EXHIBIT A 

Case 2:02-cv-72004-GCS-VMM ECF No. 425-3, PageID.6535 Filed 10/06/06 Page 1 of 14
In Re CMS Energy Securities Litigation

Civ. No. 02 CV 72004 (GCS)

Expert Rebuttal Report of Cyril Moscow

October 4,2006

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I. Personal Background and Qualifications

1. Since 1960,I have practiced business law as a member o f Honigman Miller Schwartz and

Cohn LLP in Detroit, Michigan, specializing in corporate and securities matters. Since 1973, I

have been adjunct professor at The University o f Michigan Law School and have taught classes

and seminars in corporate governance, securities regulation, enterprise organization and business

planning for publicly held corporations. Iam the co-author o f a treatise on Michigan corporate

law, Michigan Corporation Law and Practice (1990 with annual supplements). In my law

practice, teaching and national and state bar association activities, I have frequently been

involved in issues o f corporate governance at corporations with publicly traded securities.

2. In the past four yearsIprovided expert testimony in the cases listed on Exhibit 1.

3. My resume is attached as Exhibit 2. Iam being compensated for services perfonned at

an hourly basis at the rate o f $530 per hour.

11. Scope o f Analvsis

4. Ihave been retained by counsel for CMS Energy Corporation (“CMS”) in this litigation

to rebut the report presented by plaintiffs’ expert Kevin F. Dages. In this regard, Ihave been

asked to address applicable standards o f care governing the conduct .of directors and officers o f a

Michigan corporation. The specific matters about which I have been asked to develop

independent opinions are: (I)whether it i s reasonable for a Michigan corporation and its

directors and officers to rely on its outside auditors with respect to accounting for transactions;

and (2) whether CMS and its officers and directors acted recklessly in not anticipating that the

Securities and Exchange Commission (,‘SEC’,) at some point would investigate zero margin

trading transactions by CMS’s subsidiary, CMS Marketing Services & Trading Company

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(“MS&T”). As a rebuttal expert, Ilimited my inquiry to the purported facts and opinions

presented by plaintiffs’ expert Kevin F. Dages inhis report submitted in this litigation.

5. In connection with my work, Ihave called on the knowledge and experience gained

during my professional career. My work i s continuing, and, therefore, Ireserve the right to

modify or add to my report. In support o f my testimony at trial, Imay prepare exhibits based on

the information included in this report. Ialso may use as exhibits any statements, records,

documents, evidence, or other exhibits made, issued or introduced by any party.

111. Materials Considered

6. For this report, Ihave considered the materials listed on Exhibit 3.

IV. Summary of Opinions

7. In my opinion, it i s reasonable for a Michigan corporation and its officers and directors to

rely on the advice of its outside auditors with respect to accounting for revenues and costs,

including accounting for zero margin trading transactions.

8. In my opinion, institution of an investigation by the Securities and Exchange

Commission o f zero margin trading transactions by MS&T did not demonstrate that CMS and its

directors and officers were reckless, even if CMS’s stock price dropped following the disclosure

of the investigation.

V. Standards GoverninP The Conduct Of Directors And Officers

A. General Duties

CMS is a Michigan corporation. The general duties o f directors and officers o f a

Michigan corporation are contained in section 541a o f the Michigan Business Corporation Act,

as follows:

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Sec. 541a. (1) A director or officer shall discharge his or her duties as a

director or officer including his or her duties as a member o f a committee in the

following manner:

(a) In good faith.

(b) With the care an ordinarily prudent person in a like position would

exercise under similar circumstances.

(c) In a manner he or she reasonably believes to be in the best interests

o f the corporation.

(2) In discharging his or her duties, a director or officer i s entitled to

rely on information, opinions, reports, or statements, including financial

statements and other financial data, if prepared or presented by any o f the

following:

(a) One or more directors, officers, or employees o f the corporation, or

o f a business organization under joint control or common control, whom the

director or officer reasonably believes to be reliable and competent in the matters

presented.

(b) Legal counsel, public accountants, engineers, or other persons as to

matters the director or officer reasonably believes are within the person’s

professional or expert competence.

