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Round Trip Trades
Round trip or wash trades are 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. No money is made or lost, but the deals can create the appearance of higher trading volumes and revenues.
The Securities and Exchange Commission found in 2004 that by recording revenues and expenses from the round-trip trades, CMS overstated its revenues and expenses by a total of $5.2 billion over a one-year period: $1.0 billion (10% of revenue) in 2000 and $4.2 billion (36% of revenue) for the first three quarters of 2001. Likewise, CMS overstated MS&T's reported energy-trading volume by 78% in 2000 and 72% in 2001. The round trip trades inflated CMS sales and influenced stock prices. As pressure grew on companies to increase their trading activity, these wash trades apparently became a common practice.
Along with CMS Energy, Duke Energy, Dynegy Inc. and Reliant Resources Inc. have all admitted to conducting round-trip trades. CMS energy stated that all of its round-trip trades were made with either Dynegy Inc. or Reliant Energy Services. LCG consulting found that the SEC has been conducting a formal investigation of Dynegy, and last week Reliant disclosed its involvement in round-trip trading amounting to a ten percent boost in revenue between 1999 and 2001. Reliant's round-trip trades made up 20 percent of all its trading last year. Dynegy has denied taking part in anything improper and has reportedly cooperated with investigators. Four major energy companies all have made and unethical decision and have had a hand in manipulating the energy market.
In 2002 management admitted that CMS Energy booked $4.4 billion in round-trip trades and inflated its revenue by as much.
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"CMS Energy Scandal And Rebound." 123HelpMe.com. 19 Feb 2019
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Preston D. Hopper, CMS's former chief accounting officer was fired, and Tamela C. Pallas, former chief executive of CMS Houston-based trading subsidiary resigned from CMS with a lucrative $2,028,000 termination contract. Pallas¡¦ contract leaves doubt in that the company did not have knowledge of the round trip trades. I believe that CMS was afraid that Pallas would implicate others, including members of the Board of Directors. It would be impossible to conduct damage control if the public new that the company was allowed the trades to take place. The company would have no scapegoat and would have a difficult time turning things around. I believe that the board of directors where aware of the round trip trades and approved of it or they would not have given a lucrative termination contract. Pallas took the money and became the scapegoat the company needed.
May 24, 2002 CMS Energy Corporation Board of Directors announced the formation of a special committee of independent Directors to investigate matters surrounding round trip trades conducted by the Company's energy marketing unit, CMS Marketing, Services and Trading (CMS-MST). The special committee reported its findings and recommendations to the Board of Directors on November 4, 2002. In a CMS press release (2002) the board approved the recommendations of the committee and it¡¦s independent outside counsel. No new information was discovered, and there was no indication of motives other than to pump up the marketing credentials of the Marketing, Services and Trading business by showing higher sales volumes. Furthermore the committee found no apparent effort to manipulate the price of CMS Energy stock or affect energy prices.
In March 2004 the SEC filed civil lawsuits against Preston D. Hopper, and Tamela C. Pallas, 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. Hopper failed to ensure the disclosure of the true nature of the trades. 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 that there be monetary penalties and that the court prevent them from serving as officers or directors of any public company.
Are they legal?
Round trip trades are unethical and can lead to severe civil penalties. By conducting mass round trip trades it leads to the termination of ones job and makes them subjective to Securities and Exchange Commission civil law suits. The law suits can bar an individual from serving as an officers or director of any public company. Round trip trades are highly unethical and result in market manipulation. Investors trust the companies reported income in determining whether or not to purchase their stock. If a company practices round trip trading and the public is informed of the trades they will sell off all of their stock and the company¡¦s stock price would drastically drop. These practices are monitored by the Securities and Exchange Commission and they investigate all claims.
The turn around
As stated in the 2002 press release CMS Energy adopted the recommendations from the special committee and they stated that they would rapidly implement the following:
X Further amend Company policy to clarify the ban on prearranged round-trip trading.
X Conduct internal audits of CMS Marketing, Services and Trading more frequently and expand its accounting staff.
X Appoint a CMS Corporate Compliance Officer to ensure compliance with all applicable laws and regulations and act as an interface for employees who have concerns about conduct that may be unethical or illegal.
X Expand the responsibilities of the Chief Risk Officer to assess not only financial risk, but also legal and business risk.
X Requiring ethics training for all CMS Energy supervisory personnel.
X Amend the CMS Energy Code of Conduct to provide a clearer mechanism to report concerns about behavior that may be unethical or illegal.
X Prohibit former Arthur Andersen auditors who served on CMS Energy's account from any future involvement in CMS Energy audits.
X Direct the management to evaluate further personnel disciplinary actions.
X Improve communication among CMS Energy's business units and its legal department.
The Board also announced that it is taking steps to add two new members to enhance its experience and expertise. CMS Energy already has made major changes in its top management. Kenneth Whipple became chairman and CEO of CMS Energy after the round-trip trading was disclosed in May. S. Kinnie Smith Jr. joined the Company as vice chairman and general counsel in June, and Thomas Webb joined the Company as chief financial officer in August. The companies stock has risen and is currently at $14.09.
The company took the proper steps to rebound from a poor ethical decision by terminating and replacing key executive officers who where behind the decision. The company implemented changes in there policy and hired a Corporate Compliance Officer. There is reason to believe that some of the members of the board members where aware of the trading but there was no proof of the fact.
U.S. Securities and Exchange Commission. (2004, March) The Matter of CMS Energy Corp. and Terry Woolley. Retrieved August 1, 2006 from http://www.sec.gov/litigation/admin/33-8403.htm
Holyfield, J. (2002, November). CMS Energy Board Announces Completion of Special Committee's Round-Trip Trading Investigation; Company Announces Price Index Reporting Review. Retrieved August 5, 2006, from http:// www.corporate-ir.net/ireye/ir_site.zhtml?ticker=CMS&script=410&layout=-6&item_id=352601
CMS Energy Corp. Admits $4.4 Billion in "Round-Trip" Trading. Retrieved August 7, 2006 fromhttp://www.energyonline.com/Industry/News.aspx?NewsID=5814&CMS_ Energy_Corp._Admits_%244.4_Billion_in_%22Round-Trip%22_Trading