EXHIBIT 99.3
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
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ADRIENNE GREEN, Individually and on Behalf of ) CASE NO.
all Others Similarly Situated, )
)
Plaintiff, ) CLASS ACTION COMPLAINT
) FOR VIOLATIONS OF
vs. ) FEDERAL SECURITIES LAWS
)
CMS ENERGY CORPORATION, CONSUMERS ) JURY TRIAL DEMANDED
ENERGY COMPANY, WILLIAM T. McCORMICK, -------------------
JR., DAVID W. JOOS and ALAN M. WRIGHT )
)
)
Defendants. )
)
)
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Plaintiff has alleged the following based upon the investigation of
Plaintiff's counsel, which included a review of United States Securities and
Exchange Commission ("SEC") filings by CMS Energy Corporation ("CMS") and
Consumers Energy Company ("Consumers") (together CMS and Consumers shall
hereinafter be referred to as "CMS" or the "Company"), as well as regulatory
filings and reports, securities analysts reports and advisories about the
Company, press releases and other public statements issued by the Company, and
media reports about the Company, and Plaintiff believes that substantial
additional evidentiary support will exist for the allegations set forth herein
after a reasonable opportunity for discovery.
NATURE OF THE ACTION
1. This is a federal class action on behalf of purchasers of the
securities of CMS between August 3, 2000 to May 10, 2002, inclusive (the "Class
Period"), seeking to pursue remedies under the Securities Exchange Act of 1934
(the "Exchange Act").
JURISDICTION AND VENUE
2. The claims asserted herein arise under and pursuant to Sections
10(b) and 20(a) of the Exchange Act [15 U.S.C. SS. 78j(b) and 78t(a)] and
Rule 10b-5 promulgated thereunder by the SEC [17 C.F.R. S. 240.10b-5].
3. This Court has jurisdiction over the subject matter of this action
pursuant to 28 U.S.C. SS. 1331 and 1337, and Section 27 of the Exchange
Act [15 U.S.C. S. 78aa].
4. Venue is proper in this District pursuant to Section 27 of the
Exchange Act and 28 U.S.C. S. 1391(b). Many of the acts charged herein,
including the preparation and dissemination of materially false and misleading
information, occurred in substantial part in this District and CMS conducts
business in this District.
5. In connection with the acts alleged in this complaint, Defendants,
directly or indirectly, used the means and instrumentalities of interstate
commerce, including, but not limited to, the mails, interstate telephone
communications and the facilities of the national securities markets.
PARTIES
6. Plaintiff Adrienne Green, as set forth in the accompanying
certification, incorporated by reference herein, purchased the common stock of
CMS at artificially inflated prices during the Class Period and has been damaged
thereby.
7. Defendant CMS is a corporation organized under the laws of Michigan
with its principal executive offices located in Dearborn, Michigan. In its
recent press releases CMS describes itself as follows: "CMS Energy, which has 85
percent of its assets in the United States, owns and operates an electric and
natural gas distribution company with 1.7 million
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electric customers and 1.6 million gas customers; a 15,000 mile natural gas
pipeline system and associated storage facilities; interest in the nation's
largest LNG import facility; approximately 8,000 megawatts of power plants; a
midstream natural gas gathering and processing company with 700 million cubic
feet per day of capacity; an oil and gas exploration and production company with
significant domestic gas reserves; and a leading energy marketing, trading and
services company marketing 750 billion cubic feet of natural gas and 31 million
megawatt-hours of electricity annually."
8. Defendant William T. McCormick, Jr. ("McCormick") is, and at all
times relevant to the allegations raised herein was, CMS's Chairman of the Board
of Directors Chief Executive Officer and a Director, and, until May 2001,
President of CMS.
9. Defendant David W. Joos ("Joos") is, and from May 2001 was, CMS"s
President and Chief Operating Officer and a Director.
10. Defendant Alan M. Wright ("Wright") is, and from May 2001 was,
CMS's Executive Vice President, Chief Financial Officer and Chief Administrative
Officer. Prior to May 2001, Defendant Wright was CMS's Vice President and Chief
Financial Officer. At all times relevant to the allegations raised herein,
Defendant Wright was signed each of CMS's filings with the SEC as CMS's
principal financial officer.
11. Defendants McCormick, Joos and Wright, together, are referred to
herein as the "Individual Defendants."
12. During the Class Period, the Individual Defendants, as senior
executive officers and directors of CMS were privy to confidential and
proprietary information concerning CMS, its operations, finances, financial
condition, present and future business prospects. The Individual
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Defendants also had access to material adverse non-public information concerning
CMS, as discussed in detail below. Because of their positions with CMS, the
Individual Defendants had access to non-public information about its business,
finances, products, markets and present and future business prospects via access
to internal corporate documents, conversations and connections with other
corporate officers and employees, attendance at management and board of
directors meetings and committees thereof and via reports and other information
provided to them in connection therewith. Because of their possession of such
information, the Individual Defendants knew or recklessly disregarded the fact
that adverse facts specified herein had not been disclosed to, and were being
concealed from, the investing public.
13. The Individual Defendants are liable as direct participants in, and
a co-conspirator with respect to the wrongs complained of herein. In addition,
the Individual Defendants, by reason of their status as senior executive
officers and a director were "controlling persons" within the meaning of Section
20 of the Exchange Act and had the power and influence to cause the Company to
engage in the unlawful conduct complained of herein. Because of their positions
of control, the Individual Defendants were able to and did, directly or
indirectly, control the conduct of CMS's business.
14. The Individual Defendants, because of their positions with the
Company, controlled and/or possessed the authority to control the contents of
its reports, press releases and presentations to securities analysts and through
them, to the investing public. The Individual Defendants were provided with
copies of the Company's reports and press releases alleged herein to be
misleading, prior to or shortly after their issuance and had the ability and
opportunity to
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prevent their issuance or cause them to be corrected. Thus, the Individual
Defendants had the opportunity to commit the fraudulent acts alleged herein.
15. As senior executive officers and/or directors and controlling
persons of a publicly-traded company whose common stock and other securities
were, and are, registered with the SEC pursuant to the Exchange Act, and were
and are traded on the New York Stock Exchange ("NYSE") and governed by the
federal securities laws, the Individual Defendants had a duty to disseminate
promptly accurate and truthful information with respect to CMS's financial
condition and performance, growth, operations, financial statements, business,
products, markets, management, earnings and present and future business
prospects, to correct any previously issued statements that had become
materially misleading or untrue, so that the market price of CMS's common stock
would be based upon truthful and accurate information. The Individual Defendants
misrepresentations and omissions during the Class Period violated these specific
requirements and obligations.
16. The Individual Defendants are liable as participants in a
fraudulent scheme and course of conduct that operated as a fraud or deceit on
purchasers of CMS common stock by disseminating materially false and misleading
statements and/or concealing material adverse facts. The scheme (i) deceived the
investing public regarding CMS's business, operations and management and the
intrinsic value of CMS common stock, (ii) permitted CMS to engage in two
secondary stock offerings, pursuant to which CMS sold more than 21 million
shares of common stock valued at $400.6 million, (iii) permitted CMS to file
shelf registration statements with the SEC, pursuant to which CMS registered
securities valued at $2.7 billion, (iv) permitted Consumers to sell
securitization bonds valued at $469 billion, (v) permitted CMS to obtain
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financing of $1.6 billion to complete a strategic power and desalination project
in the Middle East, and (vi) caused Plaintiff and members of the Class to
purchase CMS's common stock and other securities at artificially inflated
prices.
