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ABRAMS v. VAN KAMPEN FUNDS

June 24, 2004.

IRENE ABRAMS, on behalf of herself and all others similarly situated, Plaintiffs,
v.
VAN KAMPEN FUNDS, INC., VAN KAMPEN INVESTMENT ADVISORY CORPORATION, VAN KAMPEN PRIME RATE INCOME TRUST, HOWARD TIFFEN, RICHARD F. POWERS, III, STEPHEN L. BOYD, DENNIS J. McDONNELL, and JEFFREY W. MAILLET, Defendants.



The opinion of the court was delivered by: WILLIAM HART, Senior District Judge

MEMORANDUM OPINION AND ORDER

This is a consolidated class action alleging federal securities violations involving defendant Van Kampen Prime Rate Income Trust's (the "Fund") valuation of senior loans and is subject to the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 77z-1. A class has been certified consisting of all persons who purchased shares in the Fund between September 30, 1998 and March 26, 2001, inclusive, with defendants and certain related parties excluded. See Abrams v. Van Kampen Funds, Inc., 2002 WL 1989401 (N.D. Ill. Aug. 27, 2002). Named as defendants are the Fund; Van Kampen Funds, Inc. ("Van Kampen"), the Fund's administrator; Van Kampen Investment Advisory Corp. (the "Adviser"), the Fund's investment adviser; Richard Powers, Fund Chairman of the Board, President, and Trustee during the relevant time period; Dennis McDonnell, former Fund Chairman of the Board, President, and Trustee and Fund Portfolio Manager from July 1999 until December 1999; Stephen Boyd, Fund Executive Vice President and Chief Investment Officer and Adviser Officer during the relevant time period; Howard Tiffen, Fund Portfolio Manager since December 1999 and Adviser Officer; and Jeffrey Maillet, Fund Portfolio Manager and Adviser Officer until July 1999. Count I of the Consolidated Amended Complaint alleges violations of § 11 of the Securities Act, 15 U.S.C. § 77k, against Van Kampen, the Fund, Powers, McDonnell, and Boyd. Against Van Kampen and the Adviser, Count III alleges control person liability under § 15 of the Securities Act, 15 U.S.C. § 77o, based on the alleged § 11 violations.*fn1 Pending are the parties' cross motions for summary judgment. Plaintiffs have also filed two motions to strike or exclude the testimony of three of defendants' experts.

Plaintiffs presently contend that defendants violated § 11 by making the following misrepresentations in various prospectuses that were issued during the class period. First, plaintiffs contend that defendants misrepresented the value of shares of the Fund in that they overvalued the loans held by the Fund. Plaintiffs contend that using available market quotations and properly determining fair value based on what the loans would have currently sold for would have resulted in lower daily net asset values ("NAV") for the Fund. Second, plaintiffs contend the prospectuses contained misrepresentations that the Fund used market quotations where available when this was not done. Third, plaintiffs contend that the prospectuses contained misrepresentations that the Fund's investment goal was preservation of capital even though the Fund was not managed with such a goal.

  To succeed on their § 11 claims, plaintiffs must show that defendants were responsible for untrue statements of material fact or omitted material facts in a prospectus. See Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82 (1983); Abrams v. Van Kampen Funds, Inc., 2002 WL 1160171 *5 (N.D. Ill. May 30, 2002) ("Abrams I"); Asher v. Baxter International, Inc., 2003 WL 21825498 *5 (N.D. Ill. July 24, 2003). There is no scienter or reliance requirement; instead responsible persons are liable for the material and misleading statements contained in a prospectus unless they can affirmatively make certain showings as to their knowledge and diligence. See Herman, 459 U.S. at 382; Abrams I, 2002 WL 1160171 at *5; Asher, 2003 WL 21825498 at *5. A misstatement is material if there is a substantial likelihood that it would be viewed by a reasonable investor as significantly altering the total mix of available information and thus important to the investor's decision to invest. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); Abrams I, 2002 WL 1160171 at *5.

  Here, a central issue for plaintiffs' claims is the method of valuing the senior loans held by the Fund. The parties do not dispute that the applicable general principle is that the loans were to be valued on a daily basis at the amount that could have been obtained from a current sale. See SEC Accounting Release Series No. 118, 1970 WL 5621 *4 (Dec. 30, 1970) ("ASR 118"); In re Allied Capital Corp. Securities Litigation, 2003 WL 1964184 *1 (S.D.N.Y. April 25, 2003); In re Eaton Vance Corp. Securities Litigation, 206 F. Supp.2d 142, 151-52 (D. Mass. 2002). See also 15 U.S.C. § 80a-2(a) (41) (B); 17 C.F.R. § 270. 2a-4(a). The parties also agree that current value is to be determined by "market quotations" where "readily available," or by "fair value" methods if market quotations are not readily available. See 15 U.S.C. § 80a-2(a)(41)(B); 17 C.F.R. § 270.2a-4(a)(1); ASR 118, 1970 WL 5621 at *3; Eaton Vance, 206 F. Supp.2d at 147. Regarding the class period, the parties disagree as to whether the pricing services that were then available qualified as readily available market quotations. To the extent it was appropriate to use fair value methods, the parties also disagree as to whether defendants adequately determined current value.

