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ABRAMS v. VAN KAMPEN FUNDS

January 12, 2005.

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, RICHARD F. POWERS, III, STEPHEN L. BOYD, and DENNIS J. McDONNELL, Defendants.



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

MEMORANDUM OPINION AND ORDER

A. BACKGROUND

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) ("Abrams II"). 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; and Stephen Boyd, Fund Executive Vice President and Chief Investment Officer and Adviser Officer during the relevant time period. 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 Following a ruling on the parties' cross motions for summary judgment, see Abrams v. Van Kampen Funds, Inc., 2004 WL 1433620 (N.D. Ill. June 25, 2004) ("Abrams III"), the parties filed their final pretrial order. Pending are the parties' various motions in limine.

  Plaintiffs 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.*fn2

  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 III, 2004 WL 1433620 at *1; Ong v. Sears, Roebuck & Co., 2004 WL 2534615 *16 (N.D. Ill. Sept. 27, 2004). 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 III, 2004 WL 2534615 at *1; Ong, 2004 WL 2534615 at *16. 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 III, 2004 WL 1433620 at *1; Ong, 2004 WL 2534615 at *32.

  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"); Abrams III, 2004 WL 1433620 at *2; 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; Abrams III, 2004 WL 1433620 at *2; 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 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. Abrams III, 2004 WL 1433620 at *2; Eaton Vance, 206 F. Supp. 2d at 148-49. On summary judgment, it was held that genuine factual disputes existed as to when market quotations first became readily available. See Abrams III, 2004 WL 1433620 at *4-6. It was also held that genuine factual disputes existed as to defendants' affirmative defense that they acted with due diligence in exercising their business judgment in determining that market quotations were not yet readily available. See id. at *6. Additionally, it was held that genuine factual disputes existed as to whether defendants determined the value of loan assets in the manner described in the pertinent prospectuses. See id. at *7-8. The parties' agreed statement of contested issues of fact and law is consistent with the foregoing. See Proposed Final Pretrial Order Exh. B.

  In light of the contested issues and other background described above, rulings will be made as to the pending motions in limine. Plaintiffs' motions in limine will be considered first. B. PLAINTIFFS' MOTIONS IN LIMINE

  1. To Bar Evidence that Traders Issued False Loan Pricing Data [138-1]

  Defendants contend that certain pricing services were unreliable because they were based, in part, on market participants reporting the price at which they would sell or purchase loans, not actual sales. Defendants contend such reports were particularly unreliable because a significant number of market participants would overstate or understate the price so as to gain an advantage when actually selling or buying. Plaintiffs seek to bar any evidence of such manipulative price reporting on the ground that any such evidence is hearsay based on rumors, with there being no potential testimony based on personal knowledge.

  Defendants contend that Allison Taylor can properly provide such testimony. She is a former senior loan trader, a founding member of the Loan Syndication and Trading Association ("LSTA"),*fn3 LSTA's initial Chairman, and, since 1998, the executive director of LSTA and LSTA/LPC. Defendants contend she can testify from personal experience and knowledge regarding her observations as to how LSTA/LPC functions. Defendants also point to disclaimers on LSTA/LPC forms regarding the pricing being based on estimated values provided by dealers, not necessarily actual trades. Taylor certainly can testify as to LSTA/LPC's procedures and methodologies. The question is whether any testimony that she believes market participants manipulated price reports would be inadmissible speculation or an observation based on personal experience.

  Since neither party provides Taylor's deposition testimony that is pertinent to this motion,*fn4 this issue cannot be resolved on the documents before the court. If Taylor were to testify that others told her participants were manipulating their price reports, that would be inadmissible hearsay. If she were to testify that she determined that actual participants were manipulatively reporting prices, that would likely be testimony based on personal observations. As long as there is a proper foundation, she could report such observations and conclusions. She need not be an expert to provide such testimony. See Fed.R. Evid. 701. At this time, with a very limited description of the testimony, no ruling can be made as to the admissibility of Taylor's testimony on this subject. Also, a question remains as to whether defendants actually relied on Taylor's findings.

  Defendants also contend that they have "corroborating evidence" that is consistent with Taylor's observations. This consists of testimony from Van Kampen representatives regarding conversations with senior loan market participants making clear they had no intention of honoring bids or asks they had reported and an email from a Citibank trader expressing concerns about price reporting manipulation. Defendants do not contend that this evidence is admissible to prove the truth of the matters reported by the participants and Citibank trader. They instead contend that it is admissible to show defendants' reasoning in not accepting certain price information. Plaintiffs contend that is an irrelevant purpose because intent need not be shown to prove a § 11 violation. However, information available to defendants would be relevant to defendants' business judgment defense. This evidence will not be excluded. If desired, plaintiffs may submit a proposed limiting instruction regarding the jury's use of this evidence.

