EXHIBIT 99.4
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
- --------------------------------------------
CRAIG DRIMEL, Individually and on Behalf of )
all Others Similarly Situated, )
) Civ. No. ________________
Plaintiff, )
) CLASS ACTION COMPLAINT FOR
vs. ) VIOLATIONS OF FEDERAL SECURITIES
) LAWS
CMS ENERGY CORPORATION, CONSUMERS )
ENERGY COMPANY, WILLIAM T. McCORMICK, ) JURY TRIAL DEMANDED
JR., DAVID W. JOOS and ALAN M. WRIGHT, )
)
Defendants. )
)
- --------------------------------------------
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. SS. 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. SS. 78aa].
4. Venue is proper in this District pursuant to Section 27 of
the Exchange Act and 28 U.S.C. SS. 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 Craig Drimel, 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 electric
2
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' 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' President and Chief Operating Officer and a Director.
10. Defendant Alan M. Wright ("Wright") is, and from May 2001
was, CMS' Executive Vice President, Chief Financial Officer and Chief
Administrative Officer. Prior to May 2001, Defendant Wright was CMS' Vice
President and Chief Financial Officer. At all times relevant to the allegations
raised herein, Defendant Wright was signed each of CMS' filings with the SEC as
CMS' 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 Defendants also
had access to material adverse non-public information concerning CMS,
3
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' 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 prevent their issuance or cause them to be corrected. Thus, the
Individual Defendants had the opportunity to commit the fraudulent acts alleged
herein.
4
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' 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" 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' 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
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' common stock and other securities at artificially inflated prices.
5
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.
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
6
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. 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.
7
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
benefitted 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 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
8
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 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:
9
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 benefitted 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:
- 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
10
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 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:
11
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;
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
12
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.
* * *
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
13
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
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
14
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 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
15
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 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
16
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.
49. 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.
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'
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
17
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 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.
52. 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
18
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 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
19
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 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
20
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 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 canceled 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
21
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--canceled 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 . . .
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.
22
CMS Energy is cooperating fully with the SEC in this matter.
54. In fact, CMS' 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' financial
statements violated 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 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' 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' trading
23
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 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
24
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' 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:
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.
25
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.
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,
26
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' 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.
"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.
27
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, 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
28
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' 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 presented therein was a fair
statement of CMS' 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' 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
29
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);
(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
30
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
(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, a 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' 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
31
integrity of the market price of CMS' 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' 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.
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' 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
32
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' 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.
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
33
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.
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
34
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 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
35
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.
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' 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.
36
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' operating condition
and future business 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
37
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.
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
38
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.
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' 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.
39
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
Dated: May ___, 2002
MANTESE MILLER AND SHEA, P.L.L.C.
By:______________________________
E. Powell Miller (P39487)
1301 W. Long Lake Road, Suite 135
Troy, Michigan 48098
(248) 267-1200
KIRBY MCINERNY & SQUIRE, LLP
Ira M. Press
Mark Strauss
830 Third Avenue
New York, NY 10022
(212) 371-6600
LAW OFFICES OF LIONEL Z. GLANCY
Lionel Z. Glancy
Peter A. Binkow
Tracey Thrower
1801 Avenue of the Stars, Suite 311
Los Angeles, CA 90067
Phone: (310) 201-9150
Counsel for Plaintiff
40