  Regarding securities traded over the counter, ASR 118 provides:
Over-the-counter securities. Quotations are available from various sources for most unlisted securities traded regularly in the over-the-counter market. These sources include tabulations in the financial press, publications of the National Quotation Bureau and the `Blue List' of municipal bond offerings, several financial reporting services, and individual broker-dealers. These quotations generally are in the form of inter-dealer bid and asked prices. Because of the availability of multiple sources, a company frequently has a greater number of options open to it in valuing securities traded in the over-the-counter market than it does in valuing listed securities. A company may adopt a policy of using a mean of the bid prices, or of the bid and asked prices, or of the prices of a representative selection of broker-dealers quoting on a particular security; or it may use a valuation within the range of bid and asked prices considered best to represent value in the circumstances. Any of these policies is acceptable if consistently applied. Normally, the use of asked prices alone is not acceptable.
Ordinarily, quotations for a security should be obtained from more than one broker-dealer, particularly if quotations are available only from broker-dealers not known to be established market-markers for that security, and quotations for several days should be reviewed. If the validity of the quotations appears to be questionable, or if the number of quotations is such as to indicate that there is a thin market in the security, further consideration should be given to whether `market quotations are readily available' If it is decided that they are not readily available, the security should be considered one required to be valued at `fair value as determined in good faith by the board of directors.'
ASR 118, 1970 WL 5621 at *4.

  To qualify as readily available market quotations that must be used to value securities, the pricing services must provide quotes that are sufficiently timely, sufficiently frequent, and sufficiently accurate. Eaton Vance, 206 F. Supp.2d at 148-49.

  On a motion for summary judgment, the entire record is considered with all reasonable inferences drawn in favor of the nonmovant and all factual disputes resolved in favor of the nonmovant. Turner v. J.V.D.B. & Associates, Inc., 330 F.3d 991, 994-95 (7th Cir. 2003); Palmer v. Marion County, 327 F.3d 588, 592 (7th Cir. 2003); Abrams v. Walker, 307 F.3d 650, 653-54 (7th Cir. 2002). The burden of establishing a lack of any genuine issue of material fact rests on the movant. Outlaw v. Newkirk, 259 F.3d 833, 837 (7th Cir. 2001); Wollin v. Gondert, 192 F.3d 616, 621-22 (7th Cir. 1999). The nonmovant, however, must make a showing sufficient to establish any essential element for which he, she, or it will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Binz v. Brandt Construction Co., 301 F.3d 529, 532 (7th Cir. 2002); Traylor v. Brown, 295 F.3d 783, 790 (7th Cir. 2002). The movant need not provide affidavits or deposition testimony showing the nonexistence of such essential elements. Celotex, 477 U.S. at 324. Also, it is not sufficient to show evidence of purportedly disputed facts if those facts are not plausible in light of the entire record. See NLFC, Inc. v. Devcom Mid-America, Inc., 45 F.3d 231, 236 (7th Cir.), cert. denied, 515 U.S. 1104 (1995); Covalt v. Carey Canada, Inc., 950 F.2d 481, 485 (7th Cir. 1991); Collins v. Associated Pathologists, Ltd., 844 F.2d 473, 476-77 (7th Cir.), cert. denied, 488 U.S. 852 (1988). As the Seventh Circuit has summarized:
The party moving for summary judgment carries the initial burden of production to identify "those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact." Logan v. Commercial Union Ins. Co., 96 F.3d 971, 978 (7th Cir. 1996) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (citation and internal quotation omitted)). The moving party may discharge this burden by "`showing' — that is, pointing out to the district court — that there is an absence of evidence to support the nonmoving party's case." Celotex, 477 U.S. at 325, 106 S.Ct. 2548. Once the moving party satisfies this burden, the nonmovant must "set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). "The nonmovant must do more, however, than demonstrate some factual disagreement between the parties; the issue must be `material.'" Logan, 96 F.3d at 978. "Irrelevant or unnecessary facts do not preclude summary judgment even when they are in dispute." Id. (citation omitted). In determining whether the nonmovant has identified a "material" issue of fact for trial, we are guided by the applicable substantive law; "[o]nly disputes that could affect the outcome of the suit under governing law will properly preclude the entry of summary judgment." McGinn v. Burlington Northern R.R. Co., 102 F.3d 295, 298 (7th Cir. 1996) (citation omitted). Furthermore, a factual dispute is "genuine" for summary judgment purposes only when there is "sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Hence, a "metaphysical doubt" regarding the existence of a genuine fact issue is not enough to stave off summary judgment, and "the nonmovant fails to demonstrate a genuine issue for trial `where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party. . . .'" Logan, 96 F.3d at 978 (quoting Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)).
Outlaw, 259 F.3d at 837.

