EXHIBIT 99(c)
UNITED STATES OF AMERICA
BEFORE THE
SECURITIES AND EXCHANGE COMMISSION
SECURITIES ACT OF 1933
RELEASE NO. 8403 / MARCH 17, 2004
SECURITIES EXCHANGE ACT OF 1934
RELEASE NO. 49432 / MARCH 17, 2004
ACCOUNTING AND AUDITING ENFORCEMENT
RELEASE NO. 1978 / MARCH 17, 2004
ADMINISTRATIVE PROCEEDING
FILE NO. 3-11436
: ORDER INSTITUTING CEASE-AND-
IN THE MATTER OF : DESIST PROCEEDINGS PURSUANT
: TO SECTION 8A OF THE SECURITIES
CMS ENERGY CORP. AND : ACT OF 1933 AND SECTION 21C OF
TERRY WOOLLEY, : THE SECURITIES EXCHANGE ACT
: OF 1934, MAKING FINDINGS AND
RESPONDENTS. : IMPOSING A CEASE-AND-DESIST
: ORDER
I.
The Securities and Exchange Commission ("Commission") deems it
appropriate that cease-and-desist proceedings be, and hereby are, instituted
pursuant to Section 8A of the Securities Act of 1933 (the "Securities Act") and
Section 21C of the Securities Exchange Act of 1934 (the "Exchange Act") against
CMS Energy Corp. ("CMS") and Terry Woolley ("Woolley") (collectively,
"Respondents").
II.
In anticipation of the institution of these proceedings, CMS and
Woolley have submitted Offers of Settlement ("Offers") that the Commission has
determined to accept. Solely for the purpose of these proceedings and any other
proceedings brought by or on behalf of the Commission, or to which the
Commission is a party, and without admitting or denying the findings contained
herein, except that CMS and Woolley admit the Commission's jurisdiction over
them and over the subject matter of these proceedings, CMS and Woolley consent
to the entry of this
Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the
Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934,
Making Findings and Imposing a Cease-and-Desist Order.
III.
FINDINGS
The Commission makes the following findings:(1)
A. RESPONDENTS
CMS is a Michigan corporation with its principal place of business in
Jackson, Michigan. CMS's shares are registered with the Commission under Section
12(b) of the Exchange Act and trade on the New York Stock Exchange under the
symbol "CMS." CMS is an integrated energy company operating in the United States
and in selected markets worldwide. During all relevant times, CMS, through its
subsidiaries, owned and operated a regulated public utility, sold energy into
various unregulated markets and engaged in independent power production and oil
and gas exploration and production. During the relevant period, CMS's
energy-trading division, CMS Marketing Services & Trading ("MS&T"), was active
in retail marketing of electricity and wholesale trading of electricity and
natural gas.
WOOLLEY, age 56, of Houston, Texas, was MS&T's Controller from January
1997 until December 2001, when he elected early retirement. As Controller,
Woolley was responsible for MS&T's financial accounting.
B. FACTS
1. INTRODUCTION
CMS materially overstated its revenues, expenses and energy-trading
volumes in 2000 and 2001 through the use of undisclosed round-trip energy
transactions conducted by its Houston-based energy-trading division, MS&T.(2)
These overstatements appeared in Commission filings, earnings releases and
investor presentations. The round-trip trades had no impact on CMS's net
earnings.
The round-trip trades were massive pre-arranged transactions involving
simultaneous purchases and sales of electric power or natural gas with the same
counterparty for the same volume and at the same price, with no delivery
contemplated and with neither party making any
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(1) The findings herein are made pursuant to Respondents' Offers and are not
binding on any other person or entity in these or any other proceedings.
(2) Round-trip trades have been referred to variously as "Brag-a-Watts,"
"volumetric" deals, "wash" trades, "net-zero" trades and "zero-margin" trades.
The term "round-trip" came into common usage after the practice was made public
in May 2002 and will be used in this Order.
