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STATES UNITED DISTRICT COURT DISTRICT OF MINNESOTA _________________________________________ MAX BRUCKNER and STEPHEN HEROD, Individually and on Behalf of all Others Similarly Situated, Plaintiffs, vs. XCEL ENERGY, INC., JAMES J. HOWARD, WAYNE H. BRUNETTI and EDWARD J. McINTYRE, Defendants. _________________________________________ ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) CIVIL ACTION NO. ________ CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS JURY TRIAL DEMANDED Plaintiffs have alleged the following based upon the investigation of plaintiffs counsel, which included a review of United States Securities and Exchange Commission (SEC) filings by Xcel Energy, Inc. (Xcel or the Company), as well as regulatory filings and reports, securities analysts reports and advisories about the Company, press releases and other public statements issued by the Company, and media reports about the Company, and plaintiffs believe that substantial additional evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for discovery. NATURE OF THE ACTION 1. This is a federal class action on behalf of purchasers of the securities of Xcel between January 31, 2001 to July 26, 2002, inclusive (the Class Period), seeking to pursue remedies under the Securities Exchange Act of 1934 (the Exchange Act). JURISDICTION AND VENUE 2. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the Exchange Act [15 U.S.C. 78j(b) and 78t(a)] and Rule 10b-5 promulgated thereunder by the SEC [17 C.F.R. 240.10b-5]. 3. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C. 1331 and 1337, and Section 27 of the Exchange Act [15 U.S.C. 78aa]. 4. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28 U.S.C. 1391(b). Many of the acts charged herein, including the preparation and dissemination of materially false and misleading information, occurred in substantial part in this District and Xcel conducts business in this District. 5. In connection with the acts alleged in this complaint, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the mails, interstate telephone communications and the facilities of the national securities markets. PARTIES 6. (a) Plaintiff Max Bruckner, as set forth in the accompanying certification, incorporated by reference herein, purchased the common stock of Xcel at artificially inflated prices during the Class Period and has been damaged thereby. (b) Plaintiff Stephen Herod, as set forth in the accompanying certification, incorporated by reference herein, purchased the common stock of Xcel at artificially inflated prices during the Class Period and has been damaged thereby. 7. Defendant Xcel is a corporation organized under the laws of Minnesota with its principal executive offices located in Minneapolis, Minnesota. In its recent press releases Xcel describes itself as follows: Xcel Energy is a major U.S. electricity and natural gas company with operations in 12 Western and Midwestern states. Formed by the merger of Denver-based New Century Energies (NCE) and Minneapolis-based Northern States Power Co. (NSP), Xcel Energy provides a comprehensive portfolio of energy-related products and services to 3.2 million electricity customers and 1.7 million natural gas customers through its regulated operating companies. In terms of customers, it is the fourth-largest combination electricity and natural gas company in the nation. 8. Defendant James J. Howard (Howard) is, and at all times relevant to the allegations raised herein was, Chairman of Xcels Board of Directors and a Director. 9. Defendant Wayne H. Brunetti (Brunetti) is, and at all times relevant to the allegations raised herein was, Xcels President and Chief Executive Officer. 10. Defendant Edward J. McIntyre (McIntyre) is, and at all times relevant to the allegations raised herein was, Xcels Vice President and Chief Financial Officer. At all times relevant to the allegations raised herein, defendant McIntyre signed each of Xcels filings with the SEC as Xcels principal financial officer. 11. Defendants Howard, Brunetti and McIntyre, together, are referred to herein as the Individual Defendants. 12. During the Class Period, the Individual Defendants, as senior executive officers and/or directors of Xcel were privy to confidential and proprietary information concerning Xcel, its operations, finances, financial condition, present and future business prospects. The Individual Defendants also had access to material adverse non-public information concerning Xcel, as discussed in detail below. Because of their positions with Xcel, the Individual Defendants had access to non-public information about its business, finances, products, markets and present and future business prospects via access to internal corporate documents, conversations and connections with other corporate officers and employees, attendance at management and board of directors meetings and committees thereof and via reports and other information provided to them in connection therewith. Because of their possession of such information, the Individual Defendants knew or recklessly disregarded the fact that adverse facts specified herein had not been disclosed to, and were being concealed from, the investing public. 13. The Individual Defendants are liable as direct participants in, and a co-conspirator with respect to the wrongs complained of herein. In addition, the Individual Defendants, by reason of their status as senior executive officers and a director were controlling persons within the meaning of Section 20 of the Exchange Act and had the power and influence to cause the Company to engage in the unlawful conduct complained of herein. Because of their positions of control, the Individual Defendants were able to and did, directly or indirectly, control the conduct of Xcels business. 14. The Individual Defendants, because of their positions with the Company, controlled and/or possessed the authority to control the contents of its reports, press releases and presentations to securities analysts and through them, to the investing public. The Individual Defendants were provided with copies of the Company's reports and press releases alleged herein to be misleading, prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. Thus, the Individual Defendants had the opportunity to commit the fraudulent acts alleged herein. 15. As senior executive officers and directors and as controlling persons of a publicly- traded company whose common stock and other securities were, and are, registered with the SEC pursuant to the Exchange Act, and were and are traded on the New York Stock Exchange (NYSE) and governed by the federal securities laws, the Individual Defendants had a duty to disseminate promptly accurate and truthful information with respect to Xcels financial condition and performance, growth, operations, financial statements, business, products, markets, management, earnings and present and future business prospects, to correct any previously issued statements that had become materially misleading or untrue, so that the market price of Xcels common stock and other securities would be based upon truthful and accurate information. The Individual Defendants misrepresentations and omissions during the Class Period violated these specific requirements and obligations. 