on a motion to dismiss), it can only be concluded that plaintiffs
were on inquiry notice as to the inflated NAV.

The Fund's prospectuses and registration statements
(which incorporate the prospectuses), as well as annual and
semiannual reports that were mailed to shareholders, disclosed
the Fund's valuation policy. For example, the June 21, 1999
prospectus provides:

The value of the Fund's portfolio will be
determined by the Adviser, following guidelines
established and periodically reviewed by the
Trustees. Interests in Senior Loans will be
valued by the Adviser on behalf of the Fund on
the basis of market quotations and transactions
in instruments which the Adviser believes may
be comparable to Senior Loan interests with
respect to the following characteristics:
credit quality, interest rate, interest rate
redetermination period and maturity. ...

In determining the relationship between such
instruments and the Senior Loan interests in the
Fund's portfolio, the Adviser will consider on an
ongoing basis, among other factors, (i) the
credit worthiness of the Borrower and (ii) the
current interest rate, the period until next
interest rate redetermination and maturity of
such Senior Loan interests. It is expected that
the Fund's net asset value will fluctuate as a
function of interest rate and credit factors.

. .The Adviser believes that Lenders selling
Senior Loan interests or otherwise involved ina
Senior Loan transaction may tend, in valuing
Senior Loan interests for their own account, to
be less sensitive to interest rate and credit
quality changes and, accordingly, the Adviser
does not intend to rely solely on such valuations
in valuing the Senior Loan interests for the
Fund's account. In addition, because a secondary
trading market in Senior Loans has not yet fully
developed, in valuing Senior Loans, the Adviser
may not rely solely on but may consider, to the
extent the Adviser believes such information to


than three years have elapsed from the time that

the shares upon which the claim is brought were

bona fide offered to the public to the time

plaintiffs filed the Consolidated Amended

Complaint.

Complaint { 66.

To state a claim under section 11 or section 12(a) (2) of
the Securities Act, plaintiffs must allege that defendant is
responsible for untrue statements of material fact or omitted
material facts in a registration statement or prospectus.‘ See
Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82 (1983);
Harden v. Raffensperger, Hughes & Co., 65 F.3d 1392, 1399-1400

(7th Cir. 1995); In re Newell Rubbermaid Inc. Securities

Litigation, 2000 WL 1705279 *7 (N.D. Ill. Nov. 14, 2000);

Danis v. USN Communications, Inc., 121 F. Supp. 2d 1183, 1188
(N.D. Ill. 2000); In_re Nanophase Technologies Corp. Litigation,

1999 WL 965468 *5 (N.D. Ill. Sept. 30, 1999); In re First

Merchants Acceptance Corp. Securities Litigation, 1998 WL 781118

*11 (N.D. Ill. Nov. 4, 1998). Neither statute contains a
scienter or reliance requirement, instead making persons in
certain positions absolutely liable for the material and
misleading statements unless they can affirmatively make certain
showings as to their knowledge and diligence. Herman, 459 U.S.

at 382; Pacific Dunlop Holdings Inc. v. Allen & Co., 993 F.2d

4Section 12(a) (2) also applies to oral communications,
but plaintiffs do not allege any oral communications.

~13-


1999, the NAV declined from $9.96 to $9.87, which was before a
significant increase in the Fund's use of market pricing. As
indicated in the January 31, 2000 semiannual report and the
July 31, 2000 annual report, the NAV was down to, respectively,
$9.61 and $9.50 by those dates. Plaintiffs point to an answer in
the January 31, 2000 semiannual report stating that much of the
past six months' decrease in NAV resulted from a rise in defaults
in the health-care industry in which many of the Fund's loans
were located. The February 28, 2000 prospectus also reports the
January 31, 2000 NAV, as well as that the NAV was between $9.70
and $9.78 during the quarter ending December 31, 1999 and between
$9.78 and $9.90 during the quarter ending September 30, 1999.

Additionally, it is alleged in 7 53(2d) of the Complaint
that the Fund's NAV remained stable in 1998 despite "strong
evidence" of "significant market gyrations" that should have been
expected to have affected the market value of senior loans. As
is alleged in paragraphs 41 and 42 of the Complaint, a December
1999 SEC letter regarding the need to convert to market pricing
generated coverage in the financial press, including articles in
the Wall Street Journal and New York Times. The Wall Street
Journal article specifically mentions the Fund, as do some of the
articles in more specialized financial publication.

Although the prospectuses (as well as the reports)

generally do not specifically identify the percentage of loans

- 23 -


Chicago, 75 F.3d 318, 322 (7th Cir. 1996). Ordinarily, a
plaintiff in a suit in federal court need not plead facts;
conclusions may be pleaded as long as the defendant has at least

minimal notice of the claim. Fed. R. Civ. P. 8(a) (2); Scott,

195 F.3d at 951; Albiero v. City of Kankakee, 122 F.3d 417, 419

(7th Cir. 1997); Jackson v. Marion County, 66 F.3d 151, 153-54
(7th Cir. 1995).

However, to the extent fraud is alleged, it must be

specifically pleaded. ee Fed. R. Civ. P. 9(b). Additionally,

although not. cited by either party, the PSLRA requires that
certain aspects of the case be pleaded with more specificity than
required by Fed. R. Civ. P. 8. As to misleading statements or
omissions, the PSLRA provides:

In any private action arising under this
chapter in which the plaintiff alleges that the
defendant-

(A) made an untrue statement of a
material fact; or

(B) omitted to state a material fact
necessary in order to make the statements
made, in the light of the circumstances in
which they were made, not misleading;

the complaint shall specify each statement
alleged to have been misleading, the reason or
reasons why the statement is misleading, and, if
an allegation regarding the statement or omission
is made on information and belief, the complaint
shall state with particularity all facts on which
that, belief is formed.

