiftused for the analyses .
272. Defendant Wright signed the Second Quarter 2002 10-Q .
273. The Company also reported in the Second Quarter 2002 10-Q th e
following with regard to its CMS-MST operations :
For the three months ended June 30, 2002, CMS MST's net loss was $33million, a decrease of $66 million (200 percent) from the comparabl e
110
period in 2001 . During the second quarter of 2002, credit constraintsseverely limited the overall liquidity of the energy trading marketsreducing CMS MST's ability to actively manage and optimize its openpositions as well as impacting the ability to execute new deals . Theseconstraints have placed downward pressure on trading margins for bothwholesale power and natural gas . Operating revenues increased as a resultof sales volumes on long-term power contracts that were executed duringthe latter part of 2001 .
274. On August 19, 2002, William L . Massey, Commissioner of FERC, gave a
speech at the APGA Annual Conference in Jackson Hole, Wyoming, entitled, "FER C
Agenda for 2002 ." In the speech, Massey assailed those entities who have impaired th e
integrity of the electric and gas markets, stating:
The disclosure of the now infamous Enron trading strategies such as FatBoy and Get Shorty depicted some traders as ruthless and greedy marketparticipants who would even jeopardize grid reliability to make a buck,and the disclosure of dram round trip trading by several marketparticipants, coupled with highly questionable accounting practices, hasseverely eroded investor confidence in many entities that engage in thetrading of gas or electricity . All of this funny business has called intoquestion the integrity of energy marketing and trading .
(Emphasis added) .
Dynegy Cease & Desist Settlement With the SEC
275. On September 25, 2002, the SEC filed an action against Dynegy, relating ,
in part , to its round-trip trades with CMS. Specifically, the SEC alleged that Dynegy
violated Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) an d
13(b)(2)(B) of the Exchange Act, and Rules lOb-5, 12b-20, 13a-1, 13a-13, and 13b2-1 ,
thereunder .
276. On the same day, September 25, 2002, the SEC settled its case wit h
Dynegy for $3 million . In settling the claims against it, Dynegy agreed to the entry of a
cease-and-desist order. The Litigation Release by the SEC states in the pertinent part a s
follows:
111
Round-Trip Energy Trades
Dynegy issued materially misleading information to the investing publicabout the amount of trading on its electronic trading platform,Dynegydirect. On November 15, 2001 , Dynegy entered into two massive"round-trip" electricity transactions . In a January 2002 press release,Dynegy included the notional trading value (multiple of volume , price andterm) from one of these trades in a discussion of an increase in tradingtraffic on Dynegydirect . In an April 2002 press release, Dynegy includedthe results of these trades in its reported energy trading volume and in itsfirst quarter 2002 revenues and cost of sales .
Because the round-trip trades lacked economic substance, Dynegy'sstatements were materially misleading to the investing public . This caseis the first enforcement action resulting from an energy trading company'smisleading disclosures regarding use of "round-trip" or "wash" trades .
Reasons Why the Statements Concerning the Second Quarter of 2002Were False and Misleading At the Time They Were Made
277. The statements identified above in the August 7, 2002 Press Release, th e
August 7, 2002 8-K and in the Second Quarter 2002 10-Q were false and misleading at
the times they were made because :
a. The financial statements were not prepared in accordance wit h
GAAP, as described more fully below in Section XIII ;
b. CMS failed to disclose that the Company lacked sufficient internal
control mechanisms preventing the Company from sufficiently
detecting that the accounting staff was not able to keep pace with
the growth of the Company, thus resulting in bookkeeping errors .
Additionally, computer interfaces of sub-ledgers to the general
ledger were ineffective or lacking . As a result, sub-ledger balances
did not agree to the general ledger and the differences were not
adjusted ;
112
c. CMS failed to disclose that senior management, the Audi t
Committee of the Board of Directors and Andersen were aware o f
the internal control problems and were conducting a plan o f
remediation , which included the replacement of key personnel, as
reported in the Company's 2002 10-K ; and
d. As indicated in the Final FERC Report, CMS failed to disclose that
it was engaged in the deliberate manipulation of the published
price indices by providing false data to the trade press .
278. In addition , the May 9, 2002 Press Release, May 10, 2002 Press Release ,
and May 15, 2002 Press Release failed to disclose that CMS was engaged in th e
deliberate manipulation of the published price indices by providing false data to the trad e
press, and the Company had engaged in round-trip trading transactions in order t o
artificially inflate CMS's revenues as well as the price of the Company's publicly traded
securities .
CMS Announces Results of Special Committee's Round-Trip Investigatio n
279. On November 4, 2002, CMS issued a press release (the "November 4 ,
2002 Press Release") concerning the Special Committee and its purported findings :
- CMS Energy (NYSE : CMS) announced today the completion of thework of a Board of Directors special committee established to investigateround-trip trading at CMS Marketing, Services and Trading . The specialcommittee reported its findings and recommendations to the Board ofDirectors on Thursday and the board approved the recommendations ofthe committee and its independent outside counsel .
The facts previously reported by the Company about round-trip trading atthe Houston-based subsidiary are essentially consistent with the findingsof the special committee . The special committee also concluded, based onan extensive investigation, that the round-trip trades were undertaken toraise CMS Marketing, Services and Trading 's profile as an energymarketer with the goal ofenhancing its ability to market its services . The
113
committee found no apparent effort to manipulate the price of CMSEnergy stock or affect energy prices.
CMS Energy noted that the Securities and Exchange Commission, U .S .Department of Justice, the Commodity Futures Trading Commission, andthe Federal Energy Regulatory Commission are investigating round-triptrading. CMS Energy said it would continue to cooperate with theseinvestigations.
Ken Whipple, chairman and chief executive officer of CMS Energy, said :"Round-trip trading by CMS Marketing, Services and Trading was anill-considered, inappropriate marketing practice that is unacceptable .We have already taken a number of steps recommended by the specialcommittee to prevent any reoccurrence of this practice, including thetermination of speculative trading and revisions to CMS Energy's riskmanagement policy. CMS Energy will rapidly implement the remainingrecommendations of the special committee . "
Separately, the Company also said it is conducting an internal review ofthe natural gas trade information provided by two subsidiaries - CMSMarketing, Services and Trading and the Tulsa, Okla : based CMS FieldServices - to energy industry publications that compile and report indexprices . A prelimina,y analysis indicates that some employees providedinaccurate information in the voluntary reports . The Company will takeappropriate personnel disciplinary actions . It also said that it had stoppedproviding the information to the publications .
CMS Energy began its review after other energy companies reportedsimilar activities . CMS Energy has notified the appropriate regulatory andgovernmental agencies of this review .
CMS Energy Corporation is an integrated energy company, which has asits primary business operations an electric and natural gas utility, naturalgas pipeline systems, independent power generation, and energ ymarketing, services and trading .
(Emphasis added).
CMS's Third Quarter 2002 Financial Statement s
280. On November 14, 2002, the Company issued a press release reporting the
Company's financial results for the third quarter ended September 30, 2002 (the
"November 14, 2002 Press Release ") . The November 14, 2002 Press Release repo rted
114
\. r
operating revenues of $1 .333 million, the same figure repo rted for the same period in
2001 . The Company also reported that, "CMS Energy's comprehensive review by its
new auditors, Ernst & Young, is near completion : -- Preliminary results indicate
[additional ] restatements will be required for 2000 and 2001 for reasons unrelated to
round-trip trading ."
281 . On November 15, 2002, CMS filed its Quarterly Report on Form 10-Q fo r
the third quarter ended September 30, 2002 (the "Third Quarter 2002 10-Q") . In
addition , CMS reported operating revenues for CMS-MST of $159 million , compared
with $141 million for the same period in 2001 . The Company's reference to its third
quarter 2001 results however, was not consistent with earlier reported results .
Specifically, in the Third Quarter 2001 10-Q, CMS-MST reported $1 .743 billion in
operating revenue, or $1 .602 billion more than the amount reported for that quarter
in the Third Quarter 2002 10-Q. The Third Quarter 2002 10-Q also reported that
CMS-MST incurred operating expenses of $385 million, compared with $424 million i n
the same period in 2001 . However , in the Third Quarter 2001 10 -Q, CMS-MST reporte d
operating expenses of $1 .66 billion, or $1 .236 billion more than the amount previously
reported for that quarter in 2001 .
282. The Company disclosed certain control weaknesses at CMS-MST. The
Third Quarter 2002 10-Q stated :
During the audit cycle of 2001, it was determined that there were several
weaknesses which existed in the CMS MST accounting controls, in
particular those relating to reconciling the activity and balances in
subsidiary receivable and payable ledgers with balances reflected in the
general ledger. Senior management, the Audit Committee of the Boardof Directors and the independent auditors were all notified about the
situation and a plan of remediation was begun , including replacement ofkey personnel . While important changes in control have been initiated ,
115
some elements of the remediation plans have been unavoidably delayed by
the requirement to completely re -audit the CMS Energy financialstatements for years 2000 and 2001 . Management believes thatsupplemental procedures and personnel currently in place, along with thesignificant contraction of the trading business planned by management,have allowed for continuing business activity while the controlweaknesses are remediated and staffing positions are filled by qualifiedcandidates . Management further expects controls corrections to becompleted before the end of the 2002 audit cycle .
283. The Third Quarter 2002 10-Q was signed by Webb .
Reasons Why the Statements Concerning the Third Quarter of 2002Were False and Misleading At the Time They Were Mad e
284. The statements identified above in the November 14, 2002 Press Releas e
and the Third Quarter 2002 10-Q were false and misleading at the times they were mad e
because :
a. The financial statements were not prepared in accordance wit h
GAAP, as described more fully below in Section X1l1 ;
b. As indicated in the Final FERC Report, CMS failed to disclose that
it was engaged in the deliberate manipulation of the published
price indices by providing false data to the trade press .
285. To the extent such documents incorporate by reference the Company' s
earlier filings with the SEC during the Class Period, they are also false and misleading fo r
the reasons stated above .
January 2, 2003 Platt's Power Markets Week Articl e
286. On January 6, 2003, Platt's Power Markets Week, published an article
entitled, "EFFECT OF SWITCH TO `NET' ENERGY TRADING RESULTS ." The
article described the effect on CMS's previously reported revenues after accounting fo r
its round-trip energy trading on a net basis rather than a gross basis . Specifically, the
116
article stated that CMS's 3rd Quarter 2001 revenue would be revised (negatively) by
$1 .602 billion resulting in a decrease of 91.9%.