16. The Individual Defendants are liable as a participant in a fraudulent scheme and course of conduct that operated as a fraud or deceit on purchasers of Xcels common stock and other securities by disseminating materially false and misleading statements and/or concealing material adverse facts. The scheme (i) deceived the investing public regarding Xcels business, operations and management and the intrinsic value of Xcels securities; (ii) permitted Xcel to make an additional equity investment of $300 million in its majority-owned subsidiary, funded from the sale of Xcel common stock; (iii) permitted Xcel to file a shelf registration statement on Form S-3 with the SEC for the sale of $1 billion of securities; (iv) permitted Xcel to commence a tender offer for the remaining shares of its majority-owned subsidiary, NRG Energy, Inc. (NRG), in a stock-for-stock exchange valued at approximately $500 million; (v) permitted Xcel to complete a secondary offering of its common stock, pursuant to which Xcel sold 23 million shares valued at more than $500 million; and (vi) caused plaintiffs and members of the Class to purchase Xcels common stock and other securities at artificially inflated prices. PLAINTIFFS CLASS ACTION ALLEGATIONS 17. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or otherwise acquired the securities of Xcel between January 31, 2001 and July 26, 2002, inclusive (the Class Period), and who were damaged thereby. Excluded from the Class are defendants, the officers and directors of the Company, at all relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which defendants have or had a controlling interest. 18. The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, Xcel common shares and other securities were actively traded on the NYSE. While the exact number of Class members is unknown to plaintiffs at this time and can only be ascertained through appropriate discovery, plaintiffs believe that there are hundreds or thousands of members in the proposed Class. Record owners and other members of the Class may be identified from records maintained by Xcel or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions. 19. Plaintiffs claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by defendants' wrongful conduct in violation of federal law that is complained of herein. 20. Plaintiffs will fairly and adequately protect the interests of the members of the Class and have retained counsel competent and experienced in class and securities litigation. 21. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are: (a) herein; (b) whether statements made by defendants to the investing public during the Class whether the federal securities laws were violated by defendants' acts as alleged Period misrepresented material facts about the business and operations of Xcel; and (c) to what extent the members of the Class have sustained damages and the proper measure of damages. 22. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this action as a class action. SUBSTANTIVE ALLEGATIONS 23. Xcel Energy is a major U.S. electricity and natural gas company with operations in 12 Western and Midwestern states. 24. Throughout the Class Period, defendants issued numerous statements, and filed quarterly and annual reports with the SEC, which described the Companys financial performance and the financial performance of NRG, the Companys majority-owned subsidiary. These statements were materially false and misleading because they failed to adequately disclose and/or misrepresented the following adverse facts, among others: (a) that the Company had engaged in round-trip energy trades that provided no economic benefit for the Company; (b) that Xcels and NRGs credit agreements with lenders contained cross-default provisions and covenants, the result of which was that in the event of a default by NRG Energy, among other adverse effects, Xcel would lose access to $800 million in credit; (c) that NRGs grave liquidity and credit problems had caused its credit rating to be at or near junk status. Since it was extremely close to default under several credit agreements with lenders, Xcel was now exposed to potential liability under the cross-default provisions and covenants of NRGs credit agreements; (d) that Xcels management lacked a coherent plan to remedy NRGs credit and liquidity difficulties or remove cross-default provisions and covenants from credit agreements, the result of which was that NRG credit rating would be downgraded to junk status and Xcels own credit rating would be significantly downgraded; (e) that the Company lacked the necessary internal controls to adequately monitor the trading of its power; and (f) that as a result, the value of the Companys revenues and financial results were materially overstated at all relevant times. 25. The Class Period begins on January 31, 2001. On that date, Xcel released its financial results for the fourth quarter and year ended December 31, 2000. Regulated operating earnings for 2000 were $1.70 per share, excluding special charges and extraordinary items, compared with $1.51 per share for 1999. The earnings increase was attributable to higher revenues from sales growth, weather conditions and trading operations. In addition, earnings for 1999 were reduced by 7 cents per share for the disallowance of conservation incentives. Nonregulated earnings, excluding special charges, for 2000 were $0.42 per share, compared with $0.26 per share for 1999. * Note 7. Trading Operations Effective with year-end 2000 reporting, Xcel Energy has changed its policy for the presentation of energy trading operating results. Previously, trading margins were recorded net of costs in electric and gas revenues. After the merger, Xcel Energy has elected to report trading revenues separately from trading costs. Prior years' results have been restated for consistency with 2000 reporting. [Emphasis added.] 26. On March 23, 2001, Xcel filed with the SEC its Annual Report on Form 10-K for the * * year ended December 31, 2000. The 2000 Form 10-K contained the following disclosure: Electric and Gas Trading Margins Xcel Energy's trading operations are conducted mainly by PSCo and e prime. Trading revenues and costs of goods sold do not include the revenue and production costs associated with energy produced from generation assets or results from NRG. The following table details the changes in electric and gas trading revenue and margin. 1999 (in millions) 2,056 951 (2,017) (946) 2000 1998 135 (134) ___________ 1 Trading revenue $ Trading cost of goods $ sold ___________ __________ Trading margin $ 39 5 Trading revenue increased by approximately $1.1 billion and trading margin increased by approximately $34 million in 2000. Trading revenue increased by approximately $816 million and trading margin increased by approximately $4 million in 1999. The increase in trading revenue and margin is a result of the expansion of electric trading at PSCo and natural gas trading at e prime. * Trading Operations * * Effective with year-end 2000 reporting, Xcel Energy changed its policy for the presentation of energy trading operating results. Previously, trading margins were recorded net of costs in electric and natural gas revenues. After the merger, Xcel Energy elected to report trading revenues separately from trading costs. Prior years' results have been reclassified for consistency with 2000 reporting. Xcel Energy's trading operations are conducted mainly by PSCo and e prime. Trading revenues and costs of goods sold do not include the revenue and production costs associated with energy produced from generation assets or results from NRG. [Emphasis added.] 