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 factual issue of intent
that is for the jury to decide. The jury's determination of
intent would not be assisted by McAdams's opinion on that issue.
See Dahlin, 2002 WL 31834881 at *3.

For the foregoing reasons, this motion in limine will be
granted in part and denied in part. This motion will be denied
except that McAdams will not be permitted to testify as to
(a) whether any actual valuation practice of the Fund is
consistent with a description of the practice contained in a
prospectus nor (b) whether any defendant acted in good faith or
with some other type of intent.

. xclude T imo} E: Witn Daniel R. Fisch
and David J. Ross [141-1]

Defendants intent to use Daniel Fischel and David Ross as
damages liability experts. The two provided a joint report, but
defendants now clarify that they intend to have Fischel testify

regarding two of the opinions expressed therein and Ross testify

- 19 -


The Funds have not provided us with any
analysis and documentation that supported the use
of such higher values. .. . The only support
presented for valuation at par was that this
reflected the amount the Funds would receive if
instruments were held to maturity or the loan
prepaid. As discussed in the Division of
Investment Management's December 8, 1999 letter
to the ICI, the Staff has consistently rejected a
policy of equating fair value with par value
absent evidence that an instrument could be sold
currently at approximately par.

Id.

The letter agreed that certain factors suggested by Van
Kampen could appropriately be considered when it was appropriate
to apply fair value methodology, but emphasized that these were
not the only factors to consider. "All relevant factors" were to
be considered.

+ . . The following issues suggest that all
relevant factors are not being considered in
using fair values to price certain of the Funds’
portfolio instruments:

The substantial difference that often exists

between quotations provided by LPC and fair

values used by the Funds in situations where

Van Kampen's price discovery mechanism does

not produce alternative market quotations

that Van Kampen deems reliable.
¢ The absence of any demonstrated analysis on
an instrument-by-instrument basis supporting

a valuation at approximately par value.

Id. at 3.
Rule 803(8) provides:

Records, reports, statements, or data
compilations, in any form, of public offices or
agencies, setting forth (A) the activities of the
office or agency, or (B) matters observed
pursuant to duty imposed by law as to which
matters there was a duty to report, excluding,
however, in criminal cases matters observed by

- 40 -



not be barred as a witness, but, if they desire, defendants may

depose Hudson within the next 45 days.

4. To Exclude Evidence Of, or Reference To, the SEC
Letters [145-1]

In November 1999, the Midwest Regional Office of the SEC
conducted an on-site inspection of Van Kampen. The inspection
was not limited to the Fund, but it did include an examination of
valuation procedures used by the Fund. Related to this
inspection, there was correspondence between Van Kampen officials
and SEC officials. Defendants move to exclude from evidence
three letters from the SEC to Van Kampen, dated October 20, 1999,
March 28, 2000, and June 28, 2000.4 Plaintiffs contend all
three letters are admissible under Fed. R. Evid. 803(8).

In a letter dated September 1, 1999, Van Kampen's General
Counsel, A. Thomas Smith, wrote to the SEC's Chicago Branch Chief
of Investment Company Examinations. This letter included a
lengthy explanation of Van Kampen's methods for valuing loans.”

In a letter dated October 20, 1999, which is one of the letters

“There are also four letters from Van Kampen to the SEC.
Plaintiffs point out that the motion does not raise any objection
to those letters. In the final pretrial order, however,
defendants object to those letters as well. See Pl. Exh. 3, 6,
8, 10. Any issues that exist regarding the admissibility of the
letters written by Van Kampen officials would be distinct from
the Rule 803(8) issues raised regarding the letters from the SEC
that are the subject of the present motion.

Neither side's brief attaches a copy of this letter.
The remainder of its content is not disclosed in the briefs and
neither side makes any representation as to what caused the
General Counsel to write this letter. Presumably, it was a
response to a prior inquiry from the SEC.

- 36 -


§ 31(a). "All records required to be maintained and preserved in
accordance with subsection (a) of this section shall be subject
at any time and from time to time to such reasonable periodic,
special, and other examinations by the Commission, or any member
or representative thereof, as the Commission may prescribe."

15 U.S.C. § 80a-30(b). The correspondence makes clear that the
inspection was not intended merely to confirm that certain
records were maintained. Defendants do not show that the SEC
employed inspection procedures that raise questions as to the
findings' trustworthiness.

Defendants also contend that the letters are untrust-
worthy because they were never adopted by the Commission itself.
Where recommendations are being made to the Commission, findings
made by SEC officials may be found to be untrustworthy if not
adopted by the Commission. See Peitz, 2002 WL 31101681 at *5.
That, however, is not the present situation. The Regional Office
had not made any recommendation to the Commission. The
investigative procedures that were employed had not reached a
stage that required Commission approval. As the last letter
indicated, the Regional Office did get the concurrence of the
Chief Counsel's Office. The findings in the letters will not be
found untrustworthy simply because they were not approved by the
Commission.

There is nothing to support that the Regional Office's
findings based on its inspection were untrustworthy. The

presumption of trustworthiness remains intact. Therefore, in

- 45 -



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); Unite vy
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

admissible evidence absent a stipulation by the parties that the
report itself represents McAdams's testimony.

- 13 -


cate

(6) Defendants’ Motion In Limine To Exclude the Testimony
and Report of Linda Allen [137-1] is denied.

(7) Defendants' Motion In Limine To Exclude the Eaton
Vance Documents [143-1] is denied.

(8) Defendants' Motion In Limine To Exclude the Testimony
of Thomas Hudson [144-1] is granted in part and denied in part.
Within 45 days, defendants may depose Hudson.

(9) Defendants' Motion In Limine To Exclude Evidence Of,
or Reference To, the SEC Letters [145-1] is granted in part and
denied in part. Legal conclusions must be redacted from the SEC
letters.

(10) This case will be referred to the assigned
magistrate judge to supervise settlement discussions.

(11) A status hearing before Judge Hart will be held on
March 16, 2005 at 11:30 a.m.