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profit. By recording revenues and expenses from the round-trip trades, CMS
overstated its revenues and expenses by a total of $5.2 billion over a one-year
period: $1.0 billion (10% of revenue) in 2000, and $4.2 billion (36% of revenue)
for the first three quarters of 2001. Likewise, CMS overstated MS&T's reported
energy-trading volume by 78% in 2000 and 72% in 2001.
MS&T's round-trip trades lacked economic substance. Their purpose was
to elevate MS&T into the top 20 tier ("Top 20") of industry publication volume
rankings by inflating the division's apparent trading activity. MS&T's
management thought that the appearance of robust business activity through
MS&T's membership in the Top 20 would generate business for MS&T, specifically
long-term power marketing arrangements and additional power trading.
Although CMS conducted the round trip trades to boost its trading
volume, the trades also had the effect of inflating artificially CMS's revenues
and expenses. In fact, in part because of the inflated revenues CMS moved from
number 287 on the 1999 Fortune 500 list -- which is based on revenues -- to
number 156 on the 2001 Fortune 500 list. Over the course of the round-trip
trading, CMS referenced revenue and trading volume that included the trades in
its periodic filings with the Commission, registration statements, press
releases, earnings conference calls and investor presentations.
In early 2002, while auditing CMS's financial statements for inclusion
in its 2001 Form 10-K, CMS's outside auditor required CMS to reclassify the
revenues and expenses from the round-trip trades on a net, rather than gross
basis -- eliminating the financial statement impact of the trades.(3) Although
CMS reclassified the revenues and expenses in the 2001 10-K, it did not disclose
the relevant details of the energy trades, or disclose the amount -- $4.2
billion -- of revenue CMS eliminated from its financial statements. It was not
until two months later, when the round-trip trades became the subject of the
Commission's inquiry and media attention, that CMS finally disclosed the details
underlying the reclassification. In addition, due to apparent oversight on the
part of CMS and its auditor, CMS failed to eliminate from its financial
statements the $1 billion of revenue associated with the round-trip trades CMS
conducted in 2000.
2. ROUND-TRIP TRADING BEGINS AT MS&T
Before 2000, MS&T was a small component of CMS's business. In the Fall
of 1999, CMS decided to expand into wholesale energy trading and recruited a new
chief executive to head MS&T.(4) CMS, which operates the largest public utility
in Michigan, was forecasting
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(3) The round-trip trades involve simultaneous purchases and sales at the same
price; thus, they offset completely. If a company records them "gross," the
company's financial statements will include revenues from the purported sale and
expenses from the purported purchase. If the company records them "net,"
however, its financial statements will include neither revenue nor expense from
the transactions, because they cancel each other out.
(4) The executive had previously been employed as the head of the trading
operations of another energy company, Reliant Energy, Inc. As discussed below,
Reliant was the counterparty on the vast majority of CMS's round-trip
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double-digit earnings growth at the time, based chiefly on the anticipated
activities of CMS's unregulated business units, including MS&T. At the same time
CMS publicly promoted MS&T as the primary vehicle for CMS's future growth. After
hiring the new chief executive to expand MS&T's business, CMS moved MS&T's
trading operations from Michigan to Houston, the hub of the energy-trading
industry. MS&T developed a strategy that emphasized marketing to cooperatives
and municipalities in the hope of landing long-term contracts for the sale of
electric power.
MS&T's chief executive believed increasing MS&T's trading volume would
be helpful in marketing MS&T, in light of her conclusion that some
municipalities and cooperatives conducted business only with prominently ranked
energy companies, such as those in the Top 20. MS&T ranked 36th among all power
traders in 1998, but had fallen to 56th by the end of the second quarter of
2000.
3. ROUND-TRIP ELECTRIC POWER TRADING AT MS&T
The first round-trip trade occurred in July 2000.(5) This transaction,
involving 10 million megawatt hours and priced at $380 million, was
approximately 1,000 times larger than the typical power trade. MS&T had
calculated this volume as sufficient to land CMS in the Top 20. MS&T's
accounting system automatically recorded the revenues and expenses from the
trade in MS&T's books and records on a gross basis. CMS's chief accounting
officer approved recording the gross revenues and expenses from the trade. Thus,
MS&T reported $380 million in revenue (for the purported sale) and $380 million
in expenses (for the purported purchase).