15 U.S.C. § 78u-4(b) (1).


be reliable, prices or quotations provided by
banks, dealers or pricing services with respect
to secondary market transactions in Senior Loans.
To the extent that an active secondary market in
Senior Loan interests develops to a reliable
degree, the Adviser may rely to an increasing
extent on such market prices and quotations in
valuing the Senior Loan interests in the Fund's
portfolio. In light of the senior nature of
Senior Loan interests included in the Fund's
portfolio and taking into account the Fund's
access to non-public information with respect to
Borrowers relating to such Senior Loan interests,
the Adviser does not currently believe that
consideration on a systematic basis of ratings
provided by any nationally recognized statistical
rating organization or price fluctuations with
respect to long- or short-term debt of such
Borrowers subordinate to the Senior Loans of such
Borrowers is necessary for the Determination of
the value of such Senior Loan interests.
Accordingly, the Adviser generally does not
systematically consider (but may consider in
certain instances) and, in any event, does not
rely upon such ratings or price fluctuations in
determining the value of Senior Loan interests in
the Fund's portfolio.

Def. Exh. C at B-12.

contained identical statements.
Exh. B at B-12,. The February 28, 2000 prospectus, however,

contained some change.

part:

The March 9, 1998 and December 9, 1998 prospectuses had

Subject to criteria established by the
Fund's Board of Trustees about the availability
and reliability of market indicators obtained
from independent pricing sources, certain Senior
Loans will be valued at the mean of bid and ask
market indicators supplied by independent sources
approved by the Fund's Board of Trustees. All

- 20 -

See Def. Exh. A at B-11-12;

Def.

The February 2000 prospectus provided in


in NAV, the Fund provided the explanation that it was due to a
large number of loans from health care companies and the
financial condition of that industry. Also, it is alleged that
the NAV drop was made more gradual by gradually implementing
market pricing. Had all available market pricing been
implemented in one reporting period, the larger one-time drop
would have raised greater suspicion than the gradual
implementation that was employed. It cannot be held that it was
unreasonable to fail to inquiry further when provided with the
reported explanation for the drop in NAV.

On defendants’ motion to dismiss, plaintiffs' federal
claims will not be dismissed based on the statute of limitations.
It cannot be held that the facts properly before the court
conclusively contradict plaintiffs’ allegation that they could
not have reasonably discovered their claims more than a year
before the filing of the original complaint. This ruling is
without prejudice to raising these factual issues on summary
judgment or at trial.

Defendants contend the securities claims fail on their
merits because the prospectuses contained no misrepresentative
disclosures or omissions. They contend the prospectuses
accurately described the Fund's valuation policy, disclosed that
the Fund's NAV could vary because of the credit quality of the

borrowers, and disclosed that the Fund's stated objective of

- 26-


Plaintiffs are deemed to have at least constructive notice of the
prospectuses and reports. See Whirlpool, 67 F.3d at 610;

Eckstein v. Balcor Films Investors, 58 F.3d 1162, 1169 (7th Cir.

1995); Volk v. D.A. Davidson & Co., 816 F.2d 1406, 1416 (9th Cir.

1987).

The pre-September 2000 prospectuses or reports do not
specifically identify which senior loans were priced with market
quotations. Instead, they generally indicate market pricing was
the less favored method of valuation being used by the Adviser on
behalf of the Fund without specifying how often it was used. The
January 31, 2000 semiannual report, however, has a question and
answer section in which one answer states 42% of senior loans
were then being valued based on market indicators. See Def.

Exh. K at 8. Also, the prospectuses and reports represent that
senior loans are generally illiquid. Additionally, each
prospectus and report does contain a list of all senior loans
held by the Fund on a particular date. Each list includes both
the principal balance of each loan and the Fund's valuation of
each loan. Almost all of the loans are valued within 1% of par,
with most valued within .1% of par.?®

The prospectuses and reports also show that the NAV began

to fall prior to September 2000. From September 1998 to July

5For example, of the first 100 long-term senior loans
listed in the February 28, 2000 prospectus, only four are valued
at less than 99% of par. See Def. Exh. D at F-2-7.

- 22 -


of the claim, whichever comes first. Kauthar, 149 F.3d at 670;
Whirlpool, 67 F.3d at 609; Tregenza, 12 F.3d at 721-22;

DeBruyne v. Equitable Life Assurance Society of United States,
920 F.2d 457, 466 (7th Cir. 1990). "Inquiry notice starts the
running of the statute of limitations 'when the victim of the
alleged fraud became aware of the facts that would have led a
reasonable person to investigate whether he might have a claim.'"
Whirlpool, 67 F.3d at 609 (quoting Tregenza, 12 F.3d at 718).
Accord Kauthar, 149 F.3d at 670. "However, more than 'merely
suspicious circumstances' must exist; instead the plaintiff must
learn of a circumstance that places him 'in possession of, or
with ready access to, the essential facts that he needs in order
to be able to sue.'" Kauthar, 149 F.3d at 670 (quoting Fujisawa
Pharmaceutical Co. v. Kapoor, 115 F.3d 1332, 1337 (7th Cir.
1997)). “Inquiry notice 'does not begin to run unless and until
the investor is able, with the exercise of reasonable diligence
(whether or not actually exercised), to ascertain the information
needed to file suit.'" Kauthar, 149 F.3d at 671 n.15 (quoting
Marks, 122 F.3d at 368). The standard to be applied is an
objective one, Whirlpool, 67 F.3d at 609; Scott v. Steingold,
1999 WL 618109 *4 (N.D. Ill. Aug. 9, 1999); the particular
plaintiff's level of intelligence or financial sophistication is
not considered. Mathews v. Kidder, Peabody & Co., 260 F.3d 239,

251 (3d Cir. 2001); Great Rivers Cooperative of Southeastern

-17-


delaying conversion to market pricing because it would result in
a substantial decrease in the funds' NAVs.

