in re cms energy securities litigation 02-cv-72004-conformed

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN

____________________________________ : Civ. No 02 CV 72004 (GCS)

IN RE CMS ENERGY SECURITIES : (Consolidated) LITIGATION : : HON. GEORGE CARAM STEEH : ____________________________________: DEMAND FOR JURY TRIAL

CONFORMED THIRD AMENDED CONSOLIDATED CLASS ACTION COMPLAINT

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Case 2:02-cv-72004-GCS Document 200-1 Filed 03/16/2005 of 175

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Table of Contents

Table of Contents............................................................................................................................. i

I. INTRODUCTION .........................................................................................................1

II. SUMMARY OF THE ACTION....................................................................................3

III. JURISDICTION AND VENUE ..................................................................................12

IV. PARTIES .....................................................................................................................16

1. Plaintiffs...........................................................................................................16

2. Defendants .......................................................................................................16

3. Control Person Liability...................................................................................26

4. Group Pleading ................................................................................................28

5. Duties of the Individual Defendants ................................................................29

V. FRAUDULENT SCHEME..........................................................................................30

VI. CLASS ACTION ALLEGATIONS ............................................................................32

VII. FRAUD ON THE MARKET PRESUMPTION..........................................................33

VIII. THE SAFE HARBOR PROVISION OF THE PSLRA IS INAPPLICABLE.............35

IX. BACKGROUND TO THE CLASS PERIOD .............................................................36

1. Description of CMS .........................................................................................36

2. Marketing, Services and Trading [MST] Division ..........................................36

3. Background To Round-Trip Trading ...............................................................38

4. False Price Reporting.......................................................................................41

X. RECENTLY OBTAINED EVIDENCE DIRECTLY SUPPORTING PLAINTIFFS’ CLAIMS..............................................................................................41

XI. STATEMENTS ISSUED BY DEFENDANTS AND RELATED EVENTS..............45

1. CMS’s First Quarter 2000 Financial Statements .............................................48

2. [Deleted Pursuant to Court’s Prior Orders] .....................................................50

3. CMS’s Second Quarter 2000 Financial Statements.........................................50

4. CMS’s Premium Equity Participating Security Units Offering.......................52

5. Platt’s Second Quarter 2000 Rankings ............................................................53

6. September 11, 2000 Form S-3 Registration Statement....................................53

7. October 6, 2000 Form S-3 Registration Statement..........................................54

8. CMS’s 9 7/8% Senior Notes Offering Prospectus Supplement.......................55

9. CMS’s October 18, 2000 Common Stock Offering Prospectus Supplement ......................................................................................................56


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10. [Deleted Pursuant to Court’s Prior Orders] .....................................................57

11. CMS’s Third Quarter 2000 Financial Statements............................................57

12. Platt’s Power Markets Week Article................................................................59

13. December 15, 2000 Form S-3 Registration Statement ....................................60


15. Reasons Why the Statements Concerning The Third Quarter Of 2000 Were Materially False And Misleading At The Times They Were Made ................................................................................................................61

16. CMS’s Fourth Quarter And Year End 2000 Financial Results .......................64

17. CMS’s February 23, 2001 Stock Offering Prospectus Supplement ................65

18. Platt’s Power Markets Week 4th Quarter 2000 Rankings ................................66

19. CMS’s 2000 Financial Statements...................................................................66

20. CMS’s 2000 Annual Report to Shareholders...................................................67

21. CMS’s 8.5% Senior Notes Offering ................................................................69

22. Reasons Why The Statements Concerning The Fourth Quarter And Year End 2000 Were Materially False And Misleading At The Times They Were Made..............................................................................................70

23. CMS’s First Quarter 2001 Financial Statements .............................................71

24. Platt’s Power Markets Week 1st Quarter 2001 Rankings.................................74

25. CMS’s 8.9% Senior Notes Offering ................................................................74

26. Reasons Why The Statements Concerning The First Quarter of 2001 Were Materially False And Misleading At The Times They Were Made ................................................................................................................75

27. CMS’s Second Quarter 2001 Financial Statements.........................................77

28. Platt’s August 6, 2001 Article..........................................................................79

29. Reasons Why The Statements Concerning The Second Quarter Of 2001 Were Materially False And Misleading At The Times They Were Made ................................................................................................................80

30. CMS’s Third Quarter 2001 Financial Statements............................................81

31. December 11, 2001 Press Release ...................................................................83


33. Platt’s Power Markets Week 3rd Quarter 2000 Rankings ................................84

34. December 21, 2001 CMS Press Release..........................................................85

35. Reasons Why The Statements Concerning The Third Quarter Of 2001 Were Materially False And Misleading At The Times They Were Made ................................................................................................................85


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36. CMS’s 2001 Financial Statements...................................................................87

37. 2001 CMS Annual Report To Shareholders ....................................................89

38. CMS Changes Auditors ...................................................................................90

39. Reasons Why The Statements Concerning The Fourth Quarter And Year End 2001 Were Materially False And Misleading At The Times They Were Made..............................................................................................91

40. CMS’s First Quarter 2002 Financial Results ...................................................93

41. The Truth Is Partially Revealed .......................................................................93

42. May 15, 2002 Press Release; CMS Issues Additional Disclosures Concerning Its Round-Trip Trading ..............................................................102

43. CMS’s First Quarter 2002 10-Q ....................................................................105

44. Reasons Why the Statements Concerning The First Quarter Of 2002 Were Materially False And Misleading At The Times They Were Made ..............................................................................................................109

45. May 24, 2002 Press Release; Resignation Of McCormick And Appointment Of The Special Committee. .....................................................110

46. Andersen Disavows Its Prior Audits Of CMS And Formally Ends Its Relationship With The Company...................................................................112

47. CMS’s Second Quarter 2002 Financial Results.............................................115

48. Dynegy Cease & Desist Settlement With The SEC.......................................119

49. Reasons Why the Statements Concerning The Second Quarter Of 2002 Were Materially False And Misleading At The Times They Were Made ..............................................................................................................120

50. CMS Announces Results Of Special Committee’s Round-Trip Investigation...................................................................................................122

51. CMS’s Third Quarter 2002 Financial Statements..........................................123

52. Reasons Why The Statements Concerning The Third Quarter Of 2002 Were Materially False And Misleading At The Times They Were Made ..............................................................................................................125

53. January 2003 Platt’s Power Markets Week ...................................................125

54. [Deleted in accordance with the Court’s Prior Orders] .................................126

55. CMS’s 2002 Financial Statements.................................................................127

56. CMS’s “Round-Trip” Energy Trades Materially Inflated CMS’s Trading Volumes ...........................................................................................129

XII. POST CLASS PERIOD DEVELOPMENTS ............................................................130

1. Restatement Of False Financial Statements...................................................130


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2. Sale Of CMS-MST Division..........................................................................133

3. Additional Accounting And Financial Issues ................................................133

XIII. SCIENTER ALLEGATIONS....................................................................................134

1. Motives Behind Round-Trip Trading ............................................................141

2. Insider Selling ................................................................................................143

3. Class Period Securities Offerings ..................................................................144

XIV. VIOLATIONS OF GAAP AND SEC INTERNAL CONTROL REGULATIONS........................................................................................................149

1. CMS’s Accounting Violations.......................................................................149

2. CMS Entered Into “Round-Trip” Energy Trades Which Had No Legitimate Business Purpose .........................................................................150

3. The “Round-Trip” Energy Trades Materially Inflated CMS’s Revenues ........................................................................................................151

4. CMS Failed To Disclose The Details Of Its Nonmonetary Transactions......152

5. Abuse Of Mark-To-Market Accounting ........................................................156

6. Breakdown Of CMS’s Internal Accounting Controls....................................156

7. Violations Of SEC Regulations......................................................................160

FIRST CLAIM.............................................................................................................................162

Violation Of Section 10(b) Of The Exchange Act Against And Rule 10b-5 ..............162

Promulgated Thereunder Against All Defendants.......................................................162

SECOND CLAIM........................................................................................................................166

Violation Of Section 20(a) Of The Exchange Act Against The Individual Defendants ...................................................................................................................166


Lead Plaintiffs Andover Brokerage, LLC (“Andover”) and Herbert Steiger (“Steiger”)

(collectively, “Plaintiffs”), individually and on behalf of all other persons similarly situated,

make the following allegations in this Conformed Third Amended Consolidated Class Action

Complaint (“Complaint”):1

I. INTRODUCTION

1. Plaintiffs bring this action on behalf of themselves and all other persons and

entities who purchased or otherwise acquired the securities of CMS Energy Corporation (“CMS”

or the “Company”)2 from October 25, 2000 through and including March 31, 2003 (the “Class

Period”). Plaintiffs’ allegations herein are based upon information and belief, except as to those

allegations concerning Plaintiffs, which are alleged upon personal knowledge. Plaintiffs’

information and belief are based upon, among other things, an extensive investigation conducted

by and through their attorneys, which has included a review and analysis of a myriad of sources

of information, including, inter alia, the following:

(a) CMS’s filings with the United States Securities and Exchange Commission (“SEC” or the “Commission”);

1 This Complaint is filed pursuant to the Court’s Order, dated March 4, 2005, and its Opinion and Order, dated January 7, 2005, striking certain paragraphs of the Second Amended Consolidated Class Action Complaint, dated May 26, 2004, and dismissing all claims against previously named Defendants Consumers Energy Corporation (“Consumers”), Tamela Pallas (“Pallas”), Dennis DaPra (“DaPra”) and Victor J. Fryling (“Fryling”). The March 4, 2005 Order and January 7, 2005 Order are collectively referred to herein as the Court’s “Prior Orders.”

An earlier Consolidated Class Action Complaint (“Consolidated Complaint”) was filed with the Court on May 1, 2003. In connection with Plaintiffs’ motion to amend their Consolidated Complaint, on March 31, 2004, the Court entered an Order instructing Plaintiffs to file a Proposed Amended Consolidated Class Action Complaint. On April 21, 2004, Plaintiffs’ filed their Proposed Amended Consolidated Class Action Complaint (“Proposed Complaint”). Thereafter, on May 12, 2004, the Court entered an Order Granting in Part any Denying in Part Plaintiffs’ Motion to Amend Complaint, directing Plaintiffs to file their Second Amended Consolidated Class Action Complaint.

By filing this pleading, plaintiffs do not waive, and reserve all rights (including appellate rights) with respect to the allegations, claims and parties previously stricken or dismissed by the Court’s Prior Orders. 2 Unless otherwise indicated, the terms “CMS” and the “Company” refer collectively to CMS, its subsidiaries and the Individual Defendants (defined below).


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(b) CMS’s press releases and other public statements disseminated by the Defendants during the Class Period;

(c) Documents filed by the SEC in connection with its prosecution of federal securities law claims against CMS and certain of its officers and directors, including: (1) the March 17, 2004 SEC 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 against CMS and Terry Woolley, the former Controller of CMS Marketing, Services and Trading Company (“CMS-MST” or “MST”) (available at http://www.sec.gov/litigation/admin/33-8403.htm and attached as Exhibit B to the Proposed Complaint), (2) the March 17, 2004 SEC press release (“March 17, 2004 SEC press release”) announcing that the SEC had filed a complaint against Defendant Preston Hopper (“Hopper”), CMS’s former Chief Accounting Officer, and Pallas, former Chief Executive Officer of CMS-MST (available at http://www.sec.gov/news/press/2004-38.htm and attached as Exhibit C to the Proposed Complaint), and (3) the November 25, 2003 Commodity Futures Trading Commission (“CFTC”) Order instituting proceedings against MST based upon its intentional reporting of false market information to manipulate the price of natural gas (available at http://www.cftc.gov/files/enf/03orders/enfcmsmarketingservices_order.pdf and attached as Exhibit E to the Proposed Complaint), each of which supports the allegations of this Complaint;

(d) Documents produced in this litigation by CMS’s former outside accounting firm, Arthur Andersen LLP (“Andersen”), which audited the Company’s financials during the Class Period;

(e) Reports, articles and discussions concerning CMS and the subject matter of this Complaint contained in print and electronic media and computer databases;

(f) Documents filed with and by the Federal Energy Regulatory Commission (“FERC”);

(g) Securities analyst reports and advisory opinions which refer to the Company, its businesses and markets;

(h) Interviews conducted with persons having first-hand knowledge of the facts alleged herein; and

(i) Complaints filed in other actions pending before FERC and in related litigation filed in other courts, as well as other materials filed in those actions.


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II. SUMMARY OF THE ACTION

2. This action arises out of severe accounting improprieties committed by CMS and

its wholly owned subsidiary CMS-MST. With the deregulation of the energy industry, utilities

and other independent power producers started to trade energy, creating a national power market.

While this approach would, in theory, create and promote market efficiencies and deliver power

where it was most needed, the unregulated trading market permitted opportunities for market

manipulation and exploitation by its participants. Many of these participants, including CMS,

increasingly relied upon “round-trip” or “wash” trades, which served no legitimate purpose, but

served to artificially increase the Company’s reported revenues and trading volumes, and

misrepresent or overstate the current market price of certain forms of energy. Round-trip trades

in this context involve the simultaneous buying and selling of power at the same price and

quantity with the same counter-party.

3. As described more fully below, CMS engaged in a fraudulent scheme through the

use of round-trip trading, which artificially inflated the Company’s stock price and ultimately led

to one of the largest financial losses inflicted on the investing public. Indeed, the events leading

up to this litigation and the alleged wrongdoing are considered to be among the most egregious

corporate accounting scandals since the Enron Corp. debacle. See Forbes Corporate Scandal

Sheet, Forbes.com, August 26, 2002. As part of the CMS scheme, the Company also failed to

disclose that it had failed to implement and maintain an adequate internal accounting control

system, or knowingly or recklessly tolerated the failure to use existing internal controls in a

manner that would ensure compliance with Generally Accepted Accounting Principles

(“GAAP”). This failure resulted in severe inconsistencies with ledger balances, material balance

sheet accounts and other material aspects of CMS’s accounting systems.


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4. In addition to the Company’s public filings, press releases and other publicly

available information, Plaintiffs’ claims are directly supported by: documents recently produced

to Plaintiffs by CMS’s former outside auditor, Andersen, pursuant to the Court’s August 28,

2003 Order; admissions by CMS; as well as additional commentary, as described below.

5. Throughout the Class Period, CMS and the Individual Defendants issued a series

of misstatements, and omitted to state material facts, concerning the Company’s financial results

and condition. Many of these statements concerned the operations of MST, which was

purportedly making dramatic contributions to CMS’s overall revenues quarter after quarter

during the Class Period. Throughout the Class Period, CMS included its artificially inflated

revenue and trading volume in filings with the SEC, press releases, earnings conference calls and

investor presentations. By including the results of the round-trip trades in its financial statements

during the Class Period, CMS was ultimately forced to restate downward its reported revenues

by over $5 billion.

6. The Company continuously touted its MST division as an integrated element of

its operations, stating, for example, in its 2001 Annual Report:

Few companies have the integrated energy asset base of CMS , and we believe that the earnings from the base can be further enhanced by our growing and very successful energy marketing, services and trading company. Our goal for CMS is simply to build our business to become one of North America’s leading asset-based, integrated energy supply and services companies.

(Emphasis added). The Company’s press release, dated June 26, 2002, further states that the

MST division is one of CMS’s “primary” businesses.

7. Additional press releases issued by the Company throughout the Class Period

regularly emphasized the success of the MST division and its purported dramatic increases in


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revenues. The following statements represent just a few of the reported results issued by the

Company during the Class Period:

[F]or the three months ended September 30, 2000 . . . [t]he volumes of marketed natural gas and power traded increased 72 percent and over 1000 percent, respectively.

* * *

[F]or the nine months ended September 30, 2000 . . . [t]he volumes of marketed natural gas and power traded increased 65 percent and 546 percent, respectively.

(CMS Third Quarter 2000 10-Q, filed November 14, 2000 (emphasis added));

Fourth quarter operating revenue totaled $3.19 billion, compared to $1.77 billion in the fourth quarter of 1999, up 80% from $1.77 billion in the fourth quarter of 1999. Consolidated operating revenue for 2000 grew 47 percent to $9.0 billion, from $6.1 billion in 1999, due largely to significantly lower-margin energy marketing and trading transactions . . . [The Company’s] energy marketing unit made the transition from a retail to wholesale business, with 614 billion cubic feet of natural gas marketed, an increase of 31 percent, and 37,781 gigawatt-hours of electricity marketed, up 919 percent, in 2000.

(CMS 2000 10-K, filed January 24, 2001 (emphasis added)); and

MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS . . .

The physical volumes of marketed and managed natural gas and power traded increased 17 percent and 1,783 percent respectively, due largely to significantly increased lower margin energy marketing and trading transactions.

(CMS First Quarter 2001 10-Q, filed May 11, 2001) (emphasis added).

8. MST’s operating revenues and wholesale energy sales were clearly a key

component of Company’s overall financial performance and thus material to the Company’s

investors; indeed, the commencement of round-trip trading at CMS caused a dramatic increase in

the Company’s stock price and ultimately a severe drop in price when the truth about such

trading was finally disclosed. As reported by Forbes.com on May 16, 2002:


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In America, looking busy and productive is itself a status symbol. Some people at CMS, Dynegy [Inc. (“Dynegy”)] and Reliant [Resources] wanted to look even bigger, still busier. Thus the sham transactions . . . [T]he deception seems to have worked well, offering a motive for apparent nonsense. After CMS’s share price took a dive in early 2000, it took a steady rise from $15 a share to $27 in early 2001.

9. Moreover, the recent securities fraud action instituted by the SEC against Dynegy

-- one of CMS’s round-trip trading partners -- further indicates that the SEC clearly considers a

company’s use of round-trip trading to be materially misleading when used to inflate revenues.

Specifically, the complaint, filed by the SEC on September 25, 2002, alleges that:

Dynegy failed to disclose that [its] resulting increases [in revenues] were materially attributable to the round-trip trades. Because the round-trip trades lack economic substance, Dynegy’s press releases [announcing revenues that included round trip trading] were materially misleading.

Complaint, filed with the U.S. District Court, Southern District of Texas, September 25, 2002, ¶

11.

10. CMS’s trading performance played a significant role in the actual ranking of the

Company among its peers in the energy trading business. Many of CMS’s round-trip

transactions during the Class Period were with Dynegy or Reliant Resources and/or its parent,

Reliant Energy, Inc. (collectively, “Reliant”), as counter-party.

11. Platt’s, a private news service which publishes industry publications and reports

on electricity and natural gas spot and forward prices and volumes, periodically publishes

rankings for the various participants in the energy trading industry, setting forth the volume of

trades, revenues and gains. During the Class Period, these rankings were important in the energy

trading industry because they allowed particularly large trading firms to attract larger clients

(including public utilities), take on larger trading positions, and obtain larger amounts of

unsecured debt. In the case of CMS, the Company’s illicit use of round-trip trading elevated it to


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the top tier of energy companies. During the second quarter of 2000, Platt’s ranked CMS as 48th

among its competitors in total power sales for the quarter. As the Company’s round-trip trading

increased, however, that rank increased to 20th for the third quarter of 2000 and 18th for the first

quarter of 2001. This ranking was not only reported among the energy industry, but was also

reported directly to CMS investors in the Company’s 2001 Annual Report, where the Company

touted its ranking as among the “top 20 U.S. natural gas and power marketers.”

12. Securities analysts also seized on the Company’s energy trading business as part

of a growth industry in an otherwise low growth sector. As a result of this false impression of

energy trading as a growth industry, the common stock price of CMS rose to inflated levels,

reaching a Class Period high of $31.75 per share on May 1, 2001.

13. The Company’s materially false and misleading statements, contained in its

public filings and press releases, resulted from a series of deliberate senior management and

director decisions designed to conceal the truth regarding the Company’s actual operating

results. The Individual Defendants, by reason of their senior executive positions at the Company

and attendance at meetings of the Board of Directors and committees thereof, particularly the

Audit Committee, where the quarterly and annual financial results were reviewed at length by

business segment, had direct knowledge of the illegal trading activities.

14. 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, partially

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


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periodic filings with the SEC, registration statements, press releases, earnings conference calls

and investor presentations.

15. Indeed, the revenue growth at the CMS-MST subsidiary was so staggering and

dramatic during the Class Period, solely by reason of the round-trip trading activities, that the

Individual Defendants, upon knowledge of these activities, countenanced the continuation of

these trading activities for, among other reasons, the portrayal of the Company as an industry

leader, to enhance the Company’s ability to attract large energy customers, and to advance the

Company’s placement as a Fortune 500 company. Indeed, during the Class Period, revenues

from round-trip trading constituted at least 35% of the consolidated revenues for 2000 and 2001.

16. According to a former CMS Enterprise International Auditor, on at least one

occasion, Defendant Wright (the Company’s Chief Financial Officer) directed the Company’s

division controllers to revise their 2001 year-end results upwards by a total amount of $2 to $5

billion. Moreover, periodic reports, including VAR (Value at Risk) reports, distributed to

members of senior management and CMS’s Board of Directors as part of the Company’s self-

proclaimed risk management policies, demonstrates these executives’ knowledge of the

Company’s round-trip trading practices.

17. Moreover, Consumers had direct knowledge of the fraudulent round-trip trading

practices by reason of, inter alia, its engagement in trading activities with MST, the interlocking

officers and directors of CMS and Consumers, and joint meetings of the Audit Committees of

Consumers and CMS throughout the Class Period. In addition, as discussed more fully herein,

Consumers issued innumerable joint SEC filings with CMS which contained the false and

misleading quarterly and yearly financial information.


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18. CMS’s financial statements during the Class Period were materially false and

misleading and served to inflate the price of the Company’s securities and defraud investors into

purchasing them. Ultimately, the Company’s false and misleading activities came to an abrupt

halt when CMS’s own trading partner, Dynegy, became the focus of an SEC investigation and

was forced to disclose that it had engaged in extensive round-trip trading with CMS. Upon this

disclosure, CMS was forced to admit its own wrongdoing. Specifically, beginning on May 9,

2002, the Company announced that its MST division had “initiated” electricity trades with

Dynegy in November 2001. The following day, May 10, 2002, the Company announced that the

SEC had asked it to provide information in connection with an informal inquiry it was

conducting into the Company’s round-trip trading.

19. Shortly thereafter, on May 15, 2002, the Company admitted that it had “entered

into ‘round trip’ electricity trades involving simultaneous purchases and sales with the same

counterparties [including Dynegy, Reliant and others], at the same price from May 2000 through

mid-January 2002.” The Company also disclosed that an earlier restatement in its previously

released 2001 10-K actually reflected the elimination of $3.4 billion of previously reported

revenue and expenses for the first three quarters of 2001. CMS further disclosed, for the first

time, that, with regard to 2000, an additional $1 billion would have to be restated to eliminate

revenues and expenses associated with the Company’s round-trip trading during that year.

20. Also on May 15, 2002, Kelly Farr, a spokesman for CMS stated: “[w]e admit the

mistake, and decided to go to a more conservative method of accounting for 2001. We looked at

the accounting treatment that we had for round–trip trades and decided that it would be better not

to do those.” Alejandro Bodipo-Memba, CMS Inc. Admits to Inflating Sales, Detroit Free Press,

May 16, 2002.


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21. Reaction to the foregoing disclosures was swift and severe. For example, a

Reuters article, dated May 15, 2002, entitled, “CMS Admits to $4.4 billion Worth of Bogus

Power Trades,” stated that CMS admitted it had entered into the subject round-trip trades “in an

attempt to become a leading energy trader.” Another Reuters article, dated May 15, 2002,

entitled, “For Accountants It’s Clear, Wash Trades Are Illegal,” stated:

“Recording revenues from round-trip trades would be a species of fraud because they’re overstating revenues,” said Robert Waxman, a former partner at Deloitte & Touche . . .

Accounting experts . . . said the illegality of wash trading boils down to the basic tenet of financial reporting: You don’t book revenue from a sale that lacks substance.

(Emphasis added). Commenting on additional round-trip trading which took place

between CMS and Reliant during the fourth quarter of 2000, Platt’s Power Market Week

stated that such trades “accounted for 90% of CMS’s quarterly sales, boosting its sales

volume from less than 3 million MWh to 22.1 million MWh. In that quarter, the CMS

unit ranked 18th among wholesale power sellers; without the Reliant transactions, it

would have ranked 50th.” (Emphasis added).

22. As further stated by William L. Massey, Commissioner of FERC, in a speech on

August 19, 2002:

[T]he disclosure of sham round trip trading by several market participants, coupled with highly questionable accounting practices, has severely eroded investor confidence in many entities that engage in trading of gas or electricity. All of this funny business has called into question the integrity of energy marketing and trading. Whether this is fair or not is the subject of debate, but damage has been done. Many states have backed away from their restructuring plans. Energy trading stocks have plummeted on Wall Street.

(Emphasis added).


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23. Moreover, on February 24, 2003, in the Congressional Record, Senator Dianne

Feinstein (a member of the Senate Energy and Natural Resources Committee) made the

following statement:

Dynegy, Duke Energy, El Paso, Reliant Resources, CMS, and Williams all admitted engaging in false “round-trip” or “wash” trades.

What is a “round-trip” or “wash” trade, one might ask? “Round-trip” trades occur when one firm sells energy to another and then the second firm simultaneously sells the same amount of energy back to the first company at exactly the same price. No commodity ever changes hands. But when done on an exchange, these transactions send a price signal to the market and they artificially boost revenue for the company. Fraud again.

* * *

[C]MS Energy announced 80 percent of its trade[s] in 2001 were “round trip” trades. That means 80 percent of all their trades that year were bogus trades where no commodity changed hands, and yet the balance sheets added revenue. If that isn’t fraudulent, I do not know what is.

108th CONG. REC. S2567 (FEB. 24, 2003) (emphasis added).

24. Subsequent admissions by the Company further support the allegations set forth

herein. Specifically, on May 24, 2002, the Company announced that Defendant McCormick had

resigned as Chairman and Chief Executive Officer of CMS. McCormick admitted that “[t]here

have been significant mistakes in execution.” In the same announcement, the Company stated

that it had set up a special committee to investigate the Company’s round-trip trades (the

“Special Committee” or “Committee”) and that it had been served with a subpoena from the U.S.

Attorney’s Office for the Southern District of New York in connection with such trading. The

Company further announced that it was expecting a subpoena from the U.S. Attorney’s Office

for the Southern District of Texas. Ultimately, the Special Committee concluded on November

4, 2002, that the Company’s round-trip trading was “undertaken to raise [CMS-MST]’s profile as

an energy marketer with the goal of enhancing its ability to market its services” and “was an ill-

considered, inappropriate marketing practice that is unacceptable.”


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25. As a result of the round-trip trading activities described herein, the Company

remains the subject of a criminal investigation by the United States Department of Justice.

26. As the close of the market on May 25, 2004, CMS common stock traded at $8.30

per share.

III. JURISDICTION AND VENUE

27. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §§ 1331, 1337 and 1367, and Section 27 of the Securities Exchange Act [15 U.S.C. §

78aa].

28. The claims asserted herein arise under and are pursuant to Sections 10(b) and

20(a) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78t(a)], and Rule 10b-5 promulgated

thereunder by the SEC [17 C.F.R. § 240.10b-5].

29. Venue is proper in this District pursuant to Section 27 of the Exchange Act [15

U.S.C. § 78aa] and 28 U.S.C. § 1391(b). Many of the acts alleged herein, including the

preparation and dissemination to the investing public of the materially false and misleading

statements at issue, occurred in substantial part in this District, where CMS has its principal

place of business.

30. In connection with the acts, transactions and conduct alleged herein, Defendants,

directly or indirectly, used the means and instrumentalities of interstate commerce, including, but

not limited to, the United States mails, interstate telephone communications and the facilities of

national securities exchanges and markets. The following charts indicate particularly significant

events that took place prior to and during the Class Period, including Defendants’ false and

misleading statements and subsequent disclosures, combined with a graph of the Company’s

stock price:


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CMS 2000

$-

$5.00

$10.00

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/200

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2000

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/200

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2000

8/14

/200

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/200

0

8/28

/200

0

9/4/

2000

9/11

/200

0

9/18

/200

0

9/25

/200

0

10/2

/200

0

10/9

/200

0

10/1

6/20

00

10/2

3/20

00

10/3

0/20

00

11/6

/200

0

11/1

3/20

00

11/2

0/20

00

11/2

7/20

00

12/4

/200

0

12/1

1/20

00

12/1

8/20

00

12/2

5/20

00

August 3, 2000CMS reports Second Quarter Earnings per Share of $0.72. In addition, ts operating revenue for the quarter is $1,599 million.

August 17, 2000CMS files PEPs Prospectus offering 8.8 million PEPs units. PEPs close trading on the day at $25 per unit.

October 25, 2000 (Beginning of Class Period) CMS announces consolidated operating revenues totaling $2.4 billion, up 63% from $1.47 in same period in 1999. This was due primarily to increased oil and gas, pipeline and lower margin energy revenues.


14

CMS 2001

$-

$5.00

$10.00

$15.00

$20.00

$25.00

$30.001/

2/20

01

1/16

/200

1

1/30

/200

1

2/13

/200

1

2/27

/200

1

3/13

/200

1

3/27

/200

1

4/10

/200

1

4/24

/200

1

5/8/

2001

5/22

/200

1

6/5/

2001

6/19

/200

1

7/3/

2001

7/17

/200

1

7/31

/200

1

8/14

/200

1

8/28

/200

1

9/11

/200

1

9/25

/200

1

10/9

/200

1

10/2

3/20

01

11/6

/200

1

11/2

0/20

01

12/4

/200

1

12/1

8/20

01

January 24, 2001 CMS Energy reports 4th Q. and year 2000 earnings per share of $2.53. The Company’s higher earnings were largely due to strong utility electric and gas sales, independent power sales and marketing and trading profits. Energy marketing and trading operating earnings were increased by more than three times, from $4 million in 1999 to $14 million in 2000. PEPS close trading at $26.188 per unit.

August 1, 2001 CMS Energy announces second quarter EPS of $0.40. Operating income of the marketing, service and trading business was $51 million for the second quarter, up from $0.4 million in the second quarter of 2000. PEPS close trading at $26.81 per unit. October 26, 2001

CMS Energy announces sales by the Company were up largely on increased lower margin energy marketing and trading transactions. Revenue for the quarter rose 29% to $3 billion, compared with $2.3 billion in the 3rd Quarter of 2000. PEPS close trading on previous day at $25.03 per unit.