(c) A committee of the board o f which he or she i s not a member if the

director or officer reasonably believes the committee merits confidence.

(3) A director or officer i s not entitled to rely on the information set

forth in subsection (2) if h e or she has knowledge concerning the matter in

question that makes reliance otherwise permitted by subsection (2) unwarranted.

Duties under this section, and directors’ and officers’ duties under the law o f other states,

generally are classified as duties o f care and loyalty. There i s no reference in the Dages report to

any conflict o f interest or similar matter that would indicate a breach o f director or officer duty

o f loyalty in connection with zero margin trading activity. Allegations o f reckless conduct under

state law would implicate a breach of the duty o f care which, as stated above, in Michigan would

mean a breach of the care an ordinarily prudent person in a like position would exercise under

similar circumstances. The use o f the term “reckless” in this context i s discussed below.

In common with courts throughout the country, Michigan courts traditionally have

deferred to the business judgment o f directors as a standard o f judicial review. From the classic

case o f Dodge v. Ford in 1919, to more modem statements, Michigan courts have applied the

business judgment rule. Within that framework, directors and officers are given wide discretion

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in connection with their business operations so long as they act in an informed basis, in good

faith, and in the honest belief that the actions taken were in the best interests o f the corporation.

The facts reviewed here indicate that the reporting o f zero margin trading was within the

business judgment o f the directors as a matter o fMichigan law and practice.

Michigan legslative policy also provides director protection from hindsight liability.

Pursuant to authority in section 209(c) of the Michigan Business Corporation Act, CMS has

included in its articles o f incorporation a provision exculpating directors from personal liability

to the corporation or shareholders for breaches of the duty o f care. Under this provision,

directors can only be liable to the corporation or its shareholders in limited circumstances, such

as intentional infliction of harm on the corporation or the shareholders. None o f the exceptional

circumstances are present in this case.

This case involves actions at CMS’s wholly owned subsidiary MS&T. As a separate

Michigan corporation, MS&T has its own board o f directors. In practice, however, the directors

of a wholly owned subsidiary in a multi-corporate enterprise like CMS would expect to follow

the policies and procedures established by the officers o f the parent corporation pursuant to their

authority from the parent corporation’s board o f directors. The separate existence o f a wholly

owned subsidiary corporation typically i s maintained for liability, tax or employment or other

administrative purposes, but not for general strategic direction.

B. Reliance on Outside Consultants and Advisors

In operating a complex publicly traded corporate enterprise such as CMS, the board of

directors necessarily must rely on outside consultants and advisors. Section 541a o f the

Michigan Business Corporation Act quoted above specifically authorizes directors and officers

in discharging their duties to rely upon public accountants as to matters the director or officer

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reasonably believes are within the accountants’ professional competence. The facts indicate that

the CMS financial staff relied upon Arthur Andersen & Co., a respected outside auditing firm

with expertise in accounting for energy transactions, concerning the reporting o f activities at

MS&T. Arthur Andersen certified the financial statements for the year 2000 that included zero

margin trading at MS&T and reviewed quarterly reports that accounted for revenues in a similar

fashion. It was reasonable for CMS and its directors and officers to rely upon Arthur Andersen

for the reporting o f MS&T zero-margin trading transactions. To assure themselves o f proper

reporting for the transactions at a new business enterprise with complex transactions under

applicable accounting rules, reasonable directors and officers would be expected to rely on

outside accountants’ advice. Reliance upon outside auditors was particularly appropriate in this

case because CMS and its personnel were not familiar with the details o f the trading business

conducted by MS&T.

C. Oversight Responsibilities and Duty of Inquiry

Under Section 501 o f the Michigan Business Corporation Act, the business and affairs o f

the corporation are to be managed by or under the direction o f its board. In practice, oversight

duties under this section would include monitoring the activities o f wholly owned subsidiaries.