PLAINTIFF'S CLASS ACTION ALLEGATIONS
17. Plaintiff brings this action as a class action pursuant to Federal
Rule of Civil Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all
those who purchased the securities of CMS between August 3, 2000 to May 10,
2002, inclusive (the "Class Period") and who were damaged thereby. Excluded from
the Class are Defendants, the officers and directors of the Company, at all
relevant times, members of their immediate families and their legal
representatives, heirs, successors or assigns and any entity in which Defendants
have or had a controlling interest.
18. The members of the Class are so numerous that joinder of all
members is impracticable. Throughout the Class Period, CMS common shares and
other securities were actively traded on the NYSE. While the exact number of
Class members is unknown to Plaintiff at this time and can only be ascertained
through appropriate discovery, Plaintiff believes that there are hundreds or
thousands of members in the proposed Class. Record owners and other members of
the Class may be identified from records maintained by CMS or its transfer agent
and may be notified of the pendency of this action by mail, using the form of
notice similar to that customarily used in securities class actions.
19. Plaintiff's claims are typical of the claims of the members of the
Class as all members of the Class are similarly affected by Defendants' wrongful
conduct in violation of federal law that is complained of herein.
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20. Plaintiff will fairly and adequately protect the interests of the
members of the Class and has retained counsel competent and experienced in class
and securities litigation.
21. Common questions of law and fact exist as to all members of the
Class and predominate over any questions solely affecting individual members of
the Class. Among the questions of law and fact common to the 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 material facts about the business and
operations of CMS; and
(c) to what extent the members of the Class have sustained damages
and the proper measure of damages.
22. A class action is superior to all other available methods for the
fair and efficient adjudication of this controversy since joinder of all members
is impracticable. Furthermore, as the damages suffered by individual Class
members may be relatively small, the expense and burden of individual litigation
make it impossible for members of the Class to individually redress the wrongs
done to them. There will be no difficulty in the management of this action as a
class action.
SUBSTANTIVE ALLEGATIONS
23. The Class Period begins on August 3, 2000. On that date, CMS
released its financial results for second quarter ended June 30, 2000. The press
release stated, in part:
Second quarter operating revenue totaled $1.60 billion, up 20
percent from $1.33 billion in the second quarter of 1999.
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For the first six months of 2000, consolidated net income totaled
$161 million, or $1.42 per diluted share, compared to $173 million,
or $1.48 per diluted share, for the same period in 1999. Operating
revenue for the first half of 2000 totaled $3.43 billion, up 19
percent from $2.87 billion in the first half of 1999, primarily
reflecting ownership of the CMS Panhandle Companies for the entire
first half of 2000 versus only the second quarter of 1999 and
continued revenue growth in CMS Energy's diversified energy
businesses.
24. On October 11, 2000, CMS filed its second quarter ended June 30,
2000 Form 10-Q with the SEC, incorporating the financial results released by CMS
on August 3, 2000. CMS reported revenues of $391 million from its energy
marketing and trading business and included the following additional disclosure:
Marketing, Services and Trading Results of Operations
Pretax Operating Income: Pretax operating earnings for the three
months ended June 30, 2000 increased $4 million from the comparable
period in 1999. The increase primarily reflects increased earnings
from wholesale gas activities, including mark-to-market adjustments
on trading contracts, which benefited from natural gas market price
increases, partially offset by reduced margins from wholesale
electric activities. Pretax operating income for the six months
ended June 30, 2000 increased $4 million from the comparable period
in 1999 as a result of increased wholesale gas earnings due to
increases in natural gas market prices, increased LNG sales and
earnings benefits from an energy management services acquisition
made in late 1999, partially offset by reduced margins from
wholesale electric activities.
* * *
CMS ENERGY INTENDS TO USE ITS MARKETING, SERVICES AND TRADING
BUSINESS TO IMPROVE THE RETURN ON CMS ENERGY'S OTHER BUSINESS
ASSETS. ONE METHOD TO ACHIEVE THIS GOAL IS TO USE MARKETING AND
TRADING TO ENHANCE PERFORMANCE OF ASSETS, SUCH AS GAS RESERVES AND
POWER PLANTS. Other strategies include expanding CMS Energy's
industrial and commercial energy services to enhance our commodity
marketing business, using CMS Energy's gas production as a hedge to
commodity risk in other areas of our
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business, and developing risk management products that address
customer needs.
25. The 2000 Second Quarter Form 10-Q also included the following
representations:
These Condensed Notes and their related Consolidated Financial
Statements should be read along with the Consolidated Financial
Statements and Notes contained in the 1999 Form 10-K of CMS Energy,
which includes the Reports of Independent Public Accountants.
Certain prior year amounts have been reclassified to conform with
the presentation in the current year. In the opinion of management,
the unaudited information herein reflects all adjustments necessary
to assure the fair presentation of financial position, results of
operations and cash flows for the periods presented.
26. On October 13, 2000, CMS announced that it "anticipates that its
third quarter earnings, to be released on October 26, 2000, will be 10-15%
higher than the Company's previous guidance of $0.40 per share in sustainable
earnings. THIS IMPROVEMENT IS DUE TO FAVORABLE POWER TRANSACTIONS AND COST
REDUCTIONS."
27. On October 17, 2000, CMS announced it had sold 11 million shares of
common stock in a secondary stock offering, netting proceeds of approximately
$305 million, "which will be used to repay debt."
28. On October 26, 2000, CMS released its financial results for third
quarter ended September 30, 2000. The press release stated, in part:
Third quarter operating revenue totaled $2.40 billion, up 63
percent from $1.47 billion in the third quarter of 1999, DUE MAINLY
TO INCREASED LOWER-MARGIN ENERGY MARKETING REVENUES.
For the first nine months of 2000, earnings were $1.93 per share on
consolidated net income of $216 million, compared to earnings of
$2.25 per share on consolidated net income of $256 million for the
same period in 1999. This year's results include 17 cents per share
of earnings from asset sales, which the Company does not expect to
sustain in future years. Operating revenue for the first nine
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months of 2000 totaled $5.82 billion, up 34 percent from $4.34
billion in the first nine months of 1999, PRIMARILY REFLECTING
INCREASED OIL AND GAS, PIPELINE AND LOWER-MARGIN ENERGY MARKETING
REVENUES.
29. On November 11, 2000, CMS filed its third quarter ended September
30, 2000 Form 10-Q with the SEC, incorporating the financial results released by
CMS on October 26, 2000. CMS reported revenues of $1.034 billion from its energy
marketing and trading business and included the following additional disclosure:
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: Pretax operating income for the three
months ended September 30, 2000 decreased $2 million from the
comparable period in 1999. The decrease primarily reflects
decreased earnings from power trading activities, primarily due to
cooler than normal summer weather in Michigan, partially offset by
increased earnings from wholesale gas activities, which benefited
from natural gas market price increases. The volumes of marketed
natural gas and power traded increased 72 percent and over 1,000
percent, respectively. Pretax operating income for the nine months
ended September 30, 2000 increased $2 million from the comparable
period in 1999 as a result of increased wholesale gas earnings due
to capturing gains from natural gas price market volatility,
increased LNG sales and earnings benefits from an energy management
services acquisition made in late 1999. THE VOLUMES OF MARKETED
NATURAL GAS AND POWER TRADED INCREASED 65 PERCENT AND 546 PERCENT,
RESPECTIVELY. Partially offsetting these increases were decreased
earnings from power trading activities, primarily due to cooler
than normal summer weather in Michigan.
