SEC Charges CMS Energy Corp. and Three Former CMS Executives with Fraud in Connection with Over $5 Billion in Round-Trip Energy Trades
FOR IMMEDIATE RELEASE
CMS and One Former Executive agree to Cease-and-Desist Orders; other two Executives Charged in Civil Lawsuit
Washington, D.C., March 17, 2004 - The Securities and Exchange Commission announced today a settled fraud enforcement action against CMS Energy Corporation (CMS), a Michigan-based energy company, in connection with over $5 billion in deceptive round-trip energy trades - massive pre-arranged trades that, despite lacking economic substance, grossly inflated CMS's reported revenues and propelled the company into the upper echelon of the energy-trading volume rankings.
Pursuant to a settled cease-and-desist Order, CMS and Terry Woolley, the former controller of CMS's energy-trading subsidiary, agreed to cease and desist from committing or causing violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. Woolley also agreed to pay a $25,000 penalty.
The SEC also filed a civil suit today against Preston D. Hopper, CMS's former chief accounting officer, and Tamela C. Pallas, former chief executive of CMS Houston-based trading subsidiary, for fraud and other securities law violations. The complaint alleges that Pallas orchestrated the sham transactions to simulate robust operations within CMS's marketing and trading subsidiary, and Hopper failed to ensure disclosure of the true nature of the trades. The complaint further charges that Hopper sponsored improper accounting for the sham transactions and that, when CMS's outside auditors forced CMS to reverse the reporting of the round-trip trade revenue, Hopper fraudulently failed to disclose the reasons for the reversal. The Commission is seeking in its civil suit against Hopper and Pallas, among other things, civil money penalties and court orders barring them from serving as officers or directors of public companies.
Harold F. Degenhardt, Administrator for the Commission's Fort Worth, Texas office, said, "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 disclosure 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."
The SEC finds in its Order that the massive round-trip trades conducted by CMS's trading subsidiary in 2000 and 2001, artificially increased CMS revenues and trading volumes. Between the third quarter of 2000 and the third quarter of 2001, CMS cited its artificially inflated revenue and trading volume in its filings with the SEC, press releases, earnings conference calls and investor presentations. By reflecting the results of the trades, CMS overstated its revenue by a total of $5.2 billion over five quarters: $1.0 billion, or 20%, for the last two quarters of 2000; and $4.2 billion, or 36%, for the first three quarters of 2001. CMS also overstated its trading subsidiary's reported energy-trading volume by 78% over the last two quarters of 2000 and 72% over the first three quarters of 2001.
In the civil action, the SEC alleges that Hopper improperly caused the revenue to be reported in CMS's SEC filings and earnings releases. According to the SEC's complaint, when CMS's outside auditors required CMS to reclassify the revenues and expenses from the 2001 trades in its 2001 Form 10-K on a "net," rather than a "gross" basis, nullifying the impact of the trades on the CMS income statement, Hopper failed to ensure that material details about the reclassification were disclosed in the Form 10-K. The SEC further alleges that Pallas violated the antifraud and other provisions of the securities laws by orchestrating the round-trip trading without ensuring that the resulting volume and revenues were excluded from CMS's public disclosures and SEC filings.
For further information contact:
Harold F. Degenhardt, District Administrator, (817) 900-2607
Spencer C. Barasch, Associate District Administrator, (817) 978-6425
Jeffrey Cohen, Assistant District Administrator, (817) 978-6480
Fort Worth Office
Securities and Exchange Commission