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Although numerous defendants remain in this cause of action, only defendant

CMS Energy brought the current motion, so the court’s reference to the movant will be

in the singular.

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

In re:

CMS ENERGY SECURITIES LITIGATION,

Case No: 02-72004

HON. GEORGE CARAM STEEH

_____________________________________/

OPINION AND ORDER DENYING DEFENDANT CMS ENERGY CORPORATION’S

MOTION FOR JUDGMENT ON THE PLEADINGS AND DENYING PLAINTIFFS’

MOTION FOR PARTIAL SUMMARY JUDGMENT

Before the court in this securities litigation is defendant CMS Energy’s motion for

judgment on the pleadings, brought pursuant to Fed. R. Civ. P. 12(c).1 Defendant’s

motion for judgment on the pleadings argues for dismissal of plaintiffs’ Third Amended

Complaint (“TAC”) on the basis of insufficient pleading of transaction and loss causation. 

For the reasons stated below and discussed at the hearing before this court on

November 29, 2005, defendant’s motion is DENIED. Additionally, as stated on the

record and discussed below, plaintiffs’ cross-motion for partial summary judgment is also

DENIED.

STATEMENT OF FACTS

 The facts of this matter have been described in several other orders,so only a

brief description is required here. Plaintiffs allege that defendant CMS and its

subsidiaries fraudulently inflated statements of revenue through a practice known as

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“round-trip” trading. This practice, as defined in the TAC, involves “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 or loss to either

transacting party.” TAC, ¶ 83. In the context of the round-trip trading, plaintiffs allege

that CMS issued a series of false financial statements which “served to defraud investors

into purchasing CMS securities at artificially inflated prices.” TAC, ¶ 96. Plaintiffs further

allege that “Ultimately, the Company’s disclosures 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.” TAC ¶ 99.

Defendant’s motion before this court asserts that the plaintiffs do not properly

allege either transaction causation or loss causation in the TAC. As a result, defendant

asserts that they are entitled to judgment on the pleadings. In their cross-motion,

plaintiffs seek partial summary judgment on the issue of damages. Essentially, the

plaintiffs argue that they are entitled to any damages which were proximately caused by

the defendant’s challenged conduct. The court held oral arguments on these motions on

November 29, 2005. As stated on the record, both defendant’s and plaintiffs’ motions

were denied. This opinion and order gives additional reasoning for that determination.

STANDARDS

Judgment on the Pleadings

A motion for judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c) “is

treated under the standards for motions to dismiss under Rule 12(b)(6) for failure to state

a claim under which relief may be granted.” Mueller v. Gallina, 311 F. Supp. 2d 606, 608

(E.D. Mich. 2004). Therefore, the court construes the complaint in the light most

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favorable to the plaintiffs, and must “determine whether the plaintiffs undoubtedly can

prove no set of facts in support of their claims that would entitle them to relief.” PR

Diamonds, Inc. v. Chandler, 364 F.3d 671, 680 (6th Cir. 2004) (citing Mayer v. Mylod, 988

F.2d 635, 637 (6th Cir. 1993)).

Summary Judgment

Federal Rule of Civil Procedure 56(c) empowers the court to render summary

judgment "forthwith if the pleadings, depositions, answers to interrogatories and

admissions on file, together with the affidavits, if any, show that there is no genuine issue

as to any material fact and that the moving party is entitled to judgment as a matter of

law." See Redding v. St. Eward, 241 F.3d 530, 532 (6th Cir. 2001). The Supreme Court

has affirmed the court's use of summary judgment as an integral part of the fair and

efficient administration of justice. The procedure is not a disfavored procedural shortcut. 

Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986); see also Cox v. Kentucky Dept. of

Transp., 53 F.3d 146, 149 (6th Cir. 1995).

The standard for determining whether summary judgment is appropriate is

"'whether the evidence presents a sufficient disagreement to require submission to a jury

or whether it is so one-sided that one party must prevail as a matter of law.'" Amway

Distributors Benefits Ass’n v. Northfield Ins. Co., 323 F.3d 386, 390 (6th Cir. 2003)

(quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986)). The evidence

and all reasonable inferences therefrom must be construed in the light most favorable to

the non-moving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S.

574, 587 (1986); Redding, 241 F.3d at 532 (6th Cir. 2001). "[T]he mere existence of

some alleged factual dispute between the parties will not defeat an otherwise properly

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supported motion for summary judgment; the requirement is that there be no genuine

issue of material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986)

(emphasis in original); see also National Satellite Sports, Inc. v. Eliadis, Inc., 253 F.3d

900, 907 (6th Cir. 2001).

If the movant establishes by use of the material specified in Rule 56(c) that there

is no genuine issue of material fact and that it is entitled to judgment as a matter of law,

the opposing party must come forward with "specific facts showing that there is a

genuine issue for trial." First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 270 (1968);

see also McLean v. 988011 Ontario, Ltd., 224 F.3d 797, 800 (6th Cir. 2000). Mere

allegations or denials in the non-movant's pleadings will not meet this burden, nor will a

mere scintilla of evidence supporting the non-moving party. Anderson, 477 U.S. at 248,

252. Rather, there must be evidence on which a jury could reasonably find for the nonmovant. McLean, 224 F.3d at 800 (citing Anderson, 477 U.S. at 252). 