287. On January 17, 2003, the Equity Research department of Morgan Stanle y
Dean Witter, a subsidiary of Defendant Morgan Stanley, issued a report evaluating th e
stability of CMS's business . Among other things, this report stated :
We would note that new management has taken a number of stepsin the right direction . However, the baggage from the past -burdensome parent debt, selling assets at less than what they werepurchased for, energy trading investigations - is too large to
overcome in the near-term, in our opinion .
In our view, the company needs a significant amount of equity,although not imminently. The company has put itself in a positionwhere it will only need to refinance $500 million and issue $300million of utility debt in 2003, if it can manage to raise anadditional $210 million in asset sales, which appears reasonable tous. The company is attempting to divest its field services (weestimate $150 million of proceeds), trading operations, and its
Indian and Latin American operations .
Financial Outlook
CMS needs to nay down an additional $190 million of itsdividend-restricting 3/03 credit facility by February 6, the day priorto the record date, in order to continue to pay dividends . Paydownoptions include asset sales, refinancings, monetizing the Panhandlesale proceeds, or drawing from a cash balance ($407 million at9/30) .
Due to over $1 .3 billion in expected writedowns in 2002, weproject a debt ratio close to 79% at the end of 2002 . We seeproceeds from the Panhandle sale and expected field services sal e
modestly improving the debt ratio to about 73% by year-end 2003 .
We believe CMS will have to rely primarily on asset sales o requity issuances to paydown debt, since it has negative free cashflow (we estimate shortfalls of $299 million in 2003 and $427million in 2004) . However, we see the Panhandle sale as the lastsignificant asset sale for the company in the intermediate term .
117
Federal Energy Regulatory Commission Investigatio n
288 . In August of 2002, FERC published its "Initial Report on Company-
Specific Separate Proceedings and Generic Reevaluations ; Published Natural Gas Pric e
Data; And Enron Trading Strategies" (The "Initial FERC Report") . The Initial FERC
Report addressed in part the effects of round-trip trading on published price data .
289. The Initial FERC Report states in pe rt inent part :
The Effect of Wash Trading on Published Price Data
There have been widely-reported press stories about wash trading in bothnatural gas and electricity. Staffs effort to study the effects of wash trades
on markets is being coordinated with the CFTC and the SEC .
For the purposes of this initial report, we focus on the question of whetherwash trading can be used to manipulate price data or otherwise adverselyaffects the accuracy of published price data . Staff believes that was htrading can adversely affect the accuracy of published price data undercertain circumstances . For example, wash trading provides the illusionof a deep market (that is, more volume than absent wash trades), whichmay lead buyers to assume they are getting a competitive price andtrading in a liquid market when in fact they are not. Another problem isthat, because the daily closing price is often based on the last trade, awash trade at the end of a trading day could be used to deliberately movethat price . In fact, Platts indicated that its forward price data is meant tomirror the end-of-day price used in mark-to-market accounting . In athinly-traded market, e.g., forward markets, one wash trade could movethe market price .
Because there is no way to validate the data given to the reporting firms,the possibility of a detrimental effect on prices cannot be discounted .Staff will continue to assess the role that wash trades play on the prices fornatural gas and electricity .
(Emphasis added) .
290 . In March of 2003, FERC released its "Final Report on P rice Manipulatio n
in Western Markets and Fact-Finding Investigation of Potential Manipulation of Electric
118
and Natural Gas P rices" (the "Final FERC Report") . The Final FERC Repo rt stated the
following with regard to CMS :
On November 4, 2002, CMS announced that it was conducting an internalreview of the natural gas trade information provided to the Trade Press bytwo subsidiaries, CMS Marketing Services and Trading and CMS FieldServices . CMS stated that a preliminary analysis indicated someemployees provided inaccurate data to the Trade Press . CMS furtherstated that it would take appropriate disciplinary action and it would stopproviding information to the Trade Press .
In its responses to Staff data requests, CMS stated that it had taken
disciplinary action regarding seven employees (including firing fouremployees, three of whom were regional directors) following its inquiry
into price reporting practices .
CMS hired an outside counsel who analyzed the accuracy of the tradessubmitted to Inside FERC from December 2000 to June 2002 for itsmonthly index . Of the 472 trades reported to Inside FERCfor thatperiod, there were 116 exact matches. The reasons for the 356 reportedtrades that did not have an exact match were: (1) reporting the sense ofthe market, (2) rounding off, (3) aggregation of small deals, and (4)reporting what they saw in the market .
The outside counsel interv iewed gas traders and desk heads who repo rtedCMS's trading information to the Trade Press . One trader stated that heperceived pressure from his desk head to report inaccurate prices (highor low) in order to affect the index price. The trader said he resisted thepressure, but on one occasion he did report false data in order tomanipulate an index to favor the desk's position . According to thetrader, during the winter of 2000-2001 the difference between thenatural gas prices (basis differential) at two significant Midwesterntrading points was unusually large. The trader's boss (the desk head)wanted him to narrow the basis differential between the two prices. Thetrader then reported high prices for the lower one in order to narrow thespread between the two.
Another trader said that the same desk head asked him to create aspreadsheet with fictitious trades designed to narrow another basisdifferential. The trader claims that he did create such a spreadsheet tosend to Inside FERC and a-n: ailed it to the desk head .
There are many financial products traded by energy companies that arebased on the basis differential between two natural gas delivery points .Companies use financial swaps and other instruments to mitigate risk s
119
they face due to the differences in prices at various delivery locations .They also trade basis differentials in order to speculate on thosedifferences . Because companies are taking positions based on thedifference between two points, they can profi t if they can affect the basisdifferential by moving one of the prices up and/or moving the other price
down. Staffhas seen examples of both. One method of manipulatingindices in order to affect basis differentials is to simply make up prices,
as was the case with CMS. Another way would be to only report thosetrades that favor their positions or inflate the volumes of those trades that
favor their positions .
CMS has shut down its energy trading operation, thus it no longer reportsmarket data to the Trade Press .
(Emphasis added) .
291 . The Final FERC Report also expressed the following reaction to th e
revelations to the manipulations at CMS and other energy trading firms :
StaffReaction to the Admissions of False Reporting
Staff expressed concerns about the accuracy of the published price indices
in its Initial Report. At that time we had no conclusive evidence thatanyone had actually manipulated the published price indices . We arguedthat, due to the generic problems with the price reporting process andproblems specific to the California Border gas indices, many companieshad the incentive and ability to manipulate the indices . The admissions(described above) by five significant energy trading companies (Dynegy,
AEP, Williams, CMS, and El Paso) confirm our concerns . Particularlytroubling is the common theme that because everyone knew thateveryone else was manipulating the indices by reporting false prices andvolumes, it was somehow acceptable and even necessary for this to takeplace. Whether the intent was to influence an index in order to favor itspositions or to somehow offset the false information being provided byothers, the traders of these companies were deliberately manipulating thepublished price indices by providing false data to the Trade Press . Inaddition, in many cases the heads of the trading desks were aware of themanipulations ; in some cases, they were orchestrating the manipulations .
Many traders said they were attempting to manipulate the index pricesin order to offset the attempts at manipulation by others . The AEPtraders were asked if they ever provided information that they knew inadvance would be detrimental to their trading position, and each indicatedthey had not . The obvious followup question, which was not asked byAEP (or at least not reported by AEP), is whether they ever providedinformation that they knew in advance would be good for their tradin g
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position . In general, the traders from the companies that admitted to
providing inaccurate data said they were doing so in order to ensure thattheir positions were reflected in the indices and that they were seen as amajor player in the markets . In particular, the CFTC has concluded thatDynegy was knowingly submitting false information to the reporting firmsin an attempt to skew the indices to favor its own position . Staffconcludes that the most likely scenario is that traders were manipulatingprice indices not to help create accurate indices by offsetting theinaccuracies of others, but, to the extent possible, to move the indices in a
direction that favored their positions and create the illusion that they werekey players at particular locations .
The responses also indicate that price index manipulation was part of theprice formation process . The indices are supposed to be based on fixed-
price trades. Traders manipulated the indices by reporting false andinaccurate data on their fixed-price trading activity. Any resulting
inaccuracy in the published price index fed back into the markets . Staff
interviews with traders indicate that traders looked at prices in Gas Daily
every day, just as they watched the activity on EOL . The previous day's
index price served as an indicator of the opening trading price . Inaddition, manipulation of the daily indices would feed back into themonthly indices because monthly and daily gas are, to some extent,
substitutes for each other. Moreover, trends in daily prices (especially late
in the month) provide price information for next month's gas .
One of the arguments made in defense of the price index reporting processand the accuracy of the indices is that, because there are entities with theability and incentive to manipulate the indices in both directions, themanipulation is offsetting and therefore the indices are accurate . Staffdoes not find this argument to be persuasive.
First, there is no reason to conclude that all of the manipulation is exactly
offset. For example, many of the entities with the most influence on theindices are on the same side of the market (that is, they want to see the
price move in the same direction) . Specifically, some of the large
purchasers of natural gas at the southern California border bought gas atfixed prices but sold it at an index price . The entities that bought gas at an
index price would not be able to influence the price, but those that boughtat a fixed price would have the incentive and ability to increase the indexprice.
Second, it is unrealistic that the traders could use their feel for the market(as described by the AEP traders) to predict the direction and magnitude ofthe other traders' manipulations and calculate a perfectly offsetting
manipulation of their own . Staff finds that argument to be preposterous .
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As stated by the Trade Press on numerous occasions, the only way to
ensure accurate index prices is to provide counterparties to all trades sothey can be cross-checked, thus forcing the trading companies to provideaccurate data (unless they are colluding) or have it thrown out by theTrade Press .
Third, Staff cannot recommend relying on such a haphazard method -hoping that the editors of the trade publications can perform some kind ofalchemy and arrive at accurate prices despite deliberate manipulation and
no systematic method of reporting the data to the Trade Press . Since the
Commission has jurisdiction over most of the transactions that form thebasis for the indices and many Commission jurisdictional transactions(both gas and electric) arc based on the indices, it needs to be sure that thepublished indices are accurate, not subject to manipulation, and notserving as a means for price manipulation . As the agency of the U .S .Government with the statutory obligation to ensure just and reasonableelectricity rates, the Commission cannot rely on a recipe of offsetting falsereports, traders' feel for the market, and editorial judgment (subject to
claims of First Amendment protection) for accurate price indices .