The oversight function o f corporate directors for Michigan corporations and corporations

generally has been summarized in the American Bar Association’s Corporate Directors

Guidebook (fourth edition) page 14 as follows:

A director should inquire into potential problems or issues when alerted by

circumstances or events suggesting that board attention i s appropriate; for

example, inquiry i s warranted when information provided on an important matter

appears materially inaccurate or inadequate or there i s reason to question the

veracity of management. When directors uncover or receive from others

information indicating that the corporation i s or may be experiencing significant

problems in a particular area o f business, or may be engaging in unlawful

conduct, they should make further inquiry and follow up until they are reasonably

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satisfied that management i s dealing with the situation appropriately. Even when

there are no such “red flags,” directors should periodically satisfy themselves that

the corporation maintains programs that are appropriately designed to identify and

manage business risks and reasonably effective to maintain compliance with laws

and corporate policies and procedures.

In this case, MS&T appeared to the directors and officers to be profitable and growing in

its business throughout the period in question. Its financial statements were reviewed by the

outside auditors in the ordinary course o f the preparation o f the consolidated financial statements

o f the parent corporation. The directors and management were advised that the reporting

practices o f the subsidiary were consistent with practices o f other companies in the industry.

There i s no indication in the materials that Ireviewed that CMS officers or directors saw or

should have seen “red flags” indicating accounting problems at MS&T in connection with zero

margin trading.

CMS had in place a fulcomplement of procedures and oversight functions to protect the

corporation against improper practices and excessive risk. For example, there were numerous

board committees, a risk management committee, and an internal audit fbnction. The

governance and oversight practices o f CMS in 2000, 2001 and 2002 were consistent with the

practices o f other large well regarded public corporations. There does not appear to be any basis

to conclude that CMS knew or obviously should have known that the financial reporting of

MS&T was incorrect, or that the directors or management o f CMS intended to mislead investors

with financial reporting. There also i s no evidence to indicate that zero margin trading was

illegal. Accordingly, CMS had no special duty to investigate activities o f MS&T beyond

assuring itself that customary oversight procedures were being followed.

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VI. No Duty to Prevent CMS MS&T from Engaeiw in Zero Margin Transactions

MS&T engaged in zero margin transactions for the business purpose o f enhancing its

stature with its customers. Iam advised that the zero margin transactions were not illegal. The

reporting o f the transactions on-a gross basis had been approved by outside auditors. CMS was

satisfied that the reporting o f transactions on a gross basis had no impact on reported income o f

CMS. In light o f the belief that the transactions were common in the industry, the lack o f

knowledge o f the industry by CMS, the superior knowledge possessed by Arthur Andersen

concerning the accounting for energy trading, the belief that reporting on a gross basis would

improve the business o f MS&T, and the approval o f the reporting by outside auditors, the board

and management o f CMS had no duty to prevent MS&T from engaging in zero margin

transactions in 2000 and the first two quarters o f 2001 or to change the accounting f?om gross

revenues and expenses to net margin accounting. Although there i s some question in the facts as

to the discontinuation o f reporting of zero margin transactions on a gross basis in the latter part

o f 2001, there i s no indication in the facts that this was the result o f intentional misconduct or a

gross disregard o f duties.

VII. No Recklessness in not Anticipating an SEC Investipation

The Dages report indicates that there was a drop in the market price o f CMS securities

when a preliminary investigation by the Securities and Exchange Commission was announced.

Since the directors and officers o f CMS did not believe that anything improper was occurring at

MS&T with respect to the accounting for zero margin trading transactions, they had no reason to

anticipate an SEC investigation o f accounting practices at MS&T relating to a possible violation

of federal securities law. There i s no indication that CMS consciously intended to issue false and

misleading financial statements.

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The term “reckless” i s not commonly used in connection with the analysis o f director

duties under Michigan corporate law. The term is used in determining liability under federal

securities laws. The Sixth Circuit Court of Appeals has defined reckless conduct as “highly

unreasonable conduct which i s an extreme departure from the standards of ordinary care”,

Munsbach v. Prescott, Ball & Turben, 598 F.2d 1017 (6& Cir. 1979).

The foregoing discussion concluded that the CMS directors and officers acted in- --.

accordance with their statutory standard of care and customary business practices in-Conneciion

with activities at MS&T. Consequently, it follows that CMS and its officers and directors were

not “reckless” with regard to MS&T’s accounting practices inreporting zero margin transactions

and not anticipating an SEC investigation.