ENTER:

Wbipin.7 [Lgt~

UNITED STATES DISTRICT JUDGE

DATED: JANUARY a 2005

- 51 -


object that the experts failed to apply any methodology for
connecting the general economic conditions to an effect on senior
loans in general or the Fund's NAV in particular. The experts
provide no data purporting to show how much of the Fund's drop in
NAV was caused by these conditions. The experts do not give any
consideration to the actual loans held by the Fund nor do they
attempt to correlate the Fund's NAV changes over the class period
with particular changes in economic conditions during the class
period. Under § 11, decreases in the value of the security are
presumed to be caused by the material misstatements that are
shown. McMahan & Co. v. Wherehouse Entertainment, Inc,, 65 F.3d
1044, 1048 (2d Cir. 1995), cert. denied, 517 U.S. 1190 (1996); In
re Dynegy, Inc. Securities Litigation, 339 F. Supp. 2d 804, 867

(S.D. Tex. 2004); In re Initial Public Offering Securities
Litigation, 241 F. Supp. 2d 281, 351 n.80 (S.D.N.¥. 2003). If

plaintiffs prove liability, the burden is on defendants to show
that drops in NAV were caused by something other than the alleged
misstatements in the prospectuses.*® 15 U.S.C. 77k(e); In re
Adams Golf, Inc. Securities Litigation, 381 F.3d 267, 277 (3d
Cir. 2004); McMahan, 65 F.3d at 1048; Dynegy, 339 F. Supp. 2d at
867-68; Nielsen v. Greenwood, 1996 WL 563539 *12 (N.D. I1l.

Oct. 1, 1996). Here, however, the experts do not attempt to

connect changes in loan default rates and the credit spread to

‘This is often referred to as the defense of "negative
causation." See McMahan, 65 F.3d at 1048.

- 23 -



police officers and other law enforcement

personnel, or (C) in civil actions and

proceedings and against the Government in

criminal cases, factual findings resulting from

an investigation made pursuant to authority

granted by law, unless the sources of information

or other circumstances indicate lack of

trustworthiness.
Fed. R. Evid. 803(8).

Plaintiffs contend that the October 29, 1999 letter is
admissible under Rule 803(8) (A) and that the other two letters
are admissible under Rule 803(8)(C). The October letter is a
request for information that occurred prior to the November
inspection; it does not include any factual findings that would
bring it within the purview of subsection (C). The trustworth-

iness clause of Rule 803(8) still applies to subsection (A). See

Nachtsheim v. Beech Aircraft Corp., 847 F.2d 1261, 1273 (7th Cir.
1988); United States v. Koontz, 143 F.3d 408, 412 (8th Cir.
1998); Chapman v. San Francisco Newspaper Agency, 2002 WL

31119944 *2 (N.D. Cal. Sept. 20, 2002); United States v. May,
18 M.J. 839, 842-43 (1984). The October 29 letter, however,

certainly is trustworthy as to what it is, a simple statement
confirming that additional documents had been requested. The
October 29 letter is nonhearsay in accordance with Rule
803(8) (A). Whether other grounds for excluding it exist will be
discussed below.

The other two letters contain findings based on the
November inspection. To be nonhearsay, they must satisfy the

criteria of Rule 803(8)(C), including that they do not have

-41-



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

-4-


beginning in 1998. Those reports were disclosed in discovery in
the Eaton Vance case. In the Eaton Vance case, reliability
studies were also disclosed in which Eaton Vance had compared LPC
market prices to actual prices Eaton Vance had paid for senior
loans. Both the reports and reliability study are included as
plaintiffs exhibits in the Van Kampen case. The reliability
study was considered by Allen in rendering her opinions.
Defendants object to use of these documents on the ground that
they were not properly disclosed in discovery in the Van Kampen
case and on grounds of relevance.

While defendants had some notice of the existence of
these documents prior to the time the pretrial order was
prepared, plaintiffs do not dispute that they should have
provided fuller notice and also do not dispute that the actual
documents were not provided to defendants until defendants filed
the present motion in limine. Plaintiffs indicate that the
failure to provide the documents was an oversight, but also note
that defendants were informed of the documents during the time
the final pretrial order was being prepared and did not take the
opportunity to request copies at that time. Defendants were also
offered the opportunity to further depose Allen regarding these
documents, but decided not to do so. Defendants do not dispute
that they now have the documents and do not point to any manner
in which the delayed disclosure has prejudiced their preparation
for trial. The documents will not be barred based on failure to

timely and adequately disclose them if the deficiencies were

- 34 -



as to one. Plaintiffs argue that neither of the witnesses should
be allowed to testify as to one of the opinions. Plaintiffs also
argue that the two witnesses are duplicative and only one should

be permitted to testify.

Both experts are officers of Lexecon Inc., a consulting
firm that specializes in the application of economics to legal
and regulatory issues. Plaintiffs do not question the
qualifications of either of these experts. Plaintiffs only
question the methodology used to reach the conclusions contained
in Opinion 1 below.’

Fischel and Ross were retained to examine the conclusions
set forth by plaintiffs' valuation expert, Linda Allen, and
damages expert Michael J. Barclay. Allen opines as to the
amounts by which the Fund overvalued its NAV during the class
period. Barclay, in part based on Allen's overvaluation
calculations, provides a calculation of damages to the class of
plaintiffs.

As summarized by defendants, Fischel's and Ross's
opinions and defendants' contention as to the related evidence
they will submit may be summarized as follows:

Qpinion 1: Barclay's calculations do not account for
factors other than the alleged wrongdoing that caused the Fund's

NAV to decline during the Class Period. The experts opine that

7In a separate motion in limine, plaintiffs also object
to an aspect of Opinion 2. See § B(5) infra.

- 20-


paid for the security (not exceeding the price at
which the security was offered to the public) and
(1) the value thereof as of the time such suit
was brought, or (2) the price at which such
security shall have been disposed of in the
market before suit, or (3) the price at which
such security shall have been disposed of after
suit but before judgment if such damages shall be
less than the damages representing the difference
between the amount paid for the security (not
exceeding the price at which the security was
offered to the public) and the value thereof as
of the time such suit was brought: Provided,
That if the defendant proves that any portion or
all of such damages represents other than the
depreciation in value of such security resulting
from such part of the registration statement,
with respect to which his liability is asserted,
not being true or omitting to state a material
fact required to be stated therein or necessary
to make the statements therein not misleading,
such portion of or all such damages shall not be
recoverable. ...

