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Eli Gottesdiener Deposition Harassment
Eli Gottesdiener Deposition Harassment
Plaintiffs,
Judge Barbara B. Crabb
v. Magistrate Judge Stephen L. Crocker
ALLIANT ENERGY CASH BALANCE
PENSION PLAN,
Defendant.
Defendant, Alliant Energy Cash Balance Pension Plan (“Defendant” or the “Plan”), by
and through its attorneys, Seyfarth Shaw LLP, hereby moves to sanction plaintiffs’ counsel, Eli
1. On November 4, 2009, Mr. Gottesdiener took the deposition of Defendant’s expert David
Godofsky.
2. On November 10, 2009, Mr. Gottesdiener took the deposition of Defendant’s expert
Vincent Warther.
3. Throughout both depositions, Mr. Gottesdiener badgered and berated the witnesses. He
yelled at the witnesses.
4. For example, the Godofsky deposition began with the following exchange:
Q. You hold yourself out as an expert actuary able to give opinions that the Court should
consider as expert opinions as to the calculation of benefits from cash balance plans, correct?
A. Yes.
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Q. Do you know of any place, anywhere, 96-8, or anywhere, in the law where the law says in a
defined benefit plan, you can dispense with the calculation of the accrued benefit when you're
paying a benefit out of the plan?
Q. Answer my question: Do you know of any place, sitting here now, sir, where the law, the
regulations, guidance, anything allows you to just throw the accrued benefit out the window? You
don't have to calculate the accrued benefit? Yes? Or no?
Q. No. I'm asking anyplace in the law. Just right now. Forget -- forget 99-8, you can't name it
because you're wrong. You're dead wrong. Name it. Right now. Any reg, statute, guidance,
person who's ever told you you can just dispense with the calculation of the accrued benefit?
BY MR. GOTTESDIENER: Q. Tell me anyplace other than 96-8, do you know of any, yes or
no? If you don't, just say it and we'll move to the next question. We can talk about 96-8.
Q. Yes --
Q. Yes or no. Yes or no? Do you know of anyplace anywhere other than 96-8 -- which we'll look
at in a second -- that allows a plan to ignore the calculation of the accrued benefit when paying a
participant? Yes or no?
A. Let me give that some thought. The difficulty that I have with the question is that in general
terms, the whipsaw calculation is not discussed in detail in most of the things that you discuss. It is
primarily fleshed out in Notice 96-8.
Q. No, you're not. Do you want to rethink your answer and say you that you misspoke, in fact,
you always have to calculate the accrued benefit? It just has no effect? I'll let you think about it for
a second?
A. No. No.
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Q. You're sticking with your original answer that 96-8 -- Sir, your answer is non-responsive. I
move to strike it. Answer my question.
BY MR. GOTTESDIENER: Q. Sitting here right now. Forget 96-8. Any defined benefit plan, tell
me, do you know, cite it, what authority allows you to dispense with the calculation of the accrued
benefit?
Q. I'm not.
A. Well, I think you are. Let me explain my answer. You've asked me is there --
Q. No. I'm not going to allow you to filibuster. Do you know any authority -- yes or no -- that
allows a plan to dispense with a calculation of the accrued benefit in a defined benefit plan?
A. Do I know of any?
Q. Yes. Authority?
BY MR. GOTTESDIENER:
Q. Oh come on. Your report is full of statements about authorities and guidance and law. And
you're a lawyer. You know perfectly well what my question means. Authority. Cite it. Yes or no?
Do you have any authority you can cite sitting here now that allows a plan to dispense with the
calculation of the accrued benefit before paying a participant in a defined benefit plan?
Q. That's why I'm offering you to backtrack and say that you were wrong. You always have to
calculate the accrued benefit. It just doesn't have an effect when the statutory rate is the same as
the discount rate?
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A. Well, I would like to answer your question, but I'd like to give a complete answer. I don't want
to give an incomplete answer.