15

CMS 2002

$-

$5.00

$10.00

$15.00

$20.00

$25.001/

2/20

02

1/16

/200

2

1/30

/200

2

2/13

/200

2

2/27

/200

2

3/13

/200

2

3/27

/200

2

4/10

/200

2

4/24

/200

2

5/8/

2002

5/22

/200

2

6/5/

2002

6/19

/200

2

7/3/

2002

7/17

/200

2

7/31

/200

2

8/14

/200

2

8/28

/200

2

9/11

/200

2

9/25

/200

2

10/9

/200

2

10/2

3/20

02

11/6

/200

2

11/2

0/20

02

12/4

/200

2

12/1

8/20

02

May 9, 2002 Wall Street Journal article reveals that the SEC is looking into allegations that Dynergy and CMS entered into two round trip trades valued at $1.7 billion on CMS's online energy trading system.

May 10, 2002 CMS announced that its trades with Dynergy were being looked into by federal regulators.

June 12, 2002 Andersen disavows its year end 2000 and 2001 audits of CMS Energy.

November 4, 2002 CMS announce results of the special committee investigation. PEPS close trading at $15.50 per unit.

June 26, 2002CMS announces its MST division will eliminate its speculative energy trading business line and cut its work force by 50 positions, or 25%. PEPS close trading at $17.25 per unit.

January 7, 2002 CMS Energy announced that it now sees its operating earnings to be $1.35 to $1.40 per share, down from its previous estimates by $0.35 per share. CMS attributed its shortfall to significantly warmer than normal weather on its Michigan gas distribution facility. It, however, reaffirmed its outlook of $2.00 to $2.05 per share for earnings in 2002. PEPS close trading on the day at $26.50 per unit.

April 23, 2002 CMS Energy announced that its Board of Directors has decided to change auditors from Andersen to audit its financial statements in 2002. Andersen’s engagement with CMS will end following its review of the Company’s 1st Quarter financials. PEPS close trading the previous day at $25.45 per unit.

May 15, 2002 CMS announced that it is cooperating with the SEC probe and announces the results of its internal probe. PEPS close trading the next day at $23.40 per unit.

May 24, 2002 McCormick steps down as CEO of CMS Energy.


16

IV. PARTIES

1. Plaintiffs 31. At all times during the Class Period, Lead Plaintiff Andover was one of

the largest institutional trading firms in the country, with over 30 branch offices, and was

a fully reporting member of the National Association of Securities Dealers, managed by

seasoned professionals with over 60 years of collective experience in the securities

industry. During the Class Period, Andover purchased shares of CMS common stock and

was damaged thereby.

32. Lead Plaintiff Steiger purchased shares of CMS common stock during the

Class Period and was damaged thereby.

33. By Order dated November 14, 2002, the Court appointed Andover and

Steiger as Lead Plaintiffs for the Class.

34. At the time Plaintiffs acquired CMS securities, they were without

knowledge of the facts concerning the false and misleading financial statements filed by

Defendants with the SEC and otherwise published in the markets. Plaintiffs have

sustained substantial damage as a direct and proximate result of Defendants’ violations of

the securities laws.

2. Defendants 35. Defendant CMS is a corporation organized under the laws of the State of

Michigan, with its principal executive offices located in Dearborn, Michigan. CMS is an

energy holding company operating through subsidiaries in the United States and in

selected markets around the world. Its two principal subsidiaries are Consumers and

CMS Enterprises Company (“Enterprises”). Consumers is a public utility that provides

natural gas and/or electricity to almost 6 million of Michigan's 10 million residents and


17

serves customers in all 68 of the state's Lower Peninsula counties. Enterprises, through

subsidiaries, is engaged in several energy businesses in the United States and in selected

international markets. CMS trades on the New York Stock Exchange under the ticker

symbol CMS.

36. [Paragraph deleted in accordance with the Court’s Prior Orders.]

37. Set forth below are individual persons who are named as Defendants

herein.

38. Defendant William T. McCormick, Jr. (“McCormick”) was, at all relevant

times, CMS’s Chairman of the Board of Directors, Chief Executive Officer (“CEO”) and

President of the Company. McCormick also served as Chairman of the Boards of

Directors of Consumers and Enterprises until May 24, 2002. McCormick resigned as

President of CMS on May 24, 2001 and resigned as CEO on May 24, 2002, with a $4

million severance package. McCormick remained employed by the Company as a

consultant until June 1, 2004. McCormick signed the following annual reports and

additional documents which the Company filed with the SEC during the Class Period:

December 15, 2000 Shelf Registration Statement, December 22, 2000 Shelf Registration

Statement, 2000 10-K, 2000 Annual Report, December 12, 2001 Registration Statement,

2001 10-K, and 2001 Annual Report. During the Class Period, while in possession of

adverse undisclosed information about the Company, McCormick sold 40,000 shares of

his CMS common stock for $1,002,768.00 in illegal insider trading proceeds.

McCormick’s insider selling during the Class Period is shown below:

CMS Defendant William T. McCormick, Jr. Quarterly Shares Sold (Dollar Volume)

May 2000 – March 2003


18

$-

$5

$10

$15

$20

$25

$30

M-00 A-00 N-00 F-01 M-01 A-01 N-01 F-02 M-02 A-02 N-02 F-03

Dol

lars

per

Sha

re

$-

$50

$100

$150

$200

$250

Proceeds (Thousands)

CMS Stock P i

Insider Sales

Summary of Insider Sales:Class Period Shares Sold: 40,000Proceeds from Sales: $1,002,768

39. Defendant David W. Joos (“Joos”) was, at all relevant times, President and

Chief Operating Officer (“COO”) of CMS and Consumers. Joos also served as President

and COO of Enterprises during the relevant period. Prior to serving as President of CMS

and Enterprises, Joos served as Executive Vice President of both companies since 2000.

As Executive Vice President, President and COO of Enterprises, Joos directly managed

the electric utility, independent power production, international energy distribution and

marketing, services and trading operations of the Company. Joos also served on the

Boards of Directors of CMS and Consumers since 2001, and became Chairman of the

Board of Enterprises in 2003. Joos signed the following annual report and additional

documents which the Company filed with the SEC during the Class Period: December

12, 2001 Registration Statement, 2001 10-K, and 2001 Annual Report.


19

40. Defendant Alan M. Wright (“Wright”) served as CMS’s Executive Vice

President, Chief Financial Officer and Chief Administrative Officer from May 2001 to

August 2002. Prior to May 2001, Defendant Wright was CMS’s Vice President and

Chief Financial Officer. As CMS’s principal financial officer, Defendant Wright signed

the following annual reports and additional documents which CMS filed with the SEC

during the Class Period: October 25, 2000 8-K, Third Quarter 2000 10-Q, September 11,

2000 Registration Statement, October 6, 2000 Registration Statement, December 15,

2000 Shelf Registration Statement, December 22, 2000 Shelf Registration Statement,

February 23, 2001 8-K, 2000 10-K, 2000 Annual Report, First Quarter 2001 10-Q,

August 1, 2001 8-K, Second Quarter 2001 10-Q, October 26, 2001 10-Q, Third Quarter

2001 10-Q, December 12, 2001 Registration Statement, 2001 10-K, 2001 Annual Report,

April 22, 2002 8-K, May 1, 2002 8-K, First Quarter 2002 10-Q, August 7, 2002 8-K, and

Second Quarter 2002 10-Q. Upon his departure from CMS in August of 2002, Wright

received a $1.65 million severance package. During the Class Period, while in

possession of adverse undisclosed information about the Company, Wright sold 15,640

shares of his CMS common stock for $449,658.60 in illegal insider trading proceeds.

Wright’s insider selling during the Class Period is shown below:


20

CMS Defendant Alan M. Wright Quarterly Shares Sold (Dollar Volume)

May 2000 – March 2003

$-

$5

$10

$15

$20

$25

$30

M-00 A-00 N-00 F-01 M-01 A-01 N-01 F-02 M-02 A-02 N-02 F-03

Dol

lars

per

Sha

re

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900


CMS Stock i

Insider Sales

Summary of Insider Sales:Class Period Shares Sold: 32,740Proceeds from Sales: $945,558


42. Defendant Kenneth L. Way (“Way”) served as a director of CMS and

Consumers at all relevant times since 1998 and served as Chairman of the Special

Committee, which was organized in May 2002 to investigate round-trip trades by the

Company’s CMS-MST division. Way also chaired the Finance and Pension Committee

and served on the Audit, Organization and Compensation and Executive Committees of

CMS and Consumers. Way signed the following annual reports and additional


15, 2000 Shelf Registration Statement, December 22, 2000 Shelf Registration Statement,


21

2000 10-K, 2000 Annual Report, December 12, 2001 Registration Statement, 2001 10-K,

and 2001 Annual Report.

43. Defendant Earl D. Holton (“Holton”) was a director of CMS and

Consumers at all relevant times since 1989, and served on the Special Committee. In

addition, he served as the chair of the Governance and Nominating Committee, and

served on the Organization and Compensation Committees, the Environmental and

Corporate Responsibility Committees and the Executive Committees of CMS and

Consumers. Holton also served as Chairman of the Board of Steelcase, Inc., of which

Defendant Joos ws also a board member. Holton signed the following annual reports and




2001 10-K, and 2001 Annual Report.

44. Defendant Kathleen R. Flaherty (“Flaherty”) was a director of CMS and

Consumers at all relevant times since 1995. Flaherty also served on the Special

Committee, and served on the Finance and Pension Committees, the Governance and

Nominating Committees, and the Environmental Corporate Responsibility Committees of

CMS and Consumers. Flaherty signed the following annual reports and additional



2000 10-K, 2000 Annual Report, 2001 10-K, and 2001 Annual Report.

45. Defendant Kenneth Whipple (“Whipple”) was Chairman of the Board and

CEO of CMS at all relevant times since 2002. Prior that time, he served as a director of


22

CMS since 1993. Whipple has served as a board member of Consumers since 1993 and

was a member of the Special Committee. Whipple also served as Chair of the Executive

Committees of CMS and Consumers. Whipple signed the following annual reports and






47. Defendant John M. Deutch (“Deutch”) was a director of CMS and of

Consumers at all relevant times since 1997. Deutch also served on the Audit Committees

of CMS and Consumers throughout the Class Period. Deutch signed the following

annual reports and additional documents which the Company filed with the SEC during

the Class Period: December 15, 2000 Shelf Registration Statement, December 22, 2000

Shelf Registration Statement, 2000 10-K, 2000 Annual Report, December 12, 2001

Registration Statement, and 2001 10-K.

48. Defendant James J. Duderstadt (“Duderstadt”) was a director of CMS and

Consumers at all relevant times since 1993. Duderstadt also served on the Audit

Committees of CMS and Consumers throughout the Class Period. Duderstadt currently

serves on the Environmental and Corporate Responsibility Committees, the Governance

and Nominating Committees, and the Finance and Pension Committees of CMS and

Consumers. Duderstadt signed the following annual reports and additional documents

which the Company filed with the SEC during the Class Period: December 15, 2000

Shelf Registration Statement, December 22, 2000 Shelf Registration Statement, 2000 10-


23

K, 2000 Annual Report, December 12, 2001 Registration Statement, 2001 10-K, and

2001 Annual Report.

49. Defendant W. U. Parfet (“Parfet”) was a director of CMS and of

Consumers at all relevant times since 1991. Parfet also chaired the Audit Committees of

CMS and Consumers, and served in that capacity throughout the Class Period. Parfet

also served on the Executive, Organization and Compensation, and Financial and Pension

Committees of CMS and Consumers. Parfet signed the following annual reports and





50. Defendant Percy A. Pierre (“Pierre”) was a director of CMS and of

Consumers at all relevant times since 1990. Pierre served on the Audit Committees of

CMS and Consumers throughout the Class Period. Pierre also served on the Governance

and Nominating, Finance and Pension, and Executive Committees of CMS and

Consumers, and chaired the Environmental and Corporate Responsibility Committees of

CMS and Consumers. Pierre signed the following annual reports and additional



2000 10-K, 2000 Annual Report, December 12, 2001 Registration Statement, 2001 10-K,

and 2001 Annual Report.

51. Defendant John B. Yasinsky (“Yasinsky”) was a director of CMS and of

Consumers at all relevant times since 1994. Yasinsky also served on the Audit


24

Committees of CMS and Consumers at all relevant times since 2000. In addition,

Yasinsky served on the Executive, Environmental and Corporate Responsibility

Committees of CMS and Consumers and chaired the Organization and Compensation

Committees of CMS and Consumers. Yasinsky signed the following annual reports and






53. Defendant Hopper served during the Class Period as Senior Vice

President, Chief Accounting Officer and Controller of CMS and Enterprises and was

responsible for CMS’s financial accounting and financial reporting. Hopper was later

appointed to a non-officer position as Senior Vice President of Information Technology

and Administrative Services for CMS and Consumers. Defendant Hopper signed the

following annual reports and additional documents which the Company filed with the

SEC during the Class Period: December 15, 2000 Shelf Registration Statement,

December 22, 2000 Shelf Registration Statement, 2000 10-K, 2000 Annual Report,

December 12, 2001 Registration Statement, 2001 10-K, and 2001 Annual Report. During

the Class Period, while in possession of adverse undisclosed information about the

Company, Hopper sold 2,000 shares of his CMS common stock for $52,835.00 in illegal

insider selling proceeds, as shown on the chart below. On March 17, 2004, CMS

announced that Hopper would be released, effective immediately after the SEC

announced it had filed a civil enforcement action against him. Throughout the Class


25

Period, Hopper served as Senior Vice President, Chief Accounting Officer and Controller

of CMS and Enterprises.


26

CMS Defendant Preston D. Hopper Quarterly Shares Sold (Dollar Volume)

May 2000 – March 2003

$45$44

$-

$5

$10

$15

$20

$25

$30

M-00 A-00 N-00 F-01 M-01 A-01 N-01 F-02 M-02 A-02 N-02 F-03

Dol

lars

per

Sha

re

$-

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50


Summary of Insider Sales:Class Period Shares Sold: 2,000Proceeds from Sales: $52,835

CMS Stock Price

Insider Sales

54. Defendants McCormick, Joos, Wright, Deutch, Duderstadt, Parfet, Pierre,

Yasinsky, Hopper, Way, Holten, Flaherty and Whipple are collectively referred to herein

as the “Individual Defendants.”

3. Control Person Liability 55. The Individual Defendants are liable as direct participants with respect to

the wrongs complained of herein. In addition, the Individual Defendants, by reason of

their status as senior executive officers and/or directors were “controlling persons” within

the meaning of Section 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


27

positions of control, the Individual Defendants were able to and did, directly or indirectly,

control the conduct of CMS’s business.

56. Specifically, because of their positions with CMS, the Individual

Defendants possessed the power and authority to control the contents of CMS’s annual

and quarterly reports, press releases and presentations to securities analysts, money and

portfolio managers and institutional investors, i.e., the market. Each of the Individual

Defendants, by reason of their respective management or board positions, had the ability

and opportunity to review copies of the Company’s SEC filings, reports and press

releases alleged herein to be misleading, prior to, or shortly after their issuance, and to

prevent their issuance or cause them to be corrected.

57. By virtue of their positions, the Individual Defendants had access to the

material adverse non-public information concerning the business and financial condition

of the Company. Indeed, the Company’s own risk management policies during the Class

Period demonstrate that the Individual Defendants directly managed or, at a minimum,

were aware of, the various risk levels associated with the Company’s operations,

including its round-trip trading positions in its MST division.

58. As set forth in the Company’s 2000 Annual Report and repeated in every

quarterly filing of CMS through the first quarter of 2002:

CMS’s derivative [trading] activities are subject to the direction of the Executive Oversight Committee, consisting of certain members of CMS’s senior management, and its Risk Committee, consisting of CMS business unit managers. The goal of the risk management policy is to measure and limit CMS’s overall energy commodity risk by implementing an enterprise-wide policy across all CMS business units . . . . The role of the Risk Committee is to review the corporate commodity position and ensure that net corporate exposures are within the economic risk tolerance levels established by the Board of Directors.


28

(Emphasis added).

59. Moreover, as stated in the Company’s quarterly reports for the first quarter

of 2000 through the first quarter of 2002:

CMS and its subsidiaries rely on the experience and judgment of senior management and traders to revise strategies and adjust positions as they deem necessary.

In light of their senior positions with the Company and the policies set forth above, the Individual Defendants clearly had access to internal corporate documents, including CMS’s general ledger and internal reports relating to the wholesale energy trading business’ revenue and expenses. These materials included VAR Reports and other information regularly provided to senior management and the Board of Directors in connection therewith, in their capacity as the officers and/or directors of CMS. Indeed, as stated in the Company’s First Quarter 2001 10-Q and repeated in the Second Quarter, Third Quarter and year-end 2001 reports,

CMS, through its subsidiary [CMS-MST], engages in trading activities. [CMS-MST] manages any open positions within certain guidelines which limit its exposure to market risk and requires timely reporting to management of potential financial exposure. These guidelines include statistical risk tolerance limits using historical price movements to calculate daily value at risk measurements.

(Emphasis added).

60. Based upon their respective positions and access to material non-public

information, each of the Individual Defendants knew or recklessly disregarded that the

adverse facts specified herein had not been disclosed to, and were being concealed from

the public, and that the positive representations which were being made were then

materially false and misleading.

4. Group Pleading 61. The Individual Defendants are also liable for the false statements in SEC

filings and press releases as such statements represent “group-published” information,

disseminated to the public as a result of the collective actions of the Individual


29

Defendants. It is appropriate to treat the Individual Defendants as a group and to

presume that the false and misleading information conveyed in the public filings, press

releases and other publications, as alleged herein, are the collective actions of the

narrowly defined group of Individual Defendants identified above. The Individual

Defendants, by virtue of their high level positions within CMS, directly participated in

the management of the Company, were directly involved with the day-to-day operations

and were privy to confidential non-public information concerning the wholesale energy

trading operations of CMS, as alleged herein. The Individual Defendants were involved

in drafting, reviewing and/or dissemination the false and misleading financial statements

that were issued by CMS, approved or ratified these statements and, therefore, adopted

them as their own.

5. Duties of the Individual Defendants 62. Each of the Individual Defendants had the duty to exercise due care and

diligence and the duty of full and candid disclosure of all material facts relating to the

financial reporting and results of operations of CMS. To discharge their duties, these

Defendants were required to exercise reasonable and prudent supervision over the

dissemination of information concerning the business, operations and financial reporting

of CMS. By virtue of such duties, these officers and directors were required, inter alia,

to:

a. conduct and supervise the business of CMS in accordance with

federal laws;

b. supervise the preparation of the Company’s SEC filings and to

approve any reports concerning the financial reporting and results

of CMS;


30

c. ensure that CMS established and followed adequate internal

controls;

d. create, enforce and comply with a corporate policy prohibiting

misuse of proprietary corporate information by corporate officers

and directors by trading in CMS stock based on material non-

public information; and refrain from obtaining personal benefit, at

the expense of the public purchasers of CMS securities, by

misusing proprietary non-public information.

63. As officers, directors and/or controlling persons of a publicly-held

company which is registered with the SEC under the federal securities laws and whose

common stock is traded on the New York Stock Exchange (“NYSE”), and governed by

the provisions of the federal securities laws, the Individual Defendants each had a duty to

promptly disseminate accurate and truthful information with respect to the financial

reporting and the publicly reported quarterly annual results of operations of CMS, so that

the market price of the Company’s publicly traded securities would be based upon

truthful, accurate and complete information.

64. Under the rules and regulations promulgated by the SEC under the

Exchange Act, specifically Item 303 of Regulation S-K, the Individual Defendants also

had a duty to report all trends, demands or uncertainties that were reasonably likely to

impact CMS’s (1) revenues; (2) expenses; and (3) previously reported financial

information such that it would not be indicative of future operating results. As set forth

more fully below, the representations of the Individual Defendants during the Class

Period violated these specific requirements and obligations.

V. FRAUDULENT SCHEME

65. CMS and the Individual Defendants are liable as participants in a

fraudulent scheme and course of conduct that operated as a fraud or deceit on purchasers


31

of CMS securities by disseminating materially false and misleading statements and/or

concealing material adverse facts. The scheme involved: (i) deceiving the investing

public regarding the business, operations and management of CMS, including its MST

division; (ii) permitting CMS to engage in the public offering of securities described ¶

379, below; (iii) permitting Defendants McCormick, Wright and Hopper to sell a total of

74,740 shares of their CMS common stock for $2,001,161.60 in illegal insider trading

proceeds; and (iv) causing Plaintiffs and members of the Class to purchase CMS’s

common stock and other securities at artificially inflated prices. In April 2001, CMS

scheduled a special meeting of its Board of Directors in Houston to showcase its

operations there, including an informational session about MST that Pallas presented.

Pallas was President and COO of CMS-MST from November 1999 until February 2002.

She was subsequently promoted to President and CEO of CMS-MST, and served in that

position until her resignation on May 16, 2002. At all relevant times, Pallas was in

charge of energy trading at CMS. CMS hired Pallas while she was working at Reliant,

where she served as Senior Vice President from 1997 until November 1999. Prior to that

time, Pallas was employed by Basis Energy as Senior Vice-President since 1992. As set

forth in the Company’s April 22, 2002 Proxy Statement on Schedule 14A, Pallas received

a bonus of $700,000 based upon the performance of the MST division in 2001. Before

the April 2001 special meeting, Defendant Hopper participated in a conference call

concerning the Company’s first quarter 2001 results with the Andersen engagement

partner and the CMS Audit Committee chairman [Defendant Parfet]. During her

presentation to CMS’s Board of Directors and members of CMS senior management at

the April 2001 special meeting in Houston, Pallas confirmed to the Board and


32

management that CMS’s round-trip trading was being implemented as a “ploy” to elevate

the Company’s industry rankings. Pallas described the round-trip trades as a marketing

ploy that would enable MST to scale the industry rankings and attract more business.

Accordingly, at least as early as April 2001, all members of the Boards of Directors and

Audit Committees of CMS and Consumers who were present at the April 2001 meeting

were aware of and participated in the Company’s fraudulent round-trip trading scheme.

VI. CLASS ACTION ALLEGATIONS

66. Plaintiffs bring this action as a class action pursuant to Federal Rule of

Civil Procedure 23(a) and (b)(3) on behalf of a class (the “Class”), consisting of all those

who purchased the securities of CMS during the Class Period (October 25, 2000 through

and including March 31, 2003) and who were damaged thereby. Excluded from the Class

are Defendants, the officers and directors of the Company, at all relevant times, members

of their immediate families and their legal representatives, heirs, successors or assigns

and any entity in which Defendants have or had a controlling interest.

67. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, CMS common shares were actively traded

on the NYSE. While the exact number of Class members is unknown to Plaintiffs at this

time and can only be ascertained through appropriate discovery, Plaintiffs believe that

there are hundreds or thousands of members in the proposed Class. Record owners and

other members of the Class and 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.


33

68. Plaintiffs’ 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.

69. Plaintiffs will fairly and adequately protect the interests of the members of

the Class and have retained counsel competent and experienced in class and securities

litigation.

70. Common questions of law and fact exist as to all members of the Class

and predominate over any questions solely affecting individual members of the Class.

Among the questions of law and fact common to the Class are: (a) whether the federal

securities laws were violated by Defendants' acts as alleged herein; (b) whether

statements made by Defendants to the investing public during the Class Period

misrepresented or omitted material facts about the business and operations of CMS; (c)

whether the Individual Defendants are liable as control persons under the federal

securities laws; and (d) whether the members of the Class have sustained damages and, if

so, the proper measure of such damages.

71. 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.

VII. FRAUD ON THE MARKET PRESUMPTION

72. At all relevant times, the market for CMS’s publicly traded securities was

an efficient market for the following reasons, among others:


34

a. the common stock of CMS met the requirements for listing, and

were listed and actively traded on the NYSE, a highly efficient

market;

b. as a regulated issuer, CMS filed periodic public reports with the

SEC;

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;

d. the market reacted to public information disseminated by CMS;

e. CMS was followed by several securities analysts employed by

major brokerage firms who wrote reports that were distributed to

the sales force and certain customers of their respective brokerage

firms. Each of these reports was publicly available and entered the

public marketplace;

f. the material misrepresentations and omissions alleged herein

would tend to induce a reasonable investor to misjudge the value

of CMS securities; and without knowledge of the misrepresented

or omitted material facts, Plaintiffs and the other members of the

Class purchased or otherwise acquired CMS securities between the

time Defendants made the material misrepresentations and

omissions and the time the truth was fully revealed, during which

time the price of CMS securities was inflated by Defendants’

misrepresentations and omissions.

73. 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 securities. Under these circumstances, all

purchasers of CMS securities during the Class Period suffered similar injury through their


35

purchase of CMS securities at artificially inflated prices and a presumption of reliance

applies.

74. In addition to the foregoing, all Class members are entitled to a

presumption of reliance because, as more fully alleged below, Defendants omitted,

throughout the Class Period, to disclose material information regarding CMS’s business,

financial status, financial results and business prospects.

VIII. THE SAFE HARBOR PROVISION OF THE PSLRA IS INAPPLICABLE

75. The statutory safe harbor provided for forward-looking statements under

the Private Securities Litigation Reform Act of 1995 (“PSLRA”), which applies to

forward-looking statements, does not apply to any of the allegedly false statements

pleaded in this Complaint. Many of the specific statements pleaded herein were not

identified as "forward-looking statements" when made. To the extent there were 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 materially false when made.


36

IX. BACKGROUND TO THE CLASS PERIOD

1. Description of CMS 76. Formed in Michigan in 1987, CMS is an energy holding company

operating through subsidiaries in the United States and in selected markets around the

world. The Company’s two principal subsidiaries are Consumers and Enterprises.

Consumers is a public utility, which provides natural gas and/or electricity to almost 6

million of Michigan's 10 million residents. Enterprises, through subsidiaries, is engaged

in several energy businesses in the United States and in selected international markets,

including among others the marketing, services and trading operations of the Company.

77. Formed in Michigan in 1968, Consumers is the successor to a corporation

which was organized in Maine in 1910 and conducted business in Michigan from 1915 to

1968. In 1997, Consumers, formerly named Consumers Power Company, changed its

name to Consumers Energy Company to reflect its integrated electricity and gas

businesses.

78. Based on its number of customers, Consumers' electric utility operations,

if independent, would be the thirteenth largest electric utility company in the United

States. Consumers' electric utility operations include the generation, purchase,

distribution and sale of electricity. Consumers' current electric utility customer base

includes a mix of residential, commercial and diversified industrial customers.

2. Marketing, Services and Trading [MST] Division 79. CMS-MST was formed in 1996 and is the surviving entity of a 1997

merger with CMS Gas Marketing Company, which was originally formed in 1987.

CMS-MST was created in order to provide gas, oil, coal and electric marketing, risk

management and energy management services to industrial, commercial, utility and


37

municipal energy users throughout the United States and internationally. Its customers

included, among others, the University of Utah, Illinois State University, EnerStar Power

Corporation, as well as the Michigan South Central Power Agency.

80. Before 2000, MST 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 MST, Pallas. CMS, which operates the largest public utility in

Michigan, was forecasting double-digit earnings growth at the time, based chiefly on the

anticipated activities of CMS's unregulated business units, including MST. At the same

time, CMS publicly promoted MST as the primary vehicle for CMS's future growth.

After hiring the new chief executive to expand MST's business, CMS moved MST's

trading operations from Michigan to Houston, the hub of the energy-trading industry.

MST developed a strategy that emphasized marketing to cooperatives and municipalities

in the hope of landing long-term contracts for the sale of electric power.

81. From its inception, MST has purportedly grown dramatically. In 1999,

MST acquired an energy services company in Kansas City, Missouri and an independent

energy consulting firm in Toronto, Canada. These acquisitions expanded MST's presence

in 22 cities in the United States and in Oakville, Montreal and Vancouver, Canada. CMS

has continually attempted to use MST to enhance performance of the Company’s core

assets, such as its gas reserves and power plants.

82. MST’s operations, first and foremost, involved the trading of liquid

natural gas and electricity derivative contracts. In fact, it was the purported success of

the trading operations of MST that propelled CMS to the ranks of the top twenty U.S

natural gas an power marketers, a figure often highlighted by the Company. CMS looked


38

to MST as one of the few sources of dynamic growth for the Company. Indeed, in a

letter to CMS shareholders from Defendants McCormick and Joos, contained in the 2001

Annual Report, these Defendants state: “we believe that the earnings from [CMS’s

integrated asset] base can be further enhanced by our growing and very successful

marketing, services and trading company.” (Emphasis added).

3. Background To Round-Trip Trading 83. Round-trip or wash trades are generally defined as nearly simultaneous,

pre-arranged buy-sell trades of energy with the same counter-party, at the same price and

volume, and over the same term, resulting in neither profit nor loss to either transacting

party. FERC staff has maintained that the intent to perform a round trip trade has to be

present for an actual round trip trade to occur. The following are examples of how round

trip trades can enhance a company’s position in the market:

• Inflate Revenues

Since round-trip trades involve both a “buy” and a “sell”, the revenue that

is received as a result of the “sell” part of the trade is reported as part of total

revenues on a company’s earnings statement. While there is an offsetting expense

that gets reported because of the “buy” part of the trade, there are definite benefits

to a company demonstrating substantial increase in revenues even if there are

offsetting expenses. Especially in a newly formed business, substantial increases

in revenues can set investors expectations that the business model is successful.

They make the company appear larger and more stable and can imply that the

company has substantial borrowing power.

● Increase Trade Volume


39

Round trip trades increase trade volume for energy trading companies.

During the energy boom in 1999 and 2000 energy companies distinguished

themselves by being able to show high trade volumes. Enron, for example, made

continuous headlines by boasting that it had by far the largest trade volume of any

energy marketer, and Wall Street acknowledged that fact when listing Enron as a

“strong buy” in their ratings. High trade volumes during the 1999 through 2001

period were generally considered a sign of strength since they implied doing

business with a high number of counter parties and like increased revenues, were

a sign to Wall Street that the newly developed business model was working.

● Increase the Mark to Market Value of Existing Positions

When a round-trip trade is performed on an electronic exchange or with a

broker, the price the trade is executed forms a portion of the price data that the

exchange or broker will use to determine market prices and to potentially publish

market prices. In addition, the price of round-trip trades may be directly reported

to independent publications that would use these prices in developing their

forward price indices for that day. This influence is even greater in markets

where products are very illiquid. If a round-trip trade at a price opposite of the

trader’s current position, the trade can positively influence the value of the

trader’s current open position. For example if a trader bought a forward product

at $20/MWh on Monday and then the following day performs a round-trip trade

on the same forward product at $30, their open $20 position would have increased

in value by $10. If however, the trader sold a forward product at $20/MWh on

Monday and then the following day performs a round-trip trade on the same


40

forward product at $10, their open position would again have increased in value

by $10.