27. On May 15, 2001, Xcel filed its Quarterly Report on Form 10-Q for the first quarter ended March 31, 2001. The following disclosure was included: Electric and Gas Trading Margins Xcel Energy's trading operations are conducted mainly by PSCo and e prime. Trading revenues and costs of goods sold do not include the revenue and production costs associated with energy produced from Xcel Energy's generation assets or NRG. Margins from these generating assets for utility operations are included in the short-term wholesale portion of Electric Utility Margins, discussed previously. Trading margins reflect the impact of sharing of certain trading margins under the ICA. The following table details the changes in electric and gas trading revenue and margin. Three months ended 3/31/01 3/31/00 (in millions) 967 228 (917) (223) Trading revenue $ Trading cost of goods $ sold ___________ __________ Trading margin $ 50 5 Trading revenue increased by approximately $739 million and trading margin increased by approximately $45 million for the first quarter of 2001. The increase in trading revenue and margin is a result of the expansion of electric trading at PSCo and natural gas trading at e prime and favorable market conditions. 28. On August 14, 2001, Xcel filed its Quarterly Report on Form 10-Q for the second quarter ended June 30, 2001. The following disclosure was included: Electric and Gas Trading Margins Xcel Energy's trading operations are conducted mainly by PSCo and e prime. Trading revenues and costs of goods sold do not include the revenue and production costs associated with energy produced from Xcel Energy's generation assets or energy and capacity purchased to serve native load or NRG. Margins from these generating assets for utility operations are included in the short-term wholesale portion of Electric Utility Margins, discussed previously. The trading margins reflect the impact of the sharing of certain trading margins under the ICA. The following table details the changes in electric and gas trading revenue and margin. Three months ended 6/30/01 6/30/00 (in millions) 869 367 (837) (355) Trading revenue $ Trading cost of goods $ sold ___________ __________ Trading margin $ 32 12 Trading revenue increased by approximately $502 million and trading margin increased by approximately $20 million for the second quarter of 2001. The increase in trading revenue and margin is a result of the expansion of electric trading at PSCo and natural gas trading at e prime and favorable market conditions, including strong prices in the western markets, particularly before the establishment of price caps. It is not expected that trading margins in the second half of 2001 will be as strong, due to a decline in the forward price curve. 29. On November 14, 2001, Xcel filed its Quarterly Report on Form 10-Q for the third quarter ended September 30, 2001. The following disclosure was included: Electric and Gas Trading Margins Xcel Energys trading operations are conducted mainly by PSCo and e prime. Trading revenues and costs of goods sold do not include the revenue and production costs associated with energy produced from Xcel Energys generation assets or energy and capacity purchased to serve native load or NRG. Margins from utility generating assets for utility operations are included in the short-term wholesale portion of Electric Utility Margins, discussed previously. Revenues and costs associated with energy produced from NRGs generating assets and capacity to serve NRG are included in NRGs results, which are presented in nonregulated margins. The trading margins reflect the impact of the sharing of certain trading margins under the ICA. The following table details the changes in electric and gas trading revenue and margin. Three months ended 6/30/01 6/30/00 (in millions) 688 568 (679) (555) Trading revenue $ Trading cost of goods $ sold ___________ __________ Trading margin $ 9 13 Trading revenue increased by approximately $120 million, while trading margin decreased by approximately $4 million for the third quarter of 2001. Trading margin decreased due to lower market prices for electricity, reflecting a general decline in energy prices. 30. On December 31, 2001, Xcel announced that it would make an additional equity investment of $300 million in its majority-owned subsidiary, NRG Energy, funded from the sale of Xcel common stock. 31. On February 8, 2002, Xcel announced that it had filed a shelf registration statement on Form S-3 with the SEC for the sale of $1 billion of securities, and had available $400 million from a previous registration statement. 32. On February 15, 2002, Xcel announced that it would commence a tender offer for the remaining shares of its 74% owned subsidiary, NRG Energy, in a stock-for-stock exchange valued at approximately $500 million. The press release state, in pertinent part, as follows: "We are confident that our decision to acquire the public shares of NRG is in the best interests of both the NRG and Xcel Energy shareholders," said Wayne H. Brunetti, chairman, president and CEO of Xcel Energy. In 1989, NRG was developed as an independent power producer (IPP) to create additional shareholder value as a growth company. "NRG's management has grown the company rapidly, and today it is the third largest IPP worldwide with nearly 20,000 megawatts of power generation," Brunetti said. NRG completed public offerings in June 2000 and March 2001. "However, numerous factors have recently led to significant erosion in the valuations within the IPP sector and resulted in a fundamental shift in market perception that has increased the cost of capital for these companies," Brunetti said. "These events require a refocusing of NRG's current business model. The new focus of NRG will be on managed growth with a stronger balance sheet, cost management and reduced dependence on external financing." Brunetti said Xcel Energy's plans for NRG in 2002 include: Infusing $600 million of equity into NRG Selling approximately $1.9 billion of existing, largely international, generating assets Canceling approximately $700 million of planned projects and deferring about $900 million of projects Selling unassigned turbines, and Reducing business development and A&G expenses by about $45 million. * * * "These actions demonstrate our commitment to an investment-grade bond rating for NRG and a high quality rating at Xcel Energy," Brunetti said. Xcel Energy Chief Financial Officer Jim McIntyre said the acquisition of NRG should add about 5 cents per share to Xcel Energy's 2002 earnings and about 10 cents per share in 2003 and beyond. "We plan to maintain Xcel Energy's earnings guidance for 2002 at $2.40 to $2.50 per share, and we expect the annual earnings per share growth to average 7 percent to 9 percent, with NRG's contribution growing about 15 percent per year," he said. "We view the annualized $1.50 per share dividend as a very important part of the Xcel Energy value proposition for investors. We are committed to maintaining that dividend even as we move to acquire the NRG minority shareholder interest," McIntyre added. Brunetti noted that this transaction supports Xcel Energy's "balanced portfolio" strategy and enhances the stability of its energy merchant business. 