  This motion in limine will be denied as to the "corroborating evidence." As to Taylor's testimony, the motion will be denied without prejudice to raising objections at trial.

  2. To Exclude the Testimony of Kevin Meenan and Anthony DeLuca [139-1]

  At trial, defendants intend to call Kevin Meenan as a witness and may call Anthony DeLuca. Meenan started a senior loan pricing service while working for his own firm. That firm was later purchased by Societe Generale Bank ("SocGen") and Meenan continued to provide pricing services through SocGen. SocGen was one of the pricing services used by the Fund. DeLuca was a managing director for Morgan Stanley, the parent of Van Kampen. In 1999, DeLuca conducted a review of third-party pricing of senior loans, including pricing by LPC, and reported his findings to Van Kampen's Board.

  Plaintiffs object to both witnesses on the ground that they were not disclosed in response to interrogatories. Plaintiffs also contend that these two would be expert witnesses, but were not disclosed as such and no expert reports were provided. Defendants contend they did not have to update their interrogatory responses because these two potential witnesses were disclosed to plaintiffs during deposition testimony. Defendants contend they are fact witnesses, not experts.

  There is no dispute that Meenan and DeLuca were omitted from certain discovery responses for which their names and knowledge or involvement would have been responsive to the queries. However, defendants were not required to supplement those prior responses if the corrective information was otherwise made known to plaintiffs during the discovery process. See Fed.R.Civ.P. 26(e). Also, even if there was an improper failure to disclose, the evidence should not be excluded if the nondisclosure was harmless. Here, Meenan's role at SocGen was disclosed during two depositions, including a Van Kampen Vice President testifying that Meenan was the person at SocGen most knowledgeable about third-party pricing. DeLuca's involvement in the review was disclosed in the deposition of Van Kampen's General Counsel and the Board minutes for the meeting at which he made his report. Meenan's and DeLuca's knowledge and potential as witnesses were adequately disclosed during discovery. Therefore, defendants were not obliged to supplement their prior interrogatory responses.

  Plaintiffs still complain that the witnesses were not disclosed as providing expert testimony. Since these witnesses were not retained or specially employed to provide expert testimony, the requirement of providing an expert report cannot apply to their testimony. See Fed.R.Civ.P. 26(a)(2)(B); Musser v. Gentiva Health Services, 356 F.3d 751, 756-57 (7th Cir. 2004). If some of their testimony would include opinions "based on scientific, technical, or other specialized knowledge," then they should have been disclosed as expert witnesses in accordance with Fed.R.Civ.P. 26(a)(2)(A). Musser, 356 F.3d at 756 & n. 2.

  It is doubtful that Meenan and DeLuca would be testifying as experts. Like Taylor, Meenan can testify about practices at SocGen, including drawing conclusions and expressing some opinions about what happened there, without having to rely on scientific, technical, or specialized knowledge. And even if his testimony could be properly characterized as including some expert testimony, the deposition testimony disclosing his role at SocGen would have served to disclose that possibility. Meenan's testimony would not be excluded for failure to name him as an expert. DeLuca's testimony also does not appear likely to include expert testimony. Presumably he will testify as to what he reported to the Board and possibly as to methods he used during his investigation. But, even if some of DeLuca's testimony is properly classified as expert testimony, his potential testimony was also adequately disclosed. His testimony will not be excluded.

  Although there was discovery in which Meenan and DeLuca were disclosed and therefore no technical violation of Rule 26, defendants still should have clarified to plaintiffs that Meenan and DeLuca were potential witnesses, especially if defendants have any intention of eliciting expert testimony from either witness. Counsel for defendants likely were aware of Meenan's and DeLuca's roles prior to their names being mentioned at depositions and should have disclosed them prior to the depositions. Moreover, as plaintiffs point out, they were limited as to the number of witnesses they were permitted to depose and therefore focused on persons who were expressly named by defendants as potential witnesses. Had Meenan and DeLuca been expressly identified by defendants, plaintiffs may have chosen to depose one or both of them. The court will exercise its discretion to reopen discovery for the limited purpose of permitting the deposition of these two witnesses. However, DeLuca is listed as a possible witness, not a definite witness. If defendants represent to plaintiffs that they have decided not to use him as a witness, plaintiffs will not be permitted to depose DeLuca and defendants will not be permitted to present him at trial.