15 U.S.C. § 77k{e).

As discussed in § B(4) supra, the decrease in value of a
security (in this case, effectively the decrease in NAV of the
Fund) is presumed to have been caused by any material
misstatements that are proven to have been included in one or
more of the Fund's prospectuses. On the issue of damages, the
burden is on defendants to prove that any such decrease was
caused by factors other than the material misstatements. The
decrease in value of the security (during the relevant time
period) is the exclusive measure of damages for violations of
§ 11(a); other standard measures of contractual damages are
inapplicable under the statute. McMahan, 65 F.3d at 1048;
Goldkrantz v. Griffin, 1999 WL 191540 *3 (S.D.N.Y. April 6,
1999), aff'd by unpublished order, 201 F.3d 431 (2d Cir. 1999).

~ 26 -



is stated to be that of Ross only. Defendants intend to
introduce testimony regarding Opinion 3 through Ross.

In Opinion 1, defendants' experts rely on a Standard &
Poor/Loan Syndication and Trading Association ("S&P/LSTA") index
of loans to establish an increase of loans in default or
bankruptcy during the pertinent time period, from near zero in
1996 to significantly higher from 1999 through 2001. As stated
in their report: "An increase in default rates obviously will
reduce the value of senior loans and the value of funds holding
such loans." Fischel & Ross Report at 6 (April 30, 2003). They
also rely on the London Interbank Offered Rate ("LIBOR") to
establish an increasing credit spread between October 1998 and
October 2001. LIBOR is the rate at which major international
banks in London lend dollars to each other and is often used as a
benchmark for floating rates. The credit spread relied upon is
the difference between the yield of leveraged loans and LIBOR.

As stated by defendants' experts: "Because there is an inverse
relationship between the price of any given loan and the relevant
credit spread, the increase in credit spreads also reduced the
value of senior loans and the value of funds holding such loans."

Plaintiffs do not dispute the general principles that
increased default rates and an increased credit spread will
result in a general decline in the value of floating-rate loans,
nor do they dispute that default rates and the credit spread

increased during the pertinent time period. Plaintiffs, however,

-~ 22 -


harmless. See Fed. R. Civ. P. 37(c)(1). Here, there is no
indication that defendants were prejudiced in any manner by the
delays. No sanction will be imposed.

Defendants’ other objection is relevance. Since the
reports were available to entities like the Fund, the reports are
relevant to the issue of whether there were readily available
Market quotations. The reports will not be stricken as exhibits.
The reliability study represents a method for testing the
accuracy of LPC pricing information and was relied upon one of
plaintiffs' experts. The studies are also relevant evidence.

For the foregoing reasons, this motion in limine will be
denied.

o} mT imony_o: Hi =

Thomas Hudson has been a senior loan trader at Goldman
Sachs and was on the Distressed Loan Committee of LSTA.
Plaintiffs represent that they decided to use him as a witness
after defendants proposed Meenan and DeLuca as witnesses.
Plaintiffs intend to use Hudson to rebut all or some of the
testimony of Meenan and DeLuca. Plaintiffs do not dispute that
Hudson was not previously disclosed in response to
interrogatories. However, neither had defendants expressly
disclosed Meenan and DeLuca in response to interrogatories. See
§ B(2), supra. Unlike Hudson, though, Meenan and DeLuca had been
mentioned during deposition testimony. In any event, defendants

have not been prejudiced by the delayed disclosure. Hudson will

-35-


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.
of Chicage, 877 F.2d 1333, 1339-40 (7th Cir. 1989). McAdams's

-17-


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

-9-



each day of the class period. She also compared LPC pricing data
to the Fund's valuation of its loans, resulting in statistically
significant evidence that the Fund generally overvalued loans.
Defendants do not dispute that Allen is qualified as an
expert on finance. They contend, however, that she lacks
expertise to opine on the senior loan secondary market because
she has never traded in that market, she has never worked for a
senior loan fund, and she has never been associated with LPC or
LSTA. Defendants contend that being a generalist on loan markets
is not good enough, that she must be a specialist as to the
senior loan market in order to be able to provide useful
testimony for the jury. This objection is without merit.
Allen's educational background and the research background shown
by her publications show that she is well versed on loans,
factors and conditions that affect loan markets, and other
aspects of the pertinent financial markets. Her report also
exhibits an understanding of the senior loan market and how it
functions. One need not have been a participant in a particular
market in order to qualify as an academic expert who can provide
useful testimony. Compare Crowley v. Chait, 322 F. Supp. 2d 530,
554-55 (D.N.J. 2004) (Fischel's academic and consulting expertise
in economics qualified him to provide useful testimony related to
insurance accounting, loss reserve, and management issues).
Defendants also contend that Allen's statistical evidence
comparing LPC pricing to the Fund's valuation of loans would not

be useful to the jury because it assumes LPC pricing is accurate.

~ 32-



not true. Therefore, for purposes of ruling on this motion in
limine, it is assumed that dividends represented interest earned
on the loans and were separate from the loan asset itself that
represented the value of the Fund's shares. Therefore, as a
matter of law, the payment of dividends would not be part of the
calculation of damages based on a decline in share value (NAV).

Even if that should not taken as true, defendants have
not shown that they have admissible evidence that the
distribution of dividends negatively affected NAV. All they can
point to is conclusory statements by their damages experts. Such
unsupported, conclusory statements are not admissible evidence.
See Huey v. United Parcel Service, Inc., 165 F.3d 1084, 1087 (7th
Cir. 1999); Mid-State Fertilizer, 877 F.2d at 1339-40; Ab v.
Sekendur, 2004 WL 2434220 *6 (N.D. Ill. Oct. 28, 2004) Comer v.
American Electric Power, 63 F. Supp. 2d 927, 936-37 (N.D. Ind.
1999). Alternatively, since the evidence related to the effect
of distributing dividends is inadmissible in form, defendants
will not be permitted to present it.