After the first trade, MS&T entered into additional round-trip trades
each quarter in order to maintain a Top 20 ranking. The MS&T trader would
communicate with his counterpart by telephone or e-mail in order to pre-arrange
the trades' terms. The volumes were typically in the range of 10-20 million
megawatt hours. MS&T recorded revenues and expenses from the trades in each
instance.
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transactions. On May 12, 2003, the Commission issued a settled cease-and-desist
order arising in part from Reliant's round-trip trading. In the Matter of
Reliant Resources, Inc. and Reliant Energy, Inc., Rel. Nos. 33-8232 and
34-47828; AAE Rel. No. 1780. In the order, the Commission found that Reliant had
violated the antifraud, reporting, record keeping and internal controls
provisions of the federal securities laws.
(5) In July 2000, prior to entering into the first round trip trade, MS&T
entered into a netting agreement with Reliant. The agreement, which was standard
with all MS&T counterparties, provided for the net settlement of financial
obligations resulting from trades between the two parties. It is a common
practice in the wholesale energy business to settle offsetting delivery
obligations on a net basis with a book entry. To illustrate, if CMS sold 100
megawatts of electric power to a counterparty, and purchased 50 megawatts from
the same counterparty at the same price, the net book entry would require
delivery of only 50 megawatts by CMS to the counterparty. Likewise, there would
be only one payment: the counterparty's payment to CMS for 50 megawatts. Because
round-trip trades entail, by definition, the same quantities and prices of the
same commodities at the same delivery point, the netting agreement and the book
entry settlement eliminated the need for either CMS or Reliant to exchange
commodities or cash.
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4. CMS'S EFFORTS TO AVOID PUBLIC
DETECTION OF ROUND-TRIP TRADING
Although the round-trip trades were no secret within MS&T, the MS&T
trader responsible for the trades tried to conceal the practice, fearing that
public detection would defeat the purpose of round-tripping by exposing the
fiction behind MS&T's status as a major energy trader. Beginning in the fourth
quarter of 2000, the MS&T trader responsible for the trades disguised the trades
by splitting them into multiple increments, for delivery in different geographic
regions, with slight price differentials.
MS&T continued to disguise the trades in the first and second quarters
of 2001. On June 1, 2001, an industry publication noted large volumes of trading
activity between MS&T and Reliant: "CMS and Reliant traded about 20 million Mwh,
lifting CMS up from the rank of 56th a year ago to 18th for first-quarter
2001."(6) In August 2001, a second industry publication article noted that MS&T
"has Reliant as a counterparty for about 90% of its power sales."(7) The
articles caused concern that the true nature of the trades would be detected,
and prompted MS&T to seek out another round-trip counterparty. On November 15,
2001, MS&T and the new counterparty entered into what the latter called
"Operation Volume" -- two round-trip power trades so large that MS&T's
counterparty had to override its trading platform's volume limits to execute
them. The trades involved a combined total of more than 25 million megawatt
hours of electricity.
5. MS&T'S NATURAL GAS ROUND-TRIP TRADE
In addition to the extensive electric power round-trip trading, MS&T
conducted one natural gas round-trip trade. MS&T's chief executive personally
directed one of MS&T's traders to enter the trade into MS&T's trading system,
and personally furnished that trader with the terms. This large volume gas
transaction occurred on June 1, 2001 and MS&T recorded the revenue, expense and
volume for the trade.
6. THE AUDITOR'S GUIDANCE
a. LATE 2000 AND EARLY 2001
After a member of the independent auditor's team examining MS&T ("the
MS&T audit team") discovered the first round trip trade in its third quarter
2000 review of CMS's financial statements, the audit engagement partner
discussed it with CMS's chief accounting officer. At that time, the engagement
partner had not fully analyzed the accounting treatment of the trade, but
believed, from discussions between the MS&T audit team and MS&T representatives,
that it was a
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(6) Platt's Electric Power Daily, Latest Ranking of Power Sellers Shows Big
Sales Boost: Are West's Woes Responsible? (June 1, 2001).