ANALYSIS

Defendant’s Fed. R. Civ. P. 12(c) Motion

The pleadings in a cause of action alleging securities fraud are required to

demonstrate two separate forms of causation. These are generally referred to as

transaction causation and loss causation. Transaction causation essentially means that

plaintiff has properly pled reliance on the actions of the defendant, which caused an

artificial inflation in the cost of its securities. Basic, Inc. v. Levinson, 485 U.S. 224, 248-

249 (1988). Loss causation, on the other hand, refers to the loss suffered by the

company’s investors which must be directly tied to the exposure of the company’s

fraudulent inflation of their securities prices. Dura Pharmaceuticals, Inc. v. Broudo, 125

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Plaintiffs’ position at oral argument was that the pleading standard under Dura is

less stringent than that already applied by the court on the motion to dismiss. However,

the Supreme Court’s direction to the Ninth Circuit in Dura did not modify this court’s

view of loss causation pleadings.

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S.Ct. 1627, 1633 (2005). In the present cause of action, CMS contends that the plaintiffs

have not sufficiently pled either transaction causation or loss causation in the TAC.

In support of its motion for judgment on the pleadings, CMS offers the Supreme

Court’s recent decision in Dura Pharmaceuticals, Inc. v. Broudo. The parties here

disagree as to the holding of Dura. Defendant argues the holding in Dura requires a

securities fraud complaint include a heightened level of specificity as to the causal

connection between the defendant’s misrepresentations and the plaintiff’s alleged loss. 

On the other hand, plaintiffs contend that Dura requires only a statement that plaintiff

suffered a loss proximately caused by purchasing defendant’s securities at a price

artificially inflated by that defendant’s conduct.2

This court concludes that the Supreme Court’s decision in Dura was limited to

addressing a portion of the Ninth Circuit’s securities fraud jurisprudence. In that circuit, it

had become accepted that a plaintiff could establish loss causation in the pleadings by

merely asserting that the securities were purchased at an inflated price. Id., at 1631. 

This practice essentially negated the purpose of loss causation pleadings, as it did not

require plaintiff to allege that defendant’s conduct caused a financial loss to the plaintiff. 

As a result, the Supreme Court clarified the requirement of loss causation in Dura and

explained that the plaintiff must plead that there was a causal connection between the

loss suffered and the defendant’s misconduct. Id., at 1634. 

In Dura, plaintiffs brought suit against a pharmaceuticals manufacturer alleging

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securities fraud. Specifically, the plaintiffs alleged that the defendant corporation

artificially inflated the cost of its stock through false statements which implied that the

Food and Drug Administration was going to approve a new product that was developed

by the pharmaceutical company. Id., at 1630. When the FDA did not approve the

product for public sale, Dura Pharmaceuticals’ stock price temporarily declined. Id.

At issue in Dura was whether or not plaintiffs properly alleged loss causation in

the complaint. The complaint alleged that “in reliance on the integrity of the market [the

plaintiffs]...paid artificially inflated prices for Dura securities” and the plaintiffs suffered

“damage[s] thereby.” Id., at 1630. The Ninth Circuit held that loss causation was

sufficiently pled by the simple assertion that the stock was purchased at a price which

was artificially inflated through the defendant’s misrepresentations. Id. In reversing, the

Supreme Court explained that “an inflated purchase price will not itself constitute or

proximately cause the relevant economic loss.” Id. Rather, a plaintiff must plead that the

defendant’s misrepresentation is causally linked to the economic loss suffered. Id., at

1633. A plaintiff who alleges that he or she purchased a security at an inflated price and

suffered a loss on that purchase at some point in the future has not alleged that the loss

was actually caused by the defendant’s misrepresentation. Rather, the economic loss

could have been caused by a downturn in the market that is wholly unrelated to the

defendant’s conduct. Id., at 1632.

The Supreme Court’s opinion in Dura clearly explains that it does not modify the

pleading requirements of Fed. R. Civ. P. 8(a)(2), which merely requires a plaintiff to

provide “a short and plain statement of the claim showing that the pleader is entitled to

relief.” The Supreme Court has explained that pleadings are intended to provide a

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defendant with “fair notice of what the plaintiff’s claim is and the grounds upon which it

rests.” Conley v. Gibson, 355 U.S. 41, 47 (1957). It is the court’s determination that the

TAC in the litigation at bar adequately provides the defendant with such notice with

regard to both transaction causation and loss causation. 