Defendants also argue that evidence as to dividends is
admissible so that the jury will have a complete picture. They
contend that the jury should know that class members received
dividends as well as any proceeds from the redemption of their
shares. Defendants contend the jury may make a decision based on
sympathy for the plaintiffs if the jury believes the plaintiffs
had a net loss. The jury will be instructed that they are not to

decide the case based on sympathy for a party. Since, as

- 29 -



B. 7 ‘s' TON:

_ Te jar iden th Traders Issued False Loan Pricin:

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") ,? 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

3LSTA is a senior loan pricing service first formed in
1995. In 1999, it merged with the Loan Pricing Corporation
("LPC"), which had began gathering data on senior loans in 1985.
See Abrams III, 2004 WL 1433620 at *5-6.



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.


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 x 3 x 100 screen" and "2 by 2 x 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

- 18 -


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.

To Exclu the T im Kevin Meenan on’
aL 9-.

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.



changes in the Fund's NAV nor do they make any attempt to show
how much of an effect there may have been. Therefore, it has not
been shown that this testimony is relevant to the damages issues
in this case.

Defendants' experts do point to general data regarding
decreases in loan values and senior loan fund NAV's during the
class period. The loan indices used, however, do not index
senior loans. Instead, the indices used were for all loans,
B-grade loans, and BB-grade loans. While there is some overlap
between the indices used and the types of loans held by the Fund,
apparently none of the indices correspond with the mix of loans
held by the Fund. Fischel and Ross do.not explain the
correlations or possible differences between the indices used and
the assets of the Fund. Also, Fischel and Ross provide no
statistical or other sufficient method for correlating changes in
the indices to changes in default rates or credit spreads.® As
to other senior loan funds, the experts generally do not consider
similarities and differences with the Fund nor whether the other
funds may or may not have overstated NAV.

Because not supported by adequate methodology nor shown
to be relevant to issues in the present case, Fischel and Ross

will not be permitted to testify regarding Opinion 1.

°In rebuttal, Barclay opines that multiple regression
analysis shows a lack of statistically significant correlations
between the indices and changes in the Fund's NAV.

- 24 -


’
‘* Minute Order Form (06/97)

United States District Court, Northern District of Iinois

Mame ened quate WILLIAM T. HART Shane etesed Sede
CASE NUMBER 01 C 7538 DATE JANUARY 12, 2005
CASE IRENE ABRAMS, etc. v. VAN KAMPEN FUNDS, INC., et al.
TITLE
[In the following box (a) indicate the party filing the motion, ¢.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented.)
DOCKET ENTRY:
qd) QO Filed motion of [ use listing in “Motion” box above.]
(2) a Brief in support of motion due__.
@) Oo Answer brief to motion due . Reply to answer brief due___.
(4) a Ruling/Hearingon___—_ssetfor___—_saat
(5) Oo Status hearing[held/continued to} [set for/re-set for] on set for at_
(6) oO Pretrial conference[held/continued to] [set for/re-set for]on___setfor___ ss at__—
@ Oo Trial[set for/re-set for]on__at
(8) iat} [Bench/Jury trial] [Hearing] held/continuedto__—_at.
@) a This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to}
OFRCP4(m) OLocal Rule 41.1 OOFRCP4i(aX1) CO FRCP41(aX2).
qo [Other docket entry} Motion [138-1] is denied without prejudice. Motions [139-1], [140-

1), [141-1], [144-1], and [145-1] are granted in part and denied in part. Motion [142-1] is
granted. Motions [137-1] and [143-1] are denied. This case will be referred to the assigned
magistrate judge to supervise settlement discussions. A status hearing before Judge will
be held on March 16, 2005 at 11:30 a.m.

(11) [For further detail see attached Memorandum Opinion and Order.]

‘No notices required, advised in open court.

No notices required.

\

of notices.

W | Notices mailed by judge's staff.
Notified counsel by telephone.

Docketing to mail notices.
Mail AO 450 form.
we | Cory Judge Brown

courtroom
deputy’s
initials

3 ieessig sn

eMeS Nd Chile soz

JAN 13,2005

Date/time receivedin ; - -{

central Clerk's Office" ~”



in actuality it was not. These facts will be before the jury.
The jury would not be confused by being told that the SEC found
facts that are consistent with plaintiffs’ allegations regarding
the Fund's actual valuation practices. They will not be told
that the SEC found or indicated such practices violated the 1940
Act.

Defendants' other contention is that it would be unfairly
prejudicial to provide evidence showing that the SEC reached
conclusions that go to core issues that plaintiffs must prove to
the jury. See Klein, 86 F. Supp. 2d at 820-21. Defendants argue
the jury will have before it the same evidence that was before
the SEC plus more and that, without knowing the conclusions
reached by the SEC, the jury can conclude for itself whether
there were readily available market quotations that the Fund did
not adequately take into account when valuing its holdings.

There is case law supporting that it is within the trial court's
discretion to exclude Rule 803(8) (C) evidence on this ground.
See Tulloss v, Near North Montessori School, Inc., 776 F.2d 150,
153-54 (7th Cir. 1985); Klein, 86 F. Supp. 2d at 820-21. See
alsg Young v. James Green Management, Inc,, 327 F.3d 616, 624-25
(7th Cir. 2003). Defendants do not cite any case holding that it
is necessarily an abuse of discretion to admit such evidence.
The Supreme Court has held that, as with expert and lay opinions
(see Fed. R. Evid. 704(a)), Rule 803(8)(C) evidence that goes to
ultimate issues may be admitted. See Beech Aircraft, 488 U.S.
at 169-70.

- 47 -



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

-i1l-



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

-~ 10 -



possible motivational problems with the investigator. Additional
factors that have been considered include the finality of the
findings; the extent to which the findings are based on materials
that would not be admissible in evidence; the degree to which any
hearing complied with due process; the extent to which there is
an ascertainable record; the extent to which the findings
represent an implementation of a policy in contrast to findings
of fact; whether the findings incorporate findings of another
agency that may not have been trustworthy; and, if expert
opinions were involved, the extent to which the usual criteria
for such opinions was present. Coleman, 306 F.3d at 1342 n.4
(quoting Zenith Radio Cor Vv. tsushita Ele i

Co., 505 F. Supp. 1125, 1147 (E.D. Pa. 1980), aff'd in part,
rev'd _in part on other grounds, In re Japane El

Products Antitrust Litigation, 723 F.2d 238 (3d Cir. 1983),
rev'd, Matsushita Electrical Industrial Co. v. Zenith Radio
Corp,, 475 U.S. 574 (1986)).