A company’s open positions are typically “marked to market” at the end

of each day based on available market information or trades they performed if

there were no trades in that market for a particular day. So even if the price of the

round-trip trade is not “published’ it may serve to value the position.

To use another example, if an energy company is marking to market a ten

million MWh long position, and a round trip trade was able to increase the market

price reported at a visible reporting index by $2, the company will report a P&L

gain of $20,000,000. Investors will see this gain on earnings statements with no

offsetting loss. As a result, the company can increase its value using round-trip

trades.

● Manipulate Market Prices for Future Trades

As discussed above, a round-trip trade can impact the prices being

reported in a market, this impact can have more than just a mark to market value

for the company. For instance, if the long or short position is sold or bought back

after the round-trip trade affects the prices reported, then the mark to market profit

can become realized profit. This is similar to an illegal insider trading practice

where a broker buys or sells a commodity with his own money right before he is

about to conduct a high volume trade for that same commodity for a client,

knowing that the high volume trade will manipulate the market price one way or

the other. In this case a trader manipulates the market price with a round trip

trade to increase the profitability of a future trade.


41

4. False Price Reporting 84. False price reporting is essentially a more direct method of influencing

published prices than conducting round-trip trades. False price reporting may involve the

total fabrication of trades and prices or falsely providing prices for trades that actually

happened. The false price reporting happens through publishers of trade publications,

such as Platt’s.

85. When a power trade is reported to Platt’s, for example, Platt’s will use the

price that the power was traded at, as well as the volume of MW traded to construct an

index price that will then be published in various Platt’s publications, such as Energy

Trader, Megawatt Daily, or Power Markets Week. Many energy companies use these

index prices to settle on long-term contracts, as well as mark positions. If a company

reports a fabricated high price to Platt’s, that high price will raise the Platt’s published

index price and would benefit a company that either had a long term contract to sell

power at the index price, or a company that held a long position in the market.

86. The impacts of false price reporting are the same as those indicated under

the discussion concerning round-trip trading within the “Increase the Mark to Market

Value of Existing Positions” and “Manipulate Market Prices for Future Trades”

sections. Reporting false prices is illegal and can further deceive investors by falsely

increasing the value of the company’s positions.

X. RECENTLY OBTAINED EVIDENCE DIRECTLY SUPPORTING PLAINTIFFS’ CLAIMS

87. Since the filing of the Consolidated Complaint, Plaintiffs have obtained

additional evidence strongly supporting their allegations of Defendants’ misconduct and

scienter. Such evidence includes: documents prepared and/or produced by Andersen in


42

this litigation over Defendants’ objections; public admissions by CMS; as well as

additional commentary, as described in detail below.

Andersen Documents

88. By Order dated August 28, 2003, the Court permitted Plaintiffs to initiate

discovery of Andersen. In response to Plaintiffs’ discovery requests, Andersen has

produced documents that are highly relevant to the issues in this case, including scienter

and materiality. The recently-obtained documents constitute direct (i.e., non-

circumstantial) evidence of Plaintiffs’ allegations of scienter, materiality and other issues.

As set forth above, these documents, which are identified at Exhibit A hereto, provide

further support for Plaintiffs’ information and belief allegations and are incorporated by

reference herein. See also ¶ 391, infra.

Additional Commentary

89. In reaction to disclosures concerning CMS’s round-trip trading, portfolio

manager Joshua Kennon stated that CMS’s round trip trading activities made CMS “the

poster child for accounting abuse.” See “The Revenue That Wasn’t, How CMS

Fabricated $4.4 Billion in Revenue” (available at

http://beginnersinvest.about.com/library/weekly/aa052102a.htm). As Kennon noted:

Wall Street has been up in arms recently over the disturbing amount of revenue inflating gimmicks companies have used to distort their financial statements. The practice has invaded every industry, but energy and power companies seem to be the worst perpetrators, with CMS standing out as the poster child for accounting abuse.

* * *

How CMS Fabricated $4.4 Billion Dollars Out of Thin Air

. . . CMS management traded the same amount of energy with two of its competitors, Dynegy Inc., and Reliant Resources, on the same dates for the same price. These transactions (called "round-tripping") were


43

executed solely to boost the revenue figure the companies reported to their shareholders. In 1999 and 2000 alone, CMS recorded more than $4.4 billion dollars in revenue from meaningless transactions.

Why is this a problem? Revenue is one of the most important numbers investors and analysts look at when valuing a company. It gives a general measure of the amount of growth a company is experiencing. Although revenue doesn't always equal profit, it is considered important because it is generally assumed that the more revenue a business earns, the more potential it has for profitability (through cost cutting initiatives, etc.).

SEC Press Release Issued March 17, 2004

90. On March 17, 2004, the SEC issued a press release announcing that the

SEC had instituted civil enforcement proceedings against Pallas and Defendant Hopper

seeking, “among other things, civil money penalties and court orders barring them from

serving as officers or directors of public companies.” The March 17, 2004 SEC press

release quotes SEC Administrator Harold J. Degenhardt, as stating:

The misleading presentation of the revenues and volumes generated by the sham round-trip trades distorted the public appearance of this company’s operations, making it falsely appear a revitalized powerhouse. CMS’s failure to ensure complete and accurate financial disclosures reflects a shameful indifference to the need for transparency in the public markets. Today’s action sends another clear message that such indifference will not go unpunished.

(Emphasis added).

91. As further explained by Spencer C. Barasch, Associate District

Administrator at the SEC’s Fort Worth office: “The magnitude of [CMS’s] trading is

quite significant, and it was quite deceptive to the investing public”; moreover, “[i]t made

the company’s operation look much more successful than it was.” See Bloomberg.com,

“SEC Accuses CMS, Three Ex-Executives of Sham Trades,” dated March 17, 2004

(available at

http://quote.bloomberg.com/apps/news?pid=10000103&sid=asKKXjJuHzEc&refer=us).


44

Additional Admissions

92. The impropriety of CMS’s accounting practices has also been

acknowledged by CMS’s own compliance officer, Michael D. VanHemert, Esq., who

stated that CMS’s round trip trading “was a really stupid business decision. It was done

to enhance our ability to market our company as a player.” See Jeff Bennett, “CMS

makes its ethics longtime lawyer’s job,” March 25, 2003, Detroit Free Press website

(available at http://www.freep.com/money/business/cms25_20030325.htm). As the

Detroit Free Press noted:

The Dearborn-based natural gas and electric utility rocked shareholder confidence last year when it disclosed that some employees had participated in false energy trades known as round-trip trading and misled trade magazines when reporting gas prices.

Id.

93. Moreover, MST’s internal accounting control problems were well known

to CMS’s senior management and Board of Directors during the Class Period. As

revealed in CMS’s 2003 10-K, filed with the SEC on or about March 12, 2004:

CONTROL WEAKNESSES AT [CMS-MST]

In late 2001 and during 2002, we identified a number of deficiencies in [CMS-MST]’s systems of internal accounting controls. The internal control deficiencies related to, among other things, a lack of account reconciliations, unidentified differences between subsidiary ledgers and the general ledger, and procedures and processes surrounding our accounting for energy trading contracts, including mark-to-market accounting.

Senior management, the Audit Committee of the Board of Directors, the Board of Directors, and the independent auditors were notified of these deficiencies as they were discovered, and we commenced a plan of remediation that included replacing certain key personnel and deploying additional internal and external accounting personnel to [CMS-MST]. While a number of these control improvements and changes were implemented in late 2002, the most important ones occurred in the first quarter of 2003.


45

2003 10-K, at 63 (emphasis added) (available at

http://www.cmsenergy.com/annualreport/2003_CMS_10k.pdf).

94. Although Pallas was a key culprit in the round-trip trading scam, she acted

with the full knowledge of CMS. Indeed, according to James Munisteri, Pallas’ attorney

in this action, the round trip trading “was fully disclosed to CMS . . . .” See

Bloomberg.com, “SEC Accuses CMS, Three Ex-Executives of Sham Trades,” dated

March 17, 2004 (available at

http://quote.bloomberg.com/apps/news?pid=10000103&sid=asKKXjJuHzEc&refer=us).

XI. STATEMENTS ISSUED BY DEFENDANTS AND RELATED EVENTS

Overview

95. Throughout the Class Period, CMS and the Individual Defendants issued a

series of misstatements, and omitted to state material facts, concerning the Company’s

financial results and condition. Many of these statements concerned the operations of the

Company’s MST division, which was purportedly contributing dramatically increased

revenues quarter after quarter during the Class Period. Indeed, the press releases issued

by the Company throughout the Class Period regularly touted the success of this division

and the purported increases in revenues.

96. As described more fully below, Defendants’ statements during the Class

Period were materially false, and served to defraud investors into purchasing CMS

securities at artificially inflated prices. For example, CMS’s quarterly earnings releases

invariably contained a paragraph citing gross revenues of the Company. These revenue

figures increased dramatically each quarter, due chiefly to the round-trip trading.

However, Defendants failed to disclose in the releases the source of the increasing

revenues (i.e., round-trip trades) or the amount of the related expenses.


46

97. During the Class Period, CMS regularly 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 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 virtually every quarterly earnings

release through the year-end 2002 release, in which CMS abruptly dropped any mention

of revenues.

98. Investor presentations and quarterly earnings web-cast conference calls

during the Class Period occasionally involved discussions of MST's growth, specifically

MST's increasing revenues and trading volumes. For example, during the first quarter

2001 earnings web-cast, a CMS executive emphasized MST's planned growth. Reading

from web-cast slides that reflected graphically $4.5 billion in MST revenues, volume

increases during 2000 of 1000% and planned doubling of volumes for 2001, one

executive stated: "We’ve seen tremendous growth since we've restructured this

organization and we, as you can see for this year, see a continuation of that growth. In

the power side, our volumes increased ten fold - 2000 over 1999, we're looking at

a doubling of those volumes again this year." (Emphasis added). The referenced

volumes were principally the result of round-trip trades, which, undisclosed to the

investing public, were conducted to elevate MST's energy trading volume ranking.


47

99. As a result of Defendants’ misstatements and omissions, the prices of the

Company’s securities were artificially inflated throughout the Class Period. Ultimately,

the Company’s disclosure of its fictitious revenues through its extensive round-trip

trading (among other disclosures), caused the Company’s stock price to plummet and

investors to suffer enormous financial losses.

Materially False And Misleading Statements and Omissions In Public Filings Issued During The Class Period

100. As described below, during the Class Period, Defendants issued various

false and misleading SEC filings. See, e.g., ¶¶ 150, 166, 180, 197, 203, 217, 221, 225,

233, 237, 253, 256, and 271. Indeed, these documents separately list Consumers and

CMS as the “Registrants” or issuers of such filings.

101. Specifically, during the Class Period, the Defendants filed Forms 8-K with

the SEC during the Class Period on October 25, 2000, August 1, 2001, October 26, 2001,

February 4, 2002, May 1, 2002 and August 7, 2002. These documents, which were

explicitly issued by Consumers (as well as CMS), reported the Company’s overall

revenues and expenses, among other financial figures, for the subject time period. In

most cases, the filings attach a copy of the Company’s press release of the same day.

102. The Defendants also filed Forms 10-Q during the Class Period on

November 14, 2000, May 11, 2001, August 14, 2001, November 14, 2001, May 15, 2002,

August 14, 2002 and November 15, 2002. These documents were also issued by

Consumers (as well as CMS) and reported the Company’s overall revenues and expenses,

among other financial figures, for the subject time period.

103. Finally, the Defendants issued Forms 10-K during the Class Period on

March 23, 2001 and March 29, 2002. Like the Forms 8-K and 10-Q, these documents


48

were also explicitly issued by Consumers (as well as CMS) and reported the Company’s

overall revenues and expenses, among other financial figures, for 2000 and 2001.

104. As described more fully below, the SEC filings issued by Consumers (and

CMS) were materially false and misleading since they contained consolidated financial

information, which, unbeknownst to the investing public, included revenues derived from

the Company’s illicit round-trip trading. See, e.g., ¶¶ 150, 166, 203, 217, 221, 233, 237,

253, 256, 271, 274, 302, 313, 326, 330, and 333. These documents also failed to disclose

serious internal control problems affecting the Company. See ¶¶ 416 through 421.

Moreover, the SEC filings violated GAAP in numerous respects, as further described

herein. See, e.g., ¶¶ 392 through 393.

Statements Issued By Defendants Prior To The Class Period

1. CMS’s First Quarter 2000 Financial Statements 105. On May 1, 2000, the Company issued a press release reporting CMS’s

financial results for the first quarter ended March 31, 2000 (the “May 1, 2000 Press

Release”). The May 1, 2000 Press Release reported first quarter operating revenue of

$1.83 billion, up from $1.54 billion for the first quarter of 1999. Commenting on the

Company’s reported results, Defendant McCormick stated in the press release that

CMS’s “continuing [its] asset optimization program is consistent with [its] efforts to

achieve more geographic and business focus that will allow CMS to concentrate on its

more profitable and growing energy business.”

106. The Company also filed on May 1, 2000 its current report on Form 8-K

(the May 1, 2000 8-K”) with the SEC, announcing its financial results for the first quarter

ended March 31, 2000. This document was also issued by Consumers, which is

explicitly listed as a “Registrant” on the first page of the filing. The May 1, 2000 8-K


49

attached the Company’s May 1, 2000 Press Release as an exhibit, repeating the same

statements contained in the May 1, 2000 Press Release.

107. Defendant Wright signed the May 1, 2000 8-K.

108. On May 15, 2000, CMS filed its Quarterly Report on Form 10-Q for the

first quarter ended March 31, 2000 (the “First Quarter 2000 10-Q”). This document was

also issued by Consumers, which is explicitly listed as a “Registrant” on the first page of

the filing. The First Quarter 2000 10-Q repeated the same statements as those contained

in the May 1, 2000 Press Release.

109. In addition, CMS and the Individual Defendants represented in the First

Quarter 2000 10-Q that CMS’s MST operations reported a pretax operating income

(excluding a one-time effect of a 1999 change to mark to market accounting for trading

contracts) increase of $2 million from the same period in 1999. These Defendants also

represented that CMS-MST earned operating revenue of $351 million, more than double

the $158 million reported for the same period in 1999.

110. CMS touted its strategic agenda for CMS-MST, stating:

CMS intends to use its marketing, services and trading business to improve the return on CMS'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's industrial and commercial energy services to enhance our commodity marketing business, using CMS's gas production as a hedge to commodity risk in other areas of our business, and developing risk management products that address customer needs.

111. The First Quarter 2000 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, which includes the Reports of Independent Public Accountants. Certain prior year amounts have been reclassified to conform with the presentation in


50

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.

(Emphasis added). Moreover, the Company affirmed the reliability and truthfulness of its

financial statements, stating, “[t]he financial statements are prepared in conformity with

generally accepted accounting principles and use management’s estimates where

appropriate.”

112. Defendant Wright signed the First Quarter 2000 10-Q.

113. In response to the Company’s announcement of its financial results for the

first quarter of 2000, Morgan Stanley Dean Witter, a subsidiary of Morgan Stanley & Co.

Incorporated (“Morgan Stanley”), issued a May 2, 2000 report with a “strong buy” rating

for CMS common stock. Among other things, this report stated:

Over time, we think CMS’s goal is now to be seen not just as a company with high growth potential, but one with a solid balance sheet, potential for stable growth and therefore multiple expansion, and a company that underpromises and overdelivers.

* * *

We view the CMS trading operations not as a standalone earnings contributor, but rather as operations that should enhance the value of the other businesses and are necessary for market knowledge.

2. [Deleted Pursuant to Court’s Prior Orders] 114. [Paragraph deleted in accordance with the Court’s Prior Orders.]

3. CMS’s Second Quarter 2000 Financial Statements 115. On August 3, 2000, CMS issued a press release announcing the

Company’s financial results for second quarter and six months ended June 30, 2000 (the

“August 3, 2000 Press Release”). The August 3, 2000 Press Release reported second

quarter operating revenue of $1.60 billion, up 20 percent from $1.33 billion in the second

quarter of 1999.


51

116. On August 11, 2000, CMS filed its Quarterly Report on Form 10-Q for the

second quarter ended June 30, 2000 (the “Second Quarter 2000 10-Q”) with the SEC.

This document was also issued by Consumers, which is explicitly listed as a “Registrant”

on the first page of the filing. The Second Quarter 2000 10-Q repeated the same

statements as those contained in the August 3, 2000 Press Release.

117. The Company reported quarterly operating revenue in its MST operations

of $391 million, up from $146 million in the same period in 1999. The six-month results

for the MST operations were $742 million, up from $304 million for the same period in

1999.

118. CMS further stated that:

CMS intends to use its marketing, services and trading business to improve the return on CMS'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's industrial and commercial energy services to enhance our commodity marketing business, using CMS's gas production as a hedge to commodity risk in other areas of our business, and developing risk management products that address customer needs.

119. The Second Quarter 2000 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, 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.

(Emphasis added).


52

120. Moreover, the Company affirmed the reliability and truthfulness of its



appropriate.”

121. Defendant Wright signed the Second Quarter 2000 10-Q.

4. CMS’s Premium Equity Participating Security Units Offering 122. On August 17, 2000, CMS filed a Form 424B5 Prospectus Supplement

(the “PEPS Registration Statement”), offering to the investing public 8,800,000 PEPS.

The offering was underwritten by Morgan Stanley, Banc of America and Donaldson,

Lufkin & Jenrette Securities Corporation (“DLJ”).

123. The PEPS Registration Statement incorporated the financial results of the

first and second quarters of 2000:

Second quarter operating revenue totaled $1.6 billion, up 20% from $1.3 billion in the second quarter of 1999. Operating revenue for the first half of 2000 totaled $3.4 billion, up 19% from $2.9 billion in the first half of 1999. The second quarter earnings reflect strong operating performance of our diversified energy businesses, including independent power production, gas transmission and storage, and international energy distribution, as well as gains on the sale of non-strategic assets.

124. The PEPS Registration Statement also included the following description

of CMS-MST:

CMS-MST has grown dramatically since its inception. CMS intends to use CMS-MST to enhance performance of CMS assets, such as gas reserves and power plants. CMS-MST markets annually approximately 470 Bcf of natural gas, 3,709 GWh of electricity, 23 MMBbls of crude oil and 6.5 MMBbls of natural gas liquids.

(Emphasis added).

125. The PEPS were actively trading throughout the Class Period on the New

York Stock Exchange under the symbol “CMS PRM.” The PEPS Registration Statement


53

established that the value of the PEPS Units was dependant upon and would fluctuate in

tandem with the market value of the Company’s common stock and that, if the common

stock of the Company at the time of settlement was below $13.218 per share, the

aggregate value of the PEPS could result in a substantial loss.

126. The PEPS Registration Statement stated that the sale of PEPS would net

proceeds of $213.1 million to the Company.

5. Platt’s Second Quarter 2000 Rankings 127. Prior to and during the Class Period, Platt’s reported on a daily basis, the

market prices for electricity and natural gas through the process described above.

Periodically, Platt’s would publish rankings for the various participants setting forth the

volume of trades, revenues and gains. With regard to CMS, Platt’s based its ranking of

the Company on purported sales and trading information, which CMS provided to Platt’s

prior to and during the Class Period. Such information was based almost entirely on the

Company’s round-trip trades and was, therefore, false. Moreover, Platt’s ranking of the

Company was completely inaccurate during the Class Period since it was based upon

false information.

128. On August 21, 2000, Platt’s Power Markets Week, an industry

publication, reported CMS-MST as marketing 1,361,111 MWh, in the 2nd Quarter of

2000 and 2,976,832 MWh for year to date. CMS-MST’s rank in terms of Total Marketer

Sales was, for the 2nd Quarter, 48th, and 50th for the year to date, respectively.

6. September 11, 2000 Form S-3 Registration Statement 129. On September 11, 2000, CMS filed a Form S-3 Registration Statement,

registering 9,477,868 shares of common stock, pursuant to the CMS Stock Purchase Plan

(the “September 11, 2000 Registration Statement”). The September 11, 2000


54

Registration Statement allowed investors to purchase shares of common stock of CMS

directly from the Company, and convert dividends automatically into additional shares,

with nominal brokerage fees.

130. Incorporated by reference into the September 11, 2000 Registration

Statement were the First and Second Quarter 10-Qs for 2000 and the May 1, 2000 8-K,

June 5, 2000 8-K, July 6, 2000 8-K, and August 15, 2000 8-K.

131. Defendants Wright, McCormick and Hopper signed the September 11,

2000 Registration Statement. Defendants Deutch, Duderstadt, Flaherty, Holton, Parfet,

Pierre, Way, Whipple and Yasinsky signed the document via power of attorney proffered

to Defendant Wright.

7. October 6, 2000 Form S-3 Registration Statement 132. On October 6, 2000, CMS filed a Form S-3 Registration Statement for

General Term Notes to be offered at future dates worth up to $300 million (the “October

6, 2000 Registration Statement”).

133. Incorporated by reference in the October 6, 2000 Registration Statement

were the First and Second Quarter 10-Qs and the May 1, 2000, June 5, 2000, July 6,

2000, August 15, 2000, and October 2, 2000 current reports on Forms 8-K.

134. In addition, the October 6, 2000 Registration Statement touted the future

prospects of the Company with the following statements:

OPTIMIZE OUR ASSETS THROUGH THE MARKETING, SERVICES AND TRADING BUSINESS We intend to use our marketing, services and trading business to improve the return on our other businesses. This means that we plan to continue centralizing the marketing of energy products produced by our various non-utility businesses. Other strategies include expanding our industrial and commercial energy services to enhance our commodity marketing business and developing risk management products that address customer needs.


55

* * *

MARKETING, SERVICES AND TRADING [CMS-MST], formed in 1996, provides natural gas, oil, coal and electric marketing, risk management and energy management services to industrial, commercial, utility and municipal energy users throughout the United States and internationally. [CMS-MST] has grown dramatically since its inception. CMS intends to use [CMS-MST] to enhance performance of CMS assets, such as gas reserves and power plants.

(Emphasis added).

135. Defendants Wright, McCormick, and Hopper signed the October 6, 2000

Registration Statement. Defendants Deutch, Duderstadt, Flaherty, Holton, Parfet, Pierre,

Way, Whipple and Yasinsky signed the document via power of attorney proffered to

Defendant Wright.

8. CMS’s 9 7/8% Senior Notes Offering Prospectus Supplement 136. On October 12, 2000, CMS filed a Form 424B5 Prospectus Supplement,

(“October 12, 2000 Prospectus Supplement”) offering 9 7/8% Senior Notes to the

investing public.

137. The offering was underwritten by DLJ, Morgan Stanley, Barclays Capital,

Chase Securities and CIBC World Markets.

138. The Prospectus Supplement included the unaudited financial results of the

Company for the six months ended June 30, 2000. The Prospectus Supplement, in

particular, referenced CMS’s reported consolidated operating revenue of $3.4 billion,

EBITDA of $879 million and net income of $161 million.

139. The Prospectus Supplement also highlighted the significance of the MST

division, stating:

Optimize Our Assets Through The Marketing, Services And Trading Business


56

We intend to use our marketing, services and trading business to improve the return on our other businesses. This means that we plan to continue centralizing the marketing of energy products produced by our various non-utility businesses. Other strategies include expanding our industrial and commercial energy services to enhance our commodity marketing business and developing risk management products that address customer needs.

(Emphasis added).

140. The Company anticipated net proceeds of $489 million from this offering.

9. CMS’s October 18, 2000 Common Stock Offering Prospectus Supplement

141. On October 18, 2000, CMS filed a Form 424B5 Prospectus Supplement,

(“October 18, 2000 Prospectus Supplement”) offering the sale of 11 million shares of

common stock.

142. The underwriter of the offering was Credit Suisse First Boston

Corporation.

143. CMS anticipated net proceeds of $305 million from the offering.

144. The Prospectus Supplement included the financial results of the Company

for the six-months ended June 30, 2000. The Prospectus Supplement, in particular,

referenced CMS’s reported consolidated operating revenue of $3.4 billion for the six-

month period ended June 30, 2000.

145. The Prospectus Supplement also included the following results for CMS’s

MST operations:

CMS Marketing, Services and Trading [MST] marketed 470 Bcf of gas, 3,709 GWh of electricity, 23 MMBbls of crude oil and 6.5 MMBbls of natural gas liquids; . . .

146. The Prospectus Supplement also contained the following statement,

highlighting the significance of its MST division:


57

Optimize Our Assets Through The Marketing, Services And Trading Business We intend to use our marketing, services and trading business to improve the return on our other businesses. This means that we plan to continue centralizing the marketing of energy products produced by our various non-utility businesses. Other strategies include expanding our industrial and commercial energy services to enhance our commodity marketing business and developing risk management products that address customer needs.

(Emphasis added).

10. [Deleted Pursuant to Court’s Prior Orders] 147. [Paragraph deleted in accordance with the Court’s Prior Orders.]


Materially False and Misleading Statements Issued by Defendants During The Class Period

11. CMS’s Third Quarter 2000 Financial Statements 149. On October 25, 2000, CMS issued a press release announcing the

Company’s financial results for the third quarter ended September 30, 2000 (the October

25, 2000 Press Release”). Specifically, the Company announced that CMS’s reported

consolidated operating revenues totaled $2.4 billion for the third quarter, up 63% from

$1.47 billion in the same period in 1999, due mainly to increased lower-margin energy

marketing revenues. In addition, the Company reported that operating revenues for the

first nine months of 2000 totaled $5.82 billion, up 34% from $4.34 billion in the first nine

months of 1999, primarily due to increased oil and gas, pipeline and lower-margin energy

marketing revenues.

150. Also on October 25, 2000, the Company filed its current report on Form 8-

K (the “October 25, 2000 8-K”), announcing in part, the same financial results for the

Third Quarter ended September 30, 2000 as those described above. This document was


58


the filing.

151. Defendant Wright signed the October 25, 2000 8-K.

152. On November 8, 2000, Deutsche Bank Alex. Brown initiated its coverage

of CMS common stock with a “Buy” rating. In so doing, the analyst remarked:

We are initiating coverage on CMS with a Buy rating, given the company’s attractive valuation and a handful of near-term catalysts. The company has recently resolved a number of items that significantly reduce regulatory uncertainty and mitigate earnings volatility. We believe the company is well on its way to completing its restructuring objectives, which would result in a strategically focused, more financially sound company with fewer uncertainties and greater earnings visibility.

* * *

CMS management is increasingly focused on shareholder value, in our opinion.

153. On November 14, 2000, CMS filed its Quarterly Report on Form 10-Q for

the third quarter ended September 30, 2000 (the “Third Quarter 2000 10-Q”). This

document was also issued by Consumers, which is explicitly listed as a “Registrant” on

the first page of the filing. The Third Quarter 2000 10-Q repeated the same statements

contained in the October 25, 2000 Press Release.

154. CMS also reported operating revenues of $1.034 billion from its

marketing, services and trading business as compared to $216 million in the same period

in 1999. The Company also included the following information, which touted its MST

division as follows:

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


59

due to cooler than normal summer weather in Michigan, partially offset by increased earnings from wholesale gas activities, which benefited from natural gas market price increases. The volumes of marketed natural gas and power traded increased 72 percent and over 1,000 percent, respectively. Pretax operating income for the nine months ended September 30, 2000 increased $2 million from the comparable period in 1999 as a result of increased wholesale gas earnings due to capturing gains from natural gas price market volatility, increased LNG [Liquified Natural Gas] 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.

(Emphasis added).

155. The Third Quarter 2000 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, 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.

The Company also affirmed the reliability and truthfulness of its financial

statements, stating, “[t]he financial statements are prepared in conformity with

generally accepted accounting principles and use management's estimates where

appropriate.”

156. Defendant Wright signed the Third Quarter 2000 10-Q.

12. Platt’s Power Markets Week Article 157. A November 13, 2000 article in Platt’s Power Markets Week, entitled,

“Volumes Climb Again, Up 16% For Quarter, Thanks In Part To Volatility In The West,”

noted CMS-MST’s rapid climb in rank. Specifically, the article stated,


60

an upgrade of a trading unit is allowing a new participant into the higher rankings. CMS, ranked now 20th in total sales in the third quarter, at 12.6 million MWh, had only 3 million MWh in sales after the first half of this year. It took until July, according to Tamela Pallas, president of marketing, service and trading, to get CMS's power trading team fully operational in Houston. Before the third quarter, CMS was trading its unregulated power through a third party. Now, the trading team, which is 90% assembled, is focusing on the Eastern grid and the Midwest.

(Emphasis added). Thus, by the time of this article, CMS had risen to 20th in total sales

for the quarter.

13. December 15, 2000 Form S-3 Registration Statement 158. On December 15, 2000, CMS filed a Form S-3 Shelf Registration

Statement for $2 billion in various types of securities to be offered at future dates (the

“December 15, 2000 Shelf Registration Statement”).

159. Incorporated by reference into the December 15, 2000 Shelf Registration

Statement were the First, Second and Third Quarter 2000 10-Qs, as well as the May 1,

2000, June 5, 2000, July 6, 2000, August 15, 2000, and October 2, 2000, October 12,

2000, November 1, 2000 and December 11, 2000 current reports on Forms 8-Ks.

160. Defendants Wright, McCormick, and Hopper signed the December 15,

2000 Shelf Registration Statement. Defendants Deutch, Duderstadt, Flaherty, Holton,

Parfet, Pierre, Way, Whipple and Yasinsky signed the document via power of attorney

proffered to Defendant Wright.

14. December 22, 2000 Form S-3 Registration Statement

161. On December 22, 2000, CMS filed a Form S-3 Shelf Registration

Statement, for various securities to be offered at future dates worth up to $700 million

(the “December 22, 2000 Shelf Registration Statement”).


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162. Incorporated by reference into the December 22, 2000 Shelf Registration

Statement were the First, Second and Third Quarter 2000 10-Qs, as well as the May 1,

2000, June 5, 2000 , July 6, 2000, August 15, 2000, October 2, 2000, October 12, 2000,

November 1, 2000 and December 11, 2000 current reports on Forms 8-K.


2000 Shelf Registration Statement. Defendants Deutch, Duderstadt, Flaherty, Holton,

Parfet, Pierre, Way, Whipple and Yasinsky signed the document via power of attorney

proffered to Defendant Wright.