The conversations between the editor ofInside FERC and the El Pasotraders show the inherent flaws in the system . In those conversations(which took place in late 2001 , after the Californ ia energy c risis), theInside FERC editor is clearly trying to obtain the most accurate datapossible . This is consistent with Platts ' assert ion that it tried to publish themost accurate indices possible . However, the fact that the industry wasnot providing counterpart ies by late 2001 shows that the indices were stillsubject to manipulation . Without counterparty information, there was noway for the Trade Press to cross-check for accuracy of the repo rted trades .Platts and other companies that publish indices have made improvementsin their data-gathering process in the last few months . In addition , energytrading companies have expressed a willingness to provide complete andaccurate data, including counterpa rty information . It is clear to Staff thatwithout counterparty information from all parties providing trade data, thepublished indices cannot be counted on to be accurate and free from p ricemanipulation .
Even with counterparty information, price indices could be manipulatedthrough collusion by (1) engaging in wash trading, which, as described inChapter VII, occurred on numerous occasions during 2000 and 2001 ; or(2) arranging with another company to submit false information in order to
provide phony counterparties . Therefore, providing counterpartyinformation is a necessary, but not sufficient, condition for price indicesthat are accurate and free from manipulation .
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The Commission's vision is to ensure dependable, affordable energy
through sustained competitive markets . The basis for using markets to set
energy prices rather than cost-of-service regulation is the belief thatcompetitive markets can more efficiently allocate scarce resources . In a
properly functioning competitive market, the market price serves toallocate resources . The price represents the value of the resource tosociety, reflecting demand and supply conditions . The price sends a signalto potential suppliers considering expanding production or entering themarket ; to the financial industry considering whether to finance suchexpansion, and, if so, at what interest rate ; to consumers making short-term decisions regarding how much energy to consume at a given time andlong-term decisions such as whether to buy an energy-efficient furnace or
a gas or electric appliance ; and to energy intensive businesses regarding
where to locate and which energy source to use . The price also signalswhere infrastructure improvements are most critical . A manipulated pricesends a false price signal and misallocates resources .
The accuracy and integrity of the market price are especially critical incapital-intensive industries such as natural gas and electricity .Moreover, as the predominant input choice for new electricity generation,the accuracy and integrity of natural gas prices are particularly critical .The decision of whether and where to build a natural gas-fired generation
facility is distorted if the natural gas price has been manipulated, whichleads to long-term misallocation of critical resources and ultimately hurtsconsumers . Accurate natural gas prices that are free from manipulationare the cornerstone of competitive natural gas and electricity markets .
In addition, the published price indices serve as the basis for a hugevolume of financial derivative trading . Energy companies that servecustomers use financial markets to hedge the risk in the energy industry,which is significant due to inherent price volatility and the need to makelong-term decisions with little certainty regarding future prices . Whenindex prices are manipulated (up or down), financial derivative productsare not priced properly, market participants lose faith in financialmarkets, and the cost of risk management is increased. Ultimately,energy consumers are hurt by the increased costs and inability of energycompanies to properly manage risk .
(Emphasis added) .
292. In the Final FERC Report, FERC made the following recommendation s
with regard to CMS and other energy trading companies which engaged in the practice of
market manipulation :
123
-, 1.
Staff recognizes the importance of accurate price indices to the overallhealth of competitive energy markets. The companies discussed at length
in this chapter are significant participants in U .S. electricity and naturalgas markets . I n order for the published price indices to be accurate andcredible, they must receive complete and accurate information from thesecompanies . As such, Staff recommends that the following companies berequired to show the Commission that they have fixed their internalprocessesfor reporting trading data to the Trade Press :
CMS
At a minimum, these companies need to show the following:• Those employees, including trading desk heads and managers, who
participated in manipulations or attempted manipulations of thepublished price indices have been disciplined .
• The company has a clear code of conduct in place for reportingprice information .
• All trade data reporting is done by an entity within the companythat does not have a financial interest in the published index(preferably the chief risk officer) .
• The company is fully cooperating with any government agencyinvestigating its past price reporting .
CMS's 2002 Financial Statements
293. On March 31, 2003, CMS filed its report on Form 10-K for the year-en d
and fourth quarter of 2002 ("2002 10-K") . The 2002 10-K included restated figures for
fiscal year 2001 . However, the 2002 10-K was not certified by the Company's CEO or
any principle financial officer of CMS since the Company is "in the process of restating
2001 for each quarter and intends to amend this form 10-K and provide the required
certifications at that time ."
294. The 2002 10-K reported that pursuant to the reaudit undertaken by Ernst &
Young, Ernst & Young found significant, previously undisclosed control weaknesses a t
CMS-MST. The internal controls related to "a lack of account reconciliations ,
unidentified differences between subsidiary ledgers and the general ledger, an d
124
procedures and processes surrounding the Company's accounting for energy tradin g
contracts, including mark-to-market accounting."
295. Thus, the Company admitted in the 2002 10-K, that it did not implemen t
the necessary internal controls until as late as 2003 . The 2002 10-K further stated :
Significant aspects of the remediation plan, which includes theimplementation of improvements and changes to CMS MST's internal
accounting controls, were postponed to enable the Company to preparerestated financial statements for 2000 and 2001 . While a number of thesecontrol improvements and changes were implemented in late 2002, themost important ones occurred in the first quarter of 2003 .
(Emphasis added) .
296. The 2002 10-K also disclosed that CMS commenced an interna l
investigation in 2001 into the internal control problems at the Company, a fact previousl y
undisclosed to investors, despite its materiality in the 2001 10-K . In this regard, the 2002
10-K states :
CMS MST's business experienced rapid growth during 2000 and 2001 .Late in 2001, CMS Energy became aware of certain control weaknessesat CMS MST and immediately began an internal investigation . The
investigation revealed that the size and expertise of the back-office
accounting staff had not kept pace with the rapid growth and, as aresult, bookkeeping errors had occurred and account reconciliationswere not prepared. Additionally, computer interfaces of sub-ledgers tothe general ledger were ineffective or lacking . As a result, sub-ledgerbalances did not agree to the general ledger and the differences were not
adjusted. In early 2002, CMS MST commenced an account recalculationand reconciliation project that focused initially on accounts receivable and
payable, intercompany and cash accounts, but was later expanded toinclude other accounts . The recalculation and reconstruction work for2000, 2001 and 2002 has been completed and the consolidated financialstatements reflect the required adjustments, which decreased net incomeby $5 million in 2001 and $13 million in 2000.
(Emphasis added) .
125
297, CMS also acknowledged that its previously disclosed round-trip tradin g
"had the effect of increasing operating revenues, operating expenses, accounts receivable,
accounts payable and reported trading volumes ." CMS also stated that the round-trip
trades were "undertaken to raise CMS-MST's profile as an energy marketer, with the
goal of enhancing CMS MST's ability to promote its services to new customers . "
Finally, CMS and its new auditor, Ernst & Young, provided the following caveat to th e
2002 10-K:
CMS Energy's consolidated financial statements for the years 2001 and2000 have been restated as a result of accounting adjustments identified inconnection with the re-audit and preparation of the restated 2001 and 2000consolidated financial statements of CMS Energy . CMS Energy iscurrently in the process of completing its restatement of the consolidatedfinancial statements for the quarters of 2001, and upon completion, Ernst& Young will perform a review of the 2001 quarterly financial data inaccordance with standards established by the American Institute ofCertified Public Accountants . As a result, the 2001 quarterly information
has not yet been restated. Upon completion, CMS Energy will file restatedfinancial statements for those interim periods, and for the interim periodsof 2002, in an amended Form 10-Q for September 30, 2002 . That filingwill include details of the quarterly impacts of the restatement adjustmentsfor 2001 and the fi rst three quarters of 2002 . The 2002 interim financialdata contained in Note 20, Quarterly Financial and Common StockInformation, to the consolidated financial statements has been restated toreflect the impacts of restatement adjustments.
The selected quarterly financial data related to 2001 included in Note 20,"Unaudited Summary of Quarterly Results of Operations," containinformation that we did not audit, and accordingly, we do not express anopinion on that data . We attempted, but were unable, to review thequarterly financial data in accordance with standards established by theAmerican Institute of Certified Public Accountants because we believe
that the CMS Energy's system for preparing interim financial informationdid not provide an adequate basis to enable us to complete such a review .
126
. r a,.- .
CMS's "Round-Trip" Energy Trades MateriallyInflated CMS's Trading Volumes
298. The Individual Defendants knew or recklessly disregarded that CMS's
trading volumes were grossly inflated during the Class Period, as a result of the "round-
trip" trades . The "round-trip" trades, also referred to as zero-margin trades, involved
buying electricity from other energy companies at a set price, then selling it back to them
at the same price . As admitted by the Company in CMS's First Quarter 2002 Form 10-Q,
"[t]hese simultaneous transactions, in which electricity was sold and repurchased withou t
profit, loss or cash flow impact to CMS Energy, had the effect of increasing tradin
volumes." [Emphasis added . ]
299. The impact of these "round-trip" trades was signi ficant . According to
CMS's fiscal 2000 10-K, "[t]he volumes of marketed natural gas and power traded
increased 31 percent and 919 percent, respectively ." [Emphasis added.] According t o
CMS's fiscal 2001 10-K, marketed volumes increased for "electric (51,790 GWh vs .
37,781 GWh)," a 37% increase . On May 16, 2002, The Wall Street Journal repo rted,
"with the help of the trades [CMS] was ranked the 21St largest elect ricity marketer last
year in the trade magazine Power Markets Week . Without the round-trip deals, it would
have ranked 38`h' ." According to the same article , the rationale for entering into the
transactions was twofold : (i) "[R]ankings can be used to drum up business" ; and (ii)
"Round-trip trades could also have been used to move p rices in the wholesale market or
create the impression that a given energy contract was more liquid than it really was . "
XI. POST CLASS PERIOD DEVELOPMENT S
Restatement of False Financial Statements
300 . I n order to falsely and materially inflate revenues during the Class Period ,
CMS violated GAAP and SEC rules by including approximately $5.6 billion of revenue s
127
in its financial statements from round-trip trades that lacked any economic substance .
CMS engaged in these transactions in order to manipulate the market and investors into
thinking that CMS was becoming a significant, if not a major, player in the power
marketing industry, among other reasons . The Company's failure to properly account for
and disclose CMS's round-trip trading contracts was materially misleading to investors.
Indeed, CMS's restatements constitute an admission that its previously issued financia l
statements were materia lly misstated and not in compliance with GAAP when issued, a s
a result of the effects of the round-trip trades .
301 . On May 24, 2002, in a press release (the "First Restatement"), the
Company disclosed that it had "reclassified 2001 financial statements to eliminate $4 .2
billion of revenue and expense, which included $3 .3 billion of previously reported
revenue and expense from round trip power trades . The other $900 million of revenue
and expense which was reclassified resulted from an incomplete round trip gas trade ."