33. On February 28, 2002, Xcel announced that it had completed a secondary offering of its common stock, pursuant to which Xcel sold 23 million shares valued at more than $500 million. 34. On March 13, 2002, Xcel commenced its exchange offer for NRG. The press release stated, in pertinent part, as follows: "We're confident our exchange offer is fair and is in the best interests of the stockholders of both NRG and Xcel Energy," said Wayne Brunetti, chairman, president and chief executive officer of Xcel Energy. "As I have said before, our original intent in forming NRG was to create value for shareholders. In this environment, which is difficult for NRG and other independent power producers, we believe our plan is the best alternative to deliver shareholder value. Our action today is a step in that direction." 35. On March 29, 2002, Xcel filed with the SEC its Annual Report on Form 10-K for the year ended December 31, 2001. The 2001 Form 10-K contained the following disclosure with respect to Xcels trading operations and practices: Trading Operations Xcel Energy and its subsidiaries conduct various trading operations including the purchase and sale of electric capacity and energy. Xcel Energy uses these trading operations to capture arbitrage opportunities created by regional pricing differentials, supply and demand imbalances, and changes in fuel prices. In addition, Xcel Energy participates in short-term energy or capacity sales at the utility subsidiaries. Participation in short-term wholesale energy markets provides market intelligence and information that supports the energy management of each utility subsidiary. Optimizing the utility subsidiaries physical assets by engaging in short-term sales and purchase commitments results in lowering the cost of supply for our native customers and the capturing of additional margins from non-traditional customers. Xcel Energy reduces commodity price and credit risks by using physical and financial instruments, to minimize commodity price and credit risk and hedge supplies and purchases. * * * Trading Operations Beginning with year-end 2000 reporting, Xcel Energy changed its policy for the presentation of energy trading operating results. Previously, trading margins were recorded net of costs in electric and natural gas revenues. Xcel Energy currently reports trading revenues separately from trading costs. 1999 results have been reclassified for consistency with the 2000 and 2001 presentation. Xcel Energys trading operations are conducted mainly by PSCo (electric) and e prime (gas). The results of the electric trading activity are initially recorded at PSCo. Pursuant to a Joint Operating Agreement, approved by the FERC as a part of the merger, the activity is then apportioned to the other operating utilities of Xcel Energy. Trading revenue and costs do not include the revenue and production costs associated with energy produced from generation assets or results from NRG. PSCos trading results include the impacts of the ICA rate-sharing mechanism. For more information, see Notes 13 and 14 to the Financial Statements. [Emphasis added.] 36. The 2001 Form 10-K included the following disclosure with respect to the status of NRGs credit and liquidity capabilities and requirements. NRG Financing Capabilities As part of the independent power producer sector, NRG has recently been experiencing tightening credit standards. As discussed in Note 19 to the Financial Statements, in response to this situation, Xcel Energy is planning to provide NRG with financial support. In addition, NRG is expected to slow its project growth to lessen the need for external financing in the next few years. If the plan is carried out as proposed, we anticipate that NRGs internally generated cash, available credit and borrowing capabilities will be sufficient to meet its financing needs in addition to Xcel Energy equity support. NRG and its subsidiaries have entered into a number of credit facilities. These credit facilities provided access to a total of $4.8 billion and DEM 204 million of funding at Dec. 31, 2001; at that date, borrowings of $2.9 billion were outstanding pursuant to these facilities. See further discussion in Notes 3 and 4 to the Financial Statements. In addition, NRG has filed a shelf registration to provide access to long-term debt financing, as discussed later. Impact of NRG Credit Rating Downgrade NRGs unsecured credit rating is BBB- by Standard & Poors and Baa3 by Moodys Investor Service. As noted previously, in December 2001 Moodys placed NRGs credit rating on review for potential downgrade. If Moodys subsequently downgraded NRG, many of the corporate guarantees and commitments that it currently has in place would need to be supported with letters of credit or cash collateral within 5 to 30 days. As of Dec. 31, 2001, the amount of collateral required if NRG were downgraded was approximately $960 million. Of the $960 million in collateral that could be required, approximately $200 million relates to NRGs guarantees of debt service reserve accounts required by some of its project-level financings, approximately $400 million relates to NRGs power marketing activities; and $360 million would be required to support the $2-billion NRG Finance Co. credit line. Because NRG places a maximum amount on all of its guarantees in place to support power marketing activities, and because of the relatively small number of margin accounts in place, even very large changes in market conditions would not have a material impact on the amount of collateral that would be required for NRGs power marketing in the event of a downgrade. In the event of a downgrade, NRG would expect to meet the collateral obligations with cash on hand, available credit lines provided under the revolving line of credit, liquidity support from Xcel Energy and potentially from the issuance of debt into the capital markets. NRGs revolving line of credit is expected to be increased from $500 million to $1 billion in March 2002. In addition, NRG will maintain its $125-million letter of credit facility and plans to secure a funded $125-million credit facility for a total credit facility of $1.25 billion to be available in 2002. The Contingent Equity Guarantee could increase to a maximum of $850 million by the end of 2002 as NRG further utilizes the capacity of the NRG Finance Co. credit line. Therefore, the amount of collateral required by the end of 2002 could increase to approximately $1.45 billion. 37. On May 13, 2002, Reliant Resources, Inc. (Reliant), a Texas energy trading and services company, disclosed that it had engaged in round trip tradingthe practice of buying and reselling of electricity to boost revenue and trading volume without financial riskwhich had boosted its revenues by more than 10% during its fiscal 1999, 2000 and 2001. Reliant identified Xcel as a counter-party with which it had conducted round-trip trading. 