Beginning in 2000, CMS Marketing, Services and Trading Company began to make energy trades that had no economic justification. As stated in the Securities and Exchange Commission cease and desist order ¡§CMS materially overstated its revenues, expenses and energy-trading volumes in 2000 and 2001 through the use of undisclosed round-trip energy transactions conducted by its Houston-based energy-trading division, MS&T.¡¨ These trades have now become known as "round-trip" trades. CMS issued false Press Releases describing the trades as low margin trades when in fact there were no margins. The Company admits that $5.2 billion of these trades were made in 2000 and 2001.
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.
The outcome
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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James, Tom, and Peter Fusaro. Energy and Emissions Markets: Collision or Convergence? Hoboken, NJ: John Wiley and Sons, Inc, 2006. Print.
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Roberts, MJ, Lassiter, JB & Nanda, R 2010, US Department of Energy & Recovery Act Funding: Bridging the “Valley of Death”, Harvard Business School, Cambridge, USA.
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