* * *
OUTLOOK
As the deregulation and privatization of the energy industry takes
place in global energy markets, CMS Energy has positioned itself to
be a leading regional diversified energy company developing energy
facilities and marketing energy-related services in the United
States and selected world growth markets. The key elements of the
strategy to achieve this objective are as follows:
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- Effectively implement the Michigan electric utility
restructuring legislation and gas utility customer choice program;
- Use the natural gas pipeline business for growth
opportunities across other CMS Energy businesses;
- Expand the range of energy-related services;
- Expand CMS Energy's presence in select high-growth
international markets through the diversified energy businesses;
- GROW THE MARKETING, SERVICES AND TRADING ACTIVITIES TO
OPTIMIZE AND LEVERAGE GAS AND ELECTRIC ASSETS IN THE UNITED STATES;
and
- Continued management of the asset portfolio.
30. The 2000 Second Quarter Form 10-Q also included the following
representations:
These Condensed Notes and their related Consolidated Financial
Statements should be read along with the Consolidated Financial
Statements and Notes contained in the 1999 Form 10-K of CMS Energy,
which includes the Reports of Independent Public Accountants.
Certain prior year amounts have been reclassified to conform with
the presentation in the current year. In the opinion of management,
the unaudited information herein reflects all adjustments necessary
to assure the fair presentation of financial position, results of
operations and cash flows for the periods presented.
31. On December 22, 2000, CMS announced that it had "filed with the
Securities and Exchange Commission an S-3 Registration Statement for $700
million of debt and equity securities that may be issued only upon the
conversion of outstanding convertible preferred securities. CMS Energy will
receive no cash proceeds from these issuances and will incur no additional
liabilities. On Dec. 15, 2000, CMS Energy filed with the Securities and Exchange
Commission another S-3 Registration Statement for the issuance of up to $2
billion of debt and equity securities. This shelf registration statement is
intended to provide flexibility for CMS
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Energy to issue a wide range of debt, preferred and common equity securities
from time to time in the future." Both Registration Statements on Form S-3
incorporated by reference the Quarterly Reports on Form 10-Q for the second and
third quarters of 2000.
32. On January 24, 2001, CMS released its financial results for the
fourth quarter and year ended December 31, 2000. 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. Consolidated operating
revenue for 2000 grew 47 percent to $9.0 billion, from $6.1 billion
in 1999, DUE LARGELY TO SIGNIFICANTLY INCREASED LOWER-MARGIN ENERGY
MARKETING AND TRADING TRANSACTIONS.
* * *
Significant developments for CMS Energy in 2000 included:
completing approximately $1.2 billion of a combination of
non-strategic asset sales and project debt removal from the balance
sheet;
State of Michigan enactment of comprehensive electric restructuring
legislation which removed major financial uncertainties and
provided for full recovery of stranded costs and authorization for
securitization financing to fund a five percent residential
electric rate reduction;
receiving 55 cargoes of Liquefied Natural Gas (LNG) at its CMS
Trunkline LNG Lake Charles regasification facility with attendant
gas marketing and transportation revenues, more than doubling the
27 LNG cargoes received in 1999;
recording year-end proved oil and gas reserves of 235 million net
equivalent barrels, despite the sale of 53 million net equivalent
barrels of its reserves in Michigan and Ecuador and production of
10 million barrels during the year from 1999's reserves of 248
million net equivalent barrels. Exploration and development
successes in west Texas, Wyoming and Equatorial Guinea partially
offset the sale of reserves and production;
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increasing energy marketing and trading operating earnings by more
than three times, to $14 million in 2000 from $4 million in 1999,
AS THE ENERGY MARKETING UNIT MADE THE TRANSITION FROM A RETAIL TO
WHOLESALE BUSINESS, WITH 614 BILLION CUBIC FEET OF NATURAL GAS
MARKETED, AN INCREASE OF 31 PERCENT, AND 37,781 GIGAWATT-HOURS OF
ELECTRICITY MARKETED, UP 919 PERCENT, IN 2000;
* * *
33. On February 23, 2001, CMS announced that it had sold ten million
shares of common stock pursuant to a secondary offering, netting proceeds of
approximately $295.6 million, "which will be used to repay debt."
34. On March 23, 2001, CMS filed its Annual Report on Form 10-K for the
year ended December 31, 2000, incorporating the financial results released by
CMS on January 24, 2001. CMS reported revenues of $3.3 billion for the year
ended December 31, 2000 from its energy marketing and trading business and
included the following additional disclosure:
MARKETING, SERVICES AND TRADING
CMS MST, formed in 1996 and the surviving entity of a 1997 merger
with CMS Gas Marketing Company formed in 1987, provides gas, oil,
and electric marketing, risk management and energy management
services to industrial, commercial, utility and municipal energy
users throughout the United States and abroad. CMS MST has grown
dramatically since its inception. CMS Energy intends to use CMS MST
to enhance performance of CMS Energy assets, such as gas reserves
and power plants. CMS MST markets approximately 614 bcf of natural
gas, 37,781 GWh of electricity, 31 million barrels of crude oil and
9 million barrels of natural gas liquids. From 1997 through 2000,
CMS MST also performed 350 energy management services projects. At
December 31, 2000, CMS MST had more than 10,611 customers,
transported gas on more than 40 gas pipelines and was active in 39
states and Canada and Brazil. IN 2000, CMS MST'S OPERATING REVENUE
WAS $3.3 BILLION.
* * *
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MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the year 2000, pretax operating income
increased $10 million from the comparable period in 1999. The
increase reflects increased earnings from wholesale gas trading,
increased LNG sales, and earnings from an energy management
services business acquired in late 1999. THE VOLUMES OF MARKETED
NATURAL GAS AND POWER TRADED INCREASED 31 PERCENT AND 919 PERCENT,
RESPECTIVELY. Partially offsetting these increases were lower power
trading margins, primarily due to cooler than normal summer weather
in Michigan, and increased operating expenses as the business
continues to expand its trading and marketing activities and
increase its customer base. For the year 1999, pretax operating
income was unchanged from the comparable period in 1998. Increased
earnings from retail gas sales, wholesale gas price volatility and
a 1999 acquisition of an energy management services business were
offset by costs related to market development activities.
35. On March 28, 2001, CMS announced the successful pricing of $350
million of 8.5 percent senior notes, due 2011, proceeds of which were to be sued
to repay debt.
36. On April 30, 2001, CMS released its financial results for the first
quarter ended March 31, 2001. The press release stated, in part:
First quarter operating revenue totaled $4.13 billion, up 126
percent from $1.83 billion in the first quarter of 2000, DUE
LARGELY TO SIGNIFICANTLY INCREASED LOWER-MARGIN ENERGY MARKETING
AND TRADING TRANSACTIONS.