164. On December 22, 2000, the Company issued a press release, stating:

[CMS] 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 will receive no cash proceeds from these issuances and will incur no additional liabilities. On Dec. 15, 2000, CMS 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 to issue a wide range of debt, preferred and common equity securities from time to time in the future.

165. On December 29, 2000, CMS common stock reached $28.26 per share.

15. Reasons Why the Statements Concerning The Third Quarter Of 2000 Were Materially False And Misleading At The Times They Were Made

166. The statements identified above in the October 25, 2000 Press Release, the

October 25, 2000 8-K, the Third Quarter 2000 10-Q, the December 15, 2000 Shelf

Registration Statement and the December 22, 2000 Shelf Registration Statement were

materially false and misleading at the times they were made, as described in Section X

above, describing Recently Obtained Evidence Directly Supporting Plaintiffs’ Claims, as


62

well as in ¶¶ 95 through 98. Additionally, the statements were materially false and

misleading at the time they were made because:

a. Despite the Company’s representation, the subject financial

statements were not prepared in accordance with GAAP, as

described more fully below in Section XIV;

b. CMS’s revenue, as originally reported, for the year ended

December 31, 2000, was overstated by $1 billion due to the

improper recognition of revenue derived from round-trip energy

trading transactions. CMS, in its May 15, 2002 Press Release,

indicated that such inclusion was improper. These transactions

should not have been recorded in CMS’s financial statements

because there was no business purpose for entering into the

transactions, other than for the purpose of artificially inflating

revenue and the trading prices of CMS securities. Moreover, the

Company’s fiscal 2000 revenues, as originally reported, were

inflated an additional $1.301 billion, according to the Company’s

2002 10-K, released on March 31, 2003;

c. CMS failed to disclose that it lacked sufficient internal control

mechanisms preventing the Company from sufficiently detecting

that the accounting staff was not able to keep pace with the growth

of the Company, thus resulting in bookkeeping errors.

Additionally, computer interfaces of sub-ledgers to the general

ledger were ineffective or lacking. As a result, sub-ledger balances

did not agree to the general ledger and the differences were not

adjusted;

d. For the reasons set forth in subparagraphs a through c, above, the

information presented in the subject Form 10-Q did not reflect all

adjustments necessary to assure the fair presentation of financial

position, results of operations and cash flows for the periods

presented;


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e. CMS failed to disclose that it was engaged in the deliberate

manipulation of the published price indices by providing false data

to the trade press; and

f. As later uncovered on May 13, 2002 by Platt’s Power Markets

Week from public filings, round-trip transactions between CMS

and Reliant took place during the first quarter of 2000, when CMS

saw its sales jump by over 1,100% year-over-year and over 800%

from the previous quarter. These transactions between CMS and

Reliant, among others, should not have been recorded in CMS’s

financial statements because there was no business purpose for

entering into the transactions, other than for the purpose of

artificially inflating revenues.

To the extent such documents incorporate by reference the Company’s earlier filings with

the SEC during the Class Period, they are also false and misleading for the reasons stated

above.

167. In addition, the Third Quarter 2000 10-Q was false and misleading

because the volumes of marketed natural gas and power traded did not increase 72

percent and over 1,000 percent, respectively during the third quarter of 2000. Moreover,

the volumes of natural gas and power traded did not increase 65 percent and 546 percent,

respectively, for the nine months ended September 30, 2000. Specifically, the Third

Quarter 2000 10-Q included purported revenues derived from an undisclosed round-trip

transaction involving 10 million megawatt hours and priced at $380 million, which was

approximately 1,000 times larger than the typical power trade. MST had calculated this

volume as sufficient to land CMS in the Top 20. MST's accounting system automatically

recorded the revenues and expenses from the trade in MST's books and records on a gross

basis. CMS's chief accounting officer (Defendant Hopper) approved recording the gross


64

revenues and expenses from the trade. Thus, MST reported $380 million in revenue (for

the purported sale) and $380 million in expenses (for the purported purchase)

16. CMS’s Fourth Quarter And Year End 2000 Financial Results 168. On January 24, 2001, CMS issued a press release reporting the Company’s

financial results for the fourth quarter and year ended December 31, 2000 (the “January

24, 2001 Press Release”).

169. The press release stated, in part:

Fourth quarter operating revenue totaled $3.19 billion, compared to $1.77 billion in the fourth quarter of 1999, up 80% from $1.77 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 in 2000 included:

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;

(Emphasis added.)

170. The analyst community quickly embraced the Company’s positive

portrayal of its fourth quarter 2000 financial results. Reiterating its “Buy” rating on

CMS, Banc of America Securities Equity Research, a subsidiary of Banc of America,

issued a report on January 24, 2001, remarking:

Marketing, Services, and Trading business reported significantly improved results with a 200% increase in operating income. Results were driven from increased volumes combined with higher gas and NGL margins, which more than offset higher operating expenses.

(Emphasis added).


65

171. Similarly, Merrill Lynch & Co. issued a January 29, 2001 report advising

investors to “accumulate” CMS securities and noting that “[h]igher gas and NGL margins

and overall better volumes offset power trading losses and overhead.”

172. A January 30, 2001 Equity Research Report, issued by Morgan Stanley

Dean Witter, a subsidiary of Morgan Stanley, maintained its Outperform rating on CMS

shares. The report stated:

Excellent trading results - results tripled in the 4Q versus the year prior period proving the company is able to take advantage of commodity price volatility through its niche position. New management appears to be working out well . . . . We view CMS trading operations as not only a stand-alone earnings contributor (only 1% of EBIT), but rather as operations that should enhance the value of other businesses and are necessary for market knowledge.

173. The Company also filed on February 23, 2001 its current report on Form

8-K (the “February 23, 2001 8-K”) with the SEC, announcing its financial results for the

fourth Quarter and year ended December 31, 2000, repeating the financial results

disclosed in the January 24, 2001 Press Release.

174. Defendant Wright signed the February 23, 2001 8-K.

17. CMS’s February 23, 2001 Stock Offering Prospectus Supplement

175. On February 23, 2001, CMS announced that it had sold ten million shares

of common stock pursuant to a block trade. Pursuant to a Prospectus Supplement, (the

“February 23, 2001 Prospectus Supplement) the Company sold ten million shares of

CMS common stock on February 28, 2001 to Banc of America, for proceeds of

approximately $295.6 million.

176. The Prospectus Supplement incorporated certain 2000 financial results:

Year 2000 consolidated operating revenue totaled approximately $9 billion, up 47% from $6.1 billion in 1999. Operating revenue


66

for the fourth quarter 2000 totaled $3.19 billion, up 80% from $1.77 billion in the fourth quarter 1999. . . . The growth in fourth quarter 2000 consolidated operating revenue primarily reflects increased lower-margin energy marketing and trading transactions.

(Emphasis added).

177. The Prospectus Supplement incorporated by reference the financial results

as reported in the Forms 10-Q for the quarters ending March 31, 2000, June 30, 2000, and

September 30, 2000, as well as the current reports on Forms 8-K filed, February 1, 2000,

May 1, 2000, June 5, 2000, July 6, 2000, July 6, 2000, August 15, 2000, October 2, 2000,

October 12, 2000, November 1, 2000, and December 11, 2000.

18. Platt’s Power Markets Week 4th Quarter 2000 Rankings 178. On February 26, 2001, Platt’s Power Markets Week noted that CMS-

MST’s 4th Quarter 2000 wholesale sales were 22,154,184 MWh, number 17 among all

power marketers, a 1,626% rise from the 4th Quarter in 1999 and a 75.5% increase

from the 3rd Quarter of 2000. For the year 2000, CMS was ranked 27th of all power

marketers, a rise of 1,452% from 1999, selling 37,779,969 MWh in 2000.

179. On March 19, 2001, Platt’s Power Markets Week, listed CMS-MST’s 4th

Quarter 2000 power sales as 22,154,184 MWh, ranking it 18th overall.

19. CMS’s 2000 Financial Statements

180. On March 23, 2001, CMS filed its year-end report on Form 10-K for the

fourth quarter and year ended December 31, 2000 (the “2000 10-K”). This document

was also issued by Consumers, which is explicitly listed as a “Registrant” on the first

page of the filing. The 2000 10-K repeated the same statements contained in the January

24, 2001 Press Release.


67

181. Additionally, CMS reported $1.157 billion in operating revenue from its

energy marketing and trading business, compared with $524 million in operating revenue

for 1999.

182. CMS further disclosed that CMS-MST marketed electric power of 37.781

billion KWh in 2000, compared with 3.709 billion KWh in 1999.

183. The 2000 10-K included the following additional disclosure:

CMS-MST has grown dramatically since its inception. CMS intends to use CMS-MST to enhance performance of CMS assets, such as gas reserves and power plants.

* * *

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.

(Emphasis added).

184. The 2000 10-K was signed by Defendants McCormick, Wright, Flaherty,

Holton, Way, Whipple, Deutch, Duderstadt, Parfet, Pierre and Yasinsky.

185. On March 23, 2001, CMS common stock opened at $24.84 per share,

reaching an intraday high of $25.35 per share. On the same day, CMS PEPS traded at

$27.30 per PEPS Unit.

20. CMS’s 2000 Annual Report to Shareholders 186. On March 30, 2001, CMS released its Annual Report (the “2000 Annual

Report”) to its shareholders. Attached to the 2000 Annual Report was the 2000 10-K.


68

187. The 2000 Annual Report included a letter from McCormick highlighting

various aspects of the Company’s performance in the year 2000. Included in the letter

was a glowing reference to the performance of the trading operations of CMS-MST:

Our marketing and trading business successfully made the transition from a retail to a wholesale business. It traded 614 bcf of natural gas, an increase of 31 percent from 1999, and 37,800 gigawatt-hours of electricity, up more than 900 percent.

(Emphasis added).

188. The 2000 Annual Report further touted its CMS-MST’s operations, stating

in pertinent part:

[T]he company has expanded its wholesale trading operation. About 50 employees are part of the operation, which trades natural gas, electricity and NGL . . . . In 2000, CMS marketed 614 bcf of physical gas, or about 30 percent more than in the previous year. In addition, CMS traded gas financial instruments totaling 3.7 trillion cubic feet. CMS also marketed or managed 37,800 gigawatt-hours (GWh) of electricity, 31 million barrels of oil and 9 million barrels of liquids.

189. The 2000 Annual Report also touted the effect of the CMS-MST’s

operations with regard to the consolidated financial results of the Company, stating:

In 2000 operating revenues increased $3.396 billion (45 percent) and operating expenses increased $3.422 billion (55 percent). Of these increases, $3.122 billion and $3.112 billion, respectively, are attributable to the increased business activity in the marketing, services and trading business, including its unconsolidated subsidiary, Texon. CMS’s proportionate share of Texon’s operating revenues and operating expenses increased by $545 million and $541 million, respectively.

Of the $1.234 billion increase in 1999 revenue, $240 million (19 percent) is attributable to increased trading revenues in the marketing, services and trading business (primarily representing a full year of [CMS-MST]’s Texon operations), and an increase of $63 million (5 percent) in operating revenue associated with operations of investments in the natural gas transmission segment. The $967 million increase in operating expenses includes $239


69

million (25 percent) related to increased trading activity in the marketing, services and trading segment of business. The $256 million increase in fixed charges includes $23 million (9 percent) of interest charges associated with international energy investments.

(Emphasis added).

190. The 2000 Annual Report also included the following chart, touting the

increased volumes of gas and electricity that CMS-MST marketed:

The company has increased the volumes its markets. Electricity marketed, in particular, showed significant gains in 2000 as a result of an increased emphasis on wholesale trading.

Gas Marketed (bcf)

370

470

614

98 99 00

Electricity Marketed (GWh)

7,0004,000

37,800

98 99 00

191. Moreover, the Company affirmed the reliability and truthfulness of its



appropriate.”

192. The 2000 Annual Report was signed by Defendants McCormick, Wright,

Flaherty, Holton, Way, Whipple, Deutch, Duderstadt, Parfet, Pierre and Yasinsky.

21. CMS’s 8.5% Senior Notes Offering 193. On March 28, 2001, CMS announced the successful pricing of $350

million of 8.5% Senior Notes, due 2011 (“8.5% Senior Notes”), proceeds of which were


70

to be used to repay outstanding debt of the Company. The Company expected net

proceeds of $337,375,500 from the sale of the 8.5% Senior Notes.

194. The underwriters for the offering were ABN Amro Inc., Banc of America,

Barclays Capital, CIBC World Markets, JP Morgan, Salomon Smith Barney, Scotia

Capital, and SG Cowen.

195. On the same day, CMS filed a Form 424B5 Prospectus Supplement,

(“March 28, 2001 Prospectus Supplement”) offering to the investing public the 8.5%

Senior Notes. The Prospectus Supplement incorporated by reference the Company’s

2000 10-K, and highlighted the following financial results for 2000:

CMS marketing, Services and Trading [MST] marketed 614 Bcf of gas, 37,781 GWh of electricity, 31 MMBbls of crude oil and 9.0 MMBbls of natural gas liquids;

In 2000, we had consolidated operating revenue of $8.998 billion, earnings before interest, taxes, depreciation and amortization of $1.693 billion and net income of $36 million.

196. On April 20, 2001, CMS common stock opened at $27.50 per share,

reaching a high of $28.21 per share in intraday trading on May 1, 2001.

22. Reasons Why The Statements Concerning The Fourth Quarter And Year End 2000 Were Materially False And Misleading At The Times They Were Made

197. The statements identified above in the January 24, 2001 Press Release, the

February 23, 2001 8-K, the 2000 10-K, 2000 Annual Report and March 28, 2001

Prospectus Supplement were materially false and misleading at the times they were

made, as described in Section X above, describing Recently Obtained Evidence Directly

Supporting Plaintiffs’ Claims, as well as in ¶¶ 95 through 98. Additionally, the

statements were materially false and misleading at the times they were made for the

reasons set forth above in ¶ 166 a through f, as well as ¶ 167. To the extent such


71

documents incorporate by reference the Company’s earlier filings with the SEC during

the Class Period, they are also false and misleading for the reasons stated above.

198. In addition, these statements were materially false and misleading at the

times they were made because, as later uncovered by Platt’s Power Markets Week, CMS

sold Reliant 19.8 million MWh at prices ranging from $27.35 to $76 per MWh at the

Cinergy, Entergy, PJM West and TVA trading hubs. Reliant sold CMS 19.7 MWh at

prices ranging from $24 to $64 MWh at the Cinergy, Entergy, PJM West and TVA hubs.

CMS total sales in the fourth quarter of 2000 were approximately 22.1 million MWh,

while Reliant’s total sales were approximately 70.5 million MWh. Without the

transactions they did with each other, CMS would have had 2.3 million MWh in sales;

Reliant would have had 50 million MWh in sales volume. These transactions between

CMS and Reliant, among others, should not have been recorded on CMS’s financial

statements because there was no business purpose for entering into the transactions, other

than for the purpose of artificially inflating revenues.

199. In addition, the January 24, 2001 Press Release and 2001 Annual Report

were materially false and misleading because CMS’s energy marketing unit did not

market 614 cubic feet of natural gas, nor did it market 37,781 gigawatt-hours of

electricity.

23. CMS’s First Quarter 2001 Financial Statements 200. On April 30, 2001, the Company issued a press release reporting CMS’s

financial results for the first quarter ended March 31, 2001 (the “April 30, 2001 Press

Release”). The April 30, 2001 Press Release reported that first quarter operating revenue

“totaled $4.13 billion, an increase of 126% from $1.83 billion in the first quarter of


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2000, due largely to significantly increased lower-margin energy marketing and

trading transactions.” (Emphasis added).

201. In reaction to the Company’s announcement of its financial results for the

first quarter of 2001, Banc of America Securities, a subsidiary of Banc of America,

issued a research report on April 30, 2001 that contained a “Buy” recommendation. The

report also raised its analyst price target for the Company from $34 per share to $40 per

share based, in part, upon a recognition that “non-regulated activity should represent

about 50% of earnings in 2003, up from 30% in 1999.”

202. Fahnestock & Co. noted in a May 1, 2001 report that CMS’s revenues rose

126% in the first quarter of 2001, “reaching $4.13 billion. Growth in CMS ’s lower-

margin marketing, services and trading business accounted for nearly $2.0 billion or

about 87% of the increase.” The report continued, “Marketing, services and trading

revenue grew more than 500 % in Q1/O1 to $2.3 billion. Operating earnings for this

lower margin business grew by 133% to $7 million for 1 Q/01.”

203. On May 11, 2001, CMS filed its Quarterly Report on Form 10-Q for the

first quarter ended March 31, 2001 (the “First Quarter 2001 10-Q”). This document was


the filing. The First Quarter 2001 10-Q repeated the same statements as those

incorporated in the April 30, 2001 Press Release.

204. In addition the First Quarter 2001 10-Q reported that CMS-MST’s

operating revenues for the first quarter of 2001 were $2.344 billion, up from a mere $344

million in the same period in 2000, and that CMS-MST’s operating expenses for the


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Company’s MST operations increased from $40 million in first quarter of 2000, to

$1.444 billion in the same period in 2001.

205. The Company included the following additional disclosure in its First

Quarter 2001 10-Q:

MARKETING, SERVICES AND TRADING RESULTS OF OPERATIONS PRETAX OPERATING INCOME: For the three months ended March 31, 2001… 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 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's existing assets are concentrated. CMS'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 also seeks to continue developing importing and marketing opportunities for LNG. CMS plans to capitalize on favorable market conditions for energy performance contracting through expanding its services business in selected markets.

(Emphasis added).

206. The First Quarter 2001 10-Q also included the following representations:

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's Form 10-K for the year ended December 31, 2000, which includes the Reports of Independent Public Accountants.

207. In addition, the First Quarter 2001 10-Q included the following caveat:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to


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make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

208. The First Quarter 2001 10-Q was signed by Defendant Wright.

24. Platt’s Power Markets Week 1st Quarter 2001 Rankings 209. On June 4, 2001, Platt’s Power Markets Week noted that CMS-MST’s 1st

Quarter 2001 power sales gained 1,379% above its sales in the first quarter of 2000. The

article also noted that “CMS and Reliant traded about 20 million MWh, lifting CMS up

from the rank of 56th a year ago to 18th for the first-quarter of 2001.”

25. CMS’s 8.9% Senior Notes Offering 210. On June 22, 2001, CMS filed a Form 424B5 Prospectus Supplement

(“June 22, 2001 Prospectus Supplement”) offering to the investing public 8.9% Senior

Notes due 2008. The Company expected net proceeds of $265,887,670 from the offering

of the 8.9% Senior Notes.

211. The underwriters for the offering were Banc One Capital Markets,

Comerica Securities, Deutsche Bank Alex. Brown, TD Securities, Tokyo-Mitsubishi

International PLC, Fleet Securities, and Williams Capital Group, L.P.

212. The Prospectus Supplement incorporated by reference the Company’s

2000 10-K, and highlighted the financial results for 2000 as discussed below.

213. Specifically, the Company stated: “CMS Marketing, Services and Trading

[MST] marketed 614 Bcf of gas, 37,781 GWh of electricity, 31 MMBbls of crude oil and

9.0 MMBbls of natural gas liquids.”

214. Moreover, the Company stated: “In 2000, we had consolidated operating

revenue of $8.998 billion, earnings before interest, taxes, depreciation and amortization

of $1.693 billion and net income of $36 million.”


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215. The Prospectus Supplement also incorporated the first quarter ended

March 31, 2001 financial results including the Company’s operating revenue of $4.126

billion in operating revenue.

216. Commenting on the Company’s reported financial July 9, 2001 report

from CIBC World Markets noted:

CMS 's marketing, services and trading group – [MST] - is relatively small, but growing rapidly. The group tripled its operating income from 1999 to 2000, primarily through a six-fold increase in electricity volumes marketed. It plans to achieve continued growth without taking on significant trading risk.

The CIBC report continued, “Given the company’s increase in volumes marketed

last year, its expanded operations and growth objectives, we are forecasting that

the pretax operating income contribution from [MST] will nearly double over the

next two years (to $27 million in 2002).”

26. Reasons Why The Statements Concerning The First Quarter of 2001 Were Materially False And Misleading At The Times They Were Made

217. The statements identified above in the April 30, 2001 Press Release, First

Quarter 2001 10-Q and June 22, 2001 Prospectus Supplement were materially false and

misleading at the times they were made, as described in Section X above, describing

Recently Obtained Evidence Directly Supporting Plaintiffs’ Claims, as well as in ¶¶ 95

through 98. Additionally, the statements were materially false and misleading at the

times they were made for the reasons set forth above in ¶ 166 a through f, as well as ¶¶

167, 198, and 199. To the extent such documents incorporate by reference the

Company’s earlier filings with the SEC during the Class Period, they are also false and

misleading for the reasons stated above.


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218. In addition, these documents were materially false and misleading

because:

a. CMS’s revenue, as restated, for the year ended December 31,

2001, revealed that CMS overstated its revenue by $4.205 billion

from improperly recording revenue in round-trip energy trading

transactions and an additional $1.534 billion recently included in

the 2002 10-K relating to round-trip energy trading transactions.

These transactions should not have been recorded in CMS’s

financial statements because there was no business purpose for

entering into the transactions, other than for the purpose of

artificially inflating revenue;

b. As revealed in quarterly filings in 2002, CMS’s first quarter 2001

revenues were overstated by $1.231 billion and expenses were

overstated by $1.232 billion; and

c. As later uncovered by Platt’s Power Markets Week, CMS sold

Reliant 20.8 million MWh at prices ranging from $27.35 to

$65.25/MWh at the Cinergy, Entergy, PJM West and TVA hubs.

Reliant sold CMS 20.8 MWh at prices ranging from $28.52 to

$59/MWh at the Cinergy, Entergy, and PJM West hubs. CMS

total sales in the first quarter of 2001 were approximately 23.9

million MWh; Reliant's total sales were approximately 76.8

million MWh. Without the sales to Reliant, CMS volume would

have been 3.1 million MWh. These transactions between CMS

and Reliant, among others, should not have been recorded in

CMS’s financial statements because there was no business purpose

for entering into the transactions, other than for the purpose of

artificially inflating revenues.

219. In addition, the First Quarter 2001 10-Q was false and misleading at the

time it was issued because the physical volumes of marketed and managed natural gas


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and power traded did not increase 17 percent and 1,383 percent, respectively, during the

quarter.

27. CMS’s Second Quarter 2001 Financial Statements 220. On August 1, 2001, the Company issued a press release reporting CMS’s

financial results for the second quarter ended June 30, 2001 (“August 1, 2001 Press

Release”).

221. The Company also filed on August 1, 2001 its current report on Form 8-K

(the “August 1, 2001 8-K”). This document was also issued by Consumers, which is

explicitly listed as a “Registrant” on the first page of the filing. The August 1, 2001 8-K

attached the Company’s August 1, 2001 Press Release.

222. Defendant Wright signed the August 1, 2001 8-K.

223. In reaction to the Company’s announcement of its second quarter 2001

financial results, analysts at Morgan Stanley Dean Witter, a subsidiary of Morgan

Stanley, remarked on August 1, 2001:

We expect the company’s marketing and trading business to continue to deliver strong results given increased volumes, volatility and solid trading talent. Importantly, a majority of the company’s marketing and trading business is in structured deals, which limits CMS’s risk exposure. We note the company has recently moved to become a top-20 power and gas trader as compared to its top-30 ranking last year. We estimate this unit will deliver $24 million in 2002 operating income and generate 15% to 20% annual growth.

(Emphasis added).

224. In reaction to the Company’s second quarter 2001 financial results, Banc

of America Securities, a subsidiary of Banc of America, issued an August 2, 2001

research report, stating:


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The largest increase in operating income was seen in this business segment [MST] with operating income of $51 million compared to no earnings contribution in the year ago period.

225. On August 14, 2001, CMS filed its quarterly report on Form 10-Q for the

second quarter ended June 30, 2001 (“Second Quarter 2001 10-Q”) with the SEC,

incorporating the financial results released by CMS on August 1, 2001. This document


page of the filing.

226. In addition, the Second Quarter 2001 10-Q reported operating revenues of

$3.089 billion from its energy marketing and trading business for the quarter, up from

$391 million in the same period in 1999, a 690% increase.

227. Additionally, CMS-MST reported operating expenses for its purchased

and interchange power of $1.555 billion, compared with $71 billion for the same period

in 2000, a 290% increase.

228. The Second Quarter 2001 10-Q included the following additional

disclosure:

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's existing assets are concentrated. CMS'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 also seeks to continue developing importing and marketing opportunities for LNG. CMS plans to capitalize on favorable market conditions for energy performance contracting through expanding its services business in selected markets.

229. The Second Quarter 2001 10-Q also included the following

representations:


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230. In addition, the Second Quarter 2001 10-Q included the following caveat:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

231. The Second Quarter 2001 10-Q was signed by Defendant Wright.

28. Platt’s August 6, 2001 Article 232. In article in Platt’s Power Markets Week, dated August 6, 2001, Platt’s

noted that while the CMS overall was experiencing declining income, its MST operations

surged. The article stated:

CMS marketing, services, and trading operating income was $51-million, up from zero, on revenue of $3.09-billion, up 690%. Power volume surged 1,683.6% to 24,545 GWh, and gas 331.7% to 354 Bcf.

* * *

Operating expenses leaped 198.8% to $4.17-billion, led by a 2,090% rise in power bought for marketing, services, and trading, to $1.55-billion. Gas bought for that segment jumped 349% to $1.36-billion.

(Emphasis added).


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29. Reasons Why The Statements Concerning The Second Quarter Of 2001 Were Materially False And Misleading At The Times They Were Made

233. The statements identified above in the August 1, 2001 Press Release, the

August 1, 2001 8-K and in the Second Quarter 2001 10-Q were materially false and


Recently Obtained Evidence Directly Supporting Plaintiffs’ Claims, as well as in ¶¶ 95

through 98. Additionally, the statements were materially false and misleading at the

times they were made for the reasons stated above in ¶ 166 a through f, as well as ¶¶ 167,

198, 199, 218 a through c, and 219. To the extent such documents incorporate by

reference the Company’s earlier filings with the SEC during the Class Period, they are

also false and misleading for the reasons stated above. In addition, these documents were

materially false and misleading because:

a. As later uncovered by Platt’s Power Markets Week, CMS sold

Reliant 21 million MWh at prices ranging from $21.75 to $78.50

MWh at the Cinergy, Entergy, PJM West and TVA trading hubs.

Reliant sold CMS 21 million MWh at prices ranging from $23.25

to $78.75 MWh at the Cinergy, Entergy, PJM West and TVA hubs.

CMS total sales in the second quarter of 2001 were approximately

24.9 million MWh, while Reliant’s total sales were approximately

87.5 million MWh. Without the transactions they did with each

other, CMS would have had 3.9 million MWh in sales. These

transactions between CMS and Reliant, among others, should not

have been recorded in CMS’s financial statements because there

was no business purpose for entering into the transactions, other

than for the purpose of artificially inflating revenues; and

b. As revealed in quarterly filings in 2002, CMS’s second quarter

2001 revenues were overstated by $2.166 billion and expenses

were overstated by $2.147 billion.


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30. CMS’s Third Quarter 2001 Financial Statements 234. On October 26, 2001, CMS issued a press release reporting the

Company’s financial results for the third quarter ended September 30, 2001 (the “October


235. The October 26, 2001 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.

(Emphasis added).

236. CMS also reported that its, “operating revenue in the first nine months of

2001 totaled $11.47 billion compared to $5.62 billion in the first nine months of 2000,

due to increased lower margin energy marketing and trading transactions.”

(Emphasis added).

237. The Company also filed on October 26, 2001 its current report on Form 8-

K (the “October 26, 2001 8-K”) with the SEC announcing its financial results for the

third quarter ended September 30, 2001. This document was also issued by Consumers,

which is explicitly listed as a “Registrant” on the first page of the filing. The October 26,

2001 8-K attached the Company’s October 26, 2001 Press Release as an exhibit,

repeating the same statements contained in the October 26, 2001 Press Release.

238. The October 26, 2001 8-K was signed by Defendant Wright.

239. On October 29, 2001, Merrill Lynch & Co. issued a report advising

investors to accumulate and noting, among other things:

Management outlined its strategic vision to be a “premier integrated North American energy supply and services company”. Growth will be focused on the “natural gas value chain” as well as “gas and electricity marketing and end-user services”. Staying integrated is an important component of this vision as CMS intends


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to be asset-based with a balanced portfolio of regulated and unregulated businesses.

* * *

The [MST] segment was the main positive driver in Q3 with operating income increasing by $22m to $20m. Factors cited were higher gas and electric trading volumes and margins, plus increased long-term power sales contracts. These were partially offset by higher operating expenses, some net trading losses and other factors.


the third quarter ended September 30, 2001 (the “Third Quarter 2001 10-Q”) with the

SEC. This document was also issued by Consumers, which is explicitly listed as a

“Registrant” on the first page of the filing. The Third Quarter 2001 10-Q repeated the

same statements as contained in the October 26, 2001 Press Release.

241. In addition, the Third Quarter 2001 10-Q reported the CMS-MST’s

operating revenues were $1.743 billion, up from $1.034 billion in the same period in

2000.

242. Furthermore, the Third Quarter 2001 10-Q included the following

statement relating to the Company:

OUTLOOK

CMS's vision is to be an integrated energy company with a strong asset base, supplemented with an active marketing, services and trading capability. CMS 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 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.


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243. The Third Quarter 2001 10-Q also included the following additional

representations:


244. In addition, the Third Quarter 2001 10-Q included the following caveats:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

245. The Third Quarter 2001 10-Q was signed by Defendant Wright.

31. December 11, 2001 Press Release 246. On December 11, 2001, CMS-MST announced that it has signed an

agreement with Gas Natural Trading of Spain whereby CMS-MST would become Gas

Natural’s exclusive agent to market cargoes of LNG into North America. The Press

Release also announced that:

CMS-MST markets annually more than 600 billion physical cubic feet of natural gas, 3.7 trillion cubic feet of financial gas, 37,781 gigawatt-hours of electricity, 31 million barrels of oil and 9 million barrels of liquids.

* * *

CMS Energy Corporation has annual sales of $15 billion and assets of $16 billion throughout the U.S. and in selected foreign markets with businesses in electric and natural gas utility operations; independent power production; natural gas pipelines, gathering, processing and storage; LNG importation; oil and gas exploration and production; and energy marketing, services and trading.


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32. December 12, 2001 Form S-3 Registration Statement

247. On December 12, 2001 filed a Form S-3 Registration Statement for

General Term Notes to be offered at future dates worth up to $300 million (the

“December 12, 2001 Registration Statement”).