  Plaintiffs have moved to strike the testimony of defendants' liability expert Michael McAdams and to exclude the testimony of defendants' damages experts Daniel Fischel and David Ross. Since defendants do not presently rely on McAdams's expert report or testimony, the motion to strike his testimony need not be considered. That motion will be denied without prejudice to filing any motion in limine with the final pretrial order.

  Regarding the damages experts, plaintiffs characterize one of their arguments as going to the reliability of the damages experts' testimony. However, plaintiffs do not argue that the two experts do not have adequate qualifications or that they relied on unacceptable methodologies. Instead, plaintiffs argue that the experts' testimony about general economic and market principles are not adequately connected to or supported by the facts of this case. There is no need to separately consider whether the experts' testimony should be excluded. To the extent the experts' opinions do not support any material fact, their testimony will not defeat summary judgment. Also, any question of whether the opinion of a second expert is unnecessarily cumulative would be an evidentiary issue for a trial before a jury, not an issue to be considered when a judge is ruling on a summary judgment motion. The motion to exclude will be denied without prejudice to filing any motion in limine with the final pretrial order.

  The facts taken as true for purposes of summary judgment are as follows. Where there are genuine factual disputes, the differing facts that will be taken as true for each side's motion will be noted. The Fund was organized in 1989 as a senior loan fund. Senior loans are loans made by banks and other financial institutions to corporations, partnerships, and other businesses and which have priority over most other debts of the borrower. Because of the priority, they achieve a high rate of recovery. Also, because they have a floating or variable interest rate, their value is only minimally affected by changes in market interest rates. There is no organized market for senior loans; they are generally purchased through privately negotiated transactions. Most of the Fund's assets are purchased in the primary market, that is by acquiring a piece of the original loan from the issuing financial institution and becoming a member of the lending syndicate. Some of the Fund's assets are acquired in the secondary market, that is by purchasing a piece of a loan after the lending syndicate was completed. During the class period, approximately $1 trillion of senior loans originated annually in the senior market. During the same time period, the value of senior loans sold in the secondary market was approximately $100 billion annually.

  Plaintiffs present evidence that they contend conclusively establishes that market quotations were readily available. Beginning in the early 1990's and continuing until at least the end of 1999, Van Kampen provided lists of the Fund's senior loan assets to both Donaldson Lufkin Jenrette ("DLJ") and Societe Generale ("SocGen"). For a fee, DLJ and SocGen provided daily lists of "pricing indications" for the loans that were held. In the early 1990's, they provided indications for approximately 10 to 15 percent of the loans. By the end of 1999, they provided indications for approximately 75 percent of the loans. The indications were reported as bids and offers, but did not necessarily represent bids or offers made by parties actually willing to complete a transaction. One Van Kampen employee characterizes the bids and offers as "an indication that this is somewhere near the price range where [DLJ and SocGen] think maybe something will take place. It's an opinion." Pierce Dep. 148. DLJ and SocGen did sometimes complete transactions for the prices indicated. Van Kampen received similar indications from a number of banks and broker-dealers, including Citibank, Merrill Lynch, Salomon Smith Barney, Goldman Sachs, and Morgan Stanley Dean Witter.

  Plaintiffs provide 2000 correspondence from the SEC concerning the SEC's findings following a November 1999 on-site inspection of Van Kampen senior loan operations, including the Fund. See Pl. Exh. 28, 56, 58. The findings of the SEC may be admissible evidence. See Fed.R.Evid. 803(8)(C); United States v. Peitz, 2002 WL 31101681 *5 (N.D. Ill. Sept. 20, 2002). The SEC findings support that readily available market quotations existed for at least some loans held by the Fund and the Fund nevertheless used other valuation methods.

  In 1985, the Loan Pricing Corporation ("LPC") began gathering data on senior loans. On a weekly basis, LPC issued Gold Sheets that contained pricing information for selected loans. In Fall 1999, Van Kampen contracted with LPC to provide secondary market pricing. By late 1999, most of LPC's pricing information was available on a daily basis. During at least a portion of the class period, Van Kampen received the Gold Sheet from LPC. As of that time, the Gold Sheet included a regular column listing bids for "distressed loans." The pricing information provided by LPC was based on information obtained from various participants in the senior loan market. Some or much of the information consisted of indications from brokers or dealers that did not necessarily reflect prices they would actually pay for the loans. Plaintiffs, however, provide evidence that would support that, during the class period, LPC's pricing information was reliable. Defendants' ...


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