The reductions in revenue and expenses were related only to the first three quarters o f
128
2001 . The following chart sets forth the Company's restated operating revenues for th e
nine months ended September 30, 2001 :
Nine Morphs Ended September 30, 200 1
As Originally As Restated S Change % ChangeReported (a )
(in mdions )
OPERATING REVENUES
Electric utilit y
Gas utility
Natural gas transmission
Independent power productio n
Oil and gas exploration and production
Marketing, services and trading
International energy distributio n
other
5 2027 S 2027 5 -
928 928 - -
854 854 - -
314 314 - -
158 ]58 - -
7,176 2,976 (4.200) -59 %
15 ]5 - -
5 11,472 S 7,272 5 (4.200) -37 %
( a) As Originally Reported in CMS' 10-Q for the 3Q :01 .
302. On March 31, 2003, CMS filed its 10-K for fiscal 2002 . In connectio n
with the I 0-K (the "Second Restatement"), the Company restated for the effects of the
round-trip trades, which remained uncorrected, reducing revenue and expense for 2001
by an additional $5 million and SI billion for . Indeed, the cumulative effects of the First
and Second Restatement were a reduction of revenues of approximately $8 billion or
35% of previously reported revenue. In addition, Defendants disclosed that "[a]s a result
of the restatement required with respect to the round-trip trading transactions, Ernst &
Young was engaged to re-audit CMS Energy's consolidated financial statements for each
of the fiscal years ended December 31, 2001 and December 31, 2000, which included
audit work at Consumers and Panhandle for these years ." In connection with the
restatement , CMS had "to make certain adjustments (in addition to the round-t rip trades)
to its consolidated financial statements for the fiscal years ended December 31, 2001 an d
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December 31, 2000 ." The following chart sets forth the Company's restated operating
revenues for the fiscal years ended 2000 and 2001 :
2001 2000
As Originally As Restated $ Change % Change As Originally As Restated $ Change % Change
Reported (6) Reporte d
(m milions )
OPERATING REVENUES
Electric utili ty S 2.631 $ 2,630 $ (1) 0% S 2 .676 S 2 .676 S - 0%
Gas utility 1,338 1 .338 - 0% 1 .196 1 .196 - 0%
Natural gas transmtssuon 1,053 59 (994) -94% 906 88 (818) -90%
Independent power production 388 388 - 0% 500 503 3 1%
Oil and gas exploration and production 212 - (212) -100% 131 - (131) -100%
Marketing . services and trading 3 .953 3 .674 (279) -7% 3 .294 2,178 (1,116) -34%
Intern ational energy dLstnbulion - - - 0% 265 - (265) -100%
Other 22 (26) (48) -218% 30 56 26 87%
S 9,597 5 8.063 5(1,534) -16% $ 8,998 S 6.697 S(2.301) -26%
Sale of CMS-MST Division
303. In light of the foregoing disclosures, CMS has recently decided to phase
out CMS MST's wholesale energy trading business . On January 16, 2003, CMS MST
disclosed the sale on a major portion of its wholesale natural gas trading book to Sempra
Energy Trading . The sale price was approximately $18 million . On February 13, 2003,
CMS-MST signed a definitive agreement with Constellation Power Source, Inc . to sell its
wholesale electric power business . The sale has been approved by FERC and closing i s
expected within the second quarter of 2003 .
304. On February 20, 2003, CMS-MST signed a definitive agreement with
Chevron Energy Solutions Company, a division of Chevron U .S.A., to sell the non-
federal business of CMS Viron, its energy management services provider subsidiary . On
February 26, 2003, CMS-MST also signed a definitive agreement with Pepco Energ y
130
Services, Inc. to sell CMS Viron's federal energy management se rv ices business . The
sale is subject to federal government novation which the parties are not permitted to seek
until closing has occurred .
Additional Accounting and Financial Issue s
305. Subsequent to the Company's May 2002 announcements concerning its
round-trip trading, various filings issued by the Company, including its 2002 10-K, have
raised, for the first time, additional issues concerning CMS's financials, which further
call into question their accuracy and legitimacy . Such disclosures include the
announcement of $2.9 billion in off-balance sheet debt, which raises serious issues
concerning the Company's actual financial condition. Indeed, the use of such off-balance
sheet accounting was at the center of the scandal involving Enron, which shared the same
auditors (Andersen) as CMS during the Class Period . As the architect of such
accounting, Andersen, upon information and belief, participated in a scheme with the
Company to understate debt in an attempt to make the Company appear even more
attractive to lenders as well as the market in general .
306. In addition, the Company's Third Quarter 2002 10-Q disclosed for the firs t
time that the Company engaged in inter-book and intercompany trading, which also
impacted upon the Company's financials during the Class Period . While the details
surrounding these transactions, as well as the Company's off-balance sheet accounting,
have not been fully disclosed, there mere existence raise serious and significant issues
regarding the Company's business and balance sheet .
307. Finally, as of this filing, Ernst & Young has only issued a qualified audi t
opinion, included in the 2002 10-K . The Company's new CFO has been unable to certif y
the Company's 2001 and 2002 10-Ks, rendering the reported financials, even more
131
suspect . Additional disclosures the Company is expected to issue shortly wil l
presumably resolve at least some of these issues . Until that point, however, the complete
truth regarding CMS remains with the Defendants .
XII . SCIENTER ALLEGATIONS
308 . As a result of both the Company's risk management controls and chain of
command for financial reporting, each of the Individual Defendants, at a minimum, was
aware of the MST division's round-trip trading activities . By virtue of their respective
positions, the Individual Defendants had access to the material adverse non-public
information concerning the business and financial condition of the Company . Indeed, the
Company's own risk management polices during the Class Period demonstrate that the
Individual Defendants directly managed or, at a miminum, were aware of, the various
risk levels associated with the Company's operations, including its round trading
positions in its MST division . As set forth in the Company's 2000 Annual Report and
repeated in every quarterly filing through the first quarter of 2002 ,
CMS Energy's derivative Jtrading] activities are subject to the directionof the Executive Oversight Committee, consisting of certain members ofCMS Energy's senior manazemeizt and its Risk Committee, consistingof CMS Energy business unit managers. The goal of the riskmanagement policy is to measure and limit CMS Energy 's overallenergy commodity risk by implementing an enterprise-wide policy acrossall CMS Energy business units . . . . The role of the Risk Committee isto review the corporate commodity position and ensure that netcorporate exposures are within the economic risk tolerance levelsestablished by the Board of Directors.
(Emphasis added) . Moreover, as stated in the Company's quarterly reports for the First
Quarter of 2000 through the First Quarter of 2002 :
CMS Energy and its subsidiaries rely on the experience and judgmentof senior management and traders to revise strategies and adjustpositions as they deem necessary .
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(Emphasis added) .
309. In light of their senior positions with the Company and the policies se t
forth above, the Individual Defendants clearly had access to internal corporate
documents, including CMS's general ledger and internal reports relating to the wholesale
energy trading business' revenue and expenses, such as VAR Reports and other
information regularly provided to them in connection therewith, in their capacity as the
officers and/or directors of CMS . As stated in the Company's first quarter 2001 10- Q
and repeated in the second, third and year-end 2001 reports ,
CMS Energy, through its subsidiary CMS MST, engages in trading
activities. CMS MST manages any open positions within certainguidelines which limit its exposure to market risk and requires timelyreporting- to management of potential financial exposure. Theseguidelines include statistical risk tolerance limits using historical pricemovements to calculate daily value at risk measurements.
(Emphasis added) .
310. Accordingly, the Individual Defendants received or, at a minimum, had
access to, daily VAR Reports as part of their risk management oversight responsibilities .
The VAR Reports included daily portfolio reporting and market to market valuation of
the Company's portfolio . The VAR Reports would have included round-tri p
transactions, but with an indication that there was virtually no risk to the Company from
such large transactions because there were simultaneous round-trip trades with matching
dollar amounts on the buy and sell side . All recipients of the VAR Reports would have
recognized that large riskless trades were round-trip trades with no economic substance,
or, at a minimum, were suspicious trades, requiring investigation .
311 . In addition to receiving the VAR Reports, Defendant Pallas would als o
have been aware of round-trip trades to the extent they exceeded energy traders' specifi c
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dollar limits for purchases and sales . Each energy trader at CMS had a certain dollar
value of power or gas that he or she could purchase or sell without seeking higher
approval . In order to exceed those trading limits, traders had to seek approval from a
senior officer of the Company. Through this system of checks and balances, initially
designed to control risk, many if not all of the Individual Defendants would have learned
of the round-trip trades . All such trades also were booked in the Company's general
ledger once it was approved by a senior accounting officer . A trade which exceeded the
energy trader's specific limits could not be booked in the Company's general ledger,
absent approval from such an accounting officer. This would also serve as a mechanism
for the Individual Defendants to learn of the specific round-trip trades at the time the y
were booked in the Company's general ledger .
312. Given the sheer size of the CMS's trading, senior management, includin g
the Individual Defendants, knew (or were at least reckless as to) the extent to which there
was no economic reality in the Company's energy trading business . In an effort to
receive high rankings in Power Markets Weekly, all the companies involved in energy
trading - CMS as well as other public and highly visible public companies such as
Reliant, Enron, Dynegy and others - engaged in numerous round-trip trades . The volume
of trading grew to the point where it exceeded the physical capacities of the United States
energy consumption on an annual basis . Large trades done on a round-trip basis served
to inflate trading volumes and establish rankings . Energy traders were provided bonuses
at all of these companies (including CMS) based on the volume of trading they generated .
Anyone familiar with the energy business in the United States at the time - as each of the
Individual Defendants were - had to have recognized that there was no economic reality
134
to the massive volumes of energy trading being reported by CMS as well as it s
competitors .
313. As set forth elsewhere herein in detail, the Individual Defendants, b y
virtue of their receipt of information reflecting the true facts regarding CMS, their control
over and receipt of information regarding CMS's allegedly materially misleading
misstatements and their associations with the Company which made them privy to
confidential proprietary information concerning CMS, participated in the fraudulen t
scheme alleged herein .
Motive Behind Round-Trip Trading
314. As set forth above, the Defendants engaged in a scheme which was driven
by a systematic use of round-trip trading, in order to cause the Company to appear larger
in the business community. Appearing larger among its competitors would allow the
Company to attract larger clients (including public utilities), take on larger trading
positions and obtain larger amounts of unsecured debt . As further indicated in the Fina l
FERC Report, CMS failed to disclose that it was engaged in the deliberate manipulatio n
of the published price indices by providing false data to the trade press .