Here, no questions are raised regarding the SEC's
motivation. The subject of the investigation was well within the
expertise of the SEC. The inspection was conducted in November
and the first letter was issued within a few months. Timeliness
is also satisfactory. Defendants contend there are indicia of a
lack of trustworthiness because no formal hearing was held and
the findings were made by the Midwest Regional Office without

ever being adopted by the Commission itself.

- 43 -



New York and an Adjunct Professor of Finance at New York
University. She is the author or coauthor of three books and
numerous articles, primarily in the field of loan valuation and

credit risk analysis. Her books include Understanding Market,

Credit and Operational Risk: The Value at Risk Approach and
Credit Risk Measurement: New Aj fo} e Vi
Other Paradigms.

Allen opines that, during the class period, the LPC
database was a reliable benchmark of market prices for a majority
of the loans held by the Fund. She bases this opinion on "(a)
the number, sophistication and financial resources of dealers
providing market quotations to LPC, (b) the number of quotes
provided for each loan, (c) the quality controls put in place by
LPC in response to the demand for quality by its customers,

(d) the general acceptability of the database in the market,

(e) the general acceptability of the database for the purposes of
academic research, and (f) the internal studies conducted by LPC
comparing LPC quotations to actual trade prices." Additionally,
Allen opines that, during the class period, there was a secondary
loan market for syndicated bank loans and readily available
market quotations for a majority of the loans in the Fund's
portfolio. The latter conclusion was based in part on data
regarding the average number of bid quotes and ask quotes
available for loans held by the Fund. Further, taking available
LPC pricing data as accurate, Allen recalculated NAV for each day

ef the class period and determined how much NAV was overvalued on

-31-


art

Here, the jury will not simply be presented with evidence
of the pricing information available to the Fund and then decide
whether, contrary to representations in the prospectuses, there
were readily available market quotations that were not used by
the Fund in valuing loans or pertinent pricing information that
was not considered when using fair value methods. Each side will
also present experts who will opine as to whether such quotations
or pricing information was available. In other words, even
without the SEC letters, there will be experts opining as to some
of the factual issues that must be decided by the jury. The SEC
letters are analogous to having another expert's testimony
regarding such ultimate issues, but an expert who is not biased
by being connected to a particular party. Unlike the actual
experts, the SEC letters will not be subject to cross
examination. However, the parties will still be able to
challenge the SEC's conclusions through the testimony of their
own experts as well as in closing arguments.

The SEC letters apparently would also be relevant and
admissible for another reason. Defendants will raise a business
judgment defense based on their believing alleged misstatements
in the prospectuses are actually true. The criticisms contained
in the letters from the SEC, to the extent known by particular
defendants and only as to prospectuses issued after such
knowledge, would go to the question of those defendants' good
faith beliefs regardless of whether the letters are admitted for

the truth of the matters contained therein.

- 48 -



discussed above, dividends are not relevant to calculating
damages, there is no reason for the jury to know the amount of
dividends received by class members. Defendants will not be
permitted to present evidence regarding the amount of dividends
distributed by the Fund. As part of the basic background for
this case, including evidence as to how the Fund functioned, the
parties are not precluded from presenting evidence that the loans
held by the Fund earned interest and that the interest was
distributed in the form of a dividend. The parties are only
prohibited from presenting evidence as to the amount of the
dividend and any effect the distribution of dividends may have
had on the Fund's NAV.

For the foregoing reasons, this motion in limine will be
granted. The parties will not be permitted to present evidence
as to the amount of dividends that the Fund paid nor will they be
permitted to argue that any distribution of dividends affected
the Fund's NAV or the amount of damages to be awarded in this
case. This includes that Fischel or Ross will not be permitted
to testify as to the aspect of Opinion 2 that is based on the

distribution of dividends affecting NAV and damages.

: ' I
1 To Exclude e@ Testimon nd_R xt _of Linda le: 7
Plaintiffs' valuation expert, Linda Allen, has a Ph.D. in
Economics and Finance from New York University and is currently a

Professor of Finance at Baruch College of the City University of

- 30 -


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‘, 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

‘Short excerpts of Taylor's deposition testimony in this
case and another case are provided regarding other motions in
limine.

-7-



adverse market conditions account for all or a substantial
portion of the decline in NAV, in particular an increase in loan
default rates and a widening credit spread. Defendants intend to
introduce testimony regarding Opinion 1 through Fischel. This
will include evidence that is intended to show that all senior
loan funds and a published index of senior loans experienced
declines in value comparable to the decline in the NAV of the
Fund,

Opinion 2: Barclay's calculations do not measure the
class's economic loss attributable to the alleged overpricing of
the Fund. A drop in NAV does not strictly correlate with
economic loss to the class plaintiffs. Defendants intend to
introduce testimony regarding Opinion 2 through Fischel.
Defendants will present evidence that they contend will show that
Barclay's methodology for calculating damages is flawed because
it creates windfall recoveries that bear no relationship to the
alleged overpricing of the Fund's shares.

Opinion 3: On the assumption that the Fund should have
used LPC prices, Ross calculates the amount that the NAV was
overvalued to be somewhat different from Allen's initial
calculation. Ross then uses this overvaluation calculation and a
different methodology than Barclay to calculate the amount of
purported damages to be substantially less than Barclay's total.
Ross proposes a number of alternative calculations based on

different methods or assumptions. In their report, this Opinion

-~21-


also found. In the letter, the Assistant Regional Director also
commented on the new 3 x 3 x 100 pricing procedure (the "Proposed
Guidelines") and found deficiencies. It was found that the
Proposed Guidelines too readily permitted the Adviser to override
prices otherwise indicated by the 3 x 3 x 100 procedure. Where

3 x 3 x 100 data was not available for pricing a loan, the
Proposed Guidelines still failed to adequately consider spread
when fair valuing a loan. The letter also criticizes Van Kampen
for finding that no Fund Board Member was on the Adviser's
Pricing Committee that made fair value determinations. The Board
was also criticized for having made no attempt to compare fair
valuation determinations with actual recoveries on distressed
loans.