(7) Platt's Power Markets Week, Volatility, Restructuring Boosts Volume; 2Q
Reaches 1.5 Billion Mwh (Aug. 20, 2001).
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one-time transaction (a "one-off"). On that basis CMS's auditor did not object
to the recording of the gross revenues and expenses in CMS's third quarter 2000
financial statements filed with its Form 10-Q.(8)
CMS engaged in approximately $620 million of round trip trades in the
fourth quarter of 2000. The revenues and expenses from the fourth quarter 2000
trades were recorded in CMS' income statement appended to its 2000 Form 10-K
filed with the Commission. There is no evidence that CMS' auditors explicitly
approved, or even discussed with CMS, the recording of revenues and expenses
associated with those round trip trades.
Before CMS filed its Form 10-Q for the first quarter of 2001, CMS and
its auditor discussed the inclusion of $1.2 billion of gross revenues and
expenses from round-trip trades that occurred during the first quarter. CMS's
auditor understood that the trades were simultaneous, with no physical delivery
or margin, were documented the same as any other transaction and lacked economic
substance. The auditor did not object to recording the gross revenues and
expenses on CMS's first quarter 2001 financial statements, but stated that his
staff would continue researching the accounting treatment of the round-trip
trades.
b. SECOND QUARTER 2001
After CMS filed its first quarter 2001 Form 10-Q containing $1.2
billion in round-trip-trading revenue, CMS's independent auditor further
researched whether the accounting for the trades was proper. Members of the MS&T
audit team concluded in May 2001 that the revenues and expenses from the
round-trip trades should be recorded on a net basis -- contrary to MS&T's (and
CMS's) practice. The MS&T audit team informed Woolley of its conclusion, but
neither Woolley nor the MS&T audit team notified Woolley's CMS superiors in
Michigan of the recommended change in accounting.
During the review of MS&T's second quarter 2001 financial statements,
the MS&T audit team specifically inquired whether additional round-trip trades
had occurred. In response, Woolley told them that he believed there was only one
relatively small ($50 million) round-trip trade, but in fact there was
approximately $2 billion of round-trip trades in the quarter. CMS presented the
revenues and expenses from the round-trip trades on a gross basis in the
financial statements incorporated in its second-quarter 2001 Form 10-Q, despite
the MS&T audit team's conclusion that such treatment was inappropriate.
c. THIRD AND FOURTH QUARTER 2001
In October 2001, but prior to the filing of CMS's third quarter Form
10-Q, CMS's auditor instructed CMS that the revenues and expenses from
round-trip trades could be recorded only if:
o The parties to the trade bear both credit and
performance risk;
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(8) CMS's fiscal year ends on December 31st.
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o Title to the related commodity transfers to the buyer;
and
o Settlement is for the gross proceeds (checks must be
exchanged and cashed for the gross amount of the
transaction).
The round-trip trades -- which involved no risk, no net transfer of
title and no exchange of cash -- could not satisfy these criteria. Nevertheless,
CMS reported in the third quarter of 2001 the revenues and expenses from MS&T's
third quarter round-trip trades, resulting in material financial
misstatements.(9) As division controller, Woolley was responsible for
communicating MS&T's financial information to CMS's chief accounting officer and
he did not ensure that the results of the round-trip trades were removed from
the financial data reported to CMS's chief accounting officer.
7. CMS'S 2001 FORM 10-K: CMS RECLASSIFIES
THE FINANCIAL RESULTS OF THE ROUND-TRIP TRADES
On March 24, 2002, CMS's auditors advised CMS that the financial
results of the round-trip trades conducted in 2001 would have to be reclassified
to record them all on a net basis.(10) In the Form 10-K CMS filed with the
Commission on March 29, 2002, operating revenues were reclassified to eliminate
the results of round-trip trades. CMS, after consulting with its auditors,
discussed the reclassification in the following footnote to CMS's financial
statements:
RECLASSIFICATIONS: During 2001, CMS Energy entered into
several energy trading contracts with counterparties. The
impact of these trades increased operating revenue with a
corresponding increase in operating expenses. During the
fourth quarter of 2001, it was determined that under SFAS No.