Plaintiffs allege that the Fund did not begin the
conversion to market pricing until late 1999 even though market
quotations for all or most of the loans held by the Fund had
already been readily available since 1998 and earlier.
Defendants allegedly decided to gradually convert valuation of
the Fund's loans to market pricing. According to the Complaint,
in the first quarter of 2000, approximately one-third of the
Fund's loans were valued using market prices instead of the fair
value method.

The Fund first offered shares to the public at a share
price or NAV. of $10.00. From 1989 until mid-1999, the NAV had
never fluctuated more than five to ten cents from ten dollars.
As of September 20, 1998 (the beginning of the proposed class
period), the Fund's NAV was $9.96. Over the next twelve months
it was at a high of $9.97 and a low of $9.87, which was as of
August 1999.7 However, when the gradual change in valuing
methodology began in the fourth quarter of 1999, the NAV began
dropping. By the end of the proposed class period in March 2001,

the Fund's NAV. was $8.82.

2Inconsistent with this allegation of the Complaint, the
Fund's prospectuses and reports show the NAV was lower on
July 31, 1999, when it was $9.85.


class certification’ will be denied without prejudice to bringing
a new class certification motion at the time an amended complaint
is filed.

IT IS THEREFORE ORDERED that defendants' motion to
dismiss [20-1] is granted in part and denied in part. Counts I,
II, and III are dismissed without prejudice. Count IV is
dismissed in part without prejudice to the extent it contains a
claim based on the overcharging of management fees because of
inflated values. Plaintiffs' motion for class certification
[21-1] is denied without prejudice. Plaintiffs are granted leave
to file an amended complaint and new motion for class
certification by no later than June 3, 2002. Status hearing set

for June 12, 2002 at 11:00 a.m.

ENTER:

Obbriue 7 ort

UNITED STATES DISTRICT JUDGE

DATED: MAY l 1 2002

7The court previously ruled, as jointly requested by the
parties, that, under the PSLRA, it is appropriate to resolve the
merits of a complaint prior to ruling on class certification.

- 32 -


However, the PSLRA still requires that the Complaint "specify
each statement alleged to have been misleading." 15 U.S.C.

§ 78u-4(b) (1). The Complaint, however, contains general
allegations as to misstatements in prospectuses and registration
statements without identifying specific statements or omissions
within particular prospectuses or registration statements. Also,
except for three loans, the Complaint does not specifically
identify the overvalued loans contained in any of the
prospectuses or registration statements. Therefore, the
securities claims of the Complaint must be dismissed for failure
to comply with the pleading requirements of the PSLRA. However,
since the failure to be specific may be curable, plaintiffs will
be granted leave to amend the Complaint.

Since plaintiffs may be able to cure the pleading
deficiencies of the federal claims, the merits of the Count IV
supplemental state law claim will presently be addressed. In
Count IV, it is alleged that all defendants, except the Fund
itself, breached their fiduciary duties to the Fund and its
shareholders by inflating the NAV. The inflated NAV resulted in
both a higher purchase price for Fund shares and a higher fee for
defendants whose fee was determined by a percentage of the Fund's
value. Defendants contend this claim should be dismissed because
it may only be brought as a derivative claim in the name of the

Fund. The parties agree that, because the Fund is a

- 29 -


documents contained in the public record, and reports, decisions,
and regulations of administrative bodies. Anderson, 217 F.3d

at 474-75; Menominee Indian Tribe of Wisconsin v. Thompson,

161 F.3d 449, 456 (7th Cir. 1998), cert. denied, 526 U.S. 1066
(1999); Northgate Motors, Inc. v. General Motors Corp., 111

F. Supp. 2d 1071, 1077 (B.D. Wis. 2000); Demick v. City

of Joliet, 108 F. Supp. 2d 1022, 1025 (N.D. Ill. 2000). Further,
documents that are referred to in the complaint and that are
central to a claim that is made may be considered even if not

attached to the complaint. Duferco Steel Inc. v. M/V Kalisti,

121 F.3d 321, 324 n.3 (7th Cir. 1997); Venture Associates

Corp. v. Zenith Data Systems Corp., 987 F.2d 429, 431 (7th Cir.
1993); Hebein ex rel. Berman v. Young, 37 F. Supp. 2d 1035,
1038-39 (N.D.. Ill. 1998). This includes the full text of SEC
filings, prospectuses, analysts' reports, and statements that are

integral to the complaint. Bovee v. Coopers & Lybrand C.P.A.,

272 F.3d 356, 360-61 (6th Cir. 2001); Ehlert v. Singer, 245 F.3d
1313, 1316 n.4 (11th Cir. 2001); San Leandro Emergency Medical

Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801,

808-09 (2d Cir. 1996); In re Newell Rubbermaid Inc. Securities

Litigation, 2000 WL 1705279 *3 n.2 (N.D. Ill. Nov. 14, 2000);
Nielsen v. Greenwood, 849 F. Supp. 1233, 1248-49 (N.D. Ill.
1994). Moreover, actual documents will override inconsistent

descriptions of those documents alleged in the body of the


Additionally, as to state of mind allegations, the PSLRA
provides:

In any private action arising under this
chapter in which the plaintiff may recover money
damages only on proof that the defendant acted
with a particular state of mind, the complaint
shall, with respect to each act or omission
alleged to violate this chapter, state with
particularity facts giving rise to a strong
inference that the defendant acted with the
required state of mind.

Id. § 78u-4(b) (2).
As to affirmative defenses such as the statute of
limitations, it, is unnecessary to plead facts that would negate

the affirmative defense. Alvarado v. Litscher, 267 F.3d 648,

651-52 (7th Cir. 2001); Tregenza v. Great American Communications

Co., 12 F.3d 717, 718 (7th Cir. 1993), cert, denied, 511 U.S.