In a response letter dated April 27, 2000, Smith
responded to the SEC's findings as to the Proposed Guidelines and
the criticisms of the Board. Smith noted new procedures that
limited overrides of market indicators to one day, required daily
approval by the Pricing Committee, and quarterly review by the
Board. He disagreed with the criticism regarding not adequately
considering spreads on the ground that it required too complex an
application to be feasibly implemented. As to the Board
eriticisms, Smith noted that the Board would not be reviewing
certain information on a quarterly basis and that it would be
provided reports comparing distressed loan recoveries with their

valuations.

- 38 -



The last letter to which defendants object is the SEC's
Regional Director's June 28, 2000 letter to Smith, which was a
response to Smith's April 27, 2000 letter. The June letter notes
that the valuation techniques used by the three funds had been
discussed with the Division of Investment Management's Office of
Chief Counsel and that that office concurred with the views
expressed in the June letter.

First, the June letter reemphasized that, when available,
the law requires that market quotations be used to price
financial instruments and that the funds had to look to other
possible sources for quotations when LPC supplied quotes could
not be used.

It is our understanding that the Funds do
not seek other sources of market quotations
whenever LPC-supplied quotes were deemed
unreliable. We were not shown any evidence
that explained precisely why the LPC-supplied
quotes did not reflect current market values
other than the fact the quotes fell outside
the predetermined parameters. We also did not
see any documentation evidencing that the Funds
made a determination in these circumstances
that reliable market quotations were not readily
available.

June 28, 2000 SEC Letter at 2.
The letter again criticized the three funds' applications
of fair value methodology.

In a majority of situations in which the
Funds used fair value to price their portfolio
instruments, the fair value methodology used
resulted in such instruments being valued higher
than the LPC-supplied quotes. We also noted that
in most circumstances when valuations are not
based on LPC-supplied quotes, loans were fair
valued at approximately par value.

- 39 -



Defendants want to introduce evidence that members of the
plaintiff class received dividend payments from the Fund. They
contend that evidence would show that an investor who held a
single share of the Fund during the class period would have had a
drop in NAV of $1.18, but also would have received $1.69 in
dividends for a net gain of $0.51 on the share. Defendants
contend this evidence will fit into the statutory method for
measuring damages because the receipt of dividends is part of
their evidence showing negative causation. Defendants contend
that paying dividends caused a decrease in the Fund's NAV. They
point to a conclusory statement in their damages experts' report
as supporting this contention. See Fischel & Ross Report at 8
n.7 (April 30, 2003) ("Professor Barclay's calculations do not
measure Class members' out-of-pocket losses because he ignores
the dividends paid by the Fund to its shareholders."). See also
Ross Suppl. Report at 8-9 (Oct. 17, 2003) ("I understand that
the defendants contend that plaintiffs cannot recover under
Section 11 for declines in the value of a security attributable
to factors other than the alleged material misstatements and
omissions. If defendants' contention is correct, then an
offsetting adjustment for dividend payments should be made,
because the payment of dividends necessarily caused the value of
the fund to decline by the amount of dividends paid.").

In a somewhat lengthier, but still essentially conclusory
manner, plaintiffs' damages expert stated that the payment of

dividends does not decrease NAV. As he sees it, the effect of

-27-


("Abrams ITI"), 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.?

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 ITI, 2004 WL 1433620 at *1; x: uU. & -

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

Allegations regarding misrepresentations as to the
Fund's goals were dismissed on summary judgment. See Abrams III,
2004 WL 1433620 at *9.


accordance with Rule 803(8), the factual findings contained in
the three letters are not hearsay. However, legal conclusions
contained in the letters would not be admissible to prove the
truth of the matters contained therein. Statements that the
funds failed to use market quotations that were readily available
would itself be an admissible factual statement. The additional
statements that such conduct violated statutes or regulations
would not be admissible.

Although factual findings in the letters are not excluded
as hearsay, it still must be considered whether the findings
should be excluded on other grounds. Statements that fall within
a Rule 803 exception may still be excluded as unduly prejudicial
under Rule 403 or as irrelevant. See Cooper v. Carl A. Nelson &
Co., 211 F.3d 1008, 1018 (7th Cir. 2000); Klein, 86 F. Supp. 2d
at 820.

Defendants argue that the present case involves
misstatements of fact that violated § 11 whereas the letters
address violations of § 2 of the 1940 Act which is not the issue
in this case. As previously held, however, the legal conclusions
regarding compliance with the 1940 Act are not parts of the
letters that are nonhearsay under Rule 803(8)(C). Facts
supporting possible violations of the 1940 Act, though, are the
same facts that support misstatements or omissions in the
prospectuses. Basically, some of the alleged misstatements in
the prospectuses were that the Fund was following valuation

procedures, ones that complied with statutory requirements, but

- 46 -


It is true that findings following a formal hearing with
full due process procedures are more likely to be found to be
trustworthy. However, findings based on other investigative

procedures may still be admissible. Bank of Lexington & Trust
Co. v. Vining-Sparks Securities, Inc., 959 F.2d 606, 617 (6th
Cir. 1992); Michael H. Graham, Federal Practice & Procedure

§ 7049 at 498 n.24 (2d Interim Ed. 1997). See, e.g,, Coleman,
306 F.3d at 1341-43 (determination letter based on EEOC
investigation); Bank of Lexington, 959 F.2d at 616-17 (letters of
caution from National Association of Securities Dealers); United
States v, Peitz, 2002 WL 31101681 *5 (N.D. Ill. Sept. 20, 2002)
(SEC action memorandum). Here, there is nothing presented by
defendants to indicate that the SEC's inspection was not thorough
or adequate. Although no hearing was held, the correspondence
shows the SEC provided Van Kampen with a number of opportunities
to provide additional documentation or evidence as well as
opportunities to argue that the three funds’ valuation procedures
were adequate. Defendants contend the inspection was not
intended to fully examine the Fund's valuation procedures because
one of the letters refers to the inspection as being pursuant to
§ 31 of the 1940 Act, 15 U.S.C. § 80a-30, which defendants
contend is an inspection to ensure that proper records are kept.
Although § 31(a) (15 U.S.C. § 80a-30(a)) requires that certain
records be maintained, the examination provided for in § 31(b)
(15 U.S.C. § 80a-30(b)) is not limited to an examination to

determine compliance with the recordkeeping requirement of

- 44 -


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:*

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).