315. With respect to CMS's motives for engaging in round-trip trading, a ke y
motivation was to manipulate spot market prices in order to generate (ill-gotten) profit s
on non-wash trades engaged in by CMS . Since the published price indices on which
market prices are based are directly influenced by the reported round-trip trades, CM S
could report the artificial round-trip prices in order to lower or raise market prices,
whereupon it would trade positions on which it actually bore risk . This is critical because
it belies CMS's assertion that the round-trip trading had a legitimate purpose and had no
effect on profits or shareholder equity .
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316, Another motive for the round-trip trading, acknowledged by CMS itself ,
was to develop a large presence in the energy trading arena--i .e . to be perceived in th e
financial community as a "player." The logical consequent of this motive is that CM S
wanted to foster an illusion of dynamism and growth into a potentially rich area when, i n
fact, the very nature of the wash trading was its unprofitability and economic
insubstantiality.
317. In November, 2002 CMS announced that its internal investigatio n
disclosed that some of its traders had falsified trading data submitted for publication in
Platt's and Inside FERC; an outside counsel hired by CMS to analyze the accuracy of the
reported trades found that only 116 of the 472 reported CMS trades between December ,
2000 and June, 2002 were exact matches . As reported by FERC in its March, 2003 report
on market manipulation in the Western region, CMS traders admitted to either submittin g
wholly fictitious data for publication or reporting only favorable trades in order t o
manipulate basis differentials (i .e . the difference between natural gas prices at different
trading points) . Because CMS was taking positions on financial products based on the
basis differentials, it could profit by moving the price at a trading point up or down,
which CMS did by simply making up reported prices .
Insider Selling
318. Certain Individual Defendants were also motivated to pursue thei r
fraudulent scheme in order to reap personal gain through the sale of the Company' s
common stock at artificially inflated prices .
319. Specifically, Defendant Wright engaged in the following sales of CM S
common stock during the Class Period :
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Transaction Date Number of Shares Sale Price Proceed s
12/26/00 4,140 $30.41 $124,779 .60
5/9/01 100 $29.04 $2,904.00
5/9/01 1,700 $29.15 $49,555 .00
5/9/01 6,800 $29.00 $197,200 .00
5/9/01 19,000 $29.00 $551,000
5/8/02 1,000 $20.12 $20,120
Totals 32,740 $945,558 .60
320. Defendant McCormick engaged in the following sales of CMS commo n
stock during the Class Period :
Transaction Date Number of Shares Sale Price Proceed s
7/9/01 300 $27.85 $8,355
7/9/01 4,700 $27.81 $130,707
7/6/01 5,000 $27.82 $139,100
7/2/01 4,300 $27.75 $119,325
7/2/01 200 $27.84 $5,56 8
7/2/01 500 $27.87 $13,935
8/23/01 4,700 $24.00 $112,800
8/23/01 300 $24.01 $7,20 3
8/22/01 5000 $23 .80 $119,000
8/21/01 5,000 $23 .83 $119,150
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3/8102 500 $23 .00 $11500
3/8/02 9,500 $22.75 $216,125
Totals 40 ,000 $1,002,76 8
321 . Defendant Hopper engaged in the following sales of CMS common stock
during the Class Period :
Transaction Date Number of Shares Sale Price Proceeds
1/8/01 1500 $27.52 $41,280
4/10/02 500 $23.11 $11,555
Totals 2000 $52,835.00
Class Period Securities Offerings
322 . Defendants' motive to maximize proceeds from securities offerings during
the Class Period also shows that they acted with scienter . As set forth above, during the
Class Period, CMS offered for sale common and preferred stock, as well as notes, to the
investing public in order to raise desperately needed capital . These
offerings, which raised over $1 .3 billion, included the following :
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Funds Raised In CMS Public Offerings During Class Perio d
1 .
8/17/00
Description of Security
7'/% PEPs Units
# of Unit s
8,800,000
Amount Raised
$213,100,00 0
10/10/00 8 .5% Senior Notes 350,000 $350,000,000
3/28/01 97/8 % Senior Notes 500,000 $500,000,00 0
6/22/01 8 .9% Senior Notes 269,000 $269,000,000
5/1/02 7% General Term Notes 4,088 $4,088,000
Total $1,336,188,000
XIII . VIOLATIONS OF GAAP AND SECINTERNAL CONTROL REGULATIONS
CMS's Accounting Violation s
323 . During the Class Period, the Company represented that CMS's financia l
statements when issued were prepared in conformity with GAAP, which are recognized
by the accounting profession and the SEC as the uniform rules, conventions an d
procedures necessary to define accepted accounting practice at a particular time. In fact ,
the Company used improper accounting practices in violation of GAAP and SE C
reporting requirements to falsely inflate CMS's balance sheet and to falsely repor t
revenues in the interim quarters and fiscal years during the Class Period .
324. CMS' s materially false and misleading financial statements resulted from
a series of deliberate senior management decisions designed to conceal the truth
regarding CMS's actual operating results . Defendants caused the Company to violat e
GAAP because :
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a. Defendants knew or recklessly disregarded the fact that CMS' s
financial statements were false and misleading because CMS failed
to disclose the details of its nonmonetary transactions, as required
by GAAP ;
b . Defendants knew or recklessly disregarded that, CMS's financia l
statements were false and misleading because CMS entered into
"round-trip" electricity trades to boost the company's tradin g
volumes;
c . Defendants knew or recklessly disregarded that , CMS's financial
statements were false and misleading because CMS entered into
"round-trip" energy trades which had no legitimate busines s
purpose;
d . Defendants knew or recklessly disregarded that the financia l
statements were false and misleading because CMS failed to
disclose the reasons for the material increases in revenues in the
management's discussion and analysis section of its annual reports
on Form 10-K and quarterly reporting on Form 10-Q or in the
notes to the financial statements; and
C . Defendants knew or recklessly disregarded that CMS was sufferin g
from a chronic and systematic breakdown of its internal controls
and procedures such that its financial reporting was inherently
corrupted, subject to manipulation, and unreliable, resulting in
materially false and misleading financial statements .
CMS Entered Into "Round-Trip" Energy TradesWhich Had No Legitimate Business Purpose
325 . Defendants knew or recklessly disregarded that CMS's financial result s
during the Class Period were artificially inflated by, inter alia, recognition of purporte d
revenues from "round-trip" energy trades that served no legitimate business purpose ,
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which recognition violated GAAP . In this regard, CMS admitted in its First Quarter 2002
Form 10-Q that it engaged in "'round-trip' commodity trades involving simultaneous
purchases and sales with the same counter-parties at the same price ." By engaging in
swaps, participant companies grossly inflated the dollar value of revenues and expenses .
326. The revenue generated in the above transactions did not constitute
legitimate and cognizable revenue that CMS could recognize, pursuant to GAAP .
Indeed , after approximately 19 months of engaging in the elicit energy trades, CMS
disclosed in its First Quarter 2002 Form 10-Q "that the cessation of such trades was in the
CMS Energy's best interests ," and that it "decided after the third quarter of 2001 that not
recording these trades in either revenue or expense was a more appropriate representation
of the nature of these transactions ."
The "Round-Trip" Energy Trades
Materially Inflated CMS's Revenues
327. The Defendants knew or recklessly disregarded that CMS's revenues were
grossly inflated during the Class Period, as a result of the "round-trip" trades . CMS
overstated revenues by $4 .2 billion and $1 billion for fiscal 2001 and 2000, respectively .
In this regard, CMS's IO-K for fiscal 2002 disclosed :
CMS Energy's 2001 Form 10-K, issued in March 2002, restated revenueand expense for the first three quarters of 2001 to eliminate $4.2 billion of
previously reported revenue and expense . The 2001 Form 10-K did
include $5 million of revenue and expense for 2001 from such trades,which remained uncorrected . CMS Energy inadvertently failed to restate2000 for round trip trades in the 2001 10-K. Financial statements have
now been restated to eliminate $1 billion in 2000 and $5 million in 2001of previously reported revenue and expenses .
Overall, the Company's revised consolidated fiscal 2001 revenues went from $13 billion
to $8.3 billion and consolidated fiscal 2000 revenues from $8 .7 billion to $7 .7 billion.
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Consolidated revenues during fiscal 2001 and fiscal 2000, were overstated b y
approximately 36% and l 1 %, respectively, as a result of the round-trip trades .
CMS Failed to Disclose the Details ofits Nonmonetary Transaction s
328 . Defendants knew or recklessly disregarded that CMS's financial result s
during the Class Period were artificially inflated by, inter alia, entering into "round-trip "
energy trades that served no legitimate business purpose and were accounted for i n
violation of GAAP .
329 . GAAP consists of those principles recognized by the accountin g
profession as the conventions, rules, and procedures necessary to define accepte d
accounting principles . SEC Regulation S-X requires that publicly traded companie s
present their annual financial statements in accordance with GAAP. (17 C.F.R. §
210.401 (a)(1)) . In addition, Regulation S-X requires that interim financial statements
also comply with GAAP, with the exception that interim financial may omit disclosures
which would substantially duplicate those disclosures which accompany the annual
financial statements . (17 C.F .R. § 210.10.01 (a)) . Financial statements filed with the SE C
that are not prepared in compliance with GAAP are presumed to be misleading an d
inaccurate .
330 . As set forth in Financial Accounting Standard Board ("FASB") Statement
of Finacial Accounting Concepts ("SFAC") No. 1, one of the fundamental objectives of
financial reporting is to provide accurate and reliable information concerning an entity' s
financial performance du ring the period being presented . SFAC No. 1, ¶42. states :
Financial reporting should provide information about an enterprise'sfinancial performance during a period . Investors and creditors often useinformation about the past to help in assessing the prospects of an
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enterprise. Thus, although investments and credit decisions reflectinvestors' and creditors' expectations about future enterprise performance,those expectations are commonly based at least partly on evaluations ofenterprise performance.
331 . Additionally, Section 13 of the Exchange Act requires, in part, tha t
companies :
(i) devise and maintain a system of internal controls sufficient toprovide reasonable assurances that - -
(ii) transactions are recorded as necessary (I) permit preparationof financial statements in conformity with generally acceptedaccounting principles or any other criteria applicable to suchstatements, and (II) to maintain accountability for assets .
332 . CMS has restated its annual results of operations for the years ende d
December 31, 2000, 2001, and 2002. These restatements constitute admissions that th e
reports, as filed, were materially false and misleading . In accordance with Accountin g
Principles Board Statement No. 20 ("APB 20"), "Accounting Changes," financia l
statements with material misstatements must be restated .