1085 (1994); Wade v. Henderson, 2002 WL 15697 *1 (N.D. Ill.
Jan. 4, 2002) rIt is also true, however, that a plaintiff can
plead himself or herself out of court by alleging facts showing

there is no viable claim. Kauthar SDN BHD v. Sternberg, 149 F.3d

659, 669-70 & n.14 (7th Cir. 1998), cert. denied, 525 U.S. 1114

(1999); Whirlpool Financial Corp. v. GN Holdings, Inc., 67 F.3d

605, 608 (7th Cir. 1995); Jackson, 66 F.3d at 153-54; Tregenza,

12 F.3d at 718; Wafra Leasing Corp. 1999-A-1 v. Prime Capital
Corp., 192 F. Supp. 2d 852, 860 (N.D. Ill. 2002).
Without. converting a motion to dismiss to one for summary

judgment, judicial notice may be taken of historical documents,


Iowa _v. Farmland Industries, Inc., 120 F.3d 893, 898 (8th Cir.

1997); Dodds v. Cigna Securities, Inc., 12 F.3d 346, 350 (2d Cir.

1993), cert. denied, 511 U.S. 1019 (1994); In re NAHC, Inc.
Securities Litigation, 2001 WL 1241007 *8 (E.D. Pa. Oct. 17,
2001); Cosmos Import & Export Ltd. v. Merrill Lynch, Pierce
Fenner & Smith, Inc., 1997 WL 328068 *5 (S.D.N.Y. June 16, 1997);
In re Prudential Insurance Co. of America Sales Practices
Litigation, 975 F. Supp. 584, 601 (D.N.J. 1996); Rebenstock v.
Deloitte § Touche, 907 F. Supp. 1059, 1063 (E.D. Mich. 1995).

In the present case, it must be kept in mind that the
section 11, 12, and 15 claims that are made do not require proof
of scienter. Thus, the present case is distinguishable from Rule
10b-5 claims where the plaintiff must also have sufficient facts
supporting inquiry notice as to fraudulent intent on a

defendant's part before the plaintiff has knowledge of all the

facts necessary to file suit. See Law v. Medco Research, Inc.,

113 F.3d 781, 785-86 (7th Cir. 1997); Wafra, 192 F. Supp. 2d at

861. In the present case, there need only be inquiry notice that
a registration statement or prospectus contained a material and
untrue fact. See Law, 113 F.3d at 785-86. Central to
plaintiffs’ alleged misstatements is whether the NAV was being
overstated. It must be determined whether, based on the facts

alleged (as well as those facts that may otherwise be considered

- 18 -


sells shares to the public, but shares are repurchased only once
per quarter at net asset value ("NAV"). NAV is computed by
calculating the total value of the Fund's securities and other
assets, less liabilities, and dividing the result by the number
of shares outstanding. An important component of calculating NAV
is determining the value of the loans held by the Fund. Under
SEC Rule 2a-4, where market quotations are readily available,
securities shall be valued accordingly. However, where there are
no readily available market quotations, the Fund's trustees are
to make a good faith determination of fair value, which is the
amount which the owner might reasonably expect to receive if the
asset were sold.

When. the Fund began operating in 1989, few readily
available quotes were available for the loans held by the Fund.
During the 1990's, however, a secondary market developed for
senior loans. It is alleged in the Complaint that, by the mid-
1990's, some senior loan funds began valuing loans based solely
on market quotations. From 1991 to 1998, secondary loan trading
increased twelvefold, with total traded loan value in 1998
exceeding $110 billion. In late 1999, the SEC sent a letter to
the Investment Company Institute, of which the Fund is a member,
expressing concern that senior loan funds were not properly
valuing their. loans. Soon thereafter, reports circulated in the

financial press raising concerns that some senior loan funds were


valued through market pricing, they do state that market pricing
was not the favored method of valuation even as late as February
and July 2000. Also, the prospectuses and reports both provide
information showing that most loans were being valued near par.
At the same time, the representation was also being made that
market pricing was being used as it became readily available for
particular loans. The question is whether a reasonable investor
of ordinary intelligence and ordinary financial sophistication
should have had his or her suspicions aroused enough to further
investigate because he or she would have independently realized
that market pricing may be more readily available than was
represented in the prospectuses and/or that valuing most of the
loans near par was inconsistent with economic reality.

Although defendants point to some media coverage
addressing likely problems with the valuing of loans being done
by senior loan funds, on the motion to dismiss, it cannot be
found that this potential problem received such pervasive
coverage that the average investor should have been aware of it
and then been prompted to specifically investigate the valuations
being done by the Fund. See Washington National Insurance Co. |

of New York v. Morgan Stanley & Co., 1999 WL 461796 *9-10
(S.D.N.Y. July 2, 1999); Great Neck Capital Appreciation

Investment Partnership, L.P. v. PricewaterhouseCoopers, L.L.P.,
137 F. Supp. 2d 1114, 1125-26 (E.D. Wis. 2001); DeLeonardis v.

- 24 -


‘Minate Order Form (06/97)

United States District Court, Northern District of Illinois

NamcotAwine vgs | WILLIAM. HART | Stingner ioe )

CASE NUMBER 01 C 7538 DATE MAY | a 2002
CASE IRENE ABRAMS, etc., et al. vs. 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

of the motion being presented.]

(10)

(11)

MOTION:

DOCKET ENTRY: 7

ql) im Filed motion of [ use listing in “Motion” box above.]

(2) Oo Brief in support of motion due

(3) o Answer brief to motion due___. Reply to answer briefdue___.

(4) im Ruling/Hearing on setfor at

(5) QO Status hearing[held/continued to] [set for/re-set for] on setfor sat.

(6) Qo Pretrial conference[held/continued to] [set for/re-set for]on__setfor__——at__—.
(7) ao . Trial[set for/re-set for] on_ at.