37. On May 11, 2001, CMS filed its first quarter ended March 31, 2001
Form 10-Q with the SEC, incorporating the financial results released by CMS on
April 30, 2001. CMS reported revenues of $2.344 billion from its energy
marketing and trading business and included the following additional disclosure:
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
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PRETAX OPERATING INCOME: For the three months ended March 31, 2001,
pretax operating income increased $4 million (133 percent) from the
comparable period in 2000. The increase reflects additional
earnings from wholesale gas trading and increased LNG sales. THE
PHYSICAL VOLUMES OF MARKETED AND MANAGED NATURAL GAS AND POWER
TRADED INCREASED 17 PERCENT AND 1,383 PERCENT, RESPECTIVELY, DUE
LARGELY TO SIGNIFICANTLY INCREASED LOWER-MARGIN ENERGY MARKETING
AND TRADING TRANSACTIONS.
* * *
MARKETING, SERVICES AND TRADING OUTLOOK: CMS Energy intends to use
its marketing, services and trading business to focus on wholesale
customers such as municipals, cooperatives and large industrial
customers in the central United States where CMS Energy's existing
assets are concentrated. CMS Energy's marketing, services and
trading business also intends to contract for use of significant
gas transportation and storage assets in the central United States
to provide a platform for wholesale marketing, trading, and
physical arbitrage. CMS Energy also seeks to continue developing
importing and marketing opportunities for LNG. CMS Energy plans to
capitalize on favorable market conditions for energy performance
contracting through expanding its services business in selected
markets.
38. The 2001 first quarter Form 10-Q also included the following
representations:
These interim Consolidated Financial Statements have been prepared
by CMS Energy and reviewed by the independent public accountant in
accordance with SEC rules and regulations. As such, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Certain prior
year amounts have been reclassified to conform to the presentation
in the current year. In management's opinion, the unaudited
information contained in this report reflects all adjustments
necessary to assure the fair presentation of financial position,
results of operations and cash flows for the periods presented. The
Condensed Notes to Consolidated Financial Statements and the
related Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and Notes to
Consolidated Financial Statements contained in CMS Energy's Form
10-K for the year ended December 31, 2000, which includes the
Reports of Independent
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Public Accountants. Due to the seasonal nature of CMS Energy's
operations, the results as presented for this interim period are
not necessarily indicative of results to be achieved for the fiscal
year.
39. On August 1, 2001, CMS announced its financial results for the
second quarter ended June 30, 2001. The press release stated, in part:
Second quarter operating revenue totaled $4.4 billion, up 175
percent from $1.6 billion in the second quarter of 2000, DUE
LARGELY TO SIGNIFICANTLY INCREASED LOWER-MARGIN ENERGY MARKETING
AND TRADING TRANSACTIONS.
40. On August 14, 2001, CMS filed its second quarter ended June 30,
2001 Form 10-Q with the SEC, incorporating the financial results released by CMS
on August 1, 2001. CMS reported revenues of $3.089 billion from its energy
marketing and trading business for the quarter, and included the following
additional disclosure:
GENERAL OUTLOOK
CMS Energy's vision is to be an integrated energy company with a
strong asset base, supplemented with an active marketing, services
and trading capability. CMS Energy intends to integrate the skills
and assets of its business units to obtain optimal returns and to
provide expansion opportunities for its multiple existing
businesses.
* * *
MARKETING, SERVICES AND TRADING OUTLOOK: CMS Energy intends to use
its marketing, services and trading business to focus on wholesale
customers such as municipals, cooperatives and large industrial
customers in the central United States where CMS Energy's existing
assets are concentrated. CMS Energy's marketing, services and
trading business also intends to contract for use of significant
gas transportation and storage assets in the central United States
to provide a platform for wholesale marketing, trading, and
physical arbitrage. CMS Energy also seeks to continue developing
importing and marketing opportunities for LNG. CMS Energy plans to
capitalize on favorable market
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conditions for energy performance contracting through expanding its
services business in selected markets.
41. The second quarter 2001 Form 10-Q also included the following
representations:
These interim Consolidated Financial Statements have been prepared
by CMS Energy and reviewed by the independent public accountant in
accordance with SEC rules and regulations. As such, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Certain prior
year amounts have been reclassified to conform to the presentation
in the current year. In management's opinion, the unaudited
information contained in this report reflects all adjustments
necessary to assure the fair presentation of financial position,
results of operations and cash flows for the periods presented. The
Condensed Notes to Consolidated Financial Statements and the
related Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and Notes to
Consolidated Financial Statements contained in CMS Energy's Form
10-K for the year ended December 31, 2000, which includes the
Reports of Independent Public Accountants. Due to the seasonal
nature of CMS Energy's operations, the results as presented for
this interim period are not necessarily indicative of results to be
achieved for the fiscal year.
42. On October 26, 2001, CMS announced its financial results for the
third quarter ended September 30, 2001. The press release stated, in part:
Third quarter operating revenue totaled $3.0 billion, up 29 percent
from $2.32 billion in the third quarter of 2000, DUE LARGELY TO
INCREASED LOWER MARGIN ENERGY MARKETING AND TRADING TRANSACTIONS.
* * *
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.
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43. On November 8, 2001, CMS announced that Consumers had received $469
million of gross proceeds from the sale of securitization bonds, rated triple-A,
and issued in six series with duration of from one to 13 years with an average
yield of 5.305 percent. Proceeds were to be used to reduce CMS's debt.
44. On November 14, 2001, CMS filed its third quarter ended September
30, 2001 10-Q with the SEC, incorporating the financial results released by CMS
on October 26, 2001. CMS reported revenues of $1.743 billion from its energy
marketing and trading business for the quarter, and included the following
additional disclosure:
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the three months ended September 30,
2001, pretax operating income increased $22 million from the
comparable period in 2000. The increase reflects higher gas (159
bcf vs 119 CMS-6 bcf) and electric (21.4 billion kWh vs 12.6
billion kWh) volumes and improved margins, the increased net value
of long-term power contracts and wholesale power trading activity,
net of reserves. For the nine months ended September 30, 2001,
pretax operating income increased $76 million from the comparable
period in 2000. The increase reflects higher gas (657 bcf vs 355
bcf) and electric (69.9 billion kWh vs 15.6 kWh) volumes and gas
margins, partially offset by lower electric margins, the execution
of long-term power sales contracts and increased wholesale gas and
power trading, net of reserves. Due to the variable and competitive
nature of energy trading, results for interim periods are not
necessarily indicative of results to be achieved for the fiscal
year.
* * *
OUTLOOK
CMS Energy's vision is to be an integrated energy company with a
strong asset base, supplemented with an active marketing, services
and trading capability. CMS Energy intends to integrate the skills
and assets of its business units to obtain optimal returns and to
- 18 -
provide expansion opportunities for its multiple existing
businesses.
To achieve this vision, CMS Energy announced in October 2001,
significant changes in its business strategy in order to strengthen
its balance sheet, provide more transparent and predictable future
earnings, and lower its business risk by focusing its future
business growth primarily in North America.
45. The 2001 third quarter Form 10-Q included the following additional
representations:
These interim Consolidated Financial Statements have been prepared
by CMS Energy and reviewed by the independent public accountant in
accordance with SEC rules and regulations. As such, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Certain prior
year amounts have been reclassified to conform to the presentation
in the current year. In management's opinion, the unaudited
information contained in this report reflects all adjustments
necessary to assure the fair presentation of financial position,
results of operations and cash flows for the periods presented. The
Condensed Notes to Consolidated Financial Statements and the
related Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and Notes to
Consolidated Financial Statements contained in CMS Energy's Form
10-K for the year ended December 31, 2000, which includes the
Reports of Independent Public Accountants. Due to the seasonal
nature of CMS Energy's operations, the results as presented for
this interim period are not necessarily indicative of results to be
achieved for the fiscal year.