133 and related interpretations, these trades should have been
recorded on a net basis. First, second, and third quarter
operating revenue and operating expenses have been restated
from the amounts previously reported to reflect these trades
on a net basis. There was no impact on previously reported
consolidated net income.
CMS did not explain in the footnote that the round-trip trades were
pre-arranged with a single counterparty, lacked economic substance and were
conducted for the sole purpose of inflating MS&T's volume statistics. Nor did
CMS indicate in the footnote the amount of
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(9) MS&T conducted additional round-trip trades in November and December of
2001, although the revenues from those trades never appeared in public filings.
(10) CMS failed to take steps, however, to ensure that the round-trip trades
conducted in 2000 were also reclassified.
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revenue, $4.2 billion, subject to the reclassification.(11) As a result, the
footnote was materially misleading. Moreover, CMS did not otherwise disclose the
round-trip trades in the Management's Discussion and Analysis section of its
2001 Form 10-K.
8. PUBLIC REFERENCES TO TRADING VOLUMES AND REVENUES
During the period of round-trip trading -- third quarter 2000 through
year-end 2001 -- CMS issued publicly materially misleading information. CMS
included artificially inflated revenues and trading volumes associated with the
round-trip trading in its periodic filings with the Commission, registration
statements, quarterly earnings press releases, investor presentations, and
reports to industry publications.
a. FILINGS WITH THE COMMISSION
CMS set forth the percentage increases in MS&T's trading volume in the
"Results of Operations" portion of its Commission filings. CMS's third quarter
2000 Form 10-Q provided, "The volumes of marketed natural gas and power traded
increased 72 percent and over 1000 percent respectively [as compared to third
quarter 1999]." (Emphasis added). Similar statements regarding percentage
increases appeared in each Form 10-Q during the relevant period, with the
exception of the second quarter 2001, which contained only the raw volume
statistics in terms of megawatts of power and btu's of natural gas.(12) Those
volumes were also inflated due to round-trip trading.
During the relevant period, CMS filed with the Commission several
registration statements in connection with offerings of its securities.(13) The
registration statements incorporate by reference the materially misleading Forms
10-Q and the 2000 Form 10-K, including the financial statements incorporated in
the filings.
b. QUARTERLY EARNINGS RELEASES
CMS's quarterly earnings releases contained a paragraph citing the
annual gross revenues of the company. This revenue figure increased dramatically
each quarter, from $6 billion in the second quarter of 2000 to $15 billion in
the third quarter of 2001, due chiefly to the round-trip trading. However, CMS
failed to disclose in the releases the source of the increasing revenues (i.e.,
round-trip trades) or the amount of the related expenses. Beginning with the
third quarter 2000 earnings release, CMS attributed the increasing revenues to
"lower-margin" energy marketing and trading, without disclosing the existence
and amount of "no-margin" trades. For example, the first
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(11) The reclassification footnote cross-referenced a table in another portion
of CMS's 2001 Form 10-K showing quarterly financial figures for 2000 and 2001,
including the reclassified revenues. The table, however, did not provide a
comparison with the previously reported revenues and expenses.
(12) Specifically, such statements appeared in CMS's third-quarter 2000 Form
10-Q, 2000 Form 10-K, and Forms 10-Q for the first and third quarters of 2001,
as well as the 2001 Form 10-K.
(13) CMS filed the following registration statements during the relevant period:
a Form S-3 on December 15, 2000, December 22, 2000, and December 12, 2001, and a
Form S-8 on April 11, 2001.
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quarter 2001 earnings release provides, "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
trades." (Emphasis added). The phrase "lower-margin" implies that the trading
involved some margin whereas, in fact, the round-trip trades were zero margin
transactions. This phrase appeared in each quarterly earnings release through
the year-end 2002 release, in which CMS abruptly dropped any mention of
revenues.
c. INVESTOR PRESENTATIONS
Investor presentations and quarterly earnings web-cast conference calls
occasionally involved discussions of MS&T's growth, specifically MS&T's
increasing revenues and trading volumes. For example, during the first quarter
2001 earnings web-cast, a CMS executive emphasized MS&T's planned growth.