‘The opinion numbered 1 is no longer at issue following
the court's ruling on summary judgment.

-14-


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

-16-


defendants and certain related parties excluded. See Abrams v.

Van Kampen Funds, Inc,, 2002 WL 1989401 (N.D. Ill. Aug. 27, 2002)

("Abram: "). 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.’ 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)

‘Claims for violations of § 12 of the Securities Act, 15
U.S.C. § 771, and state law claims, as well as claims against two
individual defendants, were voluntarily dismissed. Following
notice and a fairness hearing, the voluntary dismissal of those
claims was approved by the court. See Order dated Dec. 8, 2004.

See also Abrams v, Van Kampen Funds, Inc., 2004 WL 1433620 *1
n.1, *9 n.3 (N.D. Ill. June 25, 2004).

-2-


that is a subject of this motion in limine, the SEC's Midwest
Regional Office Assistant Director wrote to Smith confirming an
October 18 conversation. The letter referred to the SEC's
upcoming inspection regarding three SEC senior loan funds,
including the Fund, which would begin November 1, and requested
certain additional documents.

According to Smith's deposition testimony, the inspection
lasted approximately one week. The inspection team interviewed
Smith, the Fund's President and Portfolio Manager, and the Fund's
Assistant Portfolio Manager. Records were also examined.

In January 2000, the Fund adopted the 3 x 3 by 100 screen
and requested a meeting with the SEC to discuss it. This meeting
took place on January 25, 2000 in Washington, D.C. With a letter
dated February 1, 2000, Van Kampen sent additional documents to
the SEC.

In a letter dated March 28, 2000, which is one of the
letters that is a subject of this motion in limine, the SEC's
Assistant Regional Director wrote to the Fund's President. The
letter sets forth findings made during the November inspection.
The SEC sets forth a number of deficiencies that were found with
the pricing guidelines that were in effect as of November 1999
{the "Old Guidelines"). The inspection found a failure to
adequately consider secondary market indications, including
market quotations received directly from market makers or
indirectly through LPC. A failure to consider fluctuations in

spreads over the base rate of interest for pricing purposes was

-37-



Still to be considered is whether both Fischel and Ross
will be permitted to testify. Defendants agree that ordinarily
only one expert per side should opine on a particular subject.
See N.D. Ill. Loc. R. Form 16.1.1 n.7; Dahlin, 2002 WL 31834881.
Defendants contend, however, that Fischel will testify as to
Opinion 2 and Ross as to Opinion 3. The two opinions, however,
are closely related. Ross will not be able to opine as to
Opinion 3 without also addressing many aspects of Opinion 2.
Defendants will be precluded from using both experts. They may
choose which expert they prefer to use.” See id,

For the foregoing reasons, this motion in limine will be
granted in part and denied in part. Fischel and Ross will be
barred from testifying as to Opinion 1 and defendants will be
limited to using one expert to testify as to the remaining

opinions contained in the Fischel/Ross Report.

S. To Preclude Evidence and Ar nt _Concerni:
Paid by the Van Kampen Prime Rate Income Trust to
Shareholders [142-1]

Section 11 itself contains a provision as to damages for
violations of § 11(a).
The suit authorized under subsection (a) of

this section may be to recover such damages as
shall represent the difference between the amount

*Pischel did not join in Opinion 3. Therefore,
testimony as to both Opinions would probably require the use of
Ross. No ruling is made as to whether Fischel could testify as
to Opinion 3 if, prior to trial and because he fully agrees with
Ross as to Opinion 3, he supplements his report by adopting
Opinion 3 as well.

- 25 -



IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
DOCKETED

JAN 1 3 2005

IRENE ABRAMS, on behalf of
herself and all others
similarly situated,

Plaintiffs,

v. No. 01 C 7538
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.

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

(,



ware?

It is found that admission of the SEC letters would not
be unfairly prejudicial to defendants. Therefore, in redacted
form as discussed above, none of the letters will be excluded
from evidence.

For the foregoing reasons, this motion in limine will be
granted in part and denied in part. The letters will not be
excluded from evidence except that legal conclusions must be
redacted from the letters. The parties are to meet in an attempt

to agree upon redacted versions of the letters.

D. CONCLUSION

The parties previously attempted to settle this case with
the aid of a mediator, but could not reach an accord. Perhaps,
in light of today's ruling, the parties will now be able to
settle the case. Within one week, the parties shall contact each
other to discuss the possibility of settlement. As a possible
aid in the process, this case will be referred to the assigned
magistrate judge to conduct settlement proceedings. The parties
shall promptly contact the minute clerk of the assigned
magistrate judge to arrange for a date to appear before the
magistrate judge.

At the next status hearing, the parties shall report on
the possibility of settlement.

IT IS THEREFORE ORDERED that:

(1) Plaintiffs' Motion In Limine To Bar Evidence that

Traders Issued False Loan Pricing Data [138-1] is denied, but

- 49 ~-



This objection is without merit for two reasons. First, Allen
also provides competent and admissible evidence supporting that
LPC pricing was reliable and readily available. Second, even if
she did not personally provide such support, the reliability of
LPC pricing is a disputed issue of fact in this case. The jury
will decide the extent to which LPC/LSTA pricing information
qualifies as reliable and readily available market quotations.
In light of that finding, the jury will accordingly consider and
apply Allen's testimony comparing the LPC pricing to the Fund's
valuations.

This motion in limine will be denied in its entirety.