333 . CMS's restatements involve in relevant part (a) round-trip trading; (b)
other transactions recorded on a gross basis, rather than on a net basis ; and (c) numerous
restatements of assets and liabilities .
334 . By engaging in "round-trip" trades, CMS engaged in transactions that ha d
no legitimate business purpose and that were entered into solely to increase sales
volumes . These transactions violated GAAP for a number of reasons .
335 . SFAC No . I states that financial repo rt ing, i .e. financial statements and th e
related footnote disclosures, is intended to provide information that is useful to the user s
of the statements in making business and economic decisions . By presenting investors
with financial information that did not reflect true or valid business transactions, CM S
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did not provide useful information in the Company's fi nancial statements . In fact, CM S
provided materially misleading information .
336. Similarly , SFAC No . 1 states that "[fjinancial repo rting is expected to
provide information about an enterprise's financial performance during a period and
about how management of an enterprise has discharged its stewardship responsibility t o
owners ." By presenting revenues and expenses that were grossed up for these round-tri p
trades, Defendants did not present the Company's actual financial performance .
337. SFAC No . 2 describes the characteristics required to make accountin g
information useful to the people that use it . One of these characteristics i s
representational faithfulness, which is defined as "correspondence or agreement betwee n
a measure or description and the phenomenon that it purports to represent (sometimes
called validity) ." Because Defendants presented a false measure of CMS's revenue s
throughout the Class Period, those revenues did not represent the actual sales that had
taken place, but instead the measure of revenues was grossed up for round-trip trades . As
a result, CMS's published financial statements did not have representational faithfulness ,
as required by SFAC No . 2 .
338 . Another characteristic defined in SFAC No . 2 is verifiability . Verifiability
is "the ability through consensus among measurers to ensure that information represent s
what it purports to represent or that the chosen method of measurement has been use d
without error or bias ." CMS's method of measurement of revenues was false and
misleading, and contained error and bias, as demonstrated by the subsequent restatement .
Therefore, financial statements for CMS did not have verifiability, as required by SFAC
No. 2 .
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339. CMS has admitted that during the Class Period, $5 .3 billion of th e
transactions were recorded on a gross basis that should have been recorded on a net basis .
340. These transactions were not legitimate revenue that CMS could recognize
pursuant to GAAP . GAAP requires that revenues are not recognized until earned . An
entity's revenue-earning activities involve delivering goods, rendering services, or othe r
activities that constitute its ongoing major or central operation . See FASB Statement o f
Concepts No.5, %83-84. However, by engaging in "round-trip" trades, CMS was able t o
grossly inflate the dollar value of the transactions to inflate revenues .
341 . Thus, the above transactions were not legitimate revenue that CMS coul d
recognize pursuant to GAAP . As a result , CMS knowingly overstated the Company ' s
revenue growth based on these transactions .
342 . Moreover, Defendants knew or recklessly disregarded that CMS financia l
statements were materially false and misleading because they did not disclose key
elements of these nonmonetary transactions . Companies that engage in one or more
nonmonetary transactions , such as exchanges or swaps during a reporting period, are
required , under APB Opinion No. 29 ("APB 29"), Accountingfor Nonmonetary
Transactions, to disclose in the footnotes to the financial statements, the nature of the
transactions, the basis of accounting for the assets transferred (that is, fair value or boo k
value), and gains or losses recognized . Defendants failed to comply with APB 29 .
343 . In addition , SFAS No . 95, Statement of Cash Flows ("SFAS 95") require s
that information about all investing and financing activities of a company that affect
recognized assets or liabilities but that do not result in cash receipts or payments, such a s
145
-ems
nonmonetary asset exchanges, be disclosed in the footnotes to the financial statements .
Defendants failed to comply with SFAS 95 .
Abuse Of Mark-To-Market Accounting
344. During the Class Period, CMS's financial statements reflected the use o f
"mark -to-market accounting" (also known as "fair value accounting"). Under
mark-to-market rules, whenever companies have outstanding energy-related or othe r
derivative contracts (either assets or liabilities) on their balance sheets at the end of a
particular quarter , they must adjust them to fair market value, booking unrealized gains o r
losses to the income statement of the period .
345. Companies can use mark-to-market accounting appropriately, provide d
that they value their long-term futures contracts based on fair market quoted prices . In
order to do so, companies need to have adequate controls in place to ascertain what the
true fair market price is . CMS lacked these adequate controls, and as a result issued
financial statements that included accounting figures based on mark-to-market
accounting using phony fair market prices . This allowed CMS to grossly inflate its
reported revenues and profits throughout its business during the Class Period .
Breakdown Of CMS's Internal Accounting Controls
346 . According to SEC rules, to accomplish the objectives of accuratel y
recording, processing, summarizing and reporting financial data, a company mus t
establish an internal control structure . Section 13 (b)(2) of the Exchange Act requires tha t
CMS :
(a) make and keep books, records, and accounts, which, inreasonable detail, accurately and fairly reflect the transactions anddispositions of assets of the issuer; and
(b) devise and maintain a system of internal accountingcontrols sufficient to provide reasonable assurances that -
i . transactions are executed in accordance with
146
management's general or specific authorization ;
ii, transactions are recorded as necessary (1) to permitpreparation of financial statements in conformitywith generally accepted accounting principles . . .and (II) to maintain accountability for assets .
347 . Contrary to the requirements of GAAP and SEC Rules, CMS either failed
to implement and maintain an adequate internal accounting control system, or knowingl y
or recklessly tolerated the failure to use existing internal controls in a manner that woul d
ensure compliance with GAAP .
348. In fact, CMS offered this admission relating to its internal controls failure s
in its Form 10-K for the year ended December 31, 2002 :
In late 2001 and during 2002, the Company identified a number ofdeficiencies in MST's systems of internal accounting controls . The internalcontrol deficiencies related to, among other things, a lack of accountreconciliations, unidentified differences between subsidiary ledgers andthe general ledger, and procedures and processes surrounding theCompany's accounting for energy trading contracts, including mark-to-market accounting.
Senior management, the Audit Committee of the Board of Directors, andthe independent auditors were notified of these deficiencies as they werediscovered, and the Company commenced a plan of remediation thatincluded the replacement of certain key personnel and the deployment ofadditional internal and external accounting personnel to CMS-MST .Significant aspects of the remediation plan, which includes the
implementation of improvements and changes to CMS-MST's internalaccounting controls, were postponed to enable the Company to preparerestated financial statements for 2000 and 2001 . While a number of thesecontrol improvements and changes were implemented in late 2002, themost important ones occurred in the first quarter of 2003 .
The implementation of certain elements of its remediation plan enabledthe Company to prepare reliable restated financial statements for CMS-MST for December 31, 2000 and 2001, as well as for the quarterly periodsand full year of 2002 . Management has not yet prepared restated quarterlyfinancial statements for 2001, although it expects to do so as soon aspracticable .
147
349, Defendants knew or recklessly disregarded that CMS was suffering from a
chronic and systematic breakdown of its internal controls and procedures such that it s
financial reporting was inherently corrupted, subject to manipulation, and unreliable ,
resulting in materially false and misleading financial statements . According to CMS' s
fiscal 2002 10-K:
In late 2001 and during 2002, the Company identified a number ofdeficiencies in MST's systems of internal accounting controls . Theinternal control deficiencies related to, among other things, a lack ofaccount reconciliations, unidentified differences between subsidiaryledgers and the general ledger, and procedures and processes surroundin gthe Company's accounting for energy trading contracts, including mark-to-market accounting. Senior management, the Audit Committee of the
Board of Directors, and the independent auditors were notified of thesedeficiencies as they were discovered, and the Company commenced a planof remediation that included the replacement of certain key personnel andthe deployment of additional internal and external accounting personnel toCMS-MST. Significant aspects of the remediation plan, which includesthe implementation of improvements and changes to CMS-MST's internalaccounting controls, were postponed to enable the Company to preparerestated financial statements for 2000 and 2001 . While a number of thesecontrol improvements and changes were implemented in late 2002, themost important ones occurred in the first quarter of 2003 . [Emphasisadded . ]
350. Indeed, CMS's internal controls were in such disarray, that as of the date
of the 2002 10-K filing, "[m]anagement ha[d] not yet prepared restated quarterly
financial statements for 2001, although it expect[ed] to do so as soon as practicable ."
Moreover, rather than being mere restatements , the Company characterized its efforts as a
re-audit . According to the IO-K :
In connection with the re-audit of the financial statements for the fiscalyears ended December 31, 2001 and December 31, 2000, CMS Energydetermined to make certain adjustments (in addition to the round-triptrades) to its consolidated financial statements for the fiscal years endedDecember 31, 2001 and December 31, 2000 . Therefore, the consolidatedfinancial statements for 2001 and 2000 have been restated from amountspreviously reported .
148
351 . CMS mischaracterized the restatements as limited to "certain adjustment s
(in addition to the round-trip trades) . . ." However, as shown by the 2002 Form 10-K,
virtually every balance sheet and income statement account for fiscal years 2000 and
2001 has been restated . Indeed, even cash was misstated and reduced by $62 million i n
2001, and $41 million in 2000, a reduction of 33% and 23%, respectively . And, although
the internal control problems were widespread throughout CMS's businesses, they appear
to have been more acute at CMS's MST division . According to CMS's 2002 10-K :
CMS-MST's business experienced rapid growth during 2000 and 2001 .Late in 2001, CMS Energy became aware of certain control weaknesses atCMS-MST and immediately began an internal investigation . Theinvestigation revealed that the size and expertise of the back-officeaccounting staff had not kept pace with the rapid growth and, as a result,
bookkeeping errors had occurred and account reconciliations were notprepared. Additionally, computer interfaces of sub-ledgers to the generalledger were ineffective or lacking . As a result, sub-ledger balances did notagree to the general ledger and the differences were not adjusted . In early2002, CMS-MST commenced an account recalculation and reconciliationproject that focused initially on accounts receivable and payable,intercompany and cash accounts, but was later expanded to include otheraccounts. The recalculation and reconstruction work for 2000, 2001 and2002 has been completed and the consolidated financial statements reflectthe required adjustments, which decreased net income by $5 million in2001 and $13 million in 2000 .