(8) Oo [Bench/Jury trial] [Hearing] held/continued to att

(9) Qo This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to}

COFRCP4(m) OGeneral Rule21 OFRCP41(a\(1) © FRCP41(a)(2).

a [Other docket entry} | Defendants' motion to dismiss [20-1] is granted in part and denied in
part. Counts |, Il, and Ill are dismissed without prejudice. Count IV is dismissed in part without
prejudice to the extent it contains a claim based on the overcharging of management fees
because of inflated values. Plaintiffs’ motion for class certification [21-1] is denied without
prejudice. Plaintiffs ate granted leave to file an amended complaint and new motion for class

certification by no, later than June 3, 2002. Status hearing set for June 12, 2002 at 11:00 a.m.
. [For further detail see order attached to the original minute order.] a

No notices required, advised in open court.
7

No notices required. umber of notices

cunfent
jumper

Notices mailed by judge’s staff.

MAY 17 2002

Notified counsel by telephone. date docketed,

Docketing to mail notices.

Mail AO 450 form. docketing deputy initials

Copy to judge/magistrate judge. . MAY 16 mam

date mailed notice

courtroom
cw deputy’s

M
initials May

Datertime feceived in ; 7
central Clerk's Office mailing _ initials

10



the overvaluation of many loans. By January 31, 2001, 80% of the
Fund's loans were being valued through market pricing, with a
corresponding decrease in NAV from a previously stable amount
near $10 to $8.82. It is alleged that the registration
statements and prospectuses that were pending during the proposed
class period were materially false and misleading in that they
contained an inflated NAV. It is also alleged that the
registrations statements and prospectuses were "materially
misleading because their stated investment objective of
‘preservation of capital' had not been and could not be
maintained without falsely reporting an inflated NAV." It is
further claimed that the quarterly repurchases at "materially
inflated" valuations diluted the value of the shares of remaining
investors. Complaint @ 47.

It is alleged that the NAV remained stable despite
changing market conditions.

53. For example, throughout 1998, the

Fund's NAV remained remarkably stable, within a

few pennies of $10. However, in 1998 there were

significant market gyrations, not the least of

which involved an eroding debt market, the Asian

Financial Crisis, the Long Term Capital debacle,

near record loan defaults, and a reportedly

depressed market for publicly traded loan funds.

In fact, in 1998, Merrill Lynch Asset Management

abandoned plans to complete an initial public

offering of an exchange traded loan fund. In

announcing its plans, a Merrill Lynch spokeswoman

was quoted as saying that, "[m]Jarket conditions

prevented us from issuing the fund in 1998."

Yet, despite all of these factors, which
negatively affected the market value of the

-11-


Plaintiffs allege three specific examples of allegedly
improper valuation using the fair value method instead of market
pricing. See Complaint 7 45. On an unspecified date during the
proposed class period, a $55 million loan to Vencor Inc., "a
troubled hospital operator," was valued at $52.7 million or 95
cents on the dollar, even though it was selling at 70 cents on
the dollar on the senior loan market. As of July 31, 1999, a $65
million loan to. now-bankrupt Iridium Operating LLC was valued at
90 cents on the dollar even though it was selling at just under
70 cents on the dollar in the senior loan market. As of June 30,
2000, the Fund valued a $46 million loan to U.S. Office Products
at 95 cents on the dollar while Loan Pricing Corp. quoted it at
70 cents on the dollar. It is also generally alleged that
defendants, and specifically the Adviser, failed to follow SEC
and the Fund's guidelines for fairly valuing the loans. Instead,
both prior to and during the proposed class period, defendants
engaged "in an effort to falsely maintain a relatively stable,
albeit inflated, NAV and false impression that the objective of
"preservation of capital' was being met." Complaint @ 51.
Specifically, defendants generally ignored the financial
conditions of the borrowers and instead tended to value loans at
par.

Plaintiffs allege that the NAV of the Fund had been

materially inflated during the proposed class period because of

- 10 -


1995 WL 500491 *7-8 (E.D.N.Y. Aug. 8, 1995) (same); In re Nuveen
Fund Litigation, 855 F. Supp. 950, 954-55 (N.D. Ill. 1994)
(Minnesota law). Count IV will be dismissed without prejudice®
to the extent it contains a claim based on defendants receiving
additional management fees based on an inflated NAV.

Count IV also contains a claim that plaintiffs overpaid
for newly purchased shares because of the inflated NAVs. Such a
claim is not one on behalf of the corporation because the
corporation does not purchase shares from itself. Moreover, such
a claim affects different shareholders differently and places
shareholders in potential conflict with each other since an
inflated NAV affects existing shareholders differently than new
purchasers. See Strougo, 282 F.3d at 174-75. The Count IV claim
of breach of fiduciary duty based on inflated NAVs affecting new
purchases may be brought directly. Id. See also Mann v. Kemper
Financial Cos., 247 Ill. App. 3d 966, 618 N.E.2d 317, 327 (1st
Dist. 1992) (Illinois law). This aspect of Count IV will not be
dismissed.

Since.all the federal claims will presently be dismissed

and an amended complaint may be filed, the pending motion for

‘The dismissal is without prejudice to a properly
maintained derivative action. Also, the dismissal is without
prejudice to any claim that may be brought by any putative class
member since the putative class members have not, at this point,
been joined in this action.

- 31 -


Massachusetts business trust, Massachusetts law applies in
determining whether this claim may be brought as a direct claim.

Under Massachusetts law, "The derivative action seeks,
after management has failed or refused to act, to redress a wrong
to a corporation or association (usually by a few of its
shareholders or members) . . . [T]he wrong underlying a
derivative action is indirect, at least as to the shareholders.
It adversely affects them merely as they are the owners of the
corporate stock; only the corporation itself suffers the direct
wrong. . . . [A] complaint alleging mismanagement or wrongdoing
on the part of corporate officers or directors normally states a
claim of wrong to the corporation: the action, therefore, is
properly derivative." Jackson v. Stuhlfire, 28 Mass. App. Ct.
924, 547 N.E.2d 1146, 1148 (1990) (quoting Smith & Zobel, Mass.
Rules Practice § 23.1.1 (1975)) (ellipses in Stuhlfire).