248. Incorporated by reference in the December 12, 2001 Registration

Statement are the 2000 10-K, the First, Second, and Third Quarter 2001 10-Qs, and

February 23, 2001, May 17, 2001, June 22, 2001, July 12, 2001, August 1, 2001, August

31, 2001, October 26, 2001 and November 2, 2001 current reports on Forms 8-K.

249. The December 12, 2001 Registration Statement included the financial

results for the first nine months of 2001, reporting operating revenues of $11.472 billion

up from $5.620 billion for the first nine months of 2000, a dramatic 196% increase.


2001 Registration Statement. Defendants Deutch, Duderstadt, Flaherty, Holton, Joos,

Parfet, Pierre, Way, Whipple and Yasinsky signed via power of attorney proffered to

Defendant Wright.

33. Platt’s Power Markets Week 3rd Quarter 2000 Rankings 251. On December 17, 2001, Platt’s Power Markets Week, noted that CMS-

MST ranked 17th in the 3rd Quarter in terms of total sales among power sellers, selling

28,577,317 MWh in the quarter. These results represented a 15% increase from the

previous quarter and a 126% increase from the same quarter in 2000. The article noted

that its total sales to date for 2001, 77,339,273 MWh, ranked it 18th among its peers in

terms of total power sold, representing a 394% increase from the previous year.


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34. December 21, 2001 CMS Press Release 252. On December 21, 2001, Pallas was named as one of the 50 Key Women in

Energy in the world by Commodities Now magazine. The press release issued by the

Company, announcing the purported distinction stated:

Under her leadership, she has grown CMS-MST to a significant regional trading group with expansion underway to the West Coast.

* * *

CMS Marketing, Services and Trading [MST], which ranks in the top 50 "Best Places to Work" in Houston by the Houston Business Journal, serves 11,000 customers throughout the eastern and central United States and Canada. CMS-MST markets annually more than 600 billion physical cubic feet of natural gas, 3.7 trillion cubic feet of financial gas, 37,781 gigawatt -hours of electricity, 31 million barrels of oil and 9 million barrels of liquids.

* * *

CMS Energy Corporation has annual sales of $15 billion and assets of $16 billion throughout the U.S. and in selected foreign markets. In the U.S., where it has 85 percent of its assets, it owns and operates . . . a leading energy marketing, trading and services company handling four billion cubic feet per day of natural gas and 100 million megawatt-hours of electricity annually.

(Emphasis added).

35. Reasons Why The Statements Concerning The Third Quarter Of 2001 Were Materially False And Misleading At The Times They Were Made

253. The statements made in the October 26, 2001 Press Release, October 26,

2001 8-K, Third Quarter 2001 10-Q, December 11, 2001 Press Release, December 12,

2001 Registration Statement, December 12, 2001 Press Release and December 21, 2001

Press Release were materially false and misleading at the times they were made, as

described in Section X above, describing Recently Obtained Evidence Directly


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Supporting Plaintiffs’ Claims, as well as in ¶¶ 95 through 98. Additionally, the

statements were materially false and misleading at the times they were made for the

reasons stated above in ¶ 166 a through f, as well as ¶¶ 167, 198, 199, 218 a through c,

219, and 233 a through b. To the extent such documents incorporate by reference the

Company’s earlier filings with the SEC during the Class Period, they are also false and

misleading for the reasons stated above.

254. In addition, these statements were materially false and misleading

because:

a. As later uncovered by Platt’s Power Markets Week, CMS sold

Reliant 20.9 million MWh at prices ranging from $19 to $136

MWh at the Cinergy, Entergy and PJM West trading hubs. Reliant

sold CMS 21.2 MWh at prices ranging from $24 to $123 MWh at

the Cinergy, Entergy and PJM West hubs. CMS total sales in the

third quarter of 2001 were approximately 28.9 million MWh, while

Reliant’s total sales were approximately 108.8 million MWh.

Without the transactions they did with each other, CMS would

have had 8 million MWh in sales; Reliant would have had 87.6

million MWh in sales volume. These transactions between CMS

and Reliant, among others, should not have been recorded in

CMS’s financial statements because there was no business purpose

for entering into the transactions, other than for the purpose of

artificially inflating revenues; and

b. As revealed in quarterly filings in 2002, CMS’s third quarter 2001

revenues were overstated by $1.602 billion and expenses were

overstated by $1.236 billion.


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36. CMS’s 2001 Financial Statements 255. On February 4, 2002, the Company issued a press release reporting CMS’s

financial results for the fourth quarter and year ended December 31, 2001 (the “February


256. The Company also filed on February 4, 2002, its current report on Form 8-

K (the “February 4, 2002 8-K”) with the SEC, announcing its financial results for the

fourth quarter and year ended December 31, 2001. This document was also issued by

Consumers, which is explicitly listed as a “Registrant” on the first page of the filing. The

February 4, 2002 8-K attached the Company’s February 4, 2001 Press Release as an

exhibit, repeating the same statements contained in the February 4, 2001 Press Release.

257. Defendant Wright signed the February 4, 2002 8-K.

258. On February 7, 2002, Merrill Lynch & Co. issued a research report in

which it noted that although MST had endured a disappointing fourth quarter, “positives”

included “higher electric volumes.” At that point, CMS was still including round-trip

trades in its volume citations.

259. On March 29, 2002, CMS filed its report on Form 10-K for the year ended

December 31, 2001 (the “2001 10-K”). This document was also issued by Consumers,

which is explicitly listed as a “Registrant” on the first page of the filing. The 2001 10-K

repeated the same statements as those contained in the February 4, 2002 Press Release.

In addition, CMS reported revenues of $4 billion for the year ended December 31, 2001

from its energy marketing, services and trading business and included the following

additional statements:

MARKETING, SERVICES AND TRADING CMS-MST provides gas, oil, and electric marketing, risk management and energy management services to industrial, commercial, utility and


88

municipal energy users throughout the United States and abroad. CMS-MST has grown dramatically since its inception in 1996. CMS 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 OUTLOOK: CMS 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'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 also seeks to continue developing importing and marketing opportunities for LNG. CMS plans to capitalize on favorable market conditions for energy performance contracting by expanding its services business in selected markets.

260. The 2001 10-K also stated in a footnote:

RECLASSIFICATIONS: During 2001, CMS entered into several energy trading contracts with counterparties. The impact of these transactions 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 transactions 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 transactions on a net basis. There was no impact on previously reported consolidated net income. CMS has reclassified certain prior year amounts for comparative purposes. These reclassifications did not affect consolidated net income for the years presented.

261. In addition, the 2001 10-K included the following caveat: “The

preparation of financial statements in conformity with generally accepted accounting


89

principles requires management to make estimates and assumptions that affect the

reported amounts of assets and liabilities and disclosure of contingent assets and

liabilities at the date of the financial statements and the reported amounts of revenues and

expenses during the reporting period.” The 2001 10-K also included the following

affirmation: “The results of operations, as presented above, are based on the application

of generally accepted U.S. accounting principles.”

262. The 2001 10-K was signed by Defendants McCormick, Wright, Flaherty,

Holton, Joos, Way, Whipple, Hopper, Deutch, Duderstadt, Parfet, Pierre and Yasinsky.

37. 2001 CMS Annual Report To Shareholders 263. CMS’s 2001 Annual Report (the “2001 Annual Report”) was released by

the Company on March 31, 2002. The 2001 Annual Report contained a letter from

Defendants McCormick and David Joos to shareholders of the Company touting the

performance of the Company’s trading operations, stating “Few companies have the

integrated energy asset base of CMS, and we believe that the earnings from the base

can be further enhanced by our growing and very successful energy marketing,

services and trading company. Our goal for CMS is simply to build our business to

become one of North America’s leading asset-based, integrated energy supply and

services companies.” (Emphasis added).

264. The 2001 Annual Report also highlighted the following concerning CMS-

MST:

Marketing, Services and Trading CMS Marketing, Services and Trading (CMS-MST) had the best year in its history in 2001. CMS-MST now serves about 10,300 customers throughout the United States and Canada.


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The company posted record annual sales, with gas sales to wholesale and retail customers growing 22 percent to 0.7 trillion cubic feet. Electricity sales grew by more than one-third to 51,800 gigawatt-hours.

* * *

CMS-MST uses state-of-the-art risk management systems, policies and procedures. CMS’s chief risk officer provides independent verification of CMS-MST’s financial results, which include conservative reserves for credit, operational and market price exposures.

(Emphasis added).

265. In addition, the 2001 Annual Report included the following caveat: “The

preparation of financial statements in conformity with generally accepted accounting

principles requires management to make estimates and assumptions that affect the

reported amounts of assets and liabilities and disclosure of contingent assets and

liabilities at the date of the financial statements and the reported amounts of revenues and

expenses during the reporting period.” The 2001 Annual Report also included the

following affirmation: “The results of operations, as presented above, are based on the

application of generally accepted U.S. accounting principles.”

266. The 2001 Annual Report was signed by Defendants McCormick and Joos.

38. CMS Changes Auditors

267. On April 22, 2002, CMS filed a Press Release (the “April 22, 2002 Press

Release”) announcing that the Boards of Directors of CMS and Consumers, upon the

recommendation of their respective Audit Committees (both of which included

Defendants Parfet (Chair), Deutch, Duderstadt, Pierre and Yasinsky), voted to

discontinue the use of Andersen as auditor of the Company’s financial statements for the

year ended December 31, 2002.


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268. The Company also filed on April 22, 2002, its current report on Form 8-K

(“April 22, 2002 8-K”), which incorporated the statements contained in the April 22,

2002 press release. Defendant Wright signed the April 22, 2002 8-K.

269. The April 22, 2002 8-K attached as an exhibit a letter from Andersen to

the SEC regarding the change in certifying accountant and affirming the statements

contained in the April 22, 2002 Press Release.

270. The Company’s definitive proxy statement filed on April 22, 2002 stated:

the audit committee recently concluded that the ability of Andersen to serve as independent auditors for the year ending Dec. 31, 2002 is adversely affected by well publicized recent developments and recommended to the board the replacement of Andersen as independent auditors.

39. Reasons Why The Statements Concerning The Fourth Quarter And Year End 2001 Were Materially False And Misleading At The Times They Were Made

271. The statements identified above in the February 4, 2002 Press Release,

February 4, 2002 8-K, 2001 10-K and 2001 Annual Report were materially false and


Recently Obtained Evidence Directly Supporting Plaintiffs’ Claims. Additionally, the

statements were materially false and misleading at the times they were made because:

a. The financial statements were not prepared in accordance with

GAAP, as described more fully below in Section XIV;

b. CMS’s “reclassification” of quarterly statements of operation in

the footnote of its 2001 10-K was false and misleading as it did not

disclose that approximately $4.2 billion in restated revenues

related to illicit round-trip trading at the Company – figure based

upon admissions in the Company’s May 15, 2002 Press Release.

Indeed, CMS did not disclose that the underlying round trip trades

were pre-arranged with a single counterparty, lacked economic


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substance and were conducted for the sole purpose of inflating

MST's volume statistics. Nor did CMS indicate in the footnote the

amount of revenue, $4.2 billion, subject to the reclassification. 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 10-K;

c. As stated above, according to a former CMS Enterprise

International Auditor, Defendant Wright directed the Company’s

division controllers to revise their 2001 year-end results upwards

by a total amount of $2 to $5 billion. Accordingly, such results

were materially overstated.

d. CMS CMS failed to disclose that the Company lacked sufficient

internal control mechanisms preventing the Company from

sufficiently detecting that the accounting staff was not able to keep

pace with the growth of the Company, thus resulting in

bookkeeping errors. Additionally, computer interfaces of sub-

ledgers to the general ledger were ineffective or lacking. As a

result, sub-ledger balances did not agree to the general ledger and

the differences were not adjusted;

e. CMS failed to disclose that senior management, the Audit

Committee of the Board of Directors (including Defendants Parfet

(Chair), Deutch, Duderstadt, Pierre, and Yasinsky) and Andersen

were aware of the internal control problems and were conducting a

plan of remediation, which included the replacement of key

personnel, as reported in the Company’s 2002 10-K; and

f. CMS failed to disclose that it was engaged in the deliberate


to the trade press.


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272. To the extent such documents incorporate by reference the Company’s

earlier filings with the SEC during the Class Period, they are also false and misleading for

the reasons stated above.

40. CMS’s First Quarter 2002 Financial Results 273. On May 1, 2002, the Company issued a press release reporting CMS’s

financial results for the first quarter ended March 31, 2002 (the May 1, 2002 Press

Release”). The May 1, 2002 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.

* * *

CMS, which has 85 percent of its assets in the United States, owns an operates . . . a leading energy marketing, trading and services company marketing 750 million cubic feet of natural gas and 52 million megawatt-hours of electricity annually.

274. The Company also filed on May 1, 2002 its current report on Form 8-K

(the “May 1, 2002 8-K”). This document was also issued by Consumers, which is

explicitly listed as a “Registrant” on the first page of the filing.

275. The May 1, 2002 8-K attached the Company’s May 1, 2002 Press Release

as an exhibit, repeating the same statements as those contained in the May 1, 2002 Press

Release.

276. Defendant Wright signed the May 1, 2002 8-K.

41. The Truth Is Partially Revealed

277. On May 9, 2002, an article appeared in The Wall Street Journal, entitled

“Dynegy Trades Draw SEC Scrutiny.” The article stated, in pertinent part, as follows:


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The Securities and Exchange Commission is widening its probe of the big energy company Dynegy Inc., examining two pairs of massive electric-power trades last fall -- executed at precisely the same moment for exactly the same price -- that canceled each other out and didn't yield any profits for Dynegy or its trading partner. The trades, which appear to have significantly boosted Dynegy's trading volume last year, were meant to help burnish the company's public image just as it was seeking to take over the dominant position in online energy trading from Enron Corp., according to people familiar with the situation.

* * *

Dynegy's partner on the trades was a unit of CMS 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, according to people familiar with the trades and Dynegy's disclosed volume numbers for Dynegydirect.

Kelly Farr, a CMS spokesman, said the company conducted the trades as a favor to Dynegy. Mr. Farr also said such deals were commonplace in the energy business. In 1997, for example, Occidental Petroleum Corp. drew an informal inquiry from the SEC for a slew of trades that produced no profits, and which the company later conceded were made in large part for appearances. No action has been taken against Occidental.

Mr. Farr said CMS has conducted a number of such trades. "They were done for the convenience of our trading partners, and we stopped doing them late last year because they became too much trouble," he said.

Both Dynegy and CMS said they received no financial benefits from the trades. "We did not book these trades to revenue or income," said CMS's Mr. Farr. "Looking at the trades at face value, it's hard to understand the purpose other than to increase the volume of trading activity," said Patti Harper-Slaboszewicz, senior industry analyst at San Jose, Calif., consulting firm Frost & Sullivan.


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Dynegy President Steve Bergstrom said the electricity trades with the CMS unit were conducted "to fulfill a customer requirement" and to "stress test" Dynegydirect because the platform had been "having problems with large transactions."

* * *

The two pairs of trades with the CMS unit took place on Nov. 15, just as Dynegy was in the middle of merger negotiations with Enron -- talks that ultimately failed because of what Dynegy said were Enron's breaches of its merger agreement.

Here's how the trades worked, according to Dynegy documents reviewed by The Wall Street Journal. At 10:08 a.m. CST, Dynegy bought a month's worth of electric capacity at $25.50 per megawatt hour. At exactly the same time, Dynegy sold CMS the same amount at the same price. Twenty minutes later, at 10:28 a.m. CST, Dynegy conducted another trade to simultaneously buy and sell a year's worth of electric capacity from CMS, at a price of $34 per megawatt hour. When energy companies trade capacity, they buy or sell the promise to deliver a stream of electric power at a fixed price for a set period of time.

(Emphasis added).

278. In response to the May 9, 2002 Wall Street Journal article, CMS issued a

press release on the same date, regarding its trades with Dynegy, stating:

CMS 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 clarified today that two November 15, 2001 electricity trades between CMS-MST and Dynegy were initiated by CMS-MST. CMS did not record any revenue or income to its financial statements as a result of these trades. CMS stopped engaging in such transactions late last year.

(Emphasis added).

279. 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:


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CMS Corporation announced today that the U.S. Securities and Exchange Commission (SEC) staff has asked it to provide information in connection with an informal inquiry into simultaneous purchases and sales of electricity with the same counterparties at the same price. These transactions, which involved no profit or loss, are of the type which were the subject of recent press reports. CMS is cooperating fully with the SEC in this matter.

280. On May 13, 2002, Reliant disclosed 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.

281. Also on May 13, 2002, Platt’s Power Markets Week, published an article,

entitled “Reliant, CMS Review Trading; Pattern Of Dealmaking Suggests ‘Wash

Trading,’” by Jeffrey Ryser. Specifically, the article stated:

Analysis of trading data for Reliant and the CMS trading unit shows that the companies sold each other more than 97 million MWh from the third quarter of 2000 through the fourth quarter of 2001. The data, reported quarterly to the Federal Energy Regulatory Commission, is aggregated rather than transaction-specific, so it does not allow transactions to be matched up by date and price.

The transactions between the companies gave them a huge boost in trading volume that they could report to shareholders and analysts.

For example, in the fourth quarter of 2000, Reliant and CMS sold each other 19.7 million MWh. Those trades accounted for 90% of CMS's quarterly sales, boosting its sales volume from less than 3 million MWh to 22.1 million MWh. In that quarter, the CMS unit ranked 18th among wholesale power sellers; without the Reliant transactions, it would have ranked 50th. The deals boosted Reliant's volume by almost 40%, from less than 51 million MWh to 70.5 million MWh, keeping it among the top five wholesale sellers.

So-called wash trading involves essentially false trades in which counterparties do transactions that balance out financially,


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allowing them -- without taking any risk of altering their positions -- to create the appearance of an active market, to boost companies' trading volumes, or to accomplish other purposes, including boosting revenue figures in financial statements.

The practice is prohibited on trading exchanges regulated by the Commodity Futures Trading Commission, but it is not explicitly barred on electronic trading platforms or in bilateral trading. The power trading market, because of the growing use of online trading platforms, is susceptible to wash trading. Some market participants say they suspect the practice is being used to push up prices and trading volumes on electronic trading platforms, and one particular sequence of trades on the InterContinentalExchange has been pointed to as a possible example of wash trading to push up prices (PMW, 22 April, 1).

* * *

CMS and Reliant started doing a large number of high-volume deals in mid-2000 after a senior executive at Reliant's trading operation joined CMS to lead its new trading unit. In late 1999, Tamela Pallas, senior vice president of Reliant's Wholesale Marketing and Trading Group, left Reliant's trading operation in Houston to become president and CEO of CMS Marketing, Services and Trading, hired by CMS to build from scratch that company's trading operations in a new office in Houston. The new operations in Houston took several months into 2000 to become operational.

* * *

Deals between CMS and Reliant first appeared in the first quarter of 2000, when CMS saw its sales jump by over 1,100% year-over-year and over 800% from the previous quarter.

In the third quarter of 2000, CMS sold Reliant 10.2 million MWh at prices ranging from $22.50 to $122/MWh at the Cinergy, Entergy and PJM West trading hubs. Reliant sold CMS 10.2 million MWh at prices ranging from $33.75 to $122/MWh at delivery points Cinergy, Entergy and PJM West.

CMS total sales in the third quarter of 2000 were about 12.6 million MWh, up from about 1.4 million MWh in the second


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quarter of 2000, while Reliant's total sales were about 69 million MWh, up from about 37.3 million MWh in the second quarter of 2000.

In the fourth quarter of 2000, CMS sold Reliant 19.8 million MWh at prices ranging from $25.75 to $76/MWh at the Cinergy, Entergy, PJM West and TVA trading hubs. Reliant sold CMS 19.7 MWh at prices ranging from $24 to $64/MWh at the Cinergy, Entergy and PJM West hubs.

CMS total sales in the fourth quarter of 2000 were about 22.1 million MWh, while Reliant's total sales were about 70.5 million MWh. Without the transactions they did with each other, CMS would have had 2.3 million MWh in sales; Reliant would have had 50 million MWh in sales volume.

In the first quarter of 2001, CMS sold Reliant 20.8 million MWh at prices ranging from $27.35 to $65.25/MWh at the Cinergy, Entergy, PJM West and TVA hubs. Reliant sold CMS 20.8 MWh at prices ranging from $28.52 to $59/MWh at the Cinergy, Entergy, and PJM West hubs.

CMS total sales in the first quarter of 2001 were about 23.9 million MWh; Reliant's total sales were about 76.8 million MWh. Without the sales to Reliant, CMS volume would have been 3.1 million MWh. Reliant sales would have fallen to 56 million without the CMS deals.

In the second quarter of 2001, CMS sold Reliant 21 million MWh at prices ranging from $21.75 to $78.50/MWh at the Cinergy, Entergy and PJM West hubs. Reliant sold CMS 21 million MWh at prices ranging from $23.25 to $78.25/MWh at the Cinergy, Entergy and PJM West hubs. CMS total sales in the second quarter were about 24.9 million MWh; Reliant's total sales were about 87.5 million MWh.

Without the Reliant deals, CMS volume would have fallen to 3.9 million MWh. Reliant's volume would have dropped to 66.5 million MWh.

In the third quarter of 2001, CMS sold Reliant 20.9 million MWh at prices ranging from $19 to $136/MWh at the Cinergy, Entergy and PJM West hubs. Reliant sold CMS 21.2 million MWh at


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prices ranging from $24 to $123/MWh at the Cinergy, Entergy and PJM West hubs. CMS sales in the third quarter of 2001 totaled about 28.9 million MWh; Reliant's total sales were about 108.8 million MWh.

Without the sales to Reliant, CMS sales for the quarter would have been 8 million MWh; Reliant's volume would have been about 87.6 million MWh without the sales to CMS.

(Emphasis added).

282. A follow-up article in The Wall Street Journal on May 13, 2002, entitled,

“Trade Disclosures Shake Faith In Damaged Electricity Market,” by Mitchell Benson,

Chip Cummins and Jathon Sapsford, further addressed the wash trades:

It's not clear why firms would have made the trades, or whether they may have broken any laws. The Securities and Exchange Commission is likely to investigate whether companies fraudulently claimed revenue from trades that didn't net any profits. If not aimed at booking extra revenue, such trades also could have helped companies exaggerate their market share in a drive to be perceived as bigger players and bring in more business. Dynegy, for its part, said its trade with CMS was only intended to test the movement of large volumes of energy; Reliant declined to give any details about its trades until a conference call with analysts scheduled for today.

More broadly, the latest revelations about trading behavior suggest that the torrid growth in the three-year-old wholesale electricity market, which underpinned huge revenue growth and fat profits at these companies through much of 2000 and 2001, could have been exaggerated -- no one knows by how much. The revelations also are renewing suspicions among federal and state investigators that bogus trades may have been at least partly behind electricity prices soaring as much as 460% in California early last year.

It's not clear how this kind of trading activity may have influenced market prices. Traders say that it is possible to use such "round-tripping" trades, in which the same amount of energy is swapped in both directions, to help set a higher benchmark price for a particular contract so that other or future buyers would have to pay more. It can also be used to make the market for a contract look more liquid than it actually is. It's also unclear how prevalent the practice was. The electricity trading market isn't transparent -- it


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consists of a handful of big players doing business among themselves.

What is clear is that the wholesale electricity market grew exponentially in very short order. Sales of megawatt hours nearly doubled from one billion in the fourth quarter of 2000 to 1.97 billion in the same period of 2001, during which Enron filed for bankruptcy protection. Some observers believe fresh damage may be done to the credibility of electricity deregulation, which was supposed to bring consumers more choice and lower prices. At this point "the arguments against markets are clear," says Federal Energy Regulatory Commission member William Massey: "California is strike one, and Enron is strike two. My God, we don't need strike three."

A "third strike," adds Mr. Massey "is if consumers and state policy makers lose confidence in the market-based approach and feel like there are a lot of funny games going on in the market that they don't understand."

* * *

Right out of the gate, trading volumes shot through the roof. Companies like Enron, Dynegy, Reliant Resources and Mirant trumpeted the huge growth in their "merchant" energy businesses, saying that the increasingly liquid national electricity market was allowing them to make the kind of profits that old-style utility operations -- with their highly regulated pricing -- never could. Wall Street loved the story; several utilities spun off their unregulated units in lucrative initial public offerings. Several independent producers and big trading operations such as Enron and Dynegy saw their stock prices shoot higher.

In trading electricity contracts that called for physical delivery of power months or years down the road, these companies had lots of leeway in how they valued the contracts. Using so-called mark-to-market accounting, the energy companies booked a profit or loss on the value of contracts they held based on the market price at a given moment. When electricity prices shot upward in the Western U.S. in the first half of 2001 due to supply shortfalls in California, the companies reaped huge gains.

The opaque nature of these accounting practices were taken on faith when times were good but came under intensified scrutiny as


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Enron collapsed; now creditors and investors get spooked quickly when questions about trading practices are raised publicly.

* * *

Analysts question the explanation. Art Gelber, a former energy executive who now runs the Houston consulting firm Gelber & Associates, say such trades are typically done to create the impression that a given company – and in this case, a trading platform -- is drawing more activity than others. At the time of the trades, Enron was sinking fast and a number of rival platforms were seeking to capture the business once held by its subsidiary EnronOnline. "It's a question of looking like the busiest guy around," said Mr. Gelber, who calls the practice "competing for brag-a-watts."

Round-tripping isn't illegal in power markets. On regulated stock and futures exchanges, where the practice is known more commonly as "wash" trading, it is specifically restricted. For years, regulators have prosecuted traders who have sought to inflate trading activity in a security for the sake of manipulating the price or creating the false impression that the security is trading in a liquid market.

(Emphasis added).

283. An article in the Houston Chronicle, dated May 13, 2002, entitled “Phony

trades common?” indicated that CMS was the party that had initiated the “round-trip”

trades with Dynegy. The article stated in pertinent part as follows: “Last week, Dynegy

and CMS confirmed that they did round-trip trades with each other. The deals were done

at CMS’s request, and Dynegy said one reason it wanted to conduct them was to test its

computer systems for handling large trades.”

284. On May 13, 2002, the Equity Research department of Morgan Stanley

Dean Witter, a subsidiary of Morgan Stanley, downgraded its rating of the Company’s

common stock and stated:


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We are downgrading CMS to Equal-weight from Overweight as we believe the risks related to an energy trading business do not provide an attractive risk/reward balance for investors in this levered mid-cap company.

The SEC launched an informal inquiry on 5/10 into simultaneous purchases and sales of electricity CMS entered into with the same counterparties at the same price. CMS reported these trades did not result in any profit or loss. The company says these trades were conducted to increase trading volumes.

* * * Financial Impact? – CMS Restated 1-3Q01 Revenue

During the first three quarters of 2001, CMS recorded all revenues and costs associated with the aforementioned trades. In the 4Q 2001, it was determined that under SFAS 133 these trades should have been recorded on a net basis, and the previous three quarters were restated. Net income was not affected.

285. Upon disclosure of the extent of CMS’s trading practices and its multiple

counter-parties, CMS common stock fell from a high of $19.23 on May 10, 2002 to a low

of $15.07 on May 13, 2002, or a single-day decline of more than 22% on high volume,

and down more than 45% from the Class Period high.

42. May 15, 2002 Press Release; CMS Issues Additional Disclosures Concerning Its Round-Trip Trading

286. On May 15, 2002, CMS finally provided certain details with respect to its

“roundtrip” trading practices. In a press release (the “May 15, 2002 Press Release”),

CMS stated in pertinent part as follows:

CMS 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 counterparties 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 ,


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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 decided after the third quarter of 2001 that not recording these trades in either revenue or expense was a more appropriate representation of the nature of these transactions. Therefore, no revenue or expense was recorded in its financial statements in the fourth quarter of 2001 from such trades. Revenue and expense were re-stated for the first three quarters of 2001 to eliminate $3.4 billion of previously reported revenue and expense. The Company's Annual Report on Form 10-K for 2001, issued in March, reflects only $5 million revenue and expense from such trades, which was inadvertently included. For 2000, these trades represented $1.0 billion of revenue and expense. The trades had no effect on the Company's earnings, cash flow or balance sheet for 2001 or 2000. CMS’ 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.

(Emphasis added).

287. Kelly Farr, a CMS spokesman, stated, “[w]e admit the mistake, and

decided to go to a more conservative method of accounting for 2001. We looked at the

accounting treatment that we had for round-trip trades and decided that it would be better

not to do those.”

288. A Reuters article, dated May 15, 2002, entitled “CMS admits to $4.4

billion worth of bogus power trades” provided additional information. The article stated

in pertinent part as follows:

CMS 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


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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.

* * * 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.

(Emphasis added).

289. Another Reuters article dated May 15, 2002, entitled “For accountants it’s

clear, wash trades are illegal” provided additional detail with respect to CMS’s trading

practices. The article stated, in pertinent part, as follows:

The bogus trades that have the likes of energy traders Dynegy Inc. and CMS 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.

* * *

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


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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.

(Emphasis added).

290. Additionally, on May 15, 2002, CMS announced that it was cooperating

with the pending SEC probe. As CMS spokesman, Dan Bishop, stated: “[t]he SEC will

provide us with written questions and we’ll respond to them.” The Company further

announced that it was subject to an investigation conducted by the CFTC, which had

requested that CMS furnish information on the subject of round-trip trading.

43. CMS’s First Quarter 2002 10-Q 291. On May 15, 2002, CMS filed its Quarterly Report on Form 10-Q for the

first quarter ended March 31, 2002 (the “First Quarter 2002 10-Q”). The First Quarter

2002 10-Q repeated the same statements as those contained in the May 1, 2002 Press

Release. In addition, the Company made the following disclosure relating to its round-

trip trading:


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Recent press reports have been examining so-called "round trip" commodity trades involving simultaneous purchases and sales with the same counter-parties at the same price. CMS disclosed that [CMS-MST] entered into such transactions during the period of May 2000 through mid-January 2002. Thirteen of the trades accounted for about 98 percent of the volume. All such [CMS-MST] trades were with either Dynegy Power Marketing, Inc. or Reliant Energy Services, Inc. These simultaneous transactions, in which electricity was sold and repurchased without profit, loss or cash flow impact to CMS, had the effect of increasing trading volumes. After internally concluding that the cessation of such trades was in the CMS's best interests, [CMS-MST] stopped such trades in January 2002. CMS 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 restated 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 2002, reflects only $5 million revenue and expense from such trades, which was inadvertently included. For 2000, these trades represented $1.0 billion of revenue and expense. The trades had no effect on the Company's earnings, cash flow or balance sheet for 2001 or 2000. CMS's internal review found that these trades included 79.3 million megawatt-hours in 2001 and 29.6 million megawatt-hours in 2000. With these trades subtracted, electric trading volumes for 2001 totaled 31 million megawatt-hours and for 2000 totaled 8.3 million megawatt-hours. CMS announced on May 10, 2002 that the Securities and Exchange Commission had asked it to provide information in connection with an informal inquiry into these types of industry transactions. CMS is cooperating with the informal inquiry by the Securities and Exchange Commission and is also cooperating with the Commodity Futures Trading Commission, which has requested that the Company furnish information on the same general subject. Although CMS believes its actions were appropriate, the Company is unable to predict the outcome of these ongoing inquiries.