352. Indeed, AU § 325 .21 cites " [e]vidence of failure to perform tasks that are
part of internal control, such as reconciliations not prepared or not timely prepared," a s
"[f]ailures in the operation of internal control . "
Violations of SEC Regulation s
353. Item 7 of the 2002 Form 10-K and Item 2 of Forms 10-Q (Management' s
Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") )
must comply with Item 303 of Regulation S-K [17 C.F.R. 229.303 ] by including th e
149
information described in those sections . Specifically, in discussing results of operations ,
Item 303 of Regulation S-K requires the registrant to :
[d]escribe any known trends or uncertainties that have had or that theregistrant reasonably expects will have a material favorable or unfavorable
impact on net sales or revenues or income from continuing operations .
The Instructions to Paragraph 303(a) further state :
The discussion and analysis shall focus specifically on material events anduncertainties known to management that would cause reported financial
information not to be necessarily indicative of future operating results . . .
354 . In addition, the SEC, in its May 18, 1989 Interpretive Release No. 34-
26831, has indicated that registrants should employ the following two-step analysis i n
determining when a known trend or uncertainty is required to be included in the MD& A
disclosure pursuant to Item 303 of Regulation S-K :
A disclosure duty exists where a trend, demand, commitment, event oruncertainty is both presently known to management and is reasonablylikely to have a material effect on the registrant's financial condition orresults of operations .
355. The MD&A requirements are intended to provide, in one section of a
filing, material historical and prospective textual disclosure enabling investors and other
users to assess the financial condition and results of operations of the registrant, with
particular emphasis on the registrant's prospects for the future . As the Securities Ac t
Release No . 6711 states :
The Commission has long recognized the need for a narrative explanationof the financial statements, because a numerical presentation and briefaccompanying footnotes alone may be insufficient for an investor to judge
the quality of earnings and the likelihood that past performance isindicative of future performance . MD&A is intended to give the investoran opportunity to look at the company through the eyes of management byproviding both a short and long-term analysis of the business of th ecompany . . .
150
356. Sec. 229 .303 (Item 303), Management's discussion and analysis o f
financial condition and results of operations, states :
To the extent that the financial statements disclose materialincreases in net sales or revenues, provide a narrative discussion of
the extent to which such increases are attributable to increases inprices or to increases in the volume or amount of goods or servicesbeing sold or to the introduction of new products or services .
357. According to Securities Act Release No . 6349, n .5, at 964 :
[i]t is the responsibility of management to identify and address
those key variables and other qualitative and quantitative factorswhich are peculiar to and necessary for an understanding andevaluation of the individual company .
358 . Nonetheless, CMS's Class Period Forms 10-K and 10-Q failed to disclos e
the Company's internal control system deficiencies, and that the increases in tradin g
volume and revenues during the Class Period were the result of "round-trip" trades fo r
the purpose of inflating CMS's operating results, each of which was reasonably likely t o
have a material adverse effect on CMS's financial results, which was necessary for a
proper understanding and evaluation of the Company's operating performance and a n
informed investment decision .
359 . CMS was required to restate its financial statements for fiscal 2000 an d
2001 and all interim periods, as set forth in the fiscal 2002 10-K filed on March 28, 2003 ,
because those financial statements had not been prepared in conformity with GAAP and
SEC accounting requirements when they were issued . In view of "the potential dilution
of public confidence in financial statements resulting from restating the financia l
statements of prior periods," according to GAAP, a retroactive restatement of financial
statements is reserved for material accounting errors that existed at the time the financia l
151
statements were prepared. See APB Opinion No. 20, Accounting Changes, ¶¶ 18, 27, 34-
38. Since GAAP allows only for correction of errors that are "material," by restating its
financial statements numerous times, CMS admitted the materiality of the errors in its
previously issued financial statements for fiscal years 2000 and 2001, and all interi m
quarters .
FIRST CLAIM
Violation Of Section 10(b)_Of The Exchange Act Against And Rule I Ob-5Promulgated Thereunder Against CMS, Consumers, And The Individual
Defendants
360. Plaintiffs repeat and reallege each and every allegation contained above as
if fully set forth herein.
361 . This claim is brought pursuant to Section 10(b) of the Exchange Act, 1 5
U.S.C. § 78j(b), by Plaintiffs against CMS, Consumers and the Individual Defendants .
362 . During the Class Period, CMS, Consumers and the Individual Defendants ,
and each of them, carried out a plan, scheme and course of conduct which was intended
to and, throughout the Class Period, did : (i) deceive the investing public, including
Plaintiffs and other Class members, as alleged herein ; (ii) artificially inflate and maintain
the market price of CMS securities ; and (iii) cause Plaintiffs and other members of the
Class to purchase CMS securities at artificially inflated prices . In furtherance of this
unlawful scheme, plan and course of conduct, Defendants, and each of them, took the
actions set forth herein .
363 . The Defendants named in this count : (a) employed devices, schemes, an d
artifices to defraud ; (b) made untrue statements of material fact and/or omitted to stat e
material facts necessary to make the statements not misleading ; and (c) engaged in acts,
practices , and a course of business which operated as a fraud and deceit upon the
152
purchasers of the Company's securities in an effort to maintain artificially high market
prices for CMS securities in violation of Section 10(b) of the Exchange Act and Rul e
I Ob-5 .
364 . In addition to the duties of full disclosure imposed on the Defendants as a
result of their making of affirmative statements and reports, or participation in the makin g
of affirmative statements and repo rts to the investing public, the Individual Defendants
had a duty to promptly disseminate truthful information that would be mate rial to
investors in compliance with the integrated disclosure provisions of the SEC as embodied
in SEC Regulation S-X (17 C.F.R . Sections 210.01 et seq .) and Regulation S-K (1 7
C .F.R. Sections 229 .10 et seq.) and other SEC regulations, including accurate and truthful
information with respect to the Company's operations, financial condition and earnings so
that the market price of the Company's securities would be based on truthful, complete
and accurate information .
365 . CMS , Consumers and the Individual Defendants , individually and i n
concert, directly and indirectly, by the use, means or instrumentalities of interstat e
commerce and/or of the mails, engaged and participated in a continuous course o f
conduct to conceal adverse material information about the business, operations, financia l
performance and future prospects of CMS as specified herein .
366. These Defendants employed devices, schemes and artifices to defraud ,
while in possession of material adverse non-public information and engaged in acts,
practices, and a course of conduct as alleged herein in an effort to assure investors of
CMS's value and performance and continued substantial growth, which included the
making of, or the participation in the making of, untrue statements of material facts an d
153
omitting to state material facts necessary in order to make the statements made about
CMS and its business operations and future prospects in the light of the circumstances
under which they were made, not misleading, as set forth more particularly herein, and
engaged in transactions, practices and a course of business which operated as a fraud and
deceit upon the purchasers of CMS securities during the Class Period .
367. The Individual Defendants ' primary liability ari ses from the following
facts : (i) the Individual Defendants were high-level executives and/or directors at th e
Company during the Class Period ; (ii) the Individual Defendants were privy to and
participated in the creation, development and reporting of the Company's interna l
budgets, plans, projections and/or reports ; and (iii) the Individual Defendants were awar e
of the Company's dissemination of information to the investing public which they knew
or recklessly disregarded was materially false and misleading.
368 . The Defendants named in this Count had actual knowledge of th e
misrepresentations and omissions of material facts set forth herein, or acted with reckles s
disregard for the truth in that they failed to ascertain and to disclose such facts, even
though such facts were available to them . Such Defendants' material misrepresentations
and/or omissions were done knowingly or recklessly and for the purpose and effect of
concealing CMS's operating condition and future business prospects from the investing
public and supporting the artificially inflated price of its securities . As demonstrated by
these Defendants' material misrepresentations and omissions concerning the Company's
business, operations and financial performance throughout the Class Period, the
Defendants, if they did not have actual knowledge of the misrepresentations and
omissions alleged, were reckless in failing to obtain such knowledge by deliberatel y
154
refraining from taking those steps necessary to discover whether those statements were
false or misleading.
369. As a result of the dissemination of the materially false and misleadin g
information and failure to disclose material facts, as set forth above, the market prices o f
CMS securities were artificially inflated during the Class Period . In ignorance of the fact
that market prices of CMS publicly-traded securities were artificially inflated, and relying
directly or indirectly on the false and misleading statements made by the Defendants, or
upon the integrity of the market in which the securities trade, and/or on the absence o f
material adverse information that was known to or recklessly disregarded by Defendants
but not disclosed in public statements by Defendants during the Class Period, Plaintiffs
and the other members of the Class purchased CMS securities during the Class Period at
artificially high prices and were damaged thereby .
370. At the time of said misrepresentations and omissions , Plaintiffs and other
members of the Class were ignorant of their falsity, and believed them to be true . Had
Plaintiffs and the other members of the Class and the marketplace known of the true
financial condition and business prospects of CMS, which were not disclosed by
Defendants, Plaintiffs and other members of the Class would not have purchased or
otherwise acquired their CMS securities, or, if they had acquired such securities during
the Class Period, they would not have done so at the artificially inflated prices which they
paid .
371 . By virtue of the foregoing, CMS, Consumers and the Individua l
Defendants have violated Section 10(b) of the Exchange Act, and Rule I Ob-5
promulgated there under .
155
372. As a direct and proximate result of the wrong fu l conduct of th e
Defendants named in this Count, Plaintiffs and the other members of the Class suffered
damages in connection with their respective purchases and sales of the Company' s
securities during the Class Period .
SECOND CLAIM
Violation Of Section 20(a) Of The Exchange ActAgainst the Individual Defendant s
373 . Plaintiffs repeat and reallege each and every allegation contained above as
if fully set forth herein .
374. This claim is brought pursuant to Section 20(a) of the Exchange Act, 1 5
U.S .C. § 78t(a), by Plaintiffs against the Individual Defendants .
375. The Individual Defendants acted as a controlling person of CMS withi n
the meaning of Section 20(a) of the Exchange Act . By virtue of their high-level
positions, and ownership and contractual rights, participation in and/or awareness of the
Company's operations and/or intimate knowledge of the statements filed by the Company
with the SEC and disseminated to the investing public, the Individual Defendants had th e
power to influence and control and did influence and control, directly or indirectly, the
decision-making of the Company, including the content and dissemination of the variou s
statements which Plaintiffs contend are false and misleading. The Individual Defendants
were provided with or had unlimited access to copies of the Company's reports, press
releases, public filings and other statements alleged by Plaintiffs to be misleading prior to
and/or shortly after these statements were issued and had the ability to prevent the
issuance of the statements or cause the statements to be corrected .
156
376. In particular, the Individual Defendants had direct and supervisor y
involvement in the day-to-day operations of the Company and, therefore, are presumed to
have had the power to control or influence the particular transactions giving rise to th e
securities violations as alleged herein, and exercised the same .