2 ‘9 Exclude the Eaton Vance Document: 143-1

Eaton Vance is a senior loan fund unrelated to the Fund.
A lawsuit is pending against Eaton Vance regarding their
valuations of senior loans. Some of the same attorneys represent
the plaintiffs in both this case and the Eaton Vance case. When
deposed in the Van Kampen case, Taylor testified that monthly
LSTA pricing information was not available to buy-side
institutions like Van Kampen and Eaton Vance until September
1999. After fact discovery closed in the Van Kampen case, Taylor
was deposed in the Eaton Vance case. At that time, Taylor
corrected her testimony and stated that the reports were
available to buy-side "founding" or "full" members as of July
1998. Van Kampen did not become a full member of LSTA until
2000, but could have become a full member in 1998. Eaton Vance

was a full member in 1998 and therefore received the reports

- 33-



indicia of lacking trustworthiness. If the threshold
requirements of being factual findings resulting from an
investigation made pursuant to authority granted by law are
satisfied, trustworthiness is presumed and the burden is on the
party opposing admission to show a lack of trustworthiness.
Amtrust Inc, v. Larson, 388 F.3d 594, 599 (8th Cir. 2004);
Bridgeway Corp. v. Citibank, 201 F.3d 134, 143 (2d Cir. 2000);
Huff v. State of Illinois, 2003 WL 168630 *S (N.D. Ill. Jan. 23,
2003); Klein v. Vanek, 86 F. Supp. 2d 812, 820 (N.D. Ill. 2000).
Here, the letters contain factual findings*® that were made
following an SEC inspection performed pursuant to authority of
law. Therefore, the findings are presumed to be trustworthy.

In evaluating trustworthiness, four nonexclusive factors
set forth in the Advisory Committee Notes to Rule 803(8) are
generally considered. See Jeman v. Ho De ne., 306 F.3d
1333, 1342 (3d Cir. 2002); Klein, 86 F. Supp. 2d at 820. They
are the timeliness of the investigation; the special skill or

expertise of the official; whether a hearing was held; and

Conclusions and opinions that are factual in nature may
fall within the Rule 803(8)(C) exception. Bee ir
Corp. v. Rainey, 488 U.S. 153, 162 (1988); i

914 F.2d 889, 896 (7th Cir. 1990), cert. denied, 498 U.S. 1122
(1991); United States v. Peitz, 2002 WL 31101681 *5 (N.D. Ill.
Sept. 20, 2002). However, legal conclusions of an agency will
not be admitted under the Rule 803(8)(C) exception. Hines v.
Brandon Steel Decks, Inc,, 886 F.2d 299, 302-03 (11th Cir. 1989),

, 503 U.S. 971 (1992); Miranda-Ortiz v. Deming, 1998
WL 765161 *1 (S.D.N.Y. Oct. 29, 1998). To the extent any of the
SEC letters contain legal conclusions; any admissible portions
would be limited to those findings that are factual in nature.
Cf. Peitz, 2002 WL 31101681 at *5.

42 -



dividends on NAV is that retaining dividends, instead of
distributing them, would increase NAV.

Q. And if a fund pays out dividends, what
impact, if any, would that have on the NAV Of the
fund?

ke ke Ok

A. At some level, it's correct that a
dividend paid on the fund would reduce the NAV of
the fund. However, it's clear from looking at
the fund's NAV that it was possible to pay these
dividends over a long period of time without
having the fund's NAV vary from $10 per share by
more than a penny or two.

So what happens in these cases is that the
senior loans held by the fund pay interest to the
fund. The fund takes those interest payments
that are received from the loans and passes them
through to investors.

So rather than thinking about the dividends
as reducing NAV, which clearly they didn't over
the history of the fund prior to the class
period, since the fund's NAV never varied by more
than a couple of pennies from $10 per share, what
you're doing is paying out those dividends rather
than retaining them in the fund and reinvesting
them which, in fact, would tend to increase the
fund's NAV.

Barclay Dep. at 75-76.

One issue that goes to the admissibility of the testimony
is whether the potential effect of dividends on NAV is a question
of law as to the measure of damages or a question of fact as to
whether or not paying dividends affects NAV. Here, the Fund's
stated goal was to achieve a high level of current income
consistent with preservation of capital. If, as Barclay
indicates, dividends simply represented the distribution of
interest earned on the loans, such a distribution would be
independent of the value of the shares themselves that is

represented by NAV. Defendants point to no evidence that this is

- 28 -



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.

'o Exclude the T. and R £ ael 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 vy. Merrell Dow
Pharmaceuticals, Inc,, 509 U.S. 579 (1993).®

‘although the title of plaintiffs' motion refers to
excluding McAdams's report, the request for relief refers only to
excluding his testimony. The report itself would not be

~12-


.

am

without prejudice to objecting to Taylor's testimony at trial.

(2) Plaintiffs' Motion In Limine To Exclude the Testimony
of Kevin Meenan and Anthony DeLuca [139-1] is granted in part and
denied in part. Within 45 days, plaintiffs may depose Meenan and
DeLuca.

(3) Plaintiffs' Motion In Limine To Exclude the Testimony
and. Report of Michael P. McAdams [140-1] is granted in part and
denied in part. McAdams will not be permitted to testify as to
(a) whether any actual valuation practice of the Fund is
consistent with a description of the practice contained in a
prospectus nor (b) whether any defendant acted in good faith or
with some other type of intent.

(4) Plaintiffs' Motion In Limine To Exclude Testimony of
Expert Witnesses Daniel R. Fischel and David J. Ross [141-1] is
granted in part and denied in part. Fischel and Ross will be
barred from testifying as to Opinion 1 (the effect of adverse
market conditions on the Fund NAV) and defendants will be limited
to using one expert to testify as to the remaining opinions
contained in the Fischel/Ross Report.

(5) Plaintiffs' Motion In Limine To Preclude Evidence and
Argument Concerning Dividends Paid by the Van Kampen Prime Rate
Income Trust to Shareholders [142-1] is granted. The parties
will not be permitted to present evidence as to the amount of
dividends that the Fund paid nor will they be permitted to argue
that any distribution of dividends affected the Fund's NAV or the

amount of damages to be awarded in this case.

- 50 -



x

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 (ist 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

-15-