  For the foregoing reasons, this motion in limine will be granted in part and denied. Plaintiffs may depose Meenan and DeLuca within 45 days after the date of today's order.

  3. To Exclude the Testimony and Report of Michael P. McAdams [140-1]

  Michael P. McAdams, whom defendants intend to use as an expert witness, has more than 20 years of experience in investment management and banking. From its inception in 1988 until 1995, he managed Pilgrim Prime Rate Trust, the first retail, floating-rate loan fund. Since 1995, he has had high-level positions at two other asset management firms. He was an early member of LSTA and has served on its Board, including as Chairman of the Board. He has also been a member of LSTA's valuation project committee. Plaintiffs do not dispute that he has the credentials to be an expert in the field of senior loans. However, plaintiffs contend that the opinions expressed in his expert report are not adequately supported and therefore he does not meet the requirements to testify as an expert that are set forth in Fed.R.Civ.P. 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993).*fn5 In 2000, Rule 702 was amended to conform with Daubert and its progeny, including Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999). Expert testimony is not to be presented to a jury unless "(1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts in the case." Fed.R. Evid. 702. Daubert, 509 U.S. at 592-94, sets forth a list of factors to consider in determining reliability. The list is not definitive; particular factors in that list may or may not be pertinent in evaluating particular expert testimony. Kumho, 526 U.S. at 150-51 (quoting Daubert, 509 U.S. at 593); United States v. Romero, 189 F.3d 576, 584 (7th Cir. 1999), cert. denied, 529 U.S. 1011 (2000). The Rule 702 inquiry is "flexible." Kumho, 526 U.S. at 150 (quoting Daubert, 509 U.S. at 594). The flexibility of the inquiry is particularly important to keep in mind when the field of expertise is not a scientific one as in Daubert. See Romero, 189 F.3d at 584; Pease v. Production Workers of Chicago & Vicinity Local 707, 2003 WL 22012678 *4 (N.D. Ill. Aug. 25, 2003). In determining the reliability of the proffered testimony, the focus must be on the soundness of the methodology that is used, not on whether the conclusions that the expert reaches are correct. Deputy v. Lehman Brothers, Inc., 345 F.3d 494, 506 (7th Cir. 2003); Dewick v. Maytag Corp., 324 F. Supp. 2d 894, 898 (N.D. Ill. 2004); Pease, 2003 WL 22012678 at *4.

  McAdams presently offers the following five opinions:*fn6

 
2. Market quotations in the traditional sense — i.e. prices that reflect where bona fide transactions between willing buyers and sellers actually took place or where a buyer or seller definitely would transact business — do not exist in the senior loan market except in the most unusual and unpredictable circumstances. Market indications are not the same thing as market quotations.
3. From September 1998 through January 25, 2000, Van Kampen's method of valuing senior loans, and particularly how it used third-party pricing data when and if it was reasonably available, was consistent with the markets' development at that time and was consistent with the methodology set forth in the prospectus.
4. In January 2000, Van Kampen's decision to base its fair value determinations on LSTA/LPC indications where there were at least three bids, three asks and a spread of less than 100 basis points was reasonable given the market's development at that time and was consistent with the methodology set forth in the prospectus.
5. In November 2000, Van Kampen's decision to base its fair value determinations on LSTA/LPC indications where there were at least two bids, two asks and a spread of less than 200 basis points, was reasonable given the status of the market's development at that time, and was consistent with the methodology set forth in the prospectus.
6. In making its fair value determinations, Van Kampen made a good-faith effort to consider factors important to an arms-length [sic] buyer in assessing what they would pay for the loans on a current sale.
McAdams Report at 5-6 (April 4, 2003). Plaintiffs do not dispute that McAdams is an expert in the field. His experience qualifies him to testify as to how pricing services function, particularly how LSTA/LPC functioned. Opinion 2 is essentially descriptive and historical. It does not require applying any sort of testing or statistical methodology in order to be reliable. This opinion also does not involve a particularized application to the Fund's procedures. Therefore, questions that plaintiffs raise regarding McAdams's knowledge of the Fund's procedures are not pertinent to this opinion. McAdams's experience is enough to support reliability as to Opinion 2. Cf. Den norske Bank AS v. First National Bank of Boston, 75 F.3d 49, 57-58 (1st Cir. 1996) (employee of defendant bank with 40 years of banking experience was qualified to testify as to banking industry practices); Dahlin v. Evangelical Child & Family Agency, 2002 WL 31834881 *6-7 (N.D. Ill. Dec. 18, 2002) (expert was qualified to testify as to history of adoption practices and information being provided to adoption professionals at various periods of time).