38. In response to Reliants disclosure with respect to its round trip trading with Xcel, on May 13, 2002, Xcel provided information with respect to its round-trip trading practices, stating in pertinent part, as follows: In response to requests today, Xcel Energy is clarifying its role with regard to certain energy trades with Reliant Resources in 1999 and 2000. During its May 13 Webcast, Reliant Resources stated that it had initiated certain transactions with Public Service Company of Colorado (PSCo) that had the impact of increasing Reliant's reported trading activities. On a few occasions during 1999 and 2000 PSCo was approached by the trading and marketing arm of Reliant to enter into simultaneous buy-and-sell transactions. In these transactions, Reliant requested that PSCo buy a quantity of power from Reliant and simultaneously sell the same quantity under the same terms back to Reliant. For doing this, PSCo received a small profit. There were no such transactions conducted in either 2001 or 2002. In 1999 PSCo entered into transactions with Reliant that totaled 10 million megawatt hours of electricity for a profit of approximately $60,000. During 2000, the transactions totaled about 1 million megawatt hours of energy and the profit of approximately $50,000. The volumes of energy associated with these transactions were not reported in PSCo reports because the net impact on PSCo was zero. 39. A Reuters article dated May 15, 2002, titled For accountants its clear, wash trades are illegal provided an analysis of the illegality of round-trip trading practices. The article stated, in pertinent part, as follows: The bogus trades that have the likes of energy traders Dynegy Inc. and CMS Energy Corp. in hot water didn't just push the envelope of accounting laws, they were outright illegal, accounting experts say. The disclosure of round-trip or "wash" trades, the buying and reselling of a commodity to boost revenue and trading volume without financial risk, has shocked investors still smarting from the demise of Enron Corp. "Recording revenues from round-trip trades would be a species of fraud because they're overstating revenues," said Robert Waxman, a former partner at Deloitte & Touche, who heads up his own accounting firm now. * * * Accounting experts, however, said the illegality of wash trading boils down to the basic tenet of financial reporting: You don't book revenue from a sale that lacks substance. A substantive sale would have to transfer at least some benefit or risk -- of a drop in prices, for example -- between the parties trading, said Waxman, who is also a member of the New York State Society of Certified Public Accountants. "It's pretty much a matter of common sense," said Jack Ciesielski, an accountant who publishes the widely read Analyst's Accounting Observer. "If the transaction lacks any substance, why would you record it?" MATERIALLY MISSTATING STATEMENTS The Financial Accounting Standards Board, the accounting body that sets accounting rules in the United States, and probably the ultimate authority on the issue, seems to agree. "It would seem unjustified to book revenue," said Sheri Thompson, a spokeswoman for FASB. "If you have an arrangement or a prearrangement in place with another party, where you're going to be selling something and then buying that same thing back and there's an agreed upon price between the parties where you're creating essentially a wash, it's really not a substantive transaction." In any case, companies aren't supposed to knowingly engage in "conduct that materially misstates financial statements," as proclaimed by the Securities Exchange Act of 1934, Waxman said. That act addresses the financial reporting requirements of public companies. 40. On May 22, 2002, Xcel confirmed that it had included revenues from its round trip trading with Reliant and others in its financial statements, but downplayed the significance of such trading practices. The press release stated, in pertinent part, as follows: Upon further review of trading transactions conducted in 1999-2000, the company noted one trade with Reliant where PSCo simultaneously bought and sold power at the same price without realizing any profit. The purpose of this nonprofit transaction was in consideration of future for-profit transactions. In its financial reports in 1999 and the first three quarters of 2000, the trading margins on the transactions were reported on a net revenue basis at the time of the transactions in 1999 and 2000. In the fourth quarter of 2000, PSCo changed its reporting of trading operations from a net to a gross basis in order to provide more trading information to investors, which had no effect on reported earnings per share. The gross value of the transactions with Reliant represented less than 2.7 percent and less than 1 percent of Xcel Energy's total revenues reported for 1999 and 2000, respectively, in the most recent 10K filing. All of the trades were made at market prices. [Emphasis added.] 41. On May 31, 2002, Xcel announced that it had submitted a required report to the Federal Energy Regulatory Commission with respect to its trading practices and policies. The press release stated, in pertinent part, as follows: Xcel Energy previously reported that its wholly-owned subsidiary, Public Service Co. of Colorado, had engaged in a group of transactions in 1999 and 2000 with the trading arm of Reliant Resources in which PSCo bought a quantity of power from Reliant and simultaneously sold the same quantity back to Reliant at a slightly higher price. Upon further review of trading transactions conducted in 1999 and 2000, the company noted that in one of the Reliant transactions PSCo simultaneously bought and sold 15,000 megawatts of power at the same price in the months of November and December 1999. PSCo agreed to participate in this no-profit transaction in consideration of future transactions with Reliant in which PSCo expected to earn a small profit. As stated previously, in its financial reports in 1999 and the first three quarters of 2000, the trading margins on the transactions were reported on a net revenue basis at the time of the transactions in 1999 and 2000. In the fourth quarter of 2000, PSCo changed its reporting of trading operations from a net to a gross basis in order to provide more trading information to investors, which had no effect on reported earnings per share. The gross value of the transactions with Reliant represented less than 2.7 percent and less than 1 percent of Xcel Energy's total revenues reported for 1999 and 2000, respectively, in the most recent 10K filing. All of the trades were made at market prices. "We engaged in this group of transactions with Reliant for the proper commercial objective of making a profit, not to inflate transaction volumes or revenues," said Paul Bonavia, president of Xcel Energy - Energy Markets. 42. On June 3, 2002, Xcel announced that it had completed its exchange offer for NRG. The press release stated, in pertinent part, as follows: "We believe our plan to integrate NRG as part of Xcel Energy is the best alternative to deliver shareholder value. Xcel Energy will focus on managed growth for NRG, divesting selected NRG assets and focusing on management of the power producer's unregulated domestic projects," said Wayne H. Brunetti, Xcel Energy chairman, president and CEO. "We also expect to enhance profitability by integrating our marketing and trading groups, the management of our power plants and our corporate headquarters functions." 