46. On December 3, 2001, CMS announced that it had closed a $1.635
billion limited recourse project financing for construction of a power
generation and water desalination project in the United Arab Emirates.
47. On January 7, 2002, CMS announced a revision of earnings
estimates for fiscal 2001 of approximately 35 cents per share below previous
guidance, blaming "significantly
- 19 -
warmer than normal fourth quarter weather affecting its Michigan gas
distribution utility, lower gas and electric sales due to the economic slowdown,
additional electric generating plant maintenance costs and increased electric
distribution repair costs due to storm damage."
48. On February 4, 2002, CMS released its financial results for the
fourth quarter and year ended December 31, 2001. CMS did not highlight revenues
for the quarter, nor emphasis increased trading volume by its power marketing
and service business, as it had for the previous five quarters. The press
release stated, in part:
Energy marketing, services and trading operating income for 2001
was $71 million, up from $14 million in 2000, due to increased long
term power sales contracts and wholesale gas and power trading
activity. For the fourth quarter, operating income for the energy
marketing, services and trading business was a loss of $7 million,
down from operating income of $12 million during the same period
last year, due primarily to lower wholesale gas trading revenues
and increased operating expenses, partially offset by increased
long-term power sales.
49. On March 29, 2002, CMS filed its Annual Report on Form 10-K for the
year ended December 31, 2001, incorporating the financial results released by
CMS on February 4, 2002. CMS reported revenues of $4 billion for the year ended
December 31, 2001 from its energy marketing and trading business and included
the following additional disclosure:
MARKETING, SERVICES AND TRADING CMS MST provides gas, oil, and
electric marketing, risk management and energy management services
to industrial, commercial, utility and municipal energy users
throughout the United States and abroad. CMS MST has grown
dramatically since its inception in 1996. CMS Energy intends to use
CMS MST to focus on wholesale customers such as municipals,
cooperative electric companies and industrial and commercial
customers. In 2001, CMS MST marketed approximately 750 bcf of
natural gas, 51,790 GWh of electricity, 33 million barrels of crude
oil and 11 million barrels of natural gas liquids annually. From
1997 through 2001, CMS MST also performed 300 energy management
services
- 20 -
projects. At December 31, 2001, CMS MST had more than 10,300
customers, transported gas on more than 40 gas pipelines and was
active in most of the 50 states and Canada. In 2001, CMS MST's
operating revenue was $4.0 billion.
* * *
MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS
PRETAX OPERATING INCOME: For the year 2001, pretax operating income
increased $57 million (407 percent) from the comparable period in
2000. The increase reflects higher gas (750 bcf vs. 615 bcf) and
electric (51,790 GWh vs. 37,781 GWh) marketed volumes and average
gas margins, the mark-to-market value from origination of long term
power contracts, net of reserves, and higher earnings of the energy
management services business, partially offset by reduced net
wholesale power trading activity and higher operating expenses.
For the year 2000, pretax operating income increased $10 million
from the comparable period in 1999. The increase reflects increased
earnings from wholesale gas trading, increased LNG sales, and
earnings from an energy management services business acquired in
late 1999. The volumes of marketed natural gas and power traded
increased 31 percent and 919 percent, respectively. Partially
offsetting these increases were lower power trading margins,
primarily due to cooler than normal summer weather in Michigan, and
increased operating expenses as the business continues to expand
its trading and marketing activities and increase its customer
base.
* * *
MARKETING, SERVICES AND TRADING OUTLOOK: CMS Energy intends to use
its marketing, services and trading business to focus on customers
such as LDC's, municipals, cooperative electric companies, and
industrial and commercial businesses in selected locations in North
America. CMS Energy's marketing and trading business also intends
to contract for use of significant gas transportation and storage
assets as well as energy and generating capacity in North America
to provide a platform for wholesale marketing, trading, and
physical arbitrage. CMS Energy also seeks
- 21 -
to continue developing importing and marketing opportunities for
LNG. CMS Energy plans to capitalize on favorable market conditions
for energy performance contracting by expanding its services
business in selected markets.
Recent events related to very large market makers in the energy
trading market have raised concerns about liquidity in this market.
Management cannot predict what effect these events may have on the
liquidity of the trading markets in the short-term, but believes
the markets will be stable and grow over the long term.
50. On May 1, 2002, CMS announced its financial results for the first
quarter ended March 31, 2002. The press release stated, in part:
First quarter operating revenue totaled $2.5 billion, versus $2.9
billion in the first quarter of 2001, due to decreased electric and
natural gas utility sales and natural gas transmission revenues
resulting from near record warm winter weather and continued weak
economic conditions.
51. Then, on May 9, 2002, an article appeared in The Wall Street
Journal, titled "Dynegy Trades Draw SEC Scrutiny." The article stated in
pertinent part as follows:
Dynegy last fall conducted two pairs of massive electric-power
trades that cancelled each other out, in an apparent bid to gain
bragging rights as the company was seeking to take over the
dominant position in online energy trading from Enron Corp., a move
that led federal regulators to open yet another front in its
scrutiny of the company.
* * *
The Dynegy trades"executed at precisely the same moment for exactly
the same price"cancelled each other out. As a result, they didn't
yield profits for Dynegy or its trading partner, a unit of CMS
Energy Corp. of Dearborn, 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 in trading values between the third and
fourth quarters . . .
- 22 -
52. The same day, May 9, 2002, CMS issued a press release regarding its
trades with Dynegy.
CMS Energy Corporation announced that an article in today's Wall
Street Journal on energy trading transactions in November 2001
between its energy marketing unit, CMS Marketing, Services and
Trading (CMS-MST) and Dynegy, Inc., incorrectly characterized the
trades, which generated no profit or loss, as being initiated at
the request of Dynegy. CMS Energy clarified today that two November
15, 2001 electricity trades between CMS-MST and Dynegy were
initiated by CMS-MST.
CMS Energy did not record any revenue or income to its financial
statements as a result of these trades. CMS Energy stopped engaging
in such transactions late last year.
53. The next day, May 10, 2002, CMS announced that the SEC was
conducting an informal inquiry regarding its "round-trip" trading practices. The
press release stated in pertinent part as follows:
CMS Energy Corporation announced today that the U.S. Securities and
Exchange Commission (SEC) staff has asked it to provide information
in connection with an informal inquiry into simultaneous purchases
and sales of electricity with the same counterparties at the same
price. These transactions, which involved no profit or loss, are of
the type which were the subject of recent press reports.
CMS Energy is cooperating fully with the SEC in this matter.
54. In fact, CMS's statements and misrepresentations throughout the
Class Period in its press releases and other reports and its financial
statements included in its Annual Reports on Form 10-K and Quarterly Reports on
Form 10-Q for fiscal 2000 and 2001 were materially false and misleading in that
they failed to disclose that the Company had artificially inflated its revenues
by engaging in round-trip electricity trades. Moreover, CMS's financial
statements violated GAAP and SEC rules by including approximately $4.4 billion
of revenues in financial
- 23 -
statements from transactions that lacked any economic substance 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 in the
United States.