(Emphasis added).

292. In addition, CMS reported operating revenues for CMS-MST of $985

million, compared with $1.113 billion for the same period in 2001. This document was



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the filing. The Company’s reference to its first quarter 2001 results, however, was not

consistent with earlier reported results. Specifically, in the First Quarter 2001 10-Q,

CMS-MST reported $2.344 billion in operating revenue, or $1.231 billion more than

the amount reported for that quarter in the First Quarter 2002 10-Q. The First

Quarter 2002 10-Q also reported that CMS-MST incurred operating expenses of $881

million, compared with $994 million in the same period in 2001. However, in the First

Quarter 2001 10-Q, CMS-MST reported operating expenses of $2.226 billion, or $1.232

billion more than the amount reported for that quarter in the First Quarter 2002

10-Q.

293. Despite these inconsistencies, the Company re-affirmed the reliability and

truthfulness of its financial statements, stating, “[t]he financial statements are prepared in

conformity with generally accepted accounting principles and use management’s

estimates where appropriate.”

294. Defendant Wright signed the First Quarter 2002 10-Q.

295. On May 16, 2002, Moody’s Investor Service revised its ratings outlook for

CMS from positive to stable.

296. Also on May 16, 2002, CMS announced that Pallas resigned over the

electricity trading practices of CMS-MST. CMS stated Pallas, “expressed regret over the

controversy that has resulted from this trading activity, and her belief that it was in the

best interest of CMS for her to step down.”

297. On May 17, 2002, Banc of America Securities Equity Research, a

subsidiary of Banc of America, issued a Research Brief that commented on the wash

trade disclosures. This report noted the following:


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CMS stock has declined approximately 25% since news about its round-trip trading activities surfaced late last week.

CMS indicated that wash trades accounted for approximately 72% of its total trading volumes in 2001 and 78% in 2000, clearly showing that the trades were designed to boost marketing claims, in our opinion.

We note that in its recent 10-K filing, the company did lower its reported revenues and expenses for the first three months of FY01 for a total of $3.4 billion, which leads us to believe that the only benefit was volume “pumping.”

298. By May 20, 2002, the Company had admitted that round-trip trades

accounted for nearly 72% of its reported volume in 2001, and 78% of reported volume

in 2000.

299. On May 20, 2002, Merrill Lynch & Co. issued a FlashNote containing the

following observations:

CMS continues to be weighed down by its involvement with “wash trades” in the energy marketing and trading business [MST]. The company has released preliminary results of an internal review which showed these trades to have represented a significant portion of the trading activity at [MST] in both 2001 and 2000.

CMS specifically disclosed that wash trades amounted to 79.3 million MWh in 2001 and 29.6 million MWh in 2002. These figures were equivalent to 72% of total volumes in 2001 and 78% in 2000. The individual trades were large, with just 13 transactions accounting for 98% of the volumes in question. All of the CMS wash trades were made with either Dynegy (DYN; D-3-3-7; $7.02) or with Reliant Energy Services.

* * *

The issue has clearly damaged investor confidence and last week CMS announced the resignation of Tamela Pallas, who had been


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head of MST] since late 1999 and was formerly with Reliant. Management indicated with this announcement that they are committed to ensuring that such trading practices are not repeated.

300. Despite the Company’s earlier disclosures concerning the false and

misleading nature of its round-trip trading, it continued to withhold the entire truth from

investors. Specifically, on May 21, 2002, Defendant McCormick said in an interview

with the Detroit Free Press that: “I think as people are getting more of the facts about

this situation, I think they're getting more comfortable that there's no big problem here.

It's overblown.”

301. In response to the previous disclosures of CMS and others’ round-trip

trading, on May 21, 2002, FERC issued an order to 143 companies, including CMS, to

confirm or deny under oath their involvement in round-trip trading.

44. Reasons Why the Statements Concerning The First Quarter Of 2002 Were Materially False And Misleading At The Times They Were Made

302. The statements identified above in the May 1, 2002 Press Release, May 1,

2002 8-K, and First Quarter 2002 10-Q were materially false and misleading at the times

they were made, as described in Section X above, describing Recently Obtained Evidence

Directly Supporting Plaintiffs’ Claims. Additionally, the statements were materially false

and misleading at the times they were made because:



b. CMS failed to disclose that the Company lacked sufficient internal

control mechanisms preventing the Company from sufficiently

detecting that the accounting staff was not able to keep pace with

the growth of the Company, thus resulting in bookkeeping errors.



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adjusted;

c. CMS failed to disclose that senior management, the Audit






d. CMS failed to disclose that it was engaged in the deliberate


to the trade press.

45. May 24, 2002 Press Release; Resignation Of McCormick And Appointment Of The Special Committee.

303. On May 24, 2002, CMS announced that Defendant McCormick had

resigned as Chairman and Chief Executive Officer of CMS. At that time, Defendant

McCormick admitted that, “There have been significant mistakes in execution.”

(Emphasis added).

304. In the May 24, 2002 Press Release, CMS also announced that it had

formed a Special Committee of independent directors to investigate the Company’s

round-trip trades. CMS further stated that it expected to eliminate $1 billion in revenue

from 2000 and that:

$900 million of revenue and expense that was [previously] reclassified resulted from an incomplete round trip gas trade. The restatement will also adjust the year end 2001 balance sheet for offsetting receivable and payable amounts of $122 million related to round trip trades, and will restate 2001 revenue and expense of $5 million inadvertently missed in the 2001 restatement.

305. The Company further announced it had received a subpoena from the U.S.

Attorney’s Office for the Southern District of New York relating to the Company’s


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round-trip trading, and that it expected to receive a subpoena from the U.S. Attorney’s

Office for the Southern District of Texas.

306. On May 28, 2002, the Equity Research department of Morgan Stanley

Dean Witter, a subsidiary of Morgan Stanley, issued a Company Update on CMS and

McCormick’s resignation. The foregoing report stated:

Summary and Investment Conclusion

CMS’s CEO Bill McCormick somewhat unexpectedly resigned at the company’s annual meeting on May 24th. McCormick will remain on the CMS board of directors.

* * * The board will also establish a special committee of independent directors to investigate matters surrounding round trip trades. The special committee will retain outside counsel to assist in the investigation.

We view the management change as a positive for CMS shares. Generally, shares of companies with new management outperform. We especially note ETR and CEG shares’ outperformance when external new management was named, although ETR had a concurrent corporate restructuring that raised $4 billion in proceeds (see exhibits 1&2).

However, CMS has a number of issues weighing against it over the intermediate-term mitigating the potential benefits from a management change. We remain equal-weight on CMS shares, as we do not see shares trading better than a 7- 7.5% yield, or $19-21, over the intermediate-term. The company remains committed to its annual $1.46 dividend.

Further, the company’s high leverage and continued presence in riskier energy trading and E&P businesses presents a difficult operating environment. We would view an exit from these businesses favorably and a realistic possibility coming out of the upcoming late June analyst meeting. CMS has sold its two largest E&P positions – Equatorial Guinea and Powder River.

* * *


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On 5/24, S&P placed CMS on Creditwatch with negative implications reflecting the heightened uncertainty related to the company’s round trip energy trades.

We see potential for downward revision to our 2003 EPS estimate of $1.95.

* * * The company is currently under investigation by the SEC, FERC and CFTC related to round trip trades. Further, the company was served subpoenas from the U.S. Attorney’s Offices for the Southern District of New York and Houston, which also is investigating round trip trades. We do not know what jurisdiction the U.S. Attorney’s are operating under, but believe there are looking for evidence to call for a grand jury indictment. Lastly, the company has had a number of shareholder lawsuits filed against it. We believe the pending criminal and civil liabilities associated with these civil/legal investigations/proceedings would deter any potential near-term strategic transactions involving CMS.

(Emphasis added).

307. On May 31, 2002, CMS announced the members of the Special

Committee to investigate round-trip trades conducted by the Company. The Chairman of

the Special Committee was Defendant Way and included Defendants Whipple (Chairman

and CEO of CMS), Flaherty and Holton.

46. Andersen Disavows Its Prior Audits Of CMS And Formally Ends Its Relationship With The Company

308. On June 11, 2002, CMS announced that Andersen ended its relationship

with the Company, disavowing its 2000 and 2001 audits. Andersen also stated that it

would not assist CMS in its investigation into the Company’s round-trip trading. In a

letter to the Company, dated June 10, 2002, Andersen stated that its auditor reports

relating to CMS for 2000 and 2001 could not be relied upon, and that it would not be able

to issue an opinion on the proposed restated financial statements for those years.

309. Commenting on developments at CMS, Merrill Lynch & Co. issued a June

14, 2002 report lowering its rating on CMS stock:


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We would advise investors to underweight CMS until the company resolves its liquidity problems. Continued uncertainty around its bank facility, the recent three-notch downgrade by Moody’s, headline risks and limited options for financing, all contribute, in our view, to a liquidity crunch and continued volatility in bond prices. In a span of two days, the CMS 8.5 of 11’s went from trading at $92 (translates into +498 bps spread) to $77 (+804 bps). It is currently bid at $79 (+759 bps).

* * * Financials –Ongoing investigations by the FERC and SEC, the absence of audited financial statements and a recent very harsh downgrade by Moody’s has effectively closed access to the capital markets for CMS. Because of regulatory considerations CMS does not intend to borrow at the Consumers level. At this point, CMS’s most viable option to mitigate an imminent liquidity crunch may be to do a financing at the Panhandle level and upstream the proceeds to the parent.

* * * The current liquidity crisis facing CMS has its origin in the disclosure last month that CMS had engaged in a substantial amount of wash trades over a period of one and one-half years. Indeed, CMS acknowledged that roughly 75% of its power trading volumes during 2001 were from those wash trades. This led to a need for CMS to restate its 2000 and 2001 financial statements. It also led to the departure of CMS’ long-time CEO, Bill McCormick.

Most troubling for CMS, this also led to formal notice last week from Arthur Andersen that Andersen’s historical opinions for the periods being restated cannot be relied upon. Like many other companies, CMS has replaced Andersen as its auditor, but the new auditors from Ernst & Young [LLP (“Ernst & Young”)] are not yet in a position to complete their own audit. The timing of this latest development was unfortunate as it occurred just as the company was hoping to finalize the rollover of its bank facility that is coming due on June 17.

310. On June 26, 2002, CMS announced that the Special Committee had

selected Winston & Strawn to conduct an investigation into the round-trip energy trades

carried out by CMS-MST. CMS confirmed its status as “an integrated energy company

which has its primary business operations an electric and natural gas utility, natural gas


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pipeline systems, independent power generation, oil and gas exploration and production

and energy marketing, services and trading.” (Emphasis added).

311. On July 1, 2002, the Equity Research department of Morgan Stanley Dean

Witter, a subsidiary of Morgan Stanley, issued another research report, stating:

Industry View: In-Line

Relative valuation is moderately attractive, but uncertainty surrounding trading issues could last for some time - plus it will be difficult for this group to outperform in an improving economy.

Although management previously stated they were committed to protecting the dividend, the company’s liquidity issues may be taking a higher priority. With the banks in control of the discussions, we feel there is a greater than 50% chance of at least a 50% dividend reduction.

With cash requirements as early as mid-July, this facility may be the only source of financing for CMS until it has audited financials 90-120 days from now, after its internal board committee completes its ‘wash’ trade investigation. The company cannot issue public market securities at any of its subsidiaries, even those with audited financials (Consumers Energy and Panhandle), until this time, as it cannot obtain a comfort letter.

At a 13% dividend yield, we feel CMS shares fairly reflect the potential for a 50% dividend cut, and thus we maintain our Equal-weight.

* * *

Back to the Basics CMS is exiting the speculative energy trading business as part of its “back-to-basics” strategy. It will focus on its core North American electric utility and gas infrastructure businesses, as well as African and Middle Eastern IPP investments.

* * *


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Trading & Marketing – Still in the Game??? Although the company is planning to exit from pure speculative trading, it still views the trading and marketing business as vital for optimization of their assets, specifically LNG, Michigan retail, and power origination (munis and co-ops). We do not view this business as a core competency for CMS, and would like to see a further pullback from trading to decrease its risk profile. In addition, the speculative book has an average duration of roughly 2 1/2 years, but exposure to changes in commodity prices is immaterial.

Management stated that its has an earnings neutral forecast from trading operations, and that it should have modest positive cash flow contribution. The outstanding credit at this business should be reduced by 50% to $500 million. VAR should also be reduced 50% to $3 million.

(Emphasis added).

47. CMS’s Second Quarter 2002 Financial Results

312. On August 7, 2002, CMS issued a press release reporting the Company’s

financial results for the second quarter ended June 30, 2002 (“August 7, 2002 Press

Release”). The August 7, 2002 Press Release reported operating revenues of $2.4 billion,

compared with $2.2 billion for the same period in 2001.

313. The Company also filed on August 7, 2002, its current report on Form 8-K

(“August 7, 2002 8-K”) with the SEC, announcing its financial results for the second

quarter ended June 30, 2002. This document was also issued by Consumers, which is

explicitly listed as a “Registrant” on the first page of the filing. The August 7, 2002 8-K

attached the Company’s August 7, 2002 Press Release as an exhibit, repeating the same

statements contained in the August 7, 2002 Press Release.

314. Defendant Wright signed the August 7, 2002 8-K.

315. On August 7, 2002, CMS named Thomas J. Webb (“Webb”) as the new

CFO to replace Defendant Wright, who was leaving the Company after 12 years at CMS.


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In addition, Whipple announced that he would be unable to certify the 2001 10-K or the

June 2002 10-K by August 14, 2002. The Company announced its intention to have its

audited financial statements ready by October 2002. In addition, the Company admitted

that it would restate approximately $5.3 billion in revenue for 2000 and 2001 to reflect

the artificial growth in revenue from round-trip trading.

316. The August 7, 2002 8-K stated in pertinent part:

CEO AND CFO CERTIFICATIONS

CMS does not plan to file with the Securities and Exchange Commission the certificates required by our CEO and CFO relating to the financial statements included in the CMS Form 10-K for 2001, which includes financial statements for 2000 as well, and in the Form 10-Q to be filed on or about August 14, 2002, which will contain the 2001 and 2002 quarterly and semiannually financial statements for the period ended June 30, 2002.

The 2000 and 2001 financial statements need to be restated primarily as a result of the reported revenues and expenses for round trip trades and related balance sheet adjustments. The restatements cannot be completed until the Special Investigative Committee of CMS's Board of Directors completes its investigation of round trip trading and related issues and CMS's newly appointed independent public accountants, Ernst & Young LLP have completed a re-audit of the 2000 and 2001 financial statements and their reviews of the current quarterly and semi-annual statements for these years.

For the similar reasons, the CEO and CFO of CMS, Consumers Energy and Panhandle will not be able to make the statements required by the Sarbanes-Oxley Act of 2002 with respect to the Form 10-Q for the period ended June 30, 2002.

317. In response to the Company’s announcement of its financial results for the

second quarter of 2002, Merrill Lynch & Co. issued an August 8, 2002 report, which

stated:


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Marketing, Services & Trading: The [MST] segment showed an operating loss of $18m versus income of $33m in Q2 last year. This was before restructuring charges which were classified as non-operating. The total CMS charge was $7m ($0.06) and we believe that most of this related to the [MST] business and its reorganization in the wake of the ongoing wash trading investigation saga. Main negative operating variance factors cited were lower electric margins ($24m) and lower gas margins ($22m). There were also mark-to-market losses on inter-company positions, but these are reversed out at the parent segment on consolidation. The losses relate to contracts with other CMS entities where [MST] was acting as the hedging agent. Excluding these inter-company losses, adjusted income for the segment was actually $3m positive. The main offset for lower margins was attributed to lower operating expenses and other items ($16m).

In their discussion of [MST], management indicated that the credit constraints in the industry – and for [MST] specifically – are severely constraining their ability to optimize existing positions or source new business. They did note, however, that [MST] is in the process of entering an agreement under which a third party will offer A-rated credit support to them (on a transaction-specific basis). This is designed to enable [MST] to continue with its origination activities targeting smaller municipal and cooperative utility customers.

318. On August 14, 2002, CMS filed its Quarterly Report on Form 10-Q for the

second quarter ended June 30, 2002 (the “Second Quarter 2002 10-Q”). This document


page of the filing. The Second Quarter 2002 10-Q repeated the same statements as

contained in the May 1, 2002 Press Release. In addition, CMS reported operating

revenues for CMS-MST of $1.167 billion, compared with $923 million for the same

period in 2001. The Company’s reference to its second quarter 2001 results, however,

was not consistent with earlier reported results. Specifically, in the Second Quarter 2001

10-Q, CMS-MST reported $3.089 billion in operating revenue, or $2.166 billion more

than the amount reported for that quarter in the Second Quarter 2002 10-Q. The


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Second Quarter 2002 10-Q also reported that CMS-MST incurred operating expenses of

$1.130 billion, compared with $768 million in the same period in 2001. However, in the

Second Quarter 2001 10-Q, CMS-MST reported operating expenses of $2.915 billion, or

$2.147 billion more than the amount reported for that quarter in the Second

Quarter 2002 10-Q.

319. The Second Quarter 2002 10-Q also attached as exhibits the resignation

agreements of Pallas and Defendants McCormick and Wright.

320. The Company also proffered the following regarding its risk management

of its power and gas trading:

CMS's derivative activities are subject to the direction of the Executive Oversight Committee, which is comprised of certain members of CMS's senior management, and its Risk Committee, which is comprised of CMS business unit managers and chaired by the CMS Chief Risk Officer. The purpose of the risk management policy is to measure and limit CMS's overall energy commodity risk by implementing an enterprise-wide policy across all CMS business units. This allows CMS to maximize the use of hedges among its business units before utilizing derivatives with external parties. The role of the Risk Committee is to review the corporate commodity position and ensure that net corporate exposures are within the economic risk tolerance levels established by the Board of Directors. Management employs established policies and procedures to manage its risks associated with market fluctuations, including the use of various derivative instruments such as futures, swaps, options and forward contracts. When management uses these derivative instruments, it intends that an opposite movement in the value of the hedged item would offset any losses incurred on the derivative instruments.

CMS has performed sensitivity analyses to assess the potential loss in fair value, cash flows and earnings based upon hypothetical 10 percent increases and decreases in market exposures. Management does not believe that sensitivity analyses alone provide an accurate or reliable method for monitoring and controlling risks; therefore, CMS and its subsidiaries rely on the experience and judgment of senior management and traders to revise strategies and adjust positions as they deem necessary. Losses in excess of the amounts


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determined in the sensitivity analyses could occur if market rates or prices exceed the 10 percent shift used for the analyses.

321. Defendant Wright signed the Second Quarter 2002 10-Q.

322. The Company also reported in the Second Quarter 2002 10-Q the

following with regard to its CMS-MST operations:

For the three months ended June 30, 2002, [CMS-MST]'s net loss was $33 million, a decrease of $66 million (200 percent) from the comparable period in 2001. During the second quarter of 2002, credit constraints severely limited the overall liquidity of the energy trading markets reducing [CMS-MST]'s ability to actively manage and optimize its open positions as well as impacting the ability to execute new deals. These constraints have placed downward pressure on trading margins for both wholesale power and natural gas. Operating revenues increased as a result of sales volumes on long-term power contracts that were executed during the latter part of 2001.

323. On August 19, 2002, William L. Massey, Commissioner of FERC, gave a

speech at the APGA Annual Conference in Jackson Hole, Wyoming, entitled, “FERC

Agenda for 2002.” In the speech, Massey assailed those entities who have impaired the

integrity of the electric and gas markets, stating:

The disclosure of the now infamous Enron trading strategies such as Fat Boy and Get Shorty depicted some traders as ruthless and greedy market participants who would even jeopardize grid reliability to make a buck, and the disclosure of sham round trip trading by several market participants, coupled with highly questionable accounting practices, has severely eroded investor confidence in many entities that engage in the trading of gas or electricity. All of this funny business has called into question the integrity of energy marketing and trading.

(Emphasis added).

48. Dynegy Cease & Desist Settlement With The SEC 324. On September 25, 2002, the SEC filed an action against Dynegy, relating,

in part, to its round-trip trades with CMS. Specifically, the SEC alleged that Dynegy

violated Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and


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13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1,

thereunder.

325. On the same day, September 25, 2002, the SEC settled its case with

Dynegy for $3 million. In settling the claims against it, Dynegy agreed to the entry of a

cease-and-desist order. The Litigation Release by the SEC states in the pertinent part as

follows:

Round-Trip Energy Trades

Dynegy issued materially misleading information to the investing public about the amount of trading on its electronic trading platform, Dynegydirect. On November 15, 2001, Dynegy entered into two massive "round-trip" electricity transactions. In a January 2002 press release, Dynegy included the notional trading value (multiple of volume, price and term) from one of these trades in a discussion of an increase in trading traffic on Dynegydirect. In an April 2002 press release, Dynegy included the results of these trades in its reported energy trading volume and in its first quarter 2002 revenues and cost of sales.

* * * Because the round-trip trades lacked economic substance, Dynegy's statements were materially misleading to the investing public. This case is the first enforcement action resulting from an energy trading company's misleading disclosures regarding use of "round-trip" or "wash" trades.

(Emphasis added).

49. Reasons Why the Statements Concerning The Second Quarter Of 2002 Were Materially False And Misleading At The Times They Were Made

326. The statements identified above in the August 7, 2002 Press Release, the

August 7, 2002 8-K and in the Second Quarter 2002 10-Q were materially false and



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Recently Obtained Evidence Directly Supporting Plaintiffs’ Claims. Additionally, the

statements were materially false and misleading at the times they were made because:



b. CMS failed to disclose that the Company lacked sufficient internal

control mechanisms preventing the Company from sufficiently

detecting that the accounting staff was not able to keep pace with

the growth of the Company, thus resulting in bookkeeping errors.




adjusted;

c. CMS failed to disclose that senior management, the Audit






d. CMS failed to disclose that it was engaged in the deliberate


to the trade press.

327. In addition, the May 9, 2002 Press Release, May 10, 2002 Press Release,

and May 15, 2002 Press Release failed to disclose that CMS was engaged in the

deliberate manipulation of the published price indices by providing false data to the trade

press, and the Company had engaged in round-trip trading transactions in order to

artificially inflate CMS’s revenues as well as the price of the Company’s publicly traded

securities.


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50. CMS Announces Results Of Special Committee’s Round-Trip Investigation

328. On November 4, 2002, CMS issued a press release (the “November 4,

2002 Press Release”) concerning the Special Committee and its purported findings:

CMS (NYSE: CMS) announced today the completion of the work of a Board of Directors special committee established to investigate round-trip trading at CMS Marketing, Services and Trading. The special committee reported its findings and recommendations to the Board of Directors on Thursday and the board approved the recommendations of the committee and its independent outside counsel.

The facts previously reported by the Company about round-trip trading at the Houston-based subsidiary are essentially consistent with the findings of the special committee. The special committee also concluded, based on an extensive investigation, that the round-trip trades were undertaken to raise CMS Marketing, Services and Trading's profile as an energy marketer with the goal of enhancing its ability to market its services. The committee found no apparent effort to manipulate the price of CMS stock or affect energy prices. CMS noted that the Securities and Exchange Commission, U.S. Department of Justice, the Commodity Futures Trading Commission, and the Federal Energy Regulatory Commission are investigating round-trip trading. CMS said it would continue to cooperate with these investigations.

Ken Whipple, chairman and chief executive officer of CMS, said: "Round-trip trading by CMS Marketing, Services and Trading was an ill-considered, inappropriate marketing practice that is unacceptable. We have already taken a number of steps recommended by the special committee to prevent any reoccurrence of this practice, including the termination of speculative trading and revisions to CMS's risk management policy. CMS will rapidly implement the remaining recommendations of the special committee."

* * *

Separately, the Company also said it is conducting an internal review of the natural gas trade information provided by two


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subsidiaries - CMS Marketing, Services and Trading and the Tulsa, Okla.-based CMS Field Services - to energy industry publications that compile and report index prices. A preliminary analysis indicates that some employees provided inaccurate information in the voluntary reports. The Company will take appropriate personnel disciplinary actions. It also said that it had stopped providing the information to the publications.

CMS began its review after other energy companies reported similar activities. CMS has notified the appropriate regulatory and governmental agencies of this review.

CMS Energy Corporation is an integrated energy company, which has as its primary business operations an electric and natural gas utility, natural gas pipeline systems, independent power generation, and energy marketing, services and trading.

(Emphasis added).

51. CMS’s Third Quarter 2002 Financial Statements 329. On November 14, 2002, the Company issued a press release reporting the

Company’s financial results for the third quarter ended September 30, 2002 (the

“November 14, 2002 Press Release”). The November 14, 2002 Press Release reported

operating revenues of $1.333 million, the same figure reported for the same period in

2001. The Company also reported that, “CMS’s comprehensive review by its new

auditors, Ernst & Young, is near completion: -- Preliminary results indicate [additional]

restatements will be required for 2000 and 2001 for reasons unrelated to round-trip

trading.”


the third quarter ended September 30, 2002 (the “Third Quarter 2002 10-Q”). This

document was also issued by Consumers, which is explicitly listed as a “Registrant” on

the first page of the filing. In addition, CMS reported operating revenues for CMS-MST

of $159 million, compared with $141 million for the same period in 2001. The


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Company’s reference to its third quarter 2001 results, however, was not consistent with

earlier reported results. Specifically, in the Third Quarter 2001 10-Q, CMS-MST

reported $1.743 billion in operating revenue, or $1.602 billion more than the amount

reported for that quarter in the Third Quarter 2002 10-Q. The Third Quarter 2002

10-Q also reported that CMS-MST incurred operating expenses of $385 million,

compared with $424 million in the same period in 2001. However, in the Third Quarter

2001 10-Q, CMS-MST reported operating expenses of $1.66 billion, or $1.236 billion

more than the amount reported for that quarter in the Third Quarter 2002 10-Q.

331. The Company disclosed certain control weaknesses at CMS-MST. The

Third Quarter 2002 10-Q stated:

During the audit cycle of 2001, it was determined that there were several weaknesses which existed in the [CMS-MST] accounting controls, in particular those relating to reconciling the activity and balances in subsidiary receivable and payable ledgers with balances reflected in the general ledger. Senior management, the Audit Committee of the Board of Directors and the independent auditors were all notified about the situation and a plan of remediation was begun, including replacement of key personnel. While important changes in control have been initiated, some elements of the remediation plans have been unavoidably delayed by the requirement to completely re -audit the CMS financial statements for years 2000 and 2001. Management believes that supplemental procedures and personnel currently in place, along with the significant contraction of the trading business planned by management, have allowed for continuing business activity while the control weaknesses are remediated and staffing positions are filled by qualified candidates. Management further expects controls corrections to be completed before the end of the 2002 audit cycle.

332. The Third Quarter 2002 10-Q was signed by Webb.


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52. Reasons Why The Statements Concerning The Third Quarter Of 2002 Were Materially False And Misleading At The Times They Were Made

333. The statements identified above in the November 14, 2002 Press Release

and the Third Quarter 2002 10-Q were materially false and misleading at the times they

were made, as described in Section X above, describing Recently Obtained Evidence

Directly Supporting Plaintiffs’ Claims. Additionally, the statements were materially false

and misleading at the times they were made because:



b. CMS failed to disclose that it was engaged in the deliberate


to the trade press.

334. To the extent such documents incorporate by reference the Company’s

earlier filings with the SEC during the Class Period, they are also false and misleading for

the reasons stated above.

53. January 2003 Platt’s Power Markets Week 335. On January 6, 2003, Platt’s Power Markets Week, published an article

entitled, “EFFECT OF SWITCH TO ‘NET’ ENERGY TRADING RESULTS.” The

article described the effect on CMS’s previously reported revenues after accounting for

its round-trip energy trading on a net basis rather than a gross basis.

336. Specifically, the article stated that CMS’s 3rd Quarter 2001 revenue would

be revised (negatively) by $1.602 billion resulting in a decrease of 91.9%.

337. On January 17, 2003, the Equity Research department of Morgan Stanley

Dean Witter, a subsidiary of Morgan Stanley, issued a report evaluating the stability of

CMS’s business. Among other things, this report stated:


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We would note that new management has taken a number of steps in the right direction. However, the baggage from the past – burdensome parent debt, selling assets at less than what they were purchased for, energy trading investigations – is too large to overcome in the near-term, in our opinion.

In our view, the company needs a significant amount of equity, although not imminently. The company has put itself in a position where it will only need to refinance $500 million and issue $300 million of utility debt in 2003, if it can manage to raise an additional $210 million in asset sales, which appears reasonable to us. The company is attempting to divest its field services (we estimate $150 million of proceeds), trading operations, and its Indian and Latin American operations.

* * *

Financial Outlook CMS needs to pay down an additional $190 million of its dividend-restricting 3/03 credit facility by February 6, the day prior to the record date, in order to continue to pay dividends. Paydown options include asset sales, refinancings, monetizing the Panhandle sale proceeds, or drawing from a cash balance ($407 million at 9/30).

Due to over $1.3 billion in expected writedowns in 2002, we project a debt ratio close to 79% at the end of 2002. We see proceeds from the Panhandle sale and expected field services sale modestly improving the debt ratio to about 73% by year-end 2003.

We believe CMS will have to rely primarily on asset sales or equity issuances to paydown debt, since it has negative free cash flow (we estimate shortfalls of $299 million in 2003 and $427 million in 2004). However, we see the Panhandle sale as the last significant asset sale for the company in the intermediate term.