43. That same day, June 3, 2002, Xcel announced a complete overhaul of NRGs management, including the retirement of NRGs CEO and the resignation of its CFO. The press release stated, in pertinent part, as follows: David H. Peterson, chairman, president and CEO of NRG, announced his retirement today, and Leonard A. Bluhm, executive vice president and chief financial officer, announced his resignation. Wayne H. Brunetti, chairman, president and CEO of Xcel Energy, will assume interim the leadership position, acting as chairman and CEO of NRG, effective today. Richard C. Kelly, president of Xcel Energy Enterprises, will be acting president and chief operating officer of NRG. He will be responsible for the full integration of NRG into Xcel Energy, and will report to Brunetti. * * * "NRG's management has done an outstanding job growing and developing the company into one of the leading independent power producers in the world," Kelly said. "Today, however, we're operating in a significantly changed business environment." He stressed that the focus will be on managed growth, divesting significant NRG assets and concentrating on management of unregulated domestic projects. 44. On June 24, 2002, Xcel reiterated its plans to bolster NRGs financial condition and credit-worthiness in light of a downgrade by S&P of NRGs debt and other obligations. The press release stated, in pertinent part, as follows: "We are well along the way in executing an aggressive financial and operational plan to improve NRG's financial strength," said Wayne H. Brunetti, chairman, president and chief executive of Xcel Energy. "Our regulated operations remain financially strong and are the core of our company." Earlier today, S&P announced a decision to maintain NRG's senior unsecured debt at BBBand to downgrade Xcel Energy's senior unsecured debt to BBB- from BBB+ and its commercial paper to A3 from A2. The corporate credit ratings of Xcel Energy, its operating companies and NRG remain "investment grade." * * * "Our goal is to reduce NRG's cost structure, focus on managed growth for domestic projects, increase profitability and improve shareholder value," Brunetti said. "Simultaneously, we will grow our core utility business, which operates in a healthy service territory and has a balanced portfolio of energy sources." Xcel Energy was particularly disappointed in S&P's decision to downgrade its commercial paper, which totals about $1.4 billion. The maturity of this debt ranges from one to 40 days. "We have plans in place to substantially reduce our use of short-term debt through permanent financings," said Jim McIntyre, chief financial officer. "The company has ample liquidity from its bank lines of credit." Brunetti noted that the Xcel Energy board of directors will meet this week, and one of the issues to be discussed will be the company's dividend policy. "I will not prejudge what the outcome will be, but we understand and will consider the importance of dividends to our investors," he said. 45. That same day, on June 24, 2002, Xcel announced that NRG had completed a $325 million financing. The press release stated, in pertinent part, as follows: NRG Energy, Inc. announced today its indirect wholly owned subsidiary, NRG Peaker Finance Company LLC, has issued $325 million of floating rate senior secured bonds due in 2019. . . . The transaction, rated triple-A by Moody's Investors Service and Standard & Poor's Ratings Services due to the XLCA guarantee, utilizes an innovative financing structure developed by NRG and Goldman Sachs International, who solely managed the offering. The proceeds will primarily be used to reimburse NRG for construction and acquisition costs related to the projects. 46. The statements referenced above in paragraphs 25-29, 32, 34-36, 38 and 40-44 above, were materially false and misleading when made as they misrepresented and/or failed to adequately disclose one or more of the following adverse facts which then existed and disclosure of which was necessary to make the statements not false and/or misleading, including, but not limited to: (a) that the Company had engaged in round-trip energy trades that provided no economic benefit for the Company; (b) that Xcels and NRGs credit agreements with lenders contained cross-default provisions and covenants, the result of which was that in the event of a default by NRG Energy, among other adverse effects, Xcel would lose access to $800 million in credit; (c) that NRGs grave liquidity and credit problems had caused its credit rating to be at or near junk status. Since it was extremely close to default under several credit agreements with lenders, Xcel was now exposed to potential liability under the cross-default provisions and covenants of NRGs credit agreements; (d) that Xcels management lacked a coherent plan to remedy NRGs credit and liquidity difficulties or remove cross-default provisions and covenants from credit agreements, the result of which was that NRG credit rating would be downgraded to junk status and Xcels own credit rating would be significantly downgraded; (e) that the Company lacked the necessary internal controls to adequately monitor the trading of its power; and (f) that as a result, the value of the Companys revenues and financial results were materially overstated at all relevant times. 47. Moreover, Xcels statements and misrepresentations throughout the Class Period in its press releases and other reports and in its financial statements included in its Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q for fiscal 2000 and 2001 were materially false and misleading in that they violated GAAP and SEC rules by including revenues in the financial statements from transactions that lacked any economic substance in order to manipulate the market and investors into thinking that Xcel was becoming a significant, if not a major, player in the power marketing industry in the United States. THE TRUTH IS REVEALED 48. After market close, on July 25, 2002, Xcel reported its financial results for the second quarter ended June 30, 2002. Disclosing declining earnings and revised expectations for fiscal 2002, the press release stated, in pertinent part, as follows: "As we progress through 2002, we continue to aggressively address financial and operational challenges," said Wayne H. Brunetti, chairman, president and chief executive officer. "We are implementing a plan to transition NRG Energy from a business development to an operational focus, leveraging Xcel Energy's core skills to improve their financial performance." The NRG financial improvement plan includes: Selling selected NRG assets, with expected net proceeds of approximately $1.4 billion; Reducing NRG capital expenditures by $1.0 billion in 2003 and $1.3 billion in 2004; Xcel Energy investing equity in NRG; Integrating portions of NRG and Xcel Energy operations, with expected cost savings of approximately $75 million to $100 million on an annual basis; Taking actions to provide required liquidity for the remainder of 2002; and Taking steps to renegotiate NRG's collateral requirements in the event of a downgrade in its credit rating to below investment grade. "We have a solid financial improvement plan, but we also recognize that the near-term outlook for power prices for independent power producers such as NRG has declined," Brunetti said. "As a result, we've revised this year's Xcel Energy earnings target. We now expect annual earnings from ongoing operations in the range of $1.70 to $1.95 per share for 2002." 