55. On May 13, 2002, Reliant Resources, Inc. ("Reliant"), a Texas
energy trading and services company disclosed that it had engaged in "round trip
trading", which had boosted its revenues by more than 10% during its fiscal
1999, 2000 and 2001. Reliant identified CMS as the counter-party with which it
had conducted the majority of its "round-trip" trading.
56. An article in the Houston Chronicle dated May 13, 2002, titled
"Phony 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 done at CMS's request, and Dynegy said one reason
it wanted to conduct them was to test its computer systems for
handling large trades.
57. On disclosure of the extent and the multiple counter-parties of
CMS's trading practices, CMS common stock fell from a high of $20.06 on May 10,
2002 to a low of $15.72 on May 13, 2002, or a single-day decline of more than
21% on high volume, and down more than 45% from the Class Period high.
58. On May 15, 2002, CMS finally provided information with respect to
its "round-trip" trading practices. In a press release, CMS stated in pertinent
part as follows:
CMS Energy Corporation today reported the preliminary results of
an internal review indicating its energy marketing unit, CMS
Marketing, Services and Trading (CMS-MST), entered into "round
trip" electricity trades involving simultaneous purchases and
sales
-24-
with the same counter-parties at the same price from May 2000
through mid-January 2002. Thirteen of the trades accounted for
about 98 percent of the volume. All such CMS trades were with
either Dynegy Power Marketing, Inc. or Reliant Energy Services,
Inc. These simultaneous transactions, in which electricity was
sold and re-purchased without profit, loss or cash flow impact to
CMS Energy, had the effect of increasing trading volumes.
After internally concluding that the cessation of such trades was
in the Company's best interests, CMS stopped such trades in
January 2002.
CMS-MST has not participated in any electricity trading in
California's energy market, accordingly none of the round trip
trades involved California.
CMS ENERGY 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.
THEREFORE, NO REVENUE OR EXPENSE WAS RECORDED IN ITS FINANCIAL
STATEMENTS IN THE FOURTH QUARTER OF 2001 FROM SUCH TRADES. REVENUE
AND EXPENSE WERE RE-STATED FOR THE FIRST THREE QUARTERS OF 2001 TO
ELIMINATE $3.4 BILLION OF PREVIOUSLY REPORTED REVENUE AND EXPENSE.
THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR 2001, ISSUED IN
MARCH, REFLECTS ONLY $5 MILLION REVENUE AND EXPENSE FROM SUCH
TRADES, WHICH WAS INADVERTENTLY INCLUDED. FOR 2000, THESE TRADES
REPRESENTED $1.0 BILLION OF REVENUE AND EXPENSE. THE TRADES HAD NO
EFFECT ON THE COMPANY'S EARNINGS, CASH FLOW OR BALANCE SHEET FOR
2001 OR 2000.
CMS's internal review found that these trades included 79.3
million megawatt-hours in 2001 and 29.6 million megawatt-hours in
2000. With these trades subtracted, electric trading volumes for
2001 totaled 31 million megawatt-hours and for 2000 totaled 8.3
million megawatt-hours.
59 A Reuters' article dated May 15, 2002, titled "CMS admits to $4.4
bln worth of bogus power trades" provided additional information. The article
stated in pertinent part as follows:
-25-
CMS Energy Corp. on Wednesday said it entered into bogus
electricity trades that inflated revenues and expenses by $4.4
billion 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 or loss,
in mid-January. The company said an internal review found the
bogus trades accounted for nearly 80 percent of electricity traded
in 2001, and more than 70 percent the year before.
The company also said it restated revenues and expenses downward
by $3.4 billion for the first three quarters of 2001, which was
reflected in its annual filing done in March.
The disclosure of "wash" trades by CMS and other traders has
increased investor disenchantment with the power sector, which has
been hit hard by questions about accounting and hidden debt since
Enron Corp.'s demise last year.
"Companies were gearing for positions in the trading ranks and
this is one of the ways they went about it," said Jeff
Gildersleeve, an analyst at Argus Research.
He added, "It was always suspected that energy companies had quite
a bit of leeway in their accounting, especially in the energy
trading arena and certain companies were more aggressive than
others."
* * *
CMS said it did 13 trades, which accounted for 98 percent of the
company's volume, from May 2000 until mid-January. All the trades
were done with units of Dynegy Inc. and CMS Inc.
* * *
CMS said the bogus trades had no effect on its earnings, cash flow
or balance sheet for 2001 or 2000.
CMS said after the third quarter of 2001 it decided not to record
revenue or expense for these trades, as that would more
appropriately reflect the nature of the transactions.
-26-
Analysts and a former U.S. Securities and Exchange Commission
official have said since the trades were not conducted to make a
profit, but rather for painting a better financial picture, they
suggest at least some impropriety.
CMS said even after the restatement, its 2001 results
"inadvertently" include $5 million of revenue and expense from
"wash" trades. The trades represented $1 billion of revenue and
expense in 2000, but no decision has been made on whether to
restate results for that year, the CMS spokesman said.
The restatement shows that "it became more evident as time went on
that this sort of aggressive accounting practice would be looked
at unfavorably," Gildersleeve said.
"I think all companies were fairly aggressive and that's changed
drastically over the past several months."
Last week, CMS said federal regulators asked it to provide
information for an informal inquiry into wash trades. Also last
week, The Wall Street Journal reported the Securities and Exchange
Commission was looking into bogus trades between CMS and Dynegy
Inc. valued at $1.7 billion.
CMS said it was cooperating with the inquiry by the SEC as well as
another inquiry by the Commodity Futures Trading Commission.
60 Another Reuters article dated May 15, 2002, titled "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 envelope of
accounting laws, they were outright illegal, accounting experts
say.
The disclosure of round-trip or "wash" trades, the buying and
reselling of a commodity to boost revenue and trading volume
without financial risk, has shocked investors still smarting from
the demise of Enron Corp.
-27-
"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, WHO HEADS UP HIS OWN
ACCOUNTING FIRM NOW.
In the latest revelation of round-trip trading, CMS Energy Corp.
on Wednesday said it inflated revenues and expenses by $4.4
billion over 18 months in an attempt to become a leading energy
trader.
Few deny the practice is unethical, but its legality in the
largely deregulated world of wholesale power trading is unclear.
Over-the-counter trading was specifically exempted from regulation
by Congress under the Commodity Futures Modernization Act of
December 2000.
Muddying matters further is that there are no accounting rules
that specifically prohibit companies from puffing up revenues from
the wash trade jamboree. Some analysts have even said wash trades
were of no great consequence, as they did not change a company's
bottom line.
ACCOUNTING EXPERTS, HOWEVER, SAID THE ILLEGALITY OF WASH TRADING
BOILS DOWN TO THE BASIC TENET OF FINANCIAL REPORTING: YOU DON'T
BOOK REVENUE FROM A SALE THAT LACKS SUBSTANCE.
A SUBSTANTIVE SALE WOULD HAVE TO TRANSFER AT LEAST SOME BENEFIT OR
RISK -- OF A DROP IN PRICES, FOR EXAMPLE -- BETWEEN THE PARTIES
TRADING, SAID WAXMAN, WHO IS ALSO A MEMBER OF THE NEW YORK STATE
SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS.