54. [Deleted in accordance with the Court’s Prior Orders]






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55. CMS’s 2002 Financial Statements 343. On March 31, 2003, CMS filed its report on Form 10-K for the year-end

and fourth quarter of 2002 (“2002 10-K”). The 2002 10-K included restated figures for

fiscal year 2001. However, the 2002 10-K was not certified by the Company’s CEO or

any principle financial officer of CMS since the Company is “in the process of restating

2001 for each quarter and intends to amend this form 10-K and provide the required

certifications at that time.”

344. The 2002 10-K reported that pursuant to the reaudit undertaken by Ernst &

Young, Ernst & Young found significant, previously undisclosed control weaknesses at

CMS-MST. The internal controls related to “a lack of account reconciliations,

unidentified differences between subsidiary ledgers and the general ledger, and

procedures and processes surrounding the Company's accounting for energy trading

contracts, including mark-to-market accounting.”

345. The Company admitted in the 2002 10-K, that it did not implement the

necessary internal controls until as late as 2003:

Significant aspects of the remediation plan, which includes the implementation of improvements and changes to [CMS-MST]'s internal accounting controls, were postponed to enable the Company to prepare restated financial statements for 2000 and 2001. While a number of these control improvements and changes were implemented in late 2002, the most important ones occurred in the first quarter of 2003.

(Emphasis added).

346. The 2002 10-K also disclosed that CMS commenced an internal

investigation in 2001 into the internal control problems at the Company, a fact previously


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undisclosed to investors, despite its materiality in the 2001 10-K. In this regard, the 2002

10-K states:

[CMS-MST]'s business experienced rapid growth during 2000 and 2001. Late in 2001, CMS became aware of certain control weaknesses at [CMS-MST] and immediately began an internal investigation. The investigation revealed that the size and expertise of the back-office accounting staff had not kept pace with the rapid growth and, as a result, bookkeeping errors had occurred and account reconciliations were not prepared. Additionally, computer interfaces of sub-ledgers to the general ledger were ineffective or lacking. As a result, sub-ledger balances did not agree to the general ledger and the differences were not adjusted. In early 2002, [CMS-MST] commenced an account recalculation and reconciliation project that focused initially on accounts receivable and payable, intercompany and cash accounts, but was later expanded to include other accounts. The recalculation and reconstruction work for 2000, 2001 and 2002 has been completed and the consolidated financial statements reflect the required adjustments, which decreased net income by $5 million in 2001 and $13 million in 2000.

(Emphasis added).

347. CMS also acknowledged that its previously disclosed round-trip trading

“had the effect of increasing operating revenues, operating expenses, accounts receivable,

accounts payable and reported trading volumes.” CMS also stated that the round-trip

trades were “undertaken to raise CMS-MST’s profile as an energy marketer, with the

goal of enhancing [CMS-MST]’s ability to promote its services to new customers.”

Finally, CMS and its new auditor, Ernst & Young, provided the following caveat to the

2002 10-K:

CMS's consolidated financial statements for the years 2001 and 2000 have been restated as a result of accounting adjustments identified in connection with the re-audit and preparation of the restated 2001 and 2000 consolidated financial statements of CMS. CMS is currently in the process of completing its restatement of the consolidated financial statements for the quarters of 2001, and upon completion, Ernst & Young will perform a review of the 2001 quarterly financial data in accordance with standards


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established by the American Institute of Certified Public Accountants. As a result, the 2001 quarterly information has not yet been restated. Upon completion, CMS will file restated financial statements for those interim periods, and for the interim periods of 2002, in an amended Form 10-Q for September 30, 2002. That filing will include details of the quarterly impacts of the restatement adjustments for 2001 and the first three quarters of 2002. The 2002 interim financial data contained in Note 20, Quarterly Financial and Common Stock Information, to the consolidated financial statements has been restated to reflect the impacts of restatement adjustments.

* * *

The selected quarterly financial data related to 2001 included in Note 20, "Unaudited Summary of Quarterly Results of Operations," contain information that we did not audit, and accordingly, we do not express an opinion on that data. We attempted, but were unable, to review the quarterly financial data in accordance with standards established by the American Institute of Certified Public Accountants because we believe that the CMS's system for preparing interim financial information did not provide an adequate basis to enable us to complete such a review.

56. CMS’s “Round-Trip” Energy Trades Materially

Inflated CMS’s Trading Volumes 348. The Individual Defendants knew or recklessly disregarded that CMS’s

trading volumes were grossly inflated during the Class Period, as a result of the “round-

trip” trades. The “round-trip” trades, also referred to as zero-margin trades, involved

buying electricity from other energy companies at a set price, then selling it back to them

at the same price. As admitted by the Company in CMS’s First Quarter 2002 10-Q,

“[t]hese simultaneous transactions, in which electricity was sold and repurchased without

profit, loss or cash flow impact to CMS , had the effect of increasing trading volumes.”

(Emphasis added).

349. The impact of these “round-trip” trades was significant. According to

CMS’s fiscal 2000 10-K, “[t]he volumes of marketed natural gas and power traded

increased 31 percent and 919 percent, respectively.” (Emphasis added). According to


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CMS’s fiscal 2001 10-K, marketed volumes increased for “electric (51,790 GWh vs.

37,781 GWh),” a 37% increase. On May 16, 2002, The Wall Street Journal reported,

“with the help of the trades [CMS] was ranked the 21st largest electricity marketer last

year in the trade magazine Power Markets Week. Without the round-trip deals, it would

have ranked 38th.” According to the same article, the rationale for entering into the

transactions was twofold: (i) “[R]ankings can be used to drum up business”; and (ii)

“Round-trip trades could also have been used to move prices in the wholesale market or

create the impression that a given energy contract was more liquid than it really was.”

XII. POST CLASS PERIOD DEVELOPMENTS

1. Restatement Of False Financial Statements 350. In order to falsely and materially inflate revenues during the Class Period,

CMS violated GAAP and SEC rules by including at least $5.6 billion of revenues in its

financial statements from round-trip trades that lacked any economic substance. CMS

engaged in these transactions in order to manipulate the market and investors into

thinking that CMS was becoming a significant, if not a major, player in the power

marketing industry, among other reasons. The Company’s failure to properly account for

and disclose CMS’s round-trip trading contracts was materially misleading to investors.

Indeed, CMS’s restatements constitute an admission that its previously issued financial

statements were materially misstated and not in compliance with GAAP when issued, as

a result of the effects of the round-trip trades.

351. On May 24, 2002, in a press release (the “First Restatement”), the

Company disclosed that it had “reclassified 2001 financial statements to eliminate $4.2

billion of revenue and expense, which included $3.3 billion of previously reported

revenue and expense from round- trip power trades. The other $900 million of revenue


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and expense which was reclassified resulted from an incomplete round trip gas trade.”

The reductions in revenue and expenses were related only to the first three quarters of

2001. The following chart sets forth the Company’s restated operating revenues for the

nine months ended September 30, 2001:


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Nine Months Ended September 30, 2001

As Originally Reported (a)

As Restated $ Change % Change (in milions) OPERATING REVENUES Electric utility $ 2.027 $ 2.027 $ - - Gas utility 928 928 - - Natural gas transmission 854 854 - - Independent power production 314 314 - - Oil and gas exploration and production 158 158 - - Marketing, services and trading [MST] 7,176 2,976 (4,200) -59% International energy distribution - - - - Other 15 15 - -

$ 11,472 $ 7,272 $ (4,200) -37%

(a) As Originally Reported in CMS’s 10-Q for the Third Quarter of 2001.

352. On March 31, 2003, CMS filed its 10-K for fiscal 2002. In connection

with the 10-K (the “Second Restatement”), the Company restated for the effects of the

round-trip trades, which remained uncorrected, reducing revenue and expense for 2001

by an additional $5 million and $1 billion for 2000. Indeed, the cumulative effects of the

First and Second Restatements were a reduction of revenues of approximately $8 billion

or 35% of previously reported revenue. In addition, Defendants disclosed that “[a]s a

result of the restatement required with respect to the round-trip trading transactions, Ernst

& Young was engaged to re-audit CMS's consolidated financial statements for each of

the fiscal years ended December 31, 2001 and December 31, 2000, which included audit

work at Consumers and Panhandle for these years.” In connection with the restatement,

CMS had “to make certain adjustments (in addition to the round-trip trades) to its

consolidated financial statements for the fiscal years ended December 31, 2001 and

December 31, 2000.” The following chart sets forth the Company’s restated operating

revenues for the fiscal years ended 2000 and 2001:


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2001 2000 As Originally

Reported (b) As Restated $ Change % Change As Originally

Reported As Restated $ Change % Change

(in milions) OPERATING REVENUES Electric utility $ 2,631 $ 2,630 $ (1) 0% $ 2,676 $ 2,676 $ - 0%

Gas utility 1,338 1,338 - 0% 1,196 1,196 - 0%

Natural gas transmission 1,053 59 (994) -94% 906 88 (818) -90%

Independent power production 388 388 - 0% 500 503 3 1%

Oil and gas exploration and production 212 - (212) -100% 131 - (131) -100%

Marketing, services and trading [MST] 3,953 3,674 (279) -7% 3,294 2,178 (1,116) -34%

International energy distribution - - - 0% 265 - (265) -100%

Other 22 (26) (48) -218% 30 56 26 87%

$ 9,597 $ 8,063 $ (1,534) -16% $ 8,998 $ 6,697 $ (2,301) -26%

(b) As Originally Reported in CMS’s 2001 10-K

2. Sale Of CMS-MST Division 353. In light of the foregoing disclosures, CMS decided to phase out CMS-

MST's wholesale energy trading business. On January 16, 2003, CMS-MST disclosed

the sale on a major portion of its wholesale natural gas trading book to Sempra Energy

Trading. The sale price was approximately $18 million. On February 13, 2003, CMS-

MST signed a definitive agreement with Constellation Power Source, Inc. to sell its

wholesale electric power business.

354. On February 20, 2003, CMS-MST signed a definitive agreement with

Chevron Energy Solutions Company, a division of Chevron U.S.A., to sell the non-

federal business of CMS Viron, its energy management services provider subsidiary. On

February 26, 2003, CMS-MST also signed a definitive agreement with Pepco Energy

Services, Inc. to sell CMS Viron's federal energy management services business.

3. Additional Accounting And Financial Issues 355. Subsequent to the Company’s May 2002 announcements concerning its

round-trip trading, various filings issued by the Company, including its 2002 10-K, have


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raised, for the first time, additional issues concerning CMS’s financials, which further

call into question their accuracy and legitimacy. Such disclosures include the

announcement of $2.9 billion in off-balance sheet debt, which raises serious issues

concerning the Company’s actual financial condition.

356. In addition, the Company’s Third Quarter 2002 10-Q disclosed for the first

time that the Company engaged in inter-book and intercompany trading, which also

impacted upon the Company’s financials during the Class Period.

357. While the details surrounding these transactions, as well as the Company’s

off-balance sheet accounting, have not been fully disclosed, their mere existence raise

serious and significant issues regarding the Company’s business and balance sheet.

XIII. SCIENTER ALLEGATIONS

Overview

358. The Individual Defendants, by reason of their senior executive positions at

the Company and attendance at meetings of the Board of Directors and committees

thereof, particularly the Audit Committee (which included Defendants Parfet (Chair),

Deutch, Duderstadt, Pierre, and Yasinsky), where the quarterly and annual financial

results were reviewed at length by business segment, had direct knowledge of the illegal

trading activities. Indeed, the revenue growth at the CMS-MST subsidiary was so

staggering and dramatic during the Class Period, solely by reason of the round-trip

trading activities, that the Individual Defendants, upon knowledge of these activities,

countenanced the continuation of these trading activities, among other reasons, to portray

the Company as an industry leader, to enhance the Company’s ability to attract large

energy customers, and to advance the Company’s placement as a Fortune 500 company.


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Indeed, during the Class Period, revenues from round-trip trading constituted at least 35%

of the consolidated revenues for 2000 and 2001.

359. As a result of both the Company’s risk management controls and chain of

command for financial reporting, each of the Individual Defendants, at a minimum, was

aware of the MST division’s round-trip trading activities. By virtue of their respective

positions, the Individual Defendants had access to the material adverse non-public

information concerning the business and financial condition of the Company. In fact, the

Company’s own risk management policies during the Class Period demonstrate that the

Individual Defendants directly managed or, at a minimum, were aware of, the various

risk levels associated with the Company’s operations, including its round trading

positions in its MST division. As set forth in the Company’s 2000 Annual Report and

repeated in every quarterly filing through the first quarter of 2002,

CMS’s derivative [trading] activities are subject to the direction of the Executive Oversight Committee, consisting of certain members of CMS’s senior management, and its Risk Committee, consisting of CMS business unit managers. The goal of the risk management policy is to measure and limit CMS’s overall energy commodity risk by implementing an enterprise-wide policy across all CMS business units . . . . The role of the Risk Committee is to review the corporate commodity position and ensure that net corporate exposures are within the economic risk tolerance levels established by the Board of Directors.

(Emphasis added). In addition, as stated in the Company’s quarterly reports for the First

Quarter of 2000 through the First Quarter of 2002:

CMS and its subsidiaries rely on the experience and judgment of senior management and traders to revise strategies and adjust positions as they deem necessary.

(Emphasis added).


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360. As set forth in the Company’s Definitive Proxy Statement on Schedule

14A, which it filed with the SEC on April 27, 2000 (“April 27, 2000 Schedule 14A”), the

members of the Audit Committees of CMS and Consumers at the time were Defendants

Parfet (Chair), Deutch, Duderstadt, Pierre, and Yasinsky. April 27, 2000 Schedule 14A,

at p. 9. The April 27, 2000 Schedule 14A indicates that the Audit Committees met three

times during the previous year and further states that the Audit Committees:

meet with representatives of the independent public accountants from time to time during the year and after the completion of the annual audit of CMS' and Consumers' financial statements to review and discuss such audit, internal controls and other appropriate matters; review the activities of the Internal Audit Department; review the relationship of CMS' and Consumers' independent public accountants with CMS and Consumers insofar as they perform nonaudit services; and review and recommend to the Boards of Directors the appointment of independent public accountants.

Id.

361. Moreover, as set forth in the Company’s Definitive Proxy Statement on

Schedule 14A, which it filed with the SEC on April 23, 2001 (“April 23, 2001 Schedule

14A”), as of that date, the Audit Committees of CMS and Consumers consisted of

Defendants Parfet (Chair), Deutch, Duderstadt, Pierre, and Yasinsky. April 23, 2001

Schedule 14A, at p. 6. During the previous year, the Audit Committees of CMS and

Consumers met three times. Id. The April 23, 2001 Schedule 14A also stated the

following regarding the role of the Audit Committees:

These committees meet with representatives of the independent public accountants from time to time during the year and after the completion of the annual audit of CMS' and Consumers' financial statements to review and discuss this audit, internal controls and other appropriate matters; review the activities of the Internal Audit Department; review the relationship of CMS' and Consumers' independent public accountants with CMS and Consumers insofar as they perform nonaudit services; review and recommend to the Boards of Directors the appointment of independent public accountants; and report to the Board of Directors with respect to the


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committees' recommendations. The Board of Directors has adopted a written charter for the audit committee. The charter is included as an appendix to this proxy statement.

Id.

362. As set forth above, the Board of Directors of CMS adopted a written

charter for the Audit Committee which was attached to the April 23, 2001 Schedule 14A.

As described in the charter, the primary duties and responsibilities of the Audit

Committee are to:

[o]versee Management’s and the independent accountant’s preparation of external financial reports . . . [m]onitor the adequacy of internal controls . . . [o]versee the audit process, including the independence and performance of the Corporation’s independent accountants and internal audit department . . . [and] [m]onitor compliance by the Corporation with legal and regulatory requirements.

Id., at 17. With regard to external financial reporting, the Audit Committee is required,

inter alia, to:

[o]versee the Corporation’s annual and quarterly financial reporting process, including the related internal accounting controls . . . [review, before publication, the Corporation’s annual consolidated financial statements and related accounting policies and changes . . . [b]efore announcement or publication of the Corporation’s quarterly financial report, review and discuss with Management and the independent accountants, the Corporation’s quarterly financial results and the significant events, transactions and changes in accounting estimates which were considered by the independent accountants in performing their quarterly review. Such review shall include a discussion about the quality of reporting. The chairperson of the Committee may represent the entire Audit Committee for purposes of this review . . . [and] [i]nquire of management how it accounted for business transactions, activities and exposures and whether any accounting principles were changed.

Id., at 19. With regard to internal controls, the Audit Committee is required, inter alia, to:

[i]n consultation with management, the independent accountants and the Internal Audit Department, consider the integrity of the Corporation’s financial reporting processes and the adequacy and effectiveness of internal controls taking into account significant financial risk exposures


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and the steps management has taken to monitor, control and report such exposures . . . [r]eview significant findings identified by the independent accountants and the Internal Audit Department together with management’s responses to such recommendations . . . [and] [r]eview the reports of the Corporation’s Risk Policy Committee concerning the Corporation’s risk management activities and compliance with the Corporation’s Risk Oversight Policy.

Id. With regard to compliance with legal and regulatory requirements, the Audit

Committee is required, inter alia, to:

[p]rovide periodic reports to the full Board concerning the scope and results of the work performed by the Committee.

Id., at 20.

363. On April 22, 2002, the Company filed with the SEC its Definitive Proxy

Statement on Schedule 14A (the “April 22, 2002 Schedule 14A”). The April 22, 2002

Schedule 14A set forth, among other things, the current membership of the Audit

Committees of CMS and Consumers. The members of the Audit Committees at the time

the 2002 Proxy Statement was filed were: Defendant Parfet (Chair), Deutch, Duderstadt,

Pierre, and Yasinsky. April 22, 2002 Schedule 14A, at p. 5. During the previous year the

Audit Committees of CMS and Consumers each met four times. Id. The April 22, 2002

Schedule 14A also stated the following regarding the role of the Audit Committee:

The primary functions of these committees are to:

- Meet with representatives of the independent auditors from time to time during the year and after the completion of the annual audit of CMS' and Consumers' financial statements to review and discuss this audit, internal controls and other appropriate matters;

- Review the activities of the Internal Audit Department;

- Review the relationship of CMS' and Consumers' independent auditors with CMS and Consumers insofar as


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they perform nonaudit services;

- Review and recommend to the Boards of Directors the appointment of independent auditors;

- Report and make recommendations to the Boards of Directors; and

- Perform its duties in a manner consistent with the Audit Committee Charter adopted by the Board of Directors.

Id.

364. As set forth elsewhere herein in detail, the Individual Defendants, by

virtue of their receipt of information reflecting the true facts regarding CMS, their control

over and receipt of information regarding CMS’s allegedly materially misleading

misstatements and their associations with the Company which made them privy to

confidential proprietary information concerning CMS, participated in the fraudulent

scheme alleged herein. In light of their senior positions with the Company and the

policies set forth above, the Individual Defendants clearly had access to internal

corporate documents, including CMS’s general ledger and internal reports relating to the

wholesale energy trading business’ revenue and expenses, such as VAR Reports and

other information regularly provided to them in connection therewith, in their capacity as

the officers and/or directors of CMS.

365. Indeed, senior management and the Board of Directors of CMS and

Consumers were regularly apprised through meetings and other forms of communication

of the levels of risk involved in the trading activity ongoing at MST. The Board of

Directors set internal risk policies and acceptable loss limits for the trading activity which

were continually monitored by senior management.


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366. As stated in the Company’s First Quarter 2001 10-Q and repeated in the

Second Quarter 2001 10-Q, Third Quarter 2001 10-Q and 2001 10-K.

CMS, through its subsidiary [CMS-MST], engages in trading activities. [CMS-MST] manages any open positions within certain guidelines which limit its exposure to market risk and requires timely reporting to management of potential financial exposure. These guidelines include statistical risk tolerance limits using historical price movements to calculate daily value at risk measurements.

(Emphasis added).

367. Accordingly, the Individual Defendants received or, at a minimum, had

access to, daily VAR Reports as part of their risk management oversight responsibilities.

The VAR Reports included daily portfolio reporting and market to market valuation of

the Company’s portfolio. The VAR Reports would have included round-trip

transactions, but with an indication that there was virtually no risk to the Company from

such large transactions because there were simultaneous round-trip trades with matching

dollar amounts on the buy and sell side. All recipients of the VAR Reports would have

recognized that large riskless trades were round-trip trades with no economic substance,

or, at a minimum, were suspicious trades, requiring investigation.

368. In addition to receiving the VAR Reports, Pallas would also have been

aware of round-trip trades to the extent they exceeded energy traders’ specific dollar

limits for purchases and sales. Each energy trader at CMS had a certain dollar value of

power or gas that he or she could purchase or sell without seeking higher approval. In

order to exceed those trading limits, traders had to seek approval from a senior officer of

the Company. Through this system of checks and balances, initially designed to control

risk, many if not all of the Individual Defendants would have learned of the round-trip

trades. All such trades also were booked in the Company’s general ledger once it was


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approved by a senior accounting officer. A trade which exceeded the energy trader’s

specific limits could not be booked in the Company’s general ledger, absent approval

from such an accounting officer. This would also serve as a mechanism for the

Individual Defendants to learn of the specific round-trip trades at the times they were

booked in the Company’s general ledger.

369. Given the sheer size of the CMS’s trading, senior management, including

the Individual Defendants, knew (or were at least reckless as to) the extent to which there

was no economic reality in the Company’s energy trading business. Indeed, the size of

the Company’s round-trip trades made it made it virtually impossible for senior

management of CMS and the Company’s Board of Directors to be unaware of the

fraudulent scheme from its inception. For example, as set forth above, in July 2000,

CMS engaged in a massive transaction -- which involved 10 million megawatt hours and

$380 million -- about 1,000 times larger than the typical MST power trade. MST had

determined that this volume would place it within the Top 20 in the league tables.

Moreover, on November 15, 2001, MST and Dynegy entered into two round-trip power

trades so large -- a combined total of more than 25 million megawatt hours of electricity -

- that Dynegy had to override its trading platform’s volume limits to execute them.

1. Motives Behind Round-Trip Trading 370. As set forth above, the Defendants engaged in a scheme which was driven

by a systematic use of round-trip trading, in order to, among other things, cause the

Company to appear larger in the business community. Appearing larger among its

competitors would allow the Company to attract larger clients (including public utilities),

take on larger trading positions and obtain larger amounts of unsecured debt. CMS failed


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to disclose that it was engaged in the deliberate manipulation of the published price

indices by providing false data to the trade press.

371. With respect to CMS's motives for engaging in round-trip trading, a key

motivation was to manipulate spot market prices in order to generate (ill-gotten) profits

on non-wash trades engaged in by CMS. Since the published price indices on which

market prices are based are directly influenced by the reported round-trip trades, CMS

could report the artificial round-trip prices in order to lower or raise market prices,

whereupon it would trade positions on which it actually bore risk. This is critical because

it belies CMS's assertion that the round-trip trading had a legitimate purpose and had no

effect on profits or shareholder equity.

372. Another motive for the round-trip trading, acknowledged by CMS itself,

was to develop a large presence in the energy trading arena -- i.e., to be perceived in the

financial community as a "player." The logical consequent of this motive is that CMS

wanted to foster an illusion of dynamism and growth into a potentially rich area when, in

fact, the very nature of the wash trading was its unprofitability and economic

insubstantiality.

373. In November, 2002 CMS announced that its internal investigation

disclosed that some of its traders had falsified trading data submitted for publication in

Platt's Power Markets Week and Inside FERC; an outside counsel hired by CMS to

analyze the accuracy of the reported trades found that only 116 of the 472 reported CMS

trades between December, 2000 and June, 2002 were exact matches. As reported by

FERC in its March, 2003 report on market manipulation in the Western region, CMS

traders admitted to either submitting wholly fictitious data for publication or reporting


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only favorable trades in order to manipulate basis differentials (i.e., the difference

between natural gas prices at different trading points). Because CMS was taking

positions on financial products based on the basis differentials, it could profit by moving

the price at a trading point up or down, which CMS did by simply making up reported

prices.

2. Insider Selling 374. Certain Individual Defendants were also motivated to pursue their

fraudulent scheme in order to reap personal gain through the sale of the Company’s

common stock at artificially inflated prices.

375. Specifically, Defendant Wright engaged in the following sales of CMS

common stock during the Class Period:

Transaction Date Number of Shares Sale Price Proceeds

12/26/00 4,140 $30.41 $124,779.60

5/9/01 100 $29.04 $2,904.00

5/9/01 1,700 $29.15 $49,555.00

5/9/01 6,800 $29.00 $197,200.00

5/9/01 19,000 $29.00 $551,000

5/8/02 1,000 $20.12 $20,120

Totals 32,740 $945,558.60

376. Defendant McCormick engaged in the following sales of CMS common

stock during the Class Period:


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Transaction Date Number of Shares Sale Price Proceeds

7/9/01 300 $27.85 $8,355

7/9/01 4,700 $27.81 $130,707

7/6/01 5,000 $27.82 $139,100

7/2/01 4,300 $27.75 $119,325

7/2/01 200 $27.84 $5,568

7/2/01 500 $27.87 $13,935

8/23/01 4,700 $24.00 $112,800

8/23/01 300 $24.01 $7,203

8/22/01 5000 $23.80 $119,000

8/21/01 5,000 $23.83 $119,150

3/8/02 500 $23.00 $11500

3/8/02 9,500 $22.75 $216,125

Totals 40,000 $1,002,768

377. Defendant Hopper engaged in the following sales of CMS common stock

during the Class Period:

Transaction Date Number of Shares Sale Price Proceeds 1/8/01 1500 $27.52 $41,280 4/10/02 500 $23.11 $11,555 Totals 2000 $52,835.00

3. Class Period Securities Offerings 378. Defendants’ motive to maximize proceeds from securities offerings during

the Class Period also evidences scienter. As set forth above, during the Class Period,


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CMS offered for sale common and preferred stock, as well as notes, to the investing

public in order to raise desperately needed capital.

379. These offerings, which raised over $770 million, included the following:

Funds Raised In CMS Public Offerings During Class Period Date Description of Security # of Units Amount Raised

3/28/01 97/8 % Senior Notes 500,000 $500,000,000

6/22/01 8.9% Senior Notes 269,000 $269,000,000

5/1/02 7% General Term Notes 4,088 $4,088,000

Total $773,088,000

380. Additional evidence of Defendants’ scienter is described in Section X

above, describing Recently Obtained Evidence Directly Supporting Plaintiffs’ Claims.


382. Virtually all of Consumers senior officers and directors concurrently

served as officers and/or directors of CMS during the Class Period. A chart reflecting the

dual positions of certain officers and directors of Consumers and CMS is detailed below.


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DUAL POSITIONS OF OFFICERS AND DIRECTORS

OF CONSUMERS AND CMS ENERGY

POSITION

NAME CONSUMERS CMS ENERGY William T. McCormick

Chairman of the Board of Directors (1985-2002)

Chairman of the Board of Directors; Chief Executive Officer;

President (1987-2002) Kenneth Whipple Chairman of the Board of Directors;

Chief Executive Officer (2002- present)

Chairman of the Board of Directors; Chief Executive Officer

(2002 - present) David W. Joos President; Chief Operating Officer;

Director (10/2001 - Present); formerly Executive Vice-President

(2000 - 01)

President; Chief Operating Officer; Director (10/2001 - Present);

formerly Executive Vice-President (2000-01)

Alan M. Wright Senior Vice-President; Executive Vice-President; Chief Financial Officer; Chief Administrative

Officer (1992-2002)

Senior Vice-President; Executive Vice-President; Chief Financial Officer; Chief Administrative

Officer (1992-2002)

Victor J. Fryling Vice-Chairman; Director (1992-20000)

Chief Operating Officer (1996-2000); President

(1992-2000) William U. Parfet Director (Audit Committee Chair)

(1991 - present) Director (Audit Committee Chair)

(1991 - present) John M. Deutch Director (Audit Committee member)

(1986-1993; 1997-2003) Director (Audit Committee

member) (1986-1993; 1997-2003) James J. Duderstadt Director (Audit Committee Member)

(1993 - present) Director (Audit Committee Member) (1993 - present)

Percy A. Pierre Director (Audit Committee member) (1990 - present)

Director (Audit Committee Member)

(1990 - present) John B. Yasinsky Director

(Audit Committee Member 2000-01)(1994 - present)

Director (Audit Committee Member 2000-

01) (1994 - present)

Kathleen R. Flaherty

Director (1995 - present)


Earl D. Holton Director (1989 - present)


Kenneth L. Way Director (1998 - present)



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383. As set forth above, by virtue of their respective positions, the Individual

Defendants had access to the material adverse non-public information concerning the

business and financial condition of the Company. Moreover, Board of Directors and

Audit Committee meetings for both CMS and Consumers were held contemporaneously

during the Class Period. During such meetings, issues regarding CMS were discussed

back to back with issues regarding Consumers.

384. In addition, Defendants’ round-trip trades enhanced the power positions of

Consumers as well as CMS. Specifically, the round-trip trading increased the mark-to-

market value of Consumers’ existing positions which were based upon available market

information or trades performed internally by the Company. In this respect, Consumers

(as well as CMS) increased the value of their power positions using round-trip trades.

385. At least a portion of CMS’s underlying assets, which were dramatically

inflated due to the Company’s round-trip trading, were later transferred to Consumers,

which then reaped the benefit of such inflation. These “inter-book” and intercompany

transfers provide yet another link between Consumers and the underlying fraud.

386. CMS’s 2001 10-K at page CE-6 reveals the following in connection

Consumers’s related party transactions:

RELATED PARTY TRANSACTIONS Consumers enters into a number of significant transactions with related parties. These transactions include the purchase of capacity and energy from the MCV Partnership and from affiliates of Enterprises, the purchase of electricity from [CMS-MST], the purchase of gas supply from [CMS-MST] and CMS Oil and Gas, the purchase of gas transportation from Panhandle and its subsidiary Trunkline, the payment of parent company overhead costs to CMS , the sale, storage and transportation of natural gas and other services to the MCV Partnership, certain transactions involving derivative instruments with [CMS-MST], and an investment in CMS Common Stock.


148

Accordingly, Consumers was able to increase the mark-to-market value of

existing energy positions through transactions with CMS.

387. Throughout the Class Period, Consumers maintained a substantial equity

interest in CMS. As described in the Company’s SEC filings, Consumers maintained a

preferred stock position, valued as high as $50 million during the Class Period, in

Enterprises, the very subsidiary of CMS in which the round-trip trading took place. See,

e.g., 2000 10-K, at p. CE-23.