49. The true extent of Xcels liquidity and credit difficulties and its managements inability to effectively remedy such difficulties stemming from the operations of NRG only became apparent, however, at managements earnings conference with analysts on July 26, 2002. As reported in several business articles dated July 26, 2002, analysts were horrified to learn that the liquidity and credit difficulties extended to Xcel itself under the cross-collateral default provisions Xcel and NRG had entered into with lenders. The articles stated, in pertinent part, as follows: [Reuters] Xcel shares plummet on credit woes Shares of Xcel Energy Inc. slid by more than a third on Friday after the Minneapolis-based power company became the latest energy trader to unveil the extent of its credit and liquidity problems. On Thursday, Xcel reported sharply lower second-quarter earnings on its NRG Energy trading unit's exposure to the lackluster energy trading market. Xcel also cut its earnings estimate for the year as declining wholesale power prices, half of what they were last year, took a toll on NRG earnings, calling into question the sustainability of the dividend. The company gave no guidance for 2003. "The (earnings) conference call today was one of the worst we have had the displeasure of witnessing and dramatically reduced our confidence in the earnings, the dividend, and the fundamentals going forward," Christopher Ellinghaus, an analyst with Williams Capital Group, wrote in a research report published after the call Friday. Ellinghaus slashed his rating on the stock to "sell" from "strong buy" and cut his estimate for long-term earnings-per-share growth to zero percent from 5 percent. He said he also feared Xcel's shares could fall even further, prompting him to warn investors to avoid the stock for the next two to three months. * * * [Dow Jones] Xcel Stock plummets on worries about support for NRG Energy Still, the disclosures Thursday prompted a wave of ratings downgrades by equity analysts who cover the independent power sector. An increase in NRG's collateral requirements to between $975 million and $1.1 billion related to NRG's construction credit revolver raises the chances of a default, especially if NRG doesn't get the waiver it's negotiating with banks. ``Particularly troubling to us was the disclosure that such a default by NRG would cause a cross-default under Xcel's credit facilities,'' said analyst Steven Fleishman at Merrill Lynch in a research note. * * * [Reuters] S&P cuts Xcel Energy trading unit NRG to junk Standard & Poor's late Friday downgraded Xcel Energy Inc.'s (NYSE:XEL - News) NRG Energy Inc. trading unit's credit rating to junk status. The credit rating agency said the move triggers "substantial collateral calls" that may "severely exacerbate" NRG's liquidity and default risks. S&P cut NRG's corporate credit rating two notches to "BB," its second highest junk grade, from "BBB-minus," saying NRG's ability to raise capital is "severely constrained." S&P also warned it may cut Xcel's "BBB" corporate credit rating. The downgrades follow Xcel's Thursday announcement that its second quarter net profit fell 48 percent from a year earlier to $87.3 million. Xcel also it cut its full-year earnings estimate. It attributed the weakness in NRG Energy's exposure to the shriveling energy trading market. * * * CROSS-DEFAULT, COLLATERAL PROVISIONS AT ISSUE S&P said the outcome of its rating review depends on whether Xcel can remove a "cross default" provision in its revolving credit line and whether banks refrain from taking NRG collateral under NRG's revolving construction line. The rating agency said that in a best case scenario, NRG's rating would fall to around the "Bplus" level, roughly a two notch cut, and Xcel would retain its "BBB" rating. In contrast, if Xcel failed to waive the cross default provision and banks took NRG's collateral, NRG could default and Xcel's rating could fall to junk status, it said. "It is a very fluid situation," S&P said. * * * [The St. Paul Pioneer Press] Xcel Stock Plunges 37% In an interview, [Christopher Ellinghaus, an analyst with Williams Capital Group] said Xcel's problems are so complex, "I don't even understand all the things they need to do. But they can't explain it to me, and that doesn't instill confidence in me. There were no definitive answers, and there are an awful lot of things that have to be accomplished. I'm less than enthusiastic. "It's just a mess," he said. "I'm afraid that the stock's going to continue to fall until they get some good news." * * * "I didn't get any sense of a reason for optimism," said Ellinghaus. "I didn't get the sense that management's got a real solid grip on what they've got to do to get things rolling again." 50. More details of the earnings conference call and about Xcel were disclosed in a Dow Jones article dated July 28, 2002, and public investors learned for the first time that Xcel was being investigated by the SEC, among other regulators, for its round-trip trading practices. The July 28, 2002 Dow Jones article, titled Xcel Says It Faces U.S. Scrutiny, NRG Unit Could Enter Default stated, in pertinent part, as follows: Xcel Energy Inc. said some of its energy trades are being investigated by two federal agencies and a key subsidiary could face default, sending the Minneapolis power company's shares down 37%. * * * The company said the federal government is investigating its trading activity in those markets. Xcel and a utility subsidiary, Public Service Co . of Colorado , have received subpoenas from the Commodity Futures Trading Commission for information on "round-trip" trades, or offsetting deals to buy and sell energy, for the period from Jan. 1, 1999 , to the present. The company previously reported that Public Service engaged in a group of trades in 1999 and 2000 with Reliant Resources Inc. that involved simultaneous purchases and sales. Xcel also said it had received a subpoena from the Securities and Exchange Commission for information on such trades with Reliant Resources during the same period. Xcel said the SEC subpoena was "issued pursuant to a formal order of private investigation that does not name Xcel." Xcel has regulated operations in 12 West ern and Midwestern states, serving both electricity and natural-gas customers. Since May, its shares have plunged more than 60% on concerns about the finances of NRG Energy Inc., an unregulated subsidiary it spun off two years ago but bought back in June after Moody's Investors Service threatened to downgrade NRG's debt to junk status. Xcel plans to inject $600 million of cash to help NRG pay its bills and to sell off assets. Credit-rating agencies, however, are worried that continued weak power demand will force Xcel to spend even more to bail out NRG, which has $9 billion of debt. 51. follows: Standard & Poor's lowered NRG's corporate credit rating and placed the credit of Xcel Energy and NRG on "credit watch with negative implications." On July 29, 2002, in a statement to shareholders, Xcel stated, in pertinent part, as We want you to know what actions we are taking to address this serious situation: We are in intense discussions with a number of banks to amend the "cross-default" (financial linkages) between Xcel Energy and NRG. We are also working with banks to renegotiate NRG's cash collateral requirements. These are top priorities, and we are working on both matters simultaneously to achieve positive results. * * * The senior management team is putting all of our energy into the execution of plans that we have developed to restore NRG's financial strength through appropriate terms from lenders, divestiture of assets, cost structure reductions and other avenues. We have been executing those plans to resolve most importantly the NRG liquidity problem, and it is our top priority. 