"IT'S PRETTY MUCH A MATTER OF COMMON SENSE," SAID JACK CIESIELSKI,
AN ACCOUNTANT WHO PUBLISHES THE WIDELY READ ANALYST'S ACCOUNTING
OBSERVER. "IF THE TRANSACTION LACKS ANY SUBSTANCE, WHY WOULD YOU
RECORD IT?"
MATERIALLY MISSTATING STATEMENTS
The Financial Accounting Standards Board, the accounting body that
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 SHERI THOMPSON,
A SPOKESWOMAN FOR FASB. "IF YOU HAVE AN ARRANGEMENT OR A
PREARRANGEMENT IN PLACE WITH ANOTHER PARTY,
-28-
WHERE YOU'RE GOING TO BE SELLING SOMETHING AND THEN BUYING THAT
SAME THING BACK AND THERE'S AN AGREED UPON PRICE BETWEEN THE
PARTIES WHERE YOU'RE CREATING ESSENTIALLY A WASH, IT'S REALLY NOT
A SUBSTANTIVE TRANSACTION."
In any case, companies aren't supposed to knowingly engage in
"conduct that materially misstates financial statements," as
proclaimed by the Securities Exchange Act of 1934, Waxman said.
That act addresses the financial reporting requirements of public
companies.
CMS acknowledged the wash trades it entered into were not in the
company's best interests, and stopped such trading in January.
FALSE FINANCIAL STATEMENTS
61 In order to falsely state revenues during the Class Period,
Defendants caused CMS to violate GAAP and SEC rules by including approximately
$4.4 billion of revenues in financial statements from transactions that lacked
any economic substance 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. Defendants' failure to properly account for the
"round-trip" trading contracts caused CMS to record more than $4.4 billion of
revenues that lacked any economic substance throughout the Class Period, and,
therefore, misstated CMS's revenues throughout the Class Period.
62 CMS has admitted that its financial statements, including Annual
Reports on Form 10-K and Quarterly Reports on Form 10-Qs contained revenues from
round-trip trading.
63 CMS included its false and incorrect financial statements and
results in press releases and in SEC filings, including the Annual Reports on
Form 10-K and Quarterly Reports on Form 10-Qs for 2000 and 2001. These SEC
filings represented that the financial information
-29-
presented therein was a fair statement of CMS's financial results and that the
results were prepared in accordance with GAAP.
64 These representations were false and misleading as to the financial
information reported, as such financial information was not prepared in
conformity with GAAP, nor was the financial information a "fair representation"
of CMS's operations due to the Company's improper accounting for $4.4 billion of
revenues recognized from "round-trip" trades with Dynegy and Reliant, causing
the financial results to be presented in violation of GAAP and SEC rules.
65 Regulation S-X [17 C.F.R. Sec.210.4-01(a)(1)] states that financial
statements filed with the SEC which are not prepared in compliance with GAAP are
presumed to be misleading and inaccurate. Regulation S-X requires that interim
financial statements must also comply with GAAP, with the exception that interim
financial statements need not include disclosure that would be duplicative of
disclosures accompanying annual financial statements.
66 Due to these accounting improprieties, CMS presented its financial
results in a manner which violated GAAP, including the following fundamental
accounting principles:
(a) The principle that interim financial reporting should be based upon
the same accounting principles and practices used to prepare annual financial
statements was violated (APB No. 20, para. 10);
(b) The principal that financial reporting should provide information
that is useful to present and potential investors and creditors and other users
in making rational investment, credit and similar decisions was violated (FASB
Statement of Concepts No. 1, para. 34);
-30-
(c) The principal that financial reporting should provide information
about the economic resources of an enterprise, the claims to those resources,
and effects of transactions, events and circumstances that change resources and
claims to those resources was violated (FASB Statement of Concepts No. 1, para.
40);
(d) The principle that financial reporting should provide information
about how management of an enterprise has discharged its stewardship
responsibility to owners (stockholders) for the use of enterprise resources
entrusted to it was violated. To the extent that management offers securities of
the enterprise to the public, it voluntarily accepts wider responsibilities for
accountability to prospective investors and the public in general (FASB
Statements of Concepts No. 1, para. 50);
(e) The principle that financial reporting should provide information
about an enterprise's financial performance during a period was violated.
Investors and creditors often use information about the past to help in
assessing the prospects of an enterprise. Thus, although investment and credit
decisions reflect investors' expectations about future enterprise performance,
those expectations are commonly based at least partly on evaluations of past
enterprise performance (FASB Statement of Concepts No. 1, para. 42);
(f) The principle that financial reporting should be reliable in that
it represents what it purports to represent was violated. That information
should be reliable as well as relevant is a notion that is central to accounting
(FASB Statement of Concepts No. 2, paras. 58-59);
(g) The principle of completeness, which means that nothing is left out
of the information that may be necessary to insure that it validly represents
underlying events and conditions was violated (FASB Statement of Concepts No. 2,
para. 79); and
-31-
(h) The principle that conservatism be used as a prudent reaction to
uncertainty to try to ensure that uncertainties and risks inherent in business
situations are adequately considered was violated. The best way to avoid injury
to investors is to try to ensure that what is reported represents what it
purports to represent (FASB Statement of Concepts No. 2, paras. 95, 97).
67 Further, the undisclosed adverse information concealed by Defendants
during the Class Period is the type of information which because of SEC
regulations, regulations of the national stock exchanges and customary business
practices, is expected by investors and securities analysts to be disclosed and
is known by corporate officials and their legal and financial advisors to be the
type of information which is expected to be and must be disclosed.
68 The market for CMS's securities was open, well-developed and
efficient at all relevant times. As a result of these materially false and
misleading statements and failures to disclose, CMS's common stock traded at
artificially inflated prices during the Class Period. Plaintiff and other
members of the Class purchased or otherwise acquired CMS securities relying upon
the integrity of the market price of CMS's securities and market information
relating to CMS, and have been damaged thereby.
69 During the Class Period, Defendants materially misled the investing
public, thereby inflating the price of CMS's common stock, by publicly issuing
false and misleading statements and omitting to disclose material facts
necessary to make defendant's statements, as set forth herein, not false and
misleading. Said statements and omissions were materially false and misleading
in that they failed to disclose material adverse information and misrepresented
the truth about the Company, its business and operations, as alleged herein.
-32-
70 At all relevant times, the material misrepresentations and omissions
particularized in this Complaint directly or proximately caused or were a
substantial contributing cause of the damages sustained by plaintiff and other
members of the Class. As described herein, during the Class Period, defendants
made or caused to be made a series of materially false or misleading statements
about CMS's business, prospects and operations. These material misstatements and
omissions had the cause and effect of creating in the market an unrealistically
positive assessment of CMS and its business, prospects and operations, thus
causing the Company"s securities to be overvalued and artificially inflated at
all relevant times.
71 Defendants' materially false and misleading statements during the
Class Period resulted in Plaintiff and other members of the Class purchasing the
Company's securities at artificially inflated prices, thus causing the damages
complained of herein.
ADDITIONAL SCIENTER ALLEGATIONS
72 As alleged herein, Defendants acted with scienter in that Defendants
knew that the public documents and statements issued or disseminated in the name
of the Company were materially false and misleading; knew that such statements
or documents would be issued or acquiesced in the issuance or dissemination of
such statements or documents as primary violations of the federal securities
laws. As set forth elsewhere herein in detail, Defendants, by virtue of their
receipt of information reflecting the true facts regarding CMS, their control
over, and/or receipt and/or receipt of information of CMS's allegedly materially
misleading misstatements and/or his associations with the Company which made him
privy to confidential proprietary information concerning CMS, participated in
the fraudulent scheme alleged herein.