Reading from web-cast slides that reflected graphically $4.5 billion in MS&T
revenues, volume increases during 2000 of 1000% and planned doubling of volumes
for 2001, one executive stated: "We don't focus on volumes for volume sake. We
focus on really what kind of growth we're making in this business and I'll show
you toward the end the overall growth in earnings that we've seen there as
well." (Emphasis added). The referenced volumes were principally the result of
round-trip trades, which had no impact on MS&T's or CMS's earnings, and which,
in fact, were conducted to elevate MS&T's energy trading volume ranking.
IV.
LEGAL DISCUSSION
A. CMS'S ANTIFRAUD VIOLATIONS: SECTION 17(a) OF THE SECURITIES
ACT, AND SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5
THEREUNDER
Section 17(a) of the Securities Act prohibits employing a fraudulent
scheme or making material misrepresentations and omissions in the offer or sale
of a security. Section 10(b) of the Exchange Act and Rule 10b-5, thereunder,
prohibit the same conduct, if committed in connection with the purchase or sale
of securities. To violate these provisions, the alleged misrepresentations or
omitted facts must be material. Information is deemed material upon a showing of
a substantial likelihood that the omitted facts would have been important to a
reasonable investor. Basic, Inc. v. Levinson, 485 U.S. 224 (1988).
Establishing violations of the antifraud provisions of the Securities
Act and Exchange Act requires a showing of scienter. Aaron v. SEC, 446 U.S. 680
(1980).(14) Scienter is the "mental state embracing intent to deceive,
manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976).
The Fifth Circuit Court of Appeals has held that scienter is established by a
showing that the defendants acted intentionally or with severe recklessness. See
Broad v. Rockwell International Corp., 642 F.2d 929 (5th Cir.) (en banc), cert.
denied, 454 U.S. 965 (1981).
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(14) While the scienter requirement applies to Section 17(a)(1) of the
Securities Act, actions pursuant to Sections 17(a)(2) and 17(a)(3) of the
Securities Act do not require such a showing. Id.
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CMS violated the antifraud provisions of the Securities Act and the
Exchange Act. As demonstrated in this Order's findings, CMS's round-trip trading
scheme created a false picture of robust business activity and dramatically
overstated CMS's reported revenues, expenses and trading volumes -- in violation
of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and
Rule 10b-5 thereunder. Due to the round-trip trades' impact on CMS's financial
statements and CMS's failure to disclose the round-trip trades, CMS materially
misrepresented its revenues and expenses. There is a substantial likelihood that
these false representations and omissions would have been important to a
reasonable investor because they depicted business activity that was without
economic substance.
CMS's failure to disclose the round-trip trades would have violated the
antifraud provisions, even if CMS's accounting for the trades had technically
conformed to Generally Accepted Accounting Principles ("GAAP") -- which it did
not. CMS's accounting treatment did not conform to GAAP, as the round-trip
trades did not constitute legitimate sales or generate any actual revenue. (See
Statement of Financial Accounting Concepts No. 5; see also Staff Accounting
Bulletin 101). As the Fourth Circuit pointed out in Malone v. Microdyne Corp.:
The Financial Accounting Standards of GAAP and the antifraud
rules promulgated under Section 10(b) of the 1934 Act serve
similar purposes, and courts have often treated violations of
the former as indicative that the latter were also violated.
The prohibitions contained in GAAP and in Rule 10b-5, however,
are not perfectly coextensive. In some circumstances, courts
have found defendants liable for securities fraud under Rule
10b-5 despite having complied with GAAP.
26 F.3d 471, 478 (4th Cir. 1994)(citations omitted).
B. CMS'S REPORTING VIOLATIONS: SECTION 13(a) OF THE
EXCHANGE ACT AND RULES 12b-20, 13a-1 AND 13a-13 THEREUNDER
Section 13(a) of the Exchange Act requires issuers such as CMS to file
periodic reports with the Commission containing such information as the
Commission prescribes by rule. Exchange Act Rule 13a-1 requires issuers to file
annual reports, and Exchange Act Rule 13a-13 requires issuers to file quarterly
reports. Under Exchange Act Rule 12b-20, the reports must contain, in addition
to disclosures expressly required by statute and rules, such other information
as is necessary to ensure that the statements made are not, under the
circumstances, materially misleading. The obligation to file reports includes
the requirement that the reports be true and correct. United States v.