52. Market reaction to the revelations, on July 26, 2002 and July 28, 2002, with respect to (i) Xcels cross-collateral provisions with lenders regarding NRG, (ii) Xcels inability to remedy liquidity and credit difficulties with respect to NRG, and (iii) regulatory investigations regarding Xcels roundtrip trading practices was swift and brutal. On July 26, 2002, Xcel stock closed at $7.55, a more than 36% one-day decline, on extremely heavy trading volume. On July 29, 2002, Xcel stock closed at $5.66, a more than 25% on-day decline, again, on extremely heavy trading volume, on a day when the Dow Jones Industrial Average itself, was up almost 5.5%. FALSE FINANCIAL STATEMENTS 53. In order to falsely state revenues during the Class Period, defendants caused Xcel to violate GAAP and SEC rules by including substantial revenues in financial statements from transactions that lacked any economic substance in order to manipulate the market and investors into thinking that Xcel was becoming a significant, if not a major, player in the power marketing industry. Defendants failure to properly account for the round-trip trading contracts caused Xcel to record revenues that lacked any economic substance throughout the Class Period, and, therefore, misstated Xcels revenues throughout the Class Period. 54. Xcel has admitted that its revenues included in its financial statements, including Annual Reports on Form 10-K and Quarterly Reports on Form 10-Qs, were based upon round-trip trading and, therefore, false and improperly reported. 55. Xcel included its false and incorrect financial statements and results in press releases and in SEC filings, including the Annual Reports on Forms 10-K and Quarterly Reports on Forms 10Q for 2000 and 2001. These SEC filings represented that the financial information presented therein was a fair statement of Xcels financial results and that the results were prepared in accordance with GAAP. 56. These representations were false and misleading as to the financial information reported, as such financial information was not prepared in conformity with GAAP, nor was the financial information a fair representation of Xcels operations due to the Companys improper accounting for substantial revenues recognized from round-trip trades with Reliant, causing the financial results to be presented in violation of GAAP and SEC rules. 57. Regulation S-X [17 C.F.R. Sec.210.4-01(a)(1)] states that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate. Regulation S-X requires that interim financial statements must also comply with GAAP, with the exception that interim financial statements need not include disclosures that would be duplicative of disclosures accompanying annual financial statements. 58. The fact that Xcel admitted that it included revenues recognized from round-trip trades with Reliant in its Annual Reports on Form 10-K for fiscal 2000 and 2001 is an admission that the financial statements originally issued were false and that the misstatement of revenue was material. 59. Due to these accounting improprieties, Xcel presented its financial results in a manner which violated GAAP, including the following fundamental accounting principles: (a) The principle that interim financial reporting should be based upon the same accounting principles and practices used to prepare annual financial statements was violated (APB No. 20, para. 10); (b) The principle that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions was violated (FASB Statement of Concepts No. 1, para. 34); (c) The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and effects of transactions, events and circumstances that change resources and claims to those resources was violated (FASB Statement of Concepts No. 1, para. 40); (d) The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it was violated. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and the public in general (FASB Statements of Concepts No. 1, para. 50); (e) The principle that financial reporting should provide information about an enterprises financial performance during a period was violated. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance (FASB Statement of Concepts No. 1, para. 42); (f) The principle that financial reporting should be reliable in that it represents what it purports to represent was violated. That information should be reliable as well as relevant is a notion that is central to accounting (FASB Statement of Concepts No. 2, paras. 58-59); (g) The principle of completeness, which means that nothing is left out of the information that may be necessary to insure that it validly represents underlying events and conditions was violated (FASB Statement of Concepts No. 2, para. 79); and (h) The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered was violated. The best way to avoid injury to investors is to try to ensure that what is reported represents what it purports to represent (FASB Statement of Concepts No. 2, paras. 95, 97). 60. Further, the undisclosed adverse information concealed by defendants during the Class Period is the type of information which because of SEC regulations, regulations of the national stock exchanges and customary business practices, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed. Undisclosed Adverse Information 61. The market for Xcels securities was open, well-developed and efficient at all relevant times. As a result of these materially false and misleading statements and failures to disclose, Xcels common stock and other securities traded at artificially inflated prices during the Class Period. Plaintiffs and other members of the Class purchased or otherwise acquired Xcel securities relying upon the integrity of the market price of Xcels securities and market information relating to Xcel, and have been damaged thereby. 62. During the Class Period, defendants materially misled the investing public, thereby inflating the price of Xcels common stock and other securities, by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants statements, as set forth herein, not false and misleading. Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its business and operations, as alleged herein. 63. At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by plaintiffs and other members of the Class. As described herein, during the Class Period, defendants made or caused to be made a series...