October 4,2006

/CyrilMoscow

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September 2006

EXHIBIT 1

CYRIL MOSCOW

EXPERT TESTIMONY

Since January 2002

--. 1. Symorex v Iversen

Washtenaw County, Michigan Circuit Court (No. 01-1071-CK (2002)

(director duties - deposition)

2.

3.

US. Bank Trust Assn. (River Parksquare Project) vs. Prudential

Securities, Inc.

U.S.D.C. E.D. Wash. (2003) (rebuttal report for defendant underwriter in

securities action)

VSIHoldings, Inc. v SPX Corporation

U.S.D.C. E.D. Mich., S.D., No. 03-70225 (2004) (rebuttal report for defendant in

acquisition agreement dispute)

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EXHIBIT 2

Practice:

CYRIL MOSCOW

2290 First National Building

Detroit, Michigan 48226

(3 13) 465-7486 cmoscow@,honimnan.com

September 2006

Education

Wayne State University, A.B. 1954

The University o fMichigan Law School, J.D. 1957

Professional ExDerience

Admitted to the Michigan Bar in 1957. Trial attorney, United States Department o f

Justice, Civil Division,

1957-1960

Honigman Miller Schwartz and Cob, Detroit, 1960 to date partner)

Trustee, H.B. Shaine& Co. SPA liquidation (1987 to 1992)

Teaching: Adjunct Professor, Wayne State University Law School, Securities Regulation, 1973

Adjunct Professor, various corporate and securities classes and seminars, The University

ofMichigan Law School - 1973 to date (Visiting Professor Fall 1998)

Associations: State Bar o fMichigan, Business Law Section:

- Section Chairman, 1979-1980; Chairman or Co-Chairman, Corporate Laws

Committee

- Chairman, Business Corporation Act Revision Subcommittee, 1985 to date

American Bar Association, Section o f Business Law

- State Regulation of Securities Committee: Chairman, AdHoc Subcommittee on

Merit Regulation,

- Committee on Corporate Laws (1996-2003)

American Law Institute

1983-1988; Michigan Liaison

Publications

Articles:

(Partial List) Aspects of Shareholders' Rights, 18 Wayne Law Review 1003 (1972)

The Independent Director, 28 Business Lawyer 9 (1972)

Michigan's independent Director, 46 Business Lawyer 57 (1990)

Michigan or Delaware Incorporation, 42 Wayne Law Review 1897 (1997)

Oppression of Minority Shareholders, Michigan Bar Journal, October 1998, p 1088

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Books:

The Representative Director Problem, Insights, Vol. 16, No. 6 (June 2002)

Arbitration Bylaws and Shareholder Class Actions, Insights, Vol. 20, No. 4 (April 2006)

Siegel, Schulman & Moscow, Michigan Business Corporations, Callaghan (1979 with

1987 supp)

Schulman, Moscow and Lesser, Michigan Corporation Law &Practice, Aspen

Publishers (1990 with 2006 supp)

Moscow andMakens, Michigan Securities Regulation, Second Edition, ICLE (1994)

--.

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EXHIBIT 3

Materials reviewed:

1. Conformed Third Amended Consolidated class action complaint.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

Expert report ofKevin1;. Dages.

Deposition o fKevin F, Dages September 15,2006.

Expert report of Harris L.Devor.

Expert report of Michael J. Hams.

CMS Energy Special Investigative Committee Report dated October 25,2002.

Deposition of William J. Parfet.

Deposition o fDavid W. Joos.

Deposition of John Deutch.

Deposition of Preston Hopper.

Deposition of Alan Wright.

Articles o f Incorporation, Bylaws, and Corporate Governance Principles of CMS Energy

Corporation.

13. Minutes o fBoard of Directors meetings of CMS Energy Corporation.

14. Minutes o f Board of Directors meeting of CMS Marketing Services and Trading

Company.

15. Miscellaneous cases and legal reference materials for background.

DETROIT.2328098.4

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