The overcharging of management fees affects the
corporation as a whole; it does not directly affect individual
shareholders. Such a claim may only be brought as a derivative

claim. Green v. Nuveen Advisory Corp., 186 F.R.D. 486, 489-90

(N.D. Ill. 1999) (Massachusetts and Minnesota law). See also
Strougo v. Bassini, 282 F.3d 162, 174 (2d Cir. 2002) (Maryland
law); Marquit v. Dobson, 2000 WL 4155 *1-2 (S.D.N.Y. Jan. 3,

2000), aff'd by unpublished order sub nom., Marquit v. Williams,
229 F.3d 1135. (2d.Cir, 2000) (same); Olesh v. Dreyfus Corp.,

- 30 -


complaint. See In re Wade, 969 F.2d 241, 249 (7th Cir. 1992);
Beam v. IPCO Corp., 838 F.2d 242, 244-45 (7th Cir. 1988).

Ordinarily, as long as they are consistent with the
allegations of the complaint, a plaintiff may assert additional
facts in its response to a motion to dismiss. Brokaw v. Mercer
County, 235 F.3d 1000, 1006 (7th Cir. 2000); Forseth v. Village
of Sussex, 199 F.3d 363, 368 (7th Cir. 2000); Albiero, 122 F.3d
at 419; Gutierrez v. Peters, 111 F.3d 1364, 1367 n.2 (7th Cir.
1997); Hrubec v. National Railroad Passenger Corp., 981 F.2d 962,
963-64 (7th Cir. 1992). However, Rule 9(b) and § 78u-4 (b)
require that certain allegations be in the complaint. As to
allegations of fraud, misleading statements or omissions, and
state of mind, the allegations must be in the complaint and
cannot be supplemented by additional allegations contained in the
answer to the motion to dismiss. However, additional allegations
in an answer to.a motion to dismiss may indicate that it is
appropriate to permit further amendment of the complaint.

The Fund is a non-diversified, closed-end management
investment company with the investment objective of providing "a
high level of current income, consistent with preservation of
capital." It primarily invests in floating or variable rate
senior loans to United States corporations, partnerships, and
other entities. It has been operating since October 1989. The

Fund operates as an interval fund, which means it continually


other Senior Loans will be valued by considering
a number of factors including consideration of
market indicators, transactions in instruments
which the Adviser believes may be comparable
(including comparable credit quality, interest
rate, interest rate redetermination period and
maturity), the credit worthiness of the Borrower,
the current interest rate, the period until next
interest rate redetermination and maturity of
such Senior Loan interests. . . . To the extent
that an active secondary trading market in Senior
Loan interests develops to a reliable degree, the
Fund may rely to an increasing extent on such
market prices and quotations in valuing the
Senior Loan interests in the Fund's portfolio.

It is expected that the Fund's net asset
value will fluctuate as a function of interest
rate and credit factors. .. . In light of the
senior nature of Senior Loan interests that may
be included in the Fund's portfolio and taking
into account the Fund's access to non-public
information with respect to Borrowers relating to
such Senior Loan interests, the Fund does not
currently believe that consideration on a
systematic basis of ratings provided by any
nationally recognized statistical rating
organization or price fluctuations with respect
to long- or short-term debt of such Borrowers
subordinate to the Senior Loans of such Borrowers
is necessary for a determination of the value of
such Senior Loan interests. Accordingly, the
Fund generally will not systematically consider
(but may consider in certain instances) and, in
any event, will not rely upon such ratings or
price fluctuations in determining the value of
Senior Loan interests in the Fund's portfolio.

Def. Exh. D at B-11-12.

The annual and semiannual reports for the corresponding
time periods contained similar statements, though in a more
condensed form. Like the prospectuses, there was a similar

change starting with the January 31, 2000 semiannual report.

-21-


preserving capital could not be assured. As alleged in the
Complaint, however, the representations as to valuation policy
were false because the Fund did not actually follow the stated
policy. It is true that, at least prior to January 2000, the
Fund indicated market pricing was less favored, but it still
represented that it would use market pricing where it developed
to a "reliable degree." As of January 2000, a change was made
indicating a greater use of market pricing and it continued to be
represented that such pricing would be used where it developed to
a “reliable degree." However, as alleged by plaintiffs, the Fund
did not use market pricing for all loans for which market pricing
was readily available. Therefore, it was an inaccurate
representation that market pricing was being used as it developed
to a reliable degree. It is also alleged that the Fund omitted
disclosing that it was not complying with SEC regulations
requiring the use of market pricing where readily available.
Additionally, it is alleged that, in determining "fair value,"
the Fund also misvalued the loans. Plaintiffs have alleged false
representations or omissions as to valuing the loans.

As to the alleged misvaluing of loans using the fair
value method, defendants contend this is an allegation of
corporate mismanagement that does not state a violation of § 11

or § 12, citing Santa Fe Industries, Inc. v. Green, 430 U.S. 462

(1977). See also Shaw v. Digital Equipment Corp., 82 F.3d 1194,

- 27 -


of which judicial notice may be taken show that the securities
law claims were filed after the applicable one-year limitation
period. Alternatively, defendants contend the securities law
claims fail on their merits because plaintiffs do not allege a
material misrepresentation or omission or because either the
necessary scienter is not alleged or fraud is not alleged with
the specificity required by Fed. R. Civ. P. 9(b). As to
Count IV, defendants contend it should be dismissed for lack of
jurisdiction if all the federal claims are dismissed or, if the
merits are reached, because the claim alleged may only be brought
as a derivative. action on behalf of the Fund, not directly by
plaintiffs.

On a Rule 12(b) (6) motion to dismiss, plaintiffs'
well-pleaded allegations of fact are taken as true and all
reasonable inferences are drawn in plaintiffs' favor.