-33-
APPLICABILITY OF PRESUMPTION OF RELIANCE:
FRAUD-ON-THE-MARKET DOCTRINE
73 At all relevant times, the market for CMS' securities was an
efficient market for the following reasons, among others:
(a) CMS common stock met the requirements for listing, and was listed
and actively traded on the NYSE, a highly efficient and automated market;
(b) As a regulated issuer, NYSE filed periodic public reports with the
SEC and the NYSE;
(c) CMS regularly communicated with public investors via established
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 and other similar reporting services; and
(d) CMS was followed by several securities analysts employed by major
brokerage firms who wrote reports which were distributed to the sales force and
certain customers of their respective brokerage firms. Each of these reports was
publicly available and entered the public marketplace.
74 As a result of the foregoing, the market for CMS securities promptly
digested current information regarding CMS from all publicly available sources
and reflected such information in the price of CMS stock. Under these
circumstances, all 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.
-34-
NO SAFE HARBOR
75 The statutory safe harbor provided for forward-looking statements
under certain circumstances 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 any forward-looking statements, there were no meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those in the purportedly forward-looking
statements. Alternatively, to the extent that the statutory 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 those
forward-looking statements was made, the particular speaker knew that the
particular forward-looking statement was false, and/or the forward-looking
statement was authorized and/or approved by an executive officer of CMS who knew
that those statements were false when made.
FIRST CLAIM
VIOLATION OF SECTION 10(b) OF
THE EXCHANGE ACT AGAINST AND RULE 10B-5
PROMULGATED THEREUNDER AGAINST ALL DEFENDANTS
76 Plaintiff repeats and realleges each and every allegation contained
above as if fully set forth herein.
77 During the Class Period, CMS 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 Plaintiff and other Class members, as alleged herein; (ii)
artificially inflate and maintain the market price of CMS securities; and (iii)
cause Plaintiff and other members of the Class to purchase CMS securities at
artificially inflated
-35-
prices. In furtherance of this unlawful scheme, plan and course of conduct,
Defendants, and each of them, took the actions set forth herein.
78 Defendants (a) employed devices, schemes, and artifices to defraud;
(b) made untrue statements of material fact and/or omitted to state 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 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 Rule 10b-5. All Defendants are sued either as primary
participants in the wrongful and illegal conduct charged herein or as
controlling persons as alleged below.
79 In addition to the duties of full disclosure imposed on Defendants
as a result of their making of affirmative statements and reports, or
participation in the making of affirmative statements and reports to the
investing public, Defendants had a duty to promptly disseminate truthful
information that would be material 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 (17 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.
80 CMS and the Individual Defendants, individually and in concert,
directly and indirectly, by the use, means or instrumentalities of interstate
commerce and/or of the mails, engaged and participated in a continuous course of
conduct to conceal adverse material information about the business, operations
and future prospects of CMS as specified herein.
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81 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 and 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.
82 The Individual Defendants' primary liability, and controlling person
liability, arises from the following facts: (i) the Individual Defendants were
high-level executives and/or directors at the Company during the Class Period;
(ii) the Individual Defendants were privy to and participated in the creation,
development and reporting of the Company's internal budgets, plans, projections
and/or reports; and (iii) the Individual Defendants were aware of the Company's
dissemination of information to the investing public which they knew or
recklessly disregarded was materially false and misleading.
83 The Defendants had actual knowledge of the misrepresentations and
omissions of material facts set forth herein, or acted with reckless 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
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prospects from the investing public and supporting the artificially inflated
price of its securities. As demonstrated by Defendants' overstatements and
misstatements of the Company's business, operations and earnings throughout the
Class Period, Defendants, if they did not have actual knowledge of the
misrepresentations and omissions alleged, were reckless in failing to obtain
such knowledge by deliberately refraining from taking those steps necessary to
discover whether those statements were false or misleading.
84 As a result of the dissemination of the materially false and
misleading information and failure to disclose material facts, as set forth
above, the market price of CMS securities was 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 Defendants, or upon the integrity of the
market in which the securities trade, and/or on the absence of material adverse
information that was known to or recklessly disregarded by Defendants but not
disclosed in public statements by Defendants during the Class Period, Plaintiff
and the other members of the Class acquired CMS securities during the Class
Period at artificially high prices and were damaged thereby.
85 At the time of said misrepresentations and omissions, Plaintiff and
other members of the Class were ignorant of their falsity, and believed them to
be true. Had Plaintiff 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, Plaintiff 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.
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86 By virtue of the foregoing, Defendants have violated Section 10(b)
of the Exchange Act, and Rule 10b-5 promulgated thereunder.
87 As a direct and proximate result of Defendants' wrongful conduct,
Plaintiff 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 ACT AGAINST THE INDIVIDUAL DEFENDANTS
88 Plaintiff repeats and realleges each and every allegation contained
above as if fully set forth herein.
89 The Individual Defendants acted as a controlling person of CMS
within the meaning of Section 20(a) of the Exchange Act as alleged herein. By
virtue of his high-level positions, and his 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 the 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
various statements which Plaintiff contends 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 Plaintiff 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.
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90 In particular, the Individual Defendants had direct and supervisory
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 the securities violations as alleged herein, and
exercised the same.
91 As set forth above, CMS and the Individual Defendants each violated
Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this
Complaint. By virtue of their position each as a controlling person, the
Individual Defendants are liable pursuant to Section 20(a) of the Exchange Act.
As a direct and proximate result of CMS's and the Individual Defendants'
wrongful conduct, Plaintiff and other members of the Class suffered damages in
connection with their purchases of the Company's securities during the Class
Period.
WHEREFORE, Plaintiff prays for relief and judgment, as follows:
(a) Determining that this action is a proper class action, designating
Plaintiff as Lead Plaintiff and certifying Plaintiff as a class representative
under Rule 23 of the Federal Rules of Civil Procedure and Plaintiff's counsel as
Lead Counsel;
(b) Awarding compensatory damages in favor of Plaintiff and the 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;
(c) Awarding Plaintiff and the Class their reasonable costs and
expenses incurred in this action, including counsel fees and expert fees; and
(d) Such other and further relief as the Court may deem just and
proper.
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
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Dated: May 17, 2002
MANTESE MILLER AND MANTESE, P.L.L.C.
By: ___________________________________
E. Powell Miller
Gerard Mantese
1301 W. Long Lake Road, Suite 135
Troy, Michigan 48098
(248) 267-1200
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
Steven G. Schulman
Samuel H. Rudman
One Pennsylvania Plaza - 49th Floor
New York, NY 10119
(212) 594-5300
CAULEY GELLER BOWMAN
& COATES LLP
Paul Geller One Boca Place
2255 Glades Road, Suite 421A
Boca Raton, FLA 33431
(561) 750-3000
SCHIFFRIN & BARROWAY, LLP
Marc A. Topaz
Three Bala Plaza East Suite 500
Bala Cynwyd, PA 19004
(610) 667-7706
ADEMI & O'REILLY, LLP
Guri Ademi
3620 East Layton Avenue
Cudahy, Wisconsin 53110
(414) 482-8000
Counsel for Plaintiff
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