As previously quoted in the statement of facts, TAC ¶ 99 states “[u]ltimately, the

Company’s disclosures 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.” It is clear that this pleading is substantially different

from the pleading at issue in Dura, where plaintiff merely alleged that a loss resulted

from artificially inflated stock prices. Id., at 1630. In this case, the plaintiffs specifically

allege that the loss suffered was a direct result of CMS’s disclosures of its practice of

round-trip trading. As discussed at the hearing, the court previously considered this

issue on defendants’ motion to dismiss and is not convinced that Dura changes the

outcome. Defendants remain on sufficient notice of plaintiffs’ theory of loss causation,

even under the light of Dura. 

In addition to their reliance on Dura, defendant also asserts that the Sixth Circuit’s

recent decision in the Conaway case clarifies the requisite elements of loss causation

pleading. In Conaway, the Sixth Circuit held that the plaintiffs, who had brought suit

against the Kmart Corporation, did not fulfill the pleading requirements for loss causation

as described in Dura. D.E. & J. Ltd. Partnership v. Conaway, 2005 WL 1386448 at *5.

The court found that the plaintiffs’ pleadings were inadequate as they did nothing more

than allege that a loss occurred as a result of Kmart’s announcement of bankruptcy,

rather than allege a loss resulting from the market’s acknowledgment of prior

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misrepresentations made by the corporation. Id., at *5-6. As already stated, in the

present case the plaintiffs specifically allege that the exposure of defendants’

misrepresentations caused a drop in the stock price and a loss to the investors. 

Conaway, like Dura, requires nothing more. 

CMS further contends that the holding in Dura can be applied to an analysis of

transaction causation pleadings. The court, however, finds that such an extension of

Dura is unwarranted, as Dura speaks in a very specific manner of loss causation

pleadings, rather than both loss and transaction causation. 

Transaction causation can also be accurately referred to as reliance. As stated by

the Supreme Court, “where materially misleading statements have been disseminated

into an impersonal, well-developed market for securities, the reliance of individual

plaintiffs on the integrity of the market price may be presumed”. Basic, 485 U.S., 246-

247. Such a presumption is known as the fraud-on-the-market theory. However, as the

defendants argue, this presumption may be rebutted “through any showing that severs

the link between the alleged misrepresentation and...the price received (paid) by the

plaintiff.” Id., at 248.

As discussed at the hearing, defendant attempts to rebut this presumption by

demonstrating that the price of CMS stock did not drastically increase on any of the days

on which the allegedly fraudulent statements were made public. The court is not

persuaded that the link between defendants’ allegedly fraudulent statements and

plaintiffs’ decision to purchase CMS stock is severed by a mere showing that the stock

prices did not immediately and drastically increase in response to the statements. 

Although the price of CMS stock did not drastically increase on the very days allegedly

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fraudulent statements were made public, the court notes there is no context offered in

connection with CMS’s static prices. In order to determine the full impact release of

financial statements had on the value of CMS securities, an in-depth factual analysis

would be required. Such an analysis would be improper at this juncture. For the

reasons stated above, as well as those given at the November 29, 2005 hearing,

defendant’s motion is denied. 

Plaintiffs’ Motion for Partial Summary Judgment

In response to defendant’s motion, plaintiff’s brought a cross-motion for partial

summary judgment, on the issue of damages, citing to Central States, Southeast and

Southwest Areas Pension & Health & Welfare funds v. McNamara Motor Express, Inc.,

503 F. Supp. 96 (W.D. Mich 1980) for support. The Central States case is easily

distinguished from the case before this court. In Central States, the defendants did not

dispute they owed plaintiffs $112,800. As a result, plaintiffs moved for partial summary

judgment with respect to the owed amount, and the defendants did not oppose the

motion. While the court granted the motion, it noted that the judgment could not be

enforced until disposition of the entire action. Id. at 99.

In the present case, unlike the Central States case, defendants vigorously dispute

their liability for the sought after damages. Furthermore, unlike in Central States, the

damages sought by the plaintiffs have not yet been quantified and the parties dispute the

class period that should be used in determining said damages. For the reasons stated

on the record, as well as those stated above, the court finds that genuine issues of

material fact remain in dispute on this issue, and partial summary judgment on the issue

of damages is not appropriate under Fed. R. Civ. P. 56. 

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CONCLUSION

Because the plaintiffs’ pleadings of loss causation meet the requirements of the

Federal Rules of Civil Procedure, as well as Dura, and because the presumption of

reliance created by the fraud-on-the-market theory has not been rebutted at this

juncture, defendant’s motion for judgment on the pleadings is DENIED. In addition,

because there are genuine issues of material fact relating to the issue of damages, and

because defendant has not yet been found liable for any damage that may have been

caused, plaintiffs’ motion for partial summary judgment is also DENIED.

IT IS SO ORDERED.

s/George Caram Steeh

GEORGE CARAM STEEH

UNITED STATES DISTRICT JUDGE

Dated: December 7, 2005

CERTIFICATE OF SERVICE

Copies of this order were served on the attorneys of record on December 7, 2005, by

electronic and/or ordinary mail

s/Josephine Chaffee

Secretary/Deputy Clerk

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