Leatherman v. Tarrant County Narcotics Intelligence &

Coordination Unit, 507 U.S. 163, 164 (1993); Stachon v. United

Consumers Club, Inc., 229 F.3d 673, 675 (7th Cir. 2000).

Ordinarily, a complaint need not set forth all relevant facts
or recite the law; all that is required is a short and plain
statement showing that the party is entitled to relief. Fed. R.
Civ. P. 8(a); Anderson v. Simon, 217 F.3d 472, 474 (7th Cir.
2000), cert. denied, 531 U.S. 1073 (2001); Scott v. City of

Chicago, 195 F.3d 950, 951 (7th Cir. 1999); Doherty v. City of


578, 580, 594 (7th Cir. 1993), cert. dismissed, 510 U.S. 1160

(1994), overruled on other grounds, Gustafson v. Alloyd Co.,

513 U.S. 561 (1995); Newell, 2000 WL 1705279 at *7; Harden v.
Raffensperger, Hughes & Co., 933 F. Supp. 763, 766 (S.D. Ind.
1996); Schwitters v. Tomlinson, 1996 WL 54240 *6 (N.D. Ill.
Feb. 9, 1996); Cashman v. Coopers & Lybrand, 877 F. Supp. 425,
435 (N.D. Ill. 1995). 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. SC Industries, Inc. v. Northway, Inc., 426 U.S. 438,

449 (1976); Astor Chauffeured Limousine Co. v. Runnfeldt

Investment Corp., 910 F.2d 1540, 1546-47 (7th Cir. 1990); Newell,

2000 WL 1705279 at *7; Danis, 121 F. Supp. 2d at 1188; Nielsen v.

Greenwood, 1996 WL 563539 *14 (N.D. Ill. Oct. 1, 1996); Whirlpool

Financial Corp. v. GN Holdings, Inc., 873 F. Supp. 111, 121-22

(N.D. Ill.), aff'd, 67 F.3d 605 (7th Cir. 1995). As a general
rule, the determination of materiality presents factual issues
that cannot be resolved on a motion to dismiss. Marks v. CDW
Computer Centers, Inc., 122 F.3d 363, 370 (7th Cir. 1997).
However, if it can be determined that the misstatement was not
important and a reasonable investor could not possibly have been
swayed by the alleged misstatement, it may be determined as a

matter of law that the misstatement was not material. Newell,

- 14 -


state with particularity all facts on which that belief is
formed." 15 U.S.C. § 78u-4(b) (1). See also Aldridge v. A.T.

Cross Corp., 284 F.3d 72, 78 (1st Cir. 2002); In re Vantive Corp.

Securities Litigation, 283 F.3d 1079, 1085-88 (9th Cir. 2002);

Novak v. Kasaks, 216 F.3d 300, 307, 312-14 (2d Cir.), cert.

denied, 531 U.S. 1012 (2000); In_ re Allscripts, Inc. Securities
Litigation, 2001 WL 743411 *7 (N.D. Tll. June 29, 2001); In re

Brightpoint, Inc. Securities Litigation, 2001 WL 395752 *3-4

(S.D. Ind. March 29, 2001); In re Spyglass, Inc., Securities
Litigation, 1999 WL 543197 *1 (N.D. Ill. July 21, 1999).

A one-year limitation period applies to plaintiffs'
securities claims. See 15 U.S.C. § 77m; Whirlpool, 67 F.3d at
609. Defendants contend that plaintiffs had sufficient notice of
the alleged misstatements by September 20, 2000 or earlier, that
is more than a year prior to the filing of the original
complaint. They base this contention on (a) disclosures in the
prospectuses, semiannual reports, and annual reports as to the
valuation methodology being used; (b) declines in the Fund's NAV
from late 1999 through September 2000; (c) stable NAV's in 1998
despite the alleged existence of significant market gyrations;
and (d) the SEC letter in 1999 and the press reports that
followed.

For plaintiffs' securities claims, the one-year

limitation period accrues upon actual notice or “inguiry notice”

-~16-


stock' or 'shares') of Van Kampen Prime Rate Income Trust between
September 30, 1998 and March 26, 2001." 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; Dennis McDonnell,
former Fund Chairman of the Board, President, and Trustee;
Stephen Boyd, Fund Executive Vice President and Chief Investment
Officer and Adviser Officer; Howard Tiffen, Fund Portfolio
Manager and Adviser Officer; and Jeffrey Maillet, former
Portfolio Manager and Adviser Officer. The counts of the
Complaint are labeled as (I) a violation of § 11 of the
Securities Act, 15 U.S.C. § 77k, against Van Kampen, the Fund,
Powers, McDonnell, and Boyd; (II) a violation of § 12(a) (2) of
the Securities Act, 15 U.S.C. § 771(a) (2), against the Fund;
(III) control person liability under § 15 of the Securities Act,
15 U.S.C. § 770, for the violations of sections 11 and 12 against
Van Kampen and the Adviser; and (IV) a state law breach of
fiduciary duty claim against all defendants except the Fund.?
Presently pending is defendants' Fed. R. Civ. P. 12(b) (6)

motion to dismiss. Defendants contend that the facts alleged and

‘The Complaint does not contain allegations as to the
citizenship of all defendants and there is no contention that
Count IV would be properly before the court on diversity
jurisdiction. It is assumed that Count IV is before this court
based only on supplemental jurisdiction. See 28 U.S.C. § 1367.


Berg, 1998 WL 760338 *2 (E.D.N.Y. Sept. 15, 1998), aff'd by

unpublished order, 199 F.3d 1321 (2d Cir. 1999); Tracinda
Corp. yv. Daimlerchrysler AG, F. Supp. 2d , 2002 WL 459224

*10 (D. Del. March 22, 2002). It would be a factual question as
to whether the media coverage was sufficient to place plaintiffs
on inquiry notice.