377. As set forth above, CMS violated Section 10 (b) and Rule I Ob-5 by their
acts and omissions as alleged in this Complaint . By virtue of their positions as
controlling persons of CMS, the Individual Defendants are culpable participants in th e
violations of Section 10(b) and are, therefore, liable pursuant to Section 20(a) of th e
Exchange Act .
THIRD CLAIM
Violation of Section 11 of the Securities Act
(Against CMS, Consumers, the Underwriter Defendants and DefendantsMcCormick , Deutch , Duderstadt , Flaherty, Fryling, Holton , Parfet, Pierre, Way,
Whipple and Yasinsky)
378. For purposes of this claim, Plaintiff expressly excludes and disclaims an y
allegation that could be construed as alleging fraud or intentional or reckless misconduc t
and otherwise incorporates the allegations contained above .
379. This Claim is brought on behalf of the Sub-Class pursuant to § 11 of the
Securities Act, 15 U.S.C. § 77k, by Plaintiff Rock Capital against CMS , Consumers, the
Underwriter Defendants and Defendants McCormick, Deutch, Duderstadt, Flaherty,
Fryling, Holton, Parfet, Pierre, Way, Whipple and Yasinsky .
380. The PEPS Registration Statement filed with the SEC on August 17, 2000
constitutes a registration statement that was materially false and misleading as it omitte d
to state material facts necessary to make the statements contained therein not misleading
and failed to adequately disclose material facts as described above .
157
381 . This claim is asserted against : (1) CMS, who was the issuer of the PEPS;
(2) CMS's subsidiary, Defendant Consumers ; (2) Defendants McCormick, Deutch ,
Duderstadt, Flaherty, Fryling, Holton, Parfet, Pierre, Way, Whipple and Yasinsky, wh o
were Directors of the Company at the time of the filing of the registration statement ; and
(3) the Underwriter Defendants, who were underwriters with respect to the PEPS .
382. Plaintiff Rock Capital and other purchasers of PEPS purchased the PEPS ,
traceable to the false and misleading PEPS Registration Statement . As a direct an d
proximate result of the Defendants' acts and omissions in violation of the Securities Act ,
Rock Capital and other PEPS purchasers suffered substantial damage in connection wit h
their purchase of PEPS Units sold in the PEPs offering . By reasons of the conduct herei n
alleged, each defendant named in this Claim violated § 15 of the Securities Act.
383. At the times they purchased the PEPS, traceable to the defectiv e
registration statement, Rock Capital and other PEPS purchasers were without knowledg e
of the facts concerning the false and misleading statements or omissions alleged herein .
384. Less than one year has elapsed from the time that Rock Capital discovered
or reasonably could have discovered the facts upon which this Complaint is based. Less
than three years have elapsed from the time that the PEPs Units upon which this Claim i s
brought were bonafide offered .
FOURTH CLAIM
Violation of Section 15 of the Securities Act
(Against Defendants McCormick, Deutch, Duderstadt, Flaherty, Fryling, Holton,Parfet, Pierre, Way, Whipple and Yasinsky)
385. For purposes of this claim, Plaintiff expressly excludes and disclaims an y
allegation that could be construed as alleging fraud or intentional or reckless misconduc t
and otherwise incorporates the allegations contained above .
158
386. This claim is brought on behalf of the Sub-Class pursuant to Section 15 o f
the Secu ri ties Act, 15 U.S .C. § 77o, by Plaintiff Rock Capital against Defendant s
McCormick, Deutch, Duderstadt, Flaherty, Fryling, Holton, Parfet, Pierre, Way, Whippl e
and Yasinsky .
387. Rock Capital and the Sub-Class repeat and reallege each and every
allegation asserted above as if fully set forth herein but excluding any allegation o f
fraudulent intent .
388. It is appropriate to treat these Defendants as a group for pleading purposes
and to presume that the false, misleading and incomplete information conveyed in the
Company's public filings, press releases and other publications are the collective actions
of these Defendants .
389. Each of the Individual Defendants was a "controlling person" of CM S
within the meaning of Section 15 of the Securities Act, by virtue of his/her position as a
Director and/or senior officer of CMS. At the time of the offering of the PEPS, th e
Individual Defendants named in this claim, by virtue of their positions of control and
authority at CMS directly and indirectly, had the power and authority, and exercised th e
same, to cause the Company to engage in the wrongful conduct complained of herein .
The Individual Defendants named herein issued , caused to be issued, and part icipated in
the issuance of materially false and misleading statements in the PEPS Registration
Statement. Pursuant to Section 15 of the Securities Act, by reason of the foregoing, these
Individual Defendants are liable to Plaintiff and members of the Sub-Class to the exten t
as is CMS for the Company's violations of Section 11 of the Securities Act .
159
390. Since the misrepresentations and omissions in CMS's SEC filing s
complained of herein are the work of the Company's officers and directors, thes e
defendants are jointly and severally liable under section 15 of the Securities Act a s
control persons of CMS. They oversaw and controlled the dissemination and publication
of documents and statements on behalf of the Company.
160
.n .
WHEREFORE , Plaintiffs pray for relief and judgment , as follows:
(a) Awarding compensatory damages in favor of Plaintiffs and th e
other Class members against all Defendants, jointly and severally ,
for all damages sustained as a result of Defendants' wrongdoing, in
an amount to be proven at trial, including interest thereon ;
(b) Awarding Plaintiffs and the Class their reasonable costs an d
expenses incurred in this action, including counsel fees and exper t
fees; and
(c) Such other and further relief as the Court may deem just an d
proper.
161
JURY TRIAL DEMANDE D
Plaintiffs hereby demand a jury trial of all issues triable .
Dated: May 1, 2003
ENTWISTLE & CAPPUCCI LL P
By: ? r".IflVincent . Capp cciAndrew J . EntwistleRobert N. CappucciWilliam W. Wickersham299 Park AvenueNew York , NY 10171(212) 894-720 0
MILBERG WEISS BERSHAD HYNES &
LERACH LLP
Robert A. WallnerClifford GoodsteinChristian SiebottOne Penn PlazaNew York, New York
(212) 594-5300
Co-Lead Counsel For Plaintiffs
162
ELWOOD S. SIMON & ASSOCIATES, P.C .Elwood S . Simon355 South Old Woodward Ave .Suite 250
Birmingham, Michigan 48009(248) 646-973 0
MILLER SHEA, P.C .E. Powell Mille rMarc L. Newman1301 West Long Lake Road , Suite 135Troy, Michigan 48098(248) 267-8200
Co-Liaison Counsel For Plaintiffs
163
CERTIFICATION
ORIGINA LENTWISTLE & CAPPUCCI LL P
ROCK CAPITAL PARTNERS LLC declares, as to the claims
asserted under the federal securities laws, that :
1 . It has reviewed the consolidated amended complaint
filed against CMS Energy Corporation in the U .S . District Court,
Eastern District of Michigan .
2 . It did not purchase the security that is the
subject of this action at the direction of plaintiff's counsel o r
in order to participate in this action .
3 . It is willing to serve as a representative party
on behalf of the Class, as defined in the complaint, including
providing testimony at deposition and trial, if necessary .
4 . Its transaction(s) in CMS Energy Corporation
Premium Equity Participating Security Units during the Class
Period, as defined in the complaint, is/are as follows :
Security Transaction Date
See attached Schedule A
5 . During the three years prior to the date of thi s
Certification, it has not sought to serve or served as a
representative party for a class in any action filed under the
federal securities laws .
6 . It will not accept any payment for serving as a
representative party on behalf of the Class beyond its pro rata
share of any recovery, except such reasonable costs and expenses
directly relating to the representation of the Class as ordered
or approved by the Court .
I declare under penalty of perjury than. the foregoing
is true and correct .
Executed this *S() day of P003
PW V--Micha CoughlinChief Financial OfficerROCK CAPITAL PARTNERS LLC
Rock Capital Partners LLCSchedule A
A B C D F G H I J K M NBUY Amount Symbol TradeDate Price NetMoney SELL Amount Symbol TradeDate Price NetMoney
1 BUY 1000 CMSPRM 1/24/2003 $ 13.12 $ 13,120 .00 SELL 1000 CMSPRM 3/17/2003 $ 7 .80 $ 7,800 .0 02 BUY 500 CMSPRM 1/24/2003 $ 12.75 $ 6,375.00 SELL 1000 CMSPRM 3/18/2003 $ 7 .90 $ 7,900 .0 03 BUY 500 CMSPRM 1/24/2003 $ 12.75 $ 6,375 .00 SELL 1000 CMSPRM 3/18/2003 $ 8 .05 $ 8,050 .0 04 BUY 1000 CMSPRM 1/27/2003 $ 12 .31 $ 12,310 .00 SELL 1000 CMSPRM 3/26/2003 $ 9 .70 $ 9,700 .0 05 BUY 600 CMSPRM 2/5/2003 $ 10.42 $ 6,252 .0 06 BUY 1000 CMSPRM 2/5/2003 $ 10.40 $ 10,400 .0 07 BUY 1000 CMSPRM 2/5/2003 $ 10.40 $ 10,400 .0 08 BUY 100 CMSPRM 2/5/2003 $ 10.40 $ 1,040 .0 09 BUY 100 CMSPRM 215/2003 $ 10.45 $ 1,045.0 0
10 BUY 200 CMSPRM 2/7/2003 $ 10.40 $ 2,080 .0 011 BUY 100 CMSPRM 2/13/2003 $ 8.70 $ 870.0 0
12 BUY 100 CMSPRM 2/13/2003 $ 8.74 $ 874.0 013 BUY 200 CMSPRM 2/20/2003 $ 9.44 $ 1,888.0 014 BUY 100 CMSPRM 2/25/2003 $ 9.25 $ 925.0 015 BUY 100 CMSPRM 2/25/2003 $ 9.31 $ 931 .0 0
16 BUY 100 CMSPRM 3/7/2003 $ 8.82 $ 882.0 017 BUY 100 CMSPRM 3/10/2003 $ 8.45 $ 845.0 018 BUY 100 CMSPRM 3/11/2003 $ 7.55 $ 755.0019 BUY 200 CMSPRM 3117/2003 $ 7.92 $ 1,584 .0 020 BUY 100 CMSPRM 3/31/2003 $ 9.36 $ 936.0 0
21 BUY 100 CMSPRM 411/2003 $ 10.90 $ 1,090 .00
22 BUY 200 CMSPRM 4 11/2003 $ 10.98 $ 2,196 .00