Bilzerian, 926 F.2d 1285, 1298 (2d Cir.), cert. denied, 502 U.S. 813 (1991). The
reporting provisions are violated if false and misleading reports are filed. SEC
v. Falstaff Brewing Corp., 629 F.2d 62, 67 (D.C. Cir. 1980). Scienter is not an
element of a Section 13(a) violation. SEC v. Savoy Indus., Inc., 587 F.2d
1149,1167 (D.C. Cir. 1978).
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CMS violated these provisions by filing a third quarter 2000 Form 10-Q,
2000 Form 10-K, first, second and third quarter 2001 Forms 10-Q and a 2001 Form
10-K that were false and misleading. By failing to disclose the round-trip
trades in the reports, while, at the same time, recognizing the revenues,
expenses and volumes associated with the trades, CMS filed misleading periodic
reports.
C. CMS'S BOOKS AND RECORDS AND INTERNAL CONTROLS VIOLATIONS:
SECTIONS 13(b)(2)(A) AND 13(b)(2)(B) OF THE EXCHANGE ACT
Section 13(b)(2)(A) of the Exchange Act requires all issuers to make
and keep books, records, and accounts that, in reasonable detail, accurately and
fairly reflect their transactions and dispositions of their assets. Scienter and
materiality are not elements of primary violations of this provision. SEC v.
World-Wide Coin Inv., Ltd., 567 F. Supp. 724, 749-50 (N.D. Ga. 1983). CMS,
through its treatment of the round-trip trades, violated Section 13(b)(2)(A) by
failing to keep books, records and accounts that accurately and fairly reflected
its assets and financial results.
Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and
maintain an adequate system of internal accounting controls. Scienter and
materiality are not elements of a violation of this provision. World-Wide Coin,
567 F. Supp. at 749-50. CMS violated Section 13(b)(2)(B) by failing to devise
and maintain a system of internal controls sufficient to ensure that the results
of round-trip trades would be excluded from CMS's public disclosures. Moreover,
CMS's reporting of revenue derived from these transactions was inconsistent with
GAAP. (See Statement of Financial Accounting Concepts No. 5; see also Staff
Accounting Bulletin 101).
D. WOOLLEY CAUSED CMS'S VIOLATIONS
By recording revenues and expenses from the round-trip trades in MS&T's
books and records and submitting the entries to CMS's accounting group for
inclusion in CMS's periodic reports, press releases and earnings releases,
Woolley was a cause of CMS's antifraud, reporting, record keeping and internal
controls violations. Additionally, Woolley caused these violations by failing to
notify his superiors of the MS&T auditor's recommendation to record the revenues
and expenses associated with the round-trip trades on a net, rather than gross,
basis. Specifically, Woolley was a cause of CMS's violations of Section 17(a) of
the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the
Exchange Act, and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder.
V.
The Commission finds that CMS violated, and that Woolley was a cause of
CMS's violations of Section 17(a) of the Securities Act, and Sections 10(b),
13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20,
13a-1 and 13a-13 thereunder.
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VI.
In view of the foregoing, the Commission deems it appropriate to impose
the sanctions specified in the Respondents' Offers.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 8A of the
Securities Act and Section 21C of the Exchange Act, that:
A. Respondent CMS cease and desist from committing or causing any
violation and any future violation of Section 17(a) of the Securities Act, and
Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules
10b-5, 12b-20, 13a-1 and 13a-13 thereunder; and that
B. Respondent Woolley cease and desist from committing or causing any
violation and any future violation of Section 17(a) of the Securities Act, and
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and from causing
any violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act
and Rules 12b-20, 13a-1 and 13a-13 thereunder.
By the Commission.
Jonathan G. Katz
Secretary
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