388. In addition to its preferred position, Consumers maintained a position,

valued as high as $86 million during the Class Period, in CMS common stock. See, e.g.,

2000 10-K, at p. CE-23. The value of Consumers’ preferred and common stock positions

was dependent upon the market price of such securities and would dramatically decrease

if the truth about the Company’s fraudulent conduct was disclosed to the investment

community.



391. Pursuant to this Court’s instruction in the Order, dated May 12, 2004,

Plaintiffs have set forth, at Exhibit A, a listing of documents produced by Andersen

which are incorporated into this Complaint, but not otherwise specifically plead, in order

to preserve their confidentiality.3 Plaintiffs allege that said documents support the

allegations herein relative to Defendants’ scienter and active participation in the alleged

fraud, and specifically:

3 These documents were annexed as Exhibit A to the Proposed Complaint, previously filed with the Court under seal.


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(a) the active participation of certain of the Individual Defendants in the structuring, authorization and approval of simultaneous buy and sell energy transactions at highly material monetary levels, evidencing that, inter alia, the most senior management of CMS authorized improper round-trip trades to increase reported volumes in industry publications having the effect of manipulating the market for natural gas; and

(b) the participation and authorization by senior management of CMS in the

improper accounting treatment of the Company’s round-trip trades, ultimately requiring reversal and restatement, as well as severe accounting and internal control weaknesses and deficiencies and lack of regard by senior management for the integrity of financial statements.

XIV. VIOLATIONS OF GAAP AND SEC

INTERNAL CONTROL REGULATIONS

1. CMS’s Accounting Violations 392. During the Class Period, the Company represented that CMS’s financial

statements when issued were prepared in conformity with GAAP, which are recognized

by the accounting profession and the SEC as the uniform rules, conventions and

procedures necessary to define accepted accounting practice at a particular time. In fact,

the Company used improper accounting practices in violation of GAAP and SEC

reporting requirements to falsely inflate CMS’s balance sheet and to falsely report

revenues in the interim quarters and fiscal years during the Class Period.

393. CMS’s materially false and misleading financial statements resulted from

a series of deliberate senior management decisions designed to conceal the truth

regarding CMS’s actual operating results. Defendants caused the Company to violate

GAAP because:

a. Defendants knew or recklessly disregarded the fact that CMS’s

financial statements were materially false and misleading because

CMS failed to disclose the details of its nonmonetary transactions,

as required by GAAP;


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b. Defendants knew or recklessly disregarded that CMS’s financial

statements were materially false and misleading because CMS

entered into "round-trip" electricity trades to boost the company's

trading volumes;

c. Defendants knew or recklessly disregarded that CMS’s financial


entered into “round-trip” energy trades which had no legitimate

business purpose;

d. Defendants knew or recklessly disregarded that the financial


failed to disclose the reasons for the material increases in revenues

in the management’s discussion and analysis section of its annual

reports on Form 10-K and quarterly reporting on Form 10-Q or in

the notes to the financial statements; and

e. Defendants knew or recklessly disregarded that CMS was suffering

from a chronic and systematic breakdown of its internal controls

and procedures such that its financial reporting was inherently

corrupted, subject to manipulation, and unreliable, resulting in

materially false and misleading financial statements.

2. CMS Entered Into “Round-Trip” Energy Trades

Which Had No Legitimate Business Purpose 394. Defendants knew or recklessly disregarded that CMS’s financial results

during the Class Period were artificially inflated by, inter alia, recognition of purported

revenues from “round-trip” energy trades that served no legitimate business purpose,

which recognition violated GAAP. In this regard, CMS admitted in its First Quarter 2002

10-Q that it engaged in “’round-trip’ commodity trades involving simultaneous purchases

and sales with the same counter-parties at the same price.” By engaging in swaps,

participant companies grossly inflated the dollar value of revenues and expenses.


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395. The revenue generated in the above transactions did not constitute

legitimate and cognizable revenue that CMS could recognize, pursuant to GAAP.

Indeed, after approximately 19 months of engaging in the elicit energy trades, CMS

disclosed in its First Quarter 2002 10-Q “that the cessation of such trades was in the

CMS’s best interests,” and that it “decided after the third quarter of 2001 that not

recording these trades in either revenue or expense was a more appropriate representation

of the nature of these transactions.”

3. The “Round-Trip” Energy Trades Materially Inflated CMS’s Revenues

396. The Defendants knew or recklessly disregarded that CMS’s revenues were

grossly inflated during the Class Period, as a result of the “round-trip” trades. CMS

overstated revenues by $4.2 billion and $1 billion for fiscal 2001 and 2000, respectively.

In this regard, CMS’s 10-K for fiscal 2002 disclosed:

CMS's [2001 10-K], issued in March 2002, restated revenue and expense for the first three quarters of 2001 to eliminate $4.2 billion of previously reported revenue and expense. The [2001 10-K] did include $5 million of revenue and expense for 2001 from such trades, which remained uncorrected. CMS inadvertently failed to restate 2000 for round trip trades in the 2001 10-K. Financial statements have now been restated to eliminate $1 billion in 2000 and $5 million in 2001 of previously reported revenue and expenses.

Overall, the Company’s revised consolidated fiscal 2001 revenues went from $13 billion

to $8.3 billion and consolidated fiscal 2000 revenues from $8.7 billion to $7.7 billion.

Consolidated revenues during fiscal 2001 and fiscal 2000, were overstated by

approximately 36% and 11%, respectively, as a result of the round-trip trades.


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4. CMS Failed To Disclose The Details Of Its Nonmonetary Transactions

397. Defendants knew or recklessly disregarded that CMS’s financial results

during the Class Period were artificially inflated by, inter alia, entering into "round-trip"

energy trades that served no legitimate business purpose and were accounted for in

violation of GAAP.

398. GAAP consists of those principles recognized by the accounting

profession as the conventions, rules, and procedures necessary to define accepted

accounting principles. SEC Regulation S-X requires that publicly traded companies

present their annual financial statements in accordance with GAAP (17 C.F.R. §

210.401(a)(1)). In addition, Regulation S-X requires that interim financial statements

also comply with GAAP, with the exception that interim financial may omit disclosures

which would substantially duplicate those disclosures which accompany the annual

financial statements. (17 C.F.R. § 210.10.01(a)). Financial statements filed with the SEC

that are not prepared in compliance with GAAP are presumed to be misleading and

inaccurate.

399. As set forth in Financial Accounting Standard Board (“FASB”) Statement

of Financial Accounting Concepts (“SFAC”) No. 1, one of the fundamental objectives of

financial reporting is to provide accurate and reliable information concerning an entity’s

financial performance during the period being presented. SFAC No. 1, ¶42 states:

Financial reporting should provide information about an enterprise’s financial performance during a period. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investments and credit decisions reflect investors’ and creditors’ expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of enterprise performance.


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400. Additionally, Section 13 of the Exchange Act requires, in part, that

companies:

devise and maintain a system of internal controls sufficient to provide reasonable assurances that - -

* * * transactions are recorded as necessary (I) permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets.

401. CMS has restated its annual results of operations for the years ended

December 31, 2000, 2001, and 2002. These restatements constitute admissions that the

reports, as filed, were materially false and misleading. In accordance with Accounting

Principles Board Statement No. 20 (“APB 20”), “Accounting Changes,” financial

statements with material misstatements must be restated.

402. CMS’s restatements involve in relevant part (a) round-trip trading; (b)

other transactions recorded on a gross basis, rather than on a net basis; and (c) numerous

restatements of assets and liabilities.

403. By engaging in “round-trip” trades, CMS engaged in transactions that had

no legitimate business purpose and that were entered into solely to increase sales

volumes. These transactions violated GAAP for a number of reasons.

404. SFAC No. 1 states that financial reporting, i.e., financial statements and

the related footnote disclosures, is intended to provide information that is useful to the

users of the statements in making business and economic decisions. By presenting

investors with financial information that did not reflect true or valid business

transactions, CMS did not provide useful information in the Company’s financial

statements. In fact, CMS provided materially misleading information.


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405. Similarly, SFAC No. 1 states that “[f]inancial reporting is expected to

provide information about an enterprise’s financial performance during a period and

about how management of an enterprise has discharged its stewardship responsibility to

owners.” By presenting revenues and expenses that were grossed up for these round-trip

trades, Defendants did not present the Company’s actual financial performance.

406. SFAC No. 2 describes the characteristics required to make accounting

information useful to the people that use it. One of these characteristics is

representational faithfulness, which is defined as “correspondence or agreement between

a measure or description and the phenomenon that it purports to represent (sometimes

called validity).” Because Defendants presented a false measure of CMS’s revenues

throughout the Class Period, those revenues did not represent the actual sales that had

taken place, but instead the measure of revenues was grossed up for round-trip trades. As

a result, CMS’s published financial statements did not have representational faithfulness,

as required by SFAC No. 2.

407. Another characteristic defined in SFAC No. 2 is verifiability. Verifiability

is “the ability through consensus among measurers to ensure that information represents

what it purports to represent or that the chosen method of measurement has been used

without error or bias.” CMS’s method of measurement of revenues was false and

misleading, and contained error and bias, as demonstrated by the subsequent restatement.

Therefore, financial statements for CMS did not have verifiability, as required by SFAC

No. 2.

408. CMS has admitted that during the Class Period, $5.3 billion of the

transactions were recorded on a gross basis that should have been recorded on a net basis.


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409. These transactions were not legitimate revenue that CMS could recognize

pursuant to GAAP. GAAP requires that revenues are not recognized until earned. An

entity’s revenue-earning activities involve delivering goods, rendering services, or other

activities that constitute its ongoing major or central operation. See FASB Statement of

Concepts No. 5, ¶¶ 83-84. However, by engaging in "round-trip" trades, CMS was able

to grossly inflate the dollar value of the transactions to inflate revenues.

410. Thus, the above transactions were not legitimate revenue that CMS could

recognize pursuant to GAAP. As a result, CMS knowingly overstated the Company’s

revenue growth based on these transactions.

411. Moreover, Defendants knew or recklessly disregarded that CMS financial

statements were materially false and misleading because they did not disclose key

elements of these nonmonetary transactions. Companies that engage in one or more

nonmonetary transactions, such as exchanges or swaps during a reporting period, are

required, under APB Opinion No. 29 ("APB 29"), Accounting for Nonmonetary

Transactions, to disclose in the footnotes to the financial statements, the nature of the

transactions, the basis of accounting for the assets transferred (that is, fair value or book

value), and gains or losses recognized. Defendants failed to comply with APB 29.

412. In addition, SFAS No. 95, Statement of Cash Flows ("SFAS 95") requires

that information about all investing and financing activities of a company that affect

recognized assets or liabilities but that do not result in cash receipts or payments, such as

nonmonetary asset exchanges, be disclosed in the footnotes to the financial statements.

Defendants failed to comply with SFAS 95.


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5. Abuse Of Mark-To-Market Accounting 413. During the Class Period, CMS’s financial statements reflected the use of

“mark-to-market accounting” (also known as “fair value accounting”). Under

mark-to-market rules, whenever companies have outstanding energy-related or other

derivative contracts (either assets or liabilities) on their balance sheets at the end of a

particular quarter, they must adjust them to fair market value, booking unrealized gains or

losses to the income statement of the period.

414. Companies can use mark-to-market accounting appropriately, provided

that they value their long-term futures contracts based on fair market quoted prices. In

order to do so, companies need to have adequate controls in place to ascertain what the

true fair market price is. CMS lacked these adequate controls, and as a result issued

financial statements that included accounting figures based on mark-to-market

accounting using phony fair market prices. This allowed CMS to grossly inflate its

reported revenues and profits throughout its business during the Class Period.

6. Breakdown Of CMS’s Internal Accounting Controls 415. According to SEC rules, to accomplish the objectives of accurately

recording, processing, summarizing and reporting financial data, a company must

establish an internal control structure. Section 13(b)(2) of the Exchange Act requires that

CMS:

(a) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the issuer; and (b) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that – transactions are executed in accordance with management’s general or specific authorization; transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles . . . and (II) to maintain accountability for assets.


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416. Contrary to the requirements of GAAP and SEC Rules, CMS either failed

to implement and maintain an adequate internal accounting control system, or knowingly

or recklessly tolerated the failure to use existing internal controls in a manner that would

ensure compliance with GAAP.

417. In fact, CMS offered this admission relating to its internal controls failures

in its Form 10-K for the year ended December 31, 2002:

In late 2001 and during 2002, the Company identified a number of deficiencies in MST's systems of internal accounting controls. The internal control deficiencies related to, among other things, a lack of account reconciliations, unidentified differences between subsidiary ledgers and the general ledger, and procedures and processes surrounding the Company's accounting for energy trading contracts, including mark-to-market accounting.

Senior management, the Audit Committee of the Board of Directors, and the independent auditors were notified of these deficiencies as they were discovered, and the Company commenced a plan of remediation that included the replacement of certain key personnel and the deployment of additional internal and external accounting personnel to CMS-MST. Significant aspects of the remediation plan, which includes the implementation of improvements and changes to CMS-MST's internal accounting controls, were postponed to enable the Company to prepare restated financial statements for 2000 and 2001. While a number of these control improvements and changes were implemented in late 2002, the most important ones occurred in the first quarter of 2003.

The implementation of certain elements of its remediation plan enabled the Company to prepare reliable restated financial statements for CMS-MST for December 31, 2000 and 2001, as well as for the quarterly periods and full year of 2002. Management has not yet prepared restated quarterly financial statements for 2001, although it expects to do so as soon as practicable.


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418. Defendants knew or recklessly disregarded that CMS was suffering from a

chronic and systematic breakdown of its internal controls and procedures such that its

financial reporting was inherently corrupted, subject to manipulation, and unreliable,

resulting in materially false and misleading financial statements. According to CMS’s

fiscal 2002 10-K:

In late 2001 and during 2002, the Company identified a number of deficiencies in MST's systems of internal accounting controls. The internal control deficiencies related to, among other things, a lack of account reconciliations, unidentified differences between subsidiary ledgers and the general ledger, and procedures and processes surrounding the Company's accounting for energy trading contracts, including mark-to-market accounting. Senior management, the Audit Committee of the Board of Directors, and the independent auditors were notified of these deficiencies as they were discovered, and the Company commenced a plan of remediation that included the replacement of certain key personnel and the deployment of additional internal and external accounting personnel to CMS-MST. Significant aspects of the remediation plan, which includes the implementation of improvements and changes to CMS-MST's internal accounting controls, were postponed to enable the Company to prepare restated financial statements for 2000 and 2001. While a number of these control improvements and changes were implemented in late 2002, the most important ones occurred in the first quarter of 2003.

(Emphasis added).

419. Indeed, CMS’s internal controls were in such disarray, that as of the date

of the 2002 10-K filing, “[m]anagement ha[d] not yet prepared restated quarterly

financial statements for 2001, although it expect[ed] to do so as soon as practicable.”

Moreover, rather than being mere restatements, the Company characterized its efforts as a

re-audit. According to the 10-K:

In connection with the re-audit of the financial statements for the fiscal years ended December 31, 2001 and December 31, 2000, CMS determined to make certain adjustments (in addition to the round-trip trades) to its consolidated financial statements for the fiscal years ended December 31, 2001 and December 31, 2000.


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Therefore, the consolidated financial statements for 2001 and 2000 have been restated from amounts previously reported.

420. CMS mischaracterized the restatements as limited to “certain adjustments

(in addition to the round-trip trades) . . . .” However, as shown by the 2002 10-K,

virtually every balance sheet and income statement account for fiscal years 2000 and

2001 has been restated. Indeed, even cash was misstated and reduced by $62 million in

2001, and $41 million in 2000, a reduction of 33% and 23%, respectively. And, although

the internal control problems were widespread throughout CMS’s businesses, the

problems appear to have been more acute at CMS’s MST division. According to CMS’s

2002 10-K:

CMS-MST's business experienced rapid growth during 2000 and 2001. Late in 2001, CMS became aware of certain control weaknesses at CMS-MST and immediately began an internal investigation. The investigation revealed that the size and expertise of the back-office accounting staff had not kept pace with the rapid growth and, as a result, bookkeeping errors had occurred and account reconciliations were not prepared. Additionally, computer interfaces of sub-ledgers to the general ledger were ineffective or lacking. As a result, sub-ledger balances did not agree to the general ledger and the differences were not adjusted. In early 2002, CMS-MST commenced an account recalculation and reconciliation project that focused initially on accounts receivable and payable, intercompany and cash accounts, but was later expanded to include other accounts. The recalculation and reconstruction work for 2000, 2001 and 2002 has been completed and the consolidated financial statements reflect the required adjustments, which decreased net income by $5 million in 2001 and $13 million in 2000.

(Emphasis added).

421. Indeed, AU § 325.21 cites "[e]vidence of failure to perform tasks that are

part of internal control, such as reconciliations not prepared or not timely prepared," as

"[f]ailures in the operation of internal control. "


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7. Violations Of SEC Regulations 422. Item 7 of the 2002 10-K and Item 2 of Forms 10-Q (Management’s

Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”))

must comply with Item 303 of Regulation S-K [17 C.F.R. 229.303] by including the

information described in those sections. Specifically, in discussing results of operations,

Item 303 of Regulation S-K requires the registrant to:

[d]escribe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.

The Instructions to Paragraph 303(a) further state:

The discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results . . .

423. In addition, the SEC, in its May 18, 1989 Interpretive Release No. 34-

26831, has indicated that registrants should employ the following two-step analysis in

determining when a known trend or uncertainty is required to be included in the MD&A

disclosure pursuant to Item 303 of Regulation S-K:

A disclosure duty exists where a trend, demand, commitment, event or uncertainty is both presently known to management and is reasonably likely to have a material effect on the registrant’s financial condition or results of operations.

424. The MD&A requirements are intended to provide, in one section of a

filing, material historical and prospective textual disclosure enabling investors and other

users to assess the financial condition and results of operations of the registrant, with

particular emphasis on the registrant's prospects for the future. As the Securities Act

Release No. 6711 states:

The Commission has long recognized the need for a narrative explanation of the financial statements, because a numerical


161

presentation and brief accompanying footnotes alone may be insufficient for an investor to judge the quality of earnings and the likelihood that past performance is indicative of future performance. MD&A is intended to give the investor an opportunity to look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company . . .

425. Sec. 229.303 (Item 303), Management's discussion and analysis of

financial condition and results of operations, states:

To the extent that the financial statements disclose material increases in net sales or revenues, provide a narrative discussion of the extent to which such increases are attributable to increases in prices or to increases in the volume or amount of goods or services being sold or to the introduction of new products or services.

426. According to Securities Act Release No. 6349, n.5, at 964:

[i]t is the responsibility of management to identify and address those key variables and other qualitative and quantitative factors which are peculiar to and necessary for an understanding and evaluation of the individual company.

427. Nonetheless, CMS’s Class Period Forms 10-K and 10-Q failed to disclose

the Company’s internal control system deficiencies, and that the increases in trading

volume and revenues during the Class Period were the result of “round-trip” trades for

the purpose of artificially inflating CMS’s operating results, each of which was

reasonably likely to have a material adverse effect on CMS’s financial results, which was

necessary for a proper understanding and evaluation of the Company’s operating

performance and an informed investment decision.

428. CMS was required to restate its financial statements for fiscal 2000 and

2001 and all interim periods, as set forth in the fiscal 2002 10-K filed on March 28, 2003,

because those financial statements had not been prepared in conformity with GAAP and

SEC accounting requirements when they were issued. In view of "the potential dilution

of public confidence in financial statements resulting from restating the financial


162

statements of prior periods," according to GAAP, a retroactive restatement of financial

statements is reserved for material accounting errors that existed at the time the financial

statements were prepared. See APB Opinion No. 20, Accounting Changes, ¶¶ 18, 27, 34-

38. Since GAAP allows only for correction of errors that are "material," by restating its

financial statements numerous times, CMS admitted the materiality of the errors in its

previously issued financial statements for fiscal years 2000 and 2001, and all interim

quarters.

FIRST CLAIM

Violation Of Section 10(b) Of The Exchange Act Against And Rule 10b-5 Promulgated Thereunder Against All Defendants

429. Plaintiffs repeat and reallege each and every allegation contained above as

if fully set forth herein.

430. This claim is brought pursuant to Section 10(b) of the Exchange Act, 15

U.S.C. § 78j(b), by Plaintiffs against all Defendants.

431. 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 Plaintiffs and

other Class members, as alleged herein; (ii) artificially inflate and maintain the market

price of CMS securities; and (iii) cause Plaintiffs and other members of the Class to

purchase CMS securities at artificially inflated prices. In furtherance of this unlawful

scheme, plan and course of conduct, Defendants, and each of them, took the actions set

forth herein.

432. The Defendants named in this count: (a) employed devices, schemes, and

artifices to defraud; (b) made untrue statements of material fact and/or omitted to state


163

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.

433. In addition to the duties of full disclosure imposed on the Defendants as a

result of their making of affirmative statements and reports, or participation in the making

of affirmative statements and reports to the investing public, the Individual Defendants

had a duty to promptly disseminate truthful information that would be material to

investors in compliance with the integrated disclosure provisions of the SEC as embodied

in SEC Regulation S-X (17 C.F.R. Sections 210.01 et seq.) and Regulation S-K (17

C.F.R. Sections 229.10 et seq.) and other SEC regulations, including accurate and truthful

information with respect to the Company's operations, financial condition and earnings so

that the market price of the Company's securities would be based on truthful, complete

and accurate information.

434. 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, financial performance and future

prospects of CMS as specified herein.

435. 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


164

CMS’s value and performance and continued substantial growth, which included the

making of, or the participation in the making of, untrue statements of material facts and

omitting to state material facts necessary in order to make the statements made about

CMS and its business operations and future prospects in the light of the circumstances

under which they were made, not misleading, as set forth more particularly herein, and

engaged in transactions, practices and a course of business which operated as a fraud and

deceit upon the purchasers of CMS securities during the Class Period.

436. The Individual Defendants’ primary 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.

437. The Defendants named in this Count 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,

inter alia, concealing CMS’s operating condition and future business prospects from the

investing public and supporting the artificially inflated price of its securities. As

demonstrated by these Defendants' material misrepresentations and omissions concerning

the Company's business, operations and financial performance throughout the Class


165

Period, the Defendants, if they did not have actual knowledge of the misrepresentations

and omissions alleged, were reckless in failing to obtain such knowledge by deliberately

refraining from taking those steps necessary to discover whether those statements were

materially false or misleading.

438. 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 prices of

CMS securities were artificially inflated during the Class Period. In ignorance of the fact

that market prices of CMS publicly-traded securities were artificially inflated, and relying

directly or indirectly on the false and misleading statements made by the Defendants, or

upon the integrity of the market in which the securities trade, and/or on the absence 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, Plaintiffs

and the other members of the Class purchased CMS securities during the Class Period at

artificially high prices and were damaged thereby.

439. At the time of said misrepresentations and omissions, Plaintiffs and other

members of the Class were ignorant of their falsity, and believed them to be true. Had

Plaintiffs and the other members of the Class and the marketplace known of the true

financial condition and business prospects of CMS, which were not disclosed by

Defendants, Plaintiffs and other members of the Class would not have purchased or

otherwise acquired their CMS securities, or, if they had acquired such securities during

the Class Period, they would not have done so at the artificially inflated prices which they

paid.


166

440. By virtue of the foregoing, CMS and the Individual Defendants have

violated Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated there under.

441. As a direct and proximate result of the wrongful conduct of the

Defendants named in this Count, Plaintiffs and the other members of the Class suffered

damages in connection with their respective purchases and sales of the Company's

securities during the Class Period.

SECOND CLAIM

Violation Of Section 20(a) Of The Exchange Act Against The Individual Defendants

442. Plaintiffs repeat and reallege each and every allegation contained above as

if fully set forth herein.

443. This claim is brought pursuant to Section 20(a) of the Exchange Act, 15

U.S.C. § 78t(a), by Plaintiffs against the Individual Defendants.

444. The Individual Defendants acted as a controlling person of CMS within

the meaning of Section 20(a) of the Exchange Act. By virtue of their high-level

positions, and ownership and contractual rights, participation in and/or awareness of the

Company's operations and/or intimate knowledge of the statements filed by the Company

with the SEC and disseminated to the investing public, the Individual Defendants had 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 Plaintiffs contend are false and misleading. The Individual Defendants

were provided with or had unlimited access to copies of the Company's reports, press

releases, public filings and other statements alleged by Plaintiffs to be misleading prior to


167

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.

445. 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.

446. As set forth above, CMS violated Section 10(b) and Rule 10b-5 by their

acts and omissions as alleged in this Complaint. By virtue of their positions and actions

as controlling persons of CMS, the Individual Defendants were culpable participants in

the violations of Section 10(b) and are, therefore, liable pursuant to Section 20(a) of the

Exchange Act.

WHEREFORE, Plaintiffs pray for relief and judgment, as follows:

(a) Awarding compensatory damages in favor of Plaintiffs 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;

(b) Awarding Plaintiffs and the Class their reasonable costs and

expenses incurred in this action, including counsel fees and expert

fees; and

(c) Such other and further relief as the Court may deem just and

proper.


168

JURY TRIAL DEMANDED

Plaintiffs hereby demand a jury trial of all issues triable. Dated: March 16, 2005

ENTWISTLE & CAPPUCCI LLP By: /s/ Vincent R. Cappucci Vincent R. Cappucci Stephen D. Oestreich Robert N. Cappucci William W. Wickersham 299 Park Avenue New York, NY 10171 (212) 894-7200 MILBERG WEISS BERSHAD & SCHULMAN LLP By: /s/ Robert A. Wallner Robert A. Wallner Clifford Goodstein Todd L. Kammerman Shannon L. Hopkins One Pennsylvania Plaza New York, New York 10119 (212) 594-5300 Co-Lead Counsel For Plaintiffs

ELWOOD S. SIMON & ASSOCIATES, P.C. Elwood S. Simon 355 South Old Woodward Ave., Suite 250 Birmingham, Michigan 48009 (248) 646-9730 MILLER SHEA, P.C. By: __/s/ Marc L. Newman E. Powell Miller Marc L. Newman 950 West University Drive, Suite 300 Rochester, Michigan 48307 (248) 841-2200 Co-Liaison Counsel For Plaintiffs


1

CERTIFICATE OF SERVICE I HEREBY CERTIFY that I electronically filed with the Clerk of the Court using

the ECF System the Conformed Third Amended Consolidated Class Action Complaint

and served a copy of same by first-class mail to the following non ECF participants, this

16th day of March 2005, upon:

CLEARY, GOTTLIEB, STEEN & HAMILTON Lewis J. Liman 1 Liberty Plaza New York, NY 10006 Counsel for Defendant Wright

KERR RUSSELL and WEBER, PLC William A. Sankbeil Suite 2500, Detroit Center 500 Woodward Avenue Detroit, MI 48226 Liaison Counsel for Defendant Pallas

PEPPER HAMILTON LLP Richard A. Rossman James VandeWyngearde 100 Renaissance Center, 36th Floor Detroit, MI 48243-1157 Counsel for Defendant Wright

Michael G. Wilson Consumers Energy Company 212 W. Michigan Avenue Jackson, MI 49201 Counsel for Consumers Energy Company

WILLIAMS & CONNELLY, LLP Gerald A. Feffer 725 12th Street, NW Washington, DC 20005-5901 Counsel for Defendant McCormick

MILLER CANFIELD PADDOCK & STONE PLC Thomas R. Cox Todd A. Holleman 150 West Jefferson, Ste. 2500 Detroit, MI 48226 Liaison Counsel for Defendants

BUTZEL LONG, A PROFESSIONAL CORPORATION Philip J. Kessler Sheldon Klein Suite 900, 150 West Jefferson Detroit, MI 48226-4450 Liaison Counsel for Defendant McCormick

McDERMOTT, WILL EMERY Eric Landau Steven J. Aaronoff Shawn Harpen 18191 Von Karman Ave., Suite 500 Irvine, CA 92612 Counsel for CMS Energy Corporation

SWIDLER BERLIN SHEREFF Andrew J. Levander Neil Steiner The Chrysler Building 405 Lexington Ave. New York, NY 10174 Counsel for Defendant Joos

CADWALADER WICKERSHAM & TAFT LLP James K. Robinson 1201 F. Street NW Washington, DC 20001 Counsel for Defendant Hopper


2

GARDERE WYNEE SEWELL James G. Munisteri 1000 Louisiana, Ste. 3400 Houston, TX 77002-5007 Counsel for Defendant Pallas

DYKEMA GOSSETT PLLC Samuel Damren 400 Renaissance Center Detroit, MI 48243 Liaison Counsel for Defendant Joos

KASIBORSKI, RONAYNE & FLASKA A Professional Corporation John J. Ronayne 535 Griswold #1028 Detroit, MI 48226

KATTEN MUCHIN ZAVIS & ROSENMAN Steven L. Bashwiner Christian T. Kemnitz 525 West Monroe Street, Ste. 1600 Chicago, IL 60661

SULLIVAN & CROMWELL LLP Daryl A. Libow Joseph J. Reilly 1701 Pennsylvania Ave., NW Washington, DC 20006

__/s/ Marc L. Newman____

Marc L. Newman (P51393) 950 West University Drive Suite 300

Rochester, Michigan 48307 (248) 841-2200

[email protected]


UNITED STATES DISTRICT COURTEASTERN DISTRICT OF MICHIGAN

INDEX OF EXHIBITS

Exhibit A: Documents Produced by Arthur Andersen LLP And Incorporated Into TheConformed Third Amended Consolidated Class Action Complaint By Reference

Case 2:02-cv-72004-GCS Document 200-2 Filed 03/16/2005 Page 1 of 1

1

EXHIBIT A

Documents Produced By Arthur Andersen LLP And Incorporated Into The Conformed Third Amended Consolidated

Class Action Complaint By Reference

AA 00135 – AA 00140AA 00197 – AA 00198AA 00205 – AA 00225AA 00294 – AA 00296AA 00490 – AA 00492AA 00695 – AA 00696AA 00821 – AA 00823AA 01166 – AA 01184AA 01186 – AA 01195AA 01212 – AA 01214AA 02693 – AA 02699AA 03332 – AA 03337AA 03350 – AA 03350AA 03353 – AA 03355AA 03385 – AA 03391AA 03441 – AA 03443AA 03822 – AA 03823AA 04231 – AA 04237AA 05689 – AA 05692AA 05778 – AA 05789AA 05791 – AA 05792AA 08668 – AA 08670AA 08678 – AA 08680AA 15738 – AA 15748AA 15890 – AA 15891AA 16471 – AA 16471

Case 2:02-cv-72004-GCS Document 200-3 Filed 03/16/2005 Page 1 of 1