Moreover, throughout the pertinent time period the
prospectuses and reports continued to represent that market
pricing was being used whenever it became available. The
plaintiffs would not have had adequate reason to disbelieve or
question these statements so as to raise an objective basis for
further inquiry. Defendants point to the listing of assets
showing that most of the loans were being valued near par and
plaintiffs' allegation that it would be clear that valuing
illiquid assets near par would be an inaccurate valuation.
However, given the representation that as many as 42% of the
loans were being priced through market quotations, it was not
necessarily obvious that valuations at par did not represent a
correct valuation.

Defendants also point to the stable NAV, even during
alleged market gyrations, followed by substantial drops in NAV.
Again, on the motion to dismiss, it cannot be conclusively
determined that the stable NAVs were sufficient to raise enough

suspicion to place plaintiffs on inquiry notice. As to the drops

- 25 -


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

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, HOWARD TIFFEN,
RICHARD F. POWERS, III, STEPHEN L.
BOYD, DENNIS. J.. McDONNELL,

and JEFFREY W. MAILLET,

DOCKETED

MAY 1.7 2002

Defendants.

MEMORANDUM OPINION AND ORDER

This is a consolidated putative 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. § 78u-4. The court appointed lead
plaintiffs and approved lead counsel. The Consolidated Amended
Complaint (the "Complaint") proposes a class consisting of "all

persons who purchased or otherwise acquired shares ("common

OG


1206 (lst Cir. 1996); 7547 Corp. v. Parker & Parsley Development

Partners, L.P., 38 F.3d 211, 231 (5th Cir. 1994); Craftmatic
Securities Litigation v. Kraftsow, 890 F.2d 628, 638 n.14 (3d
Cir. 1989). To the extent plaintiffs allege that it was a
misrepresentation to use a "fair value" instead of available
market pricing while representing market pricing was being used
where available, that is not nonactionable corporate
mismanagement; it is a misrepresentation as to the practices
actually being applied. Similarly, defendants ignoring market
pricing as a factor in determining fair value would be
inconsistent with the representation that this factor was part of
the fair value method. However, in those situations where market
pricing was not available and plaintiffs allege defendants simply
misvalued the loan using the "fair value" method, plaintiffs may
be alleging nonactionable corporate mismanagement. In response
to the motion to dismiss, plaintiffs contend they do not make
this last type of claim. As is discussed below, plaintiffs are
not adequately specific in identifying the misrepresentations and
omissions. On the present pleadings, it cannot be determined
that any of plaintiffs' allegations constitute mere corporate
mismanagement.

Defendants' last contention is that plaintiffs' claims
fail to satisfy the specificity requirement of Rule 9(b). As is

discussed above, Rule 9(b) does not apply to plaintiffs' claims.

- 28 -


Fund's Loan interests, the Fund's NAV never
waivered, serving as strong evidence that the
Fund was not making "fair value" determinations
in accordance with the "current sale" rule
under ASR 118 and its own stated valuation
considerations. The Fund's valuation
determinations were thus not in good faith,
which in addition to leading to materially
inflated NAVs also constituted a breach of the
Individual Defendants' fiduciary duties to
plaintiffs and the Class.

54. In sum, defendants failed to adopt and
employ "mark to market" pricing procedures for
the Fund's interest in the senior loan interests
of the Portfolio, despite the existence of
“readily available" market quotations, or, in the
alternative, failed to determine in good faith
the "fair value" of the Fund's senior loan
interests, considering all indications in value
in respect of a "current sale."

Complaint I{ 53(2d)-54.3

The original complaint in this case was filed on

September 28, 2001. The present Complaint was filed on

January 7, 2002. As to discovery of their claims, plaintiffs

allege:

At the time they purchased Fund shares,
plaintiffs and the other members of the Class
were without knowledge of the facts concerning
the wrongful conduct alleged herein and could not
have reasonably discovered those facts prior to
the end of the Class Period. Less than one year
has elapsed from the time that plaintiffs
discovered or reasonably could have discovered
the facts upon which the Consolidated Amended
Complaint is based to the time that plaintiffs
filed the Consolidated Amended Complaint. Less

sThe Complaint contains two sets of paragraphs numbered

51 through 53. Herein, the second set of paragraphs is referred
to as 51(2d), 52(2d), and 53(2d).

-12-


2000 WL 1705279 at *7; Danis, 121 F. Supp. 2d at 1188; Endo v.

Albertine, 863 F. Supp. 708, 717 (N.D. Ill. 1994).

Defendants contend that the pleading requirements of Rule
9(b) apply to the federal claims because, even if fraud is not a
necessary element of the claims, plaintiffs' allegations sound in
fraud. The Seventh Circuit has not ruled on the issue and it is
recognized that the case law is split. However, this court
agrees with those courts that have held that the pleading
requirements for fraud do not apply to a claim for which fraud is

not an element. See In re NationsMart Corp. Securities

Litigation, 130 F.3d 309, 315 (8th Cir.), cert. denied, 524 U.S.

927 (1998); Danis v. USN Communications, Inc., 73 F. Supp. 2d

923, 932 (N.D. Ill. 1999); First Merchants, 1998 WL 781118 at *11
& n.6; In_re CINAR Corp. Securities Litigation, 186 F. Supp. 2d
279, 307 (E.D.N.Y. 2002). But even though Rule 9(b) does not
apply to the, federal claims, the PSLRA does apply. Since there
is no state of mind requirement for the § 11 and § 12(a) (2)
claims, thé State of mind pleading requirements of § 78u-4(b) (2)
do not come into play. However, since plaintiffs' securities
claims are based on alleged misstatements of material fact, the
Complaint must “specify each statement alleged to have been
misleading, the reason or reasons why the statement is
misleading, and, if an allegation regarding the statement or

omission is .made on information and belief, the complaint shall

-~ 15 -