  Opinion 3 is different than Opinion 2. While it still requires an expert understanding of the pricing services that were available, it also requires an understanding of the Fund's actual practices. Plaintiffs contend that McAdams was not fully informed as to the Fund's practices because defendants did not supply him with all the pertinent evidence. Plaintiffs also contend that this opinion is unreliable because McAdams never examined the Fund's particular valuations to determine if they were accurate.

  Plaintiffs contend that McAdams is not qualified to opine as to whether the Fund's practices corresponded with pricing resources available in the market because McAdams has insufficient knowledge of the Fund's actual practices. In particular, plaintiffs complain that (a) McAdams has not read a July 1999 PricewaterhouseCoopers LLC ("PwC") review of the Fund's valuation practices and (b) at his deposition, McAdams could not recall SEC correspondence questioning the Fund's valuation methods. While familiarity with the PwC report may have provided McAdams with additional information about the Fund's actual practices, the other documents that he was provided should have been sufficient to allow McAdams to be familiar with the practices. His lack of complete familiarity and recall goes more to the weight of his opinion, not whether it is admissible. The jury will be able to determine whether McAdams's assumptions about actual practices of the Fund correspond with the evidence of actual practices that will be presented at trial. Similarly, to the extent the SEC correspondence sets forth factual findings and not legal analysis, McAdams's failure to recall details of the correspondence goes to the weight to be given his testimony and the jury will resolve factual questions as to the actual practices that were in place. Plaintiffs do not contend that McAdams was not shown the correspondence when preparing his report, only that, at the time he was disposed, he could not recall having seen it.

  The other issue raised by plaintiffs is that McAdams should not be permitted to testify about the Fund reasonably applying valuation methods when he never tested the accuracy of the valuations. Plaintiffs contend McAdams is not qualified to testify as to the efficacy of the Fund's actual valuation procedures because he made no comparison between the values given to particular loans and the prices the loans may have sold at during the same time period. According to McAdams's admissible testimony, however, there is only limited available data as to actual prices that loans sold for in the secondary market. Plaintiffs would like to rely on pricing information provided by LSTA/LPC and other services as being accurate, but the accuracy of those prices is a question of fact for the jury. McAdams may properly testify that the valuation practices of the Fund complied with the price information for loans that was contemporaneously available. Plaintiffs may cross examine him as to the lack of any price comparison study in order to raise questions as to the weight or credibility of his testimony, but that is not enough to make his testimony inadmissible.

  Plaintiffs also generally raise the contention that McAdams's opinions are conclusory and lack supporting details. See generally Mid-State Fertilizer Co. v. Exchange National Bank of Chicago, 877 F.2d 1333, 1339-40 (7th Cir. 1989). McAdams's discussion of Opinion 3, however, is sufficiently detailed and not conclusory. See McAdams Report at 21-24.

  There is one aspect of Opinion 3 as to which McAdams will not be permitted to testify. He opines that the Fund's actual valuation practices were consistent with the description of those practices contained in the prospectuses. That is a purely factual question of comparing the evidence of actual practices with the descriptions contained in the prospectuses. No expertise is required to make such a comparison. McAdams's testimony as to this issue would not assist the jury. McAdams will not be permitted to testify as to that aspect of Opinion 3.

  Opinions 4 and 5 both concern whether the particular practices involved, the "3 × 3 × 100 screen" and "2 by 2 × 200 screen," see Abrams III, 2004 WL 1433620 at *6, were reasonable in light of pricing information then available in the market. His testimony concerns the reasonableness of each particular practice in light of then-available information, not whether the Fund's actual application produced accurate valuations. McAdams may properly testify as to these opinions. As with Opinion 3, however, McAdams will not be permitted to testify as to whether the Fund's actual practice was consistent with the descriptions of the practices contained in the prospectuses.

  Although McAdams's summarized statement of Opinion 6 refers only to the Fund's good-faith intent, the specifics of this opinion explain why it is unnecessary to discount from the par value of a loan to take into account the illiquid nature of senior loans. He opines that the "illiquidity discount" is taken into account at the time par is first set. He also opines as to the effect on the value of a loan that a breach of a bank covenant or a bankruptcy filing may have. McAdams may testify regarding his opinions on these subjects. However, he will not be permitted to testify as to whether he believed any defendant acted in good faith in determining the price an arm's length buyer would pay for a loan. That is a ...


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