Q. Oh, just get on with it. You're absolutely filibustering. I move to strike as non-responsive.
Yes or no?
5. Mr. Gottesdiener, as demonstrated in the examples below, acted with a similar lack of
civility during the Warther deposition. For example, shortly after the deposition began
the following exchange he condescendingly told that witness to “Go ahead and answer
the question in the nonresponsive way you're doing, sir. Go ahead.” See Warther Dep.,
part I attached at Exhibit 2 at 13. Shortly thereafter, the following exchange occurred:
BY MR. GOTTESDIENER: Q. Just answer it and stop quibbling. Would you please answer my
question.
BY MR. GOTTESDIENER: Q. Do you think it's your role to comment back if you think that you're
on the other end of comments that you don't like? Aren't you supposed to be a neutral advocate
only for the truth, sir?
THE WITNESS: As I understand it, it is my place here to answer questions as best I can.
BY MR. GOTTESDIENER: Q. Oh, so you don't -- that's -- that's all? You don't see yourself as an
officer of the court trying to provide the court assistance in arriving at the truth?
THE WITNESS: There's some legal questions in there, such as whether I'm an officer of the court.
I do not know the answer to --
MR. CASCIARI: Wait. Wait. Let him answer. Eli, let him answer.
MR. GOTTESDIENER: I got his answer. Stop interrupting me. I can interrupt the witness.
MR. GOTTESDIENER: Yes, I can. Show me a rule that says I can't. It's my question. I can
withdraw the question and ask a new one.
4
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MR. GOTTESDIENER: Go ahead. Go get the Judge on the phone while I ask questions.
BY MR. GOTTESDIENER: Q. Sir, answer my question. Mathematically do you know, yes or no,
how the Alliant Cash Balance Pension Plan arrives at paying the account balance? Can you
explain it as a mathematical matter?
Q. Could you --
Q. I have withdrawn every single question except for please explain mathematically, if you can,
how the Alliant Pension Plan ends up paying the account balance as the lump sum to participants
who request one during the 1998 to 2006 period.
MR. CASCIARI: May the record reflect that Mr. Gottesdiener is lurching toward the witness. He's
physically lurching toward the witness staring at him, lurching.
BY MR. GOTTESDIENER: Q. Well, it doesn't matter because, Mr. Witness, your eyes are closed,
are they not?
Id. at 45-47.
6. During the Warther deposition, the undersigned counsel brought Mr. Gottensdiener’s
behavior to the attention of the Court, which led to the Court’s text order of November
10, 2009 (docket no. 106). In that order, the Court “offer[ed] the possibility of post hoc
sanctions.”
7. During the afternoon session of the Warther deposition, the badgering resumed. The
following examples helps to elucidate this point:
BY MR. GOTTESDIENER: Q. You have not ever in your life come across, whether you went
searching for it or not, anybody who advocates use of Black-Scholes for an entire portfolio that is
not pure equity, correct?
A. I have not specifically gone looking for such a cite. Black-Scholes is obviously applicable.
MR. CASCIARI: No, you're arguing with him. You're saying that he's nonresponsive. That's fort
Judge to decide, the trier of fact.
5
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MR. CASCIARI: It is not for you to make statements about the witness' testimony that is of a
demeanor standpoint.
8. The Plan does not assert this motion lightly. It is obvious that Mr. Gottesdiener’s modis
operandi is to badger the witness into agreeing with him by asking questions that are
compound (and even ask questions are composed of three, four sub-questions), cutting
off the witness before his answer is complete if he doesn’t like the answer or only likes
part of the answer (and is trying to stop what he thinks will be a qualifier to the answer)
and repeating questions until he gets the answer he likes. Mr. Gottesdiener raises his
voice, makes faces, leers towards the witness, and throws his hands in the air, all of
which are intended to belittle the witness. See Id. at 5, 20, and 134 (Mr. Gottesdiener
throws his hands in the air, point and leers at witness and raises his voice).
9. This belittling behavior is not always readily apparent from the transcript. For that
reason attached as Exhibit 4 is an excerpt of the audio recording from the morning of the
Warther deposition.
10. The Plan believes that Mr. Gottesdiener’s deposition techniques have earned him
substantial settlements in his cases.
11. The Federal Rules explicitly provide for sanctions in this circumstance. See Fed. R. Civ.
P. 30(d)(2). Pursuant to Rule 30, a court may impose sanctions against an attorney whose
conduct impedes, delays or frustrates the fair examination of a witness. The drafters of
the Rule 30 explained that an attorney engages in conduct worthy of sanction when he
acts in a manner “during a deposition that would not be allowed in the presence of a
judicial officer.” See Advisory Committee Notes on 1993 Amendments to Fed. R. Civ.
P. 30.
12. Courts have barred counsel from taking part in any additional depositions in the litigation
as a sanction. Reed v. Advocate Health Care, 2008 U.S. Dist. LEXIS 3561 (N.D. Ill. Jan.
17, 2008) (lawyer who "acted unprofessionally by making several argumentative, hostile,
and/or threatening comments" to both opposing counsel and witness during deposition is
barred from participating in any further depositions) .
13. The Plan requests that Mr. Gottesdiener be barred from participating in any further
depositions.
14. This ruling will not prejudice Plaintiffs, as Mr. Gottesdiener has colleagues capable of
handling the remaining depositions such as Steven Cohen — an attorney who works for
Mr. Gottesdiener and has attended the depositions of both Godfosky and Warther.
15. Alternatively, the Plan asks that all further depositions be held at the Federal Courthouse
in Madison in the presence of a representative of the Court.
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16. The Plan asks the Court to rule at once, as 8 witnesses are scheduled to be deposed
between November 12 and December 2, all of whom will be deposed by Mr.
Gottesdiener.
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CERTIFICATE OF SERVICE
I, Sam Schwartz-Fenwick, an attorney, do hereby certify that I have caused a true and
correct copy of the foregoing MOTION TO SANCTION PLAINTIFFS’ COUNSEL to be served upon the
following via the Court’s ECF system, with EXHIBIT 4 TO DEFENDANT’S MOTION being manually
filed with the Clerk of Court and served on the foregoing via Federal Express on November 11,
2009:
Eli Gottesdiener
Gottesdiener Law Firm, PLLC
498 7th Street
Brooklyn, New York 11215
/s/Mark Casciari
Mark Casciari
CH1 11845932.2
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THOMAS A. LARSON
v.
Defendant.
It is undoubtedly difficult for counsel to sit by quietly as the opinions of the experts upon
which his client’s case depends are exposed through careful questioning to be lacking in
substance and support. But sit-by quietly counsel must, because under the Federal Rules
“speaking objections” are forbidden, and objections as to form or foundation “must be stated
expert witnesses, no matter how much they identify with the party paying them, or how upset
they may become seeing the infirmities in their theories laid bare, must answer the questions put
to them like any other witness, and let the chips fall where they may.
Plaintiffs’ counsel in the Godofsky and Warther expert depositions reflect improper conduct on
the part of the witnesses and, in the case of the Warther deposition, the witness and defense
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counsel, not Plaintiffs’ counsel. Moreover, following the Court’s ruling during the Warther
deposition, it was the improper conduct of defense counsel, not Plaintiffs’ counsel, that
continued unabated, both for the remainder of the Warther deposition and two days later during
the Altman deposition. See Pl. Mtn for an Order Re. the Conduct of Depositions (Doc. 113) at 2
(attaching Altman transcript and citing to 16 different times during the deposition where defense
counsel made improper speaking objections, coached the witness and generally interfered with the
The instant motion should be denied, and defense counsel admonished to comply with the
DISCUSSION
David Godofsky is a lawyer with Alston & Bird LLP and actuary who defends cash
balance pension plans for a substantial portion of his practice. See e.g. Ex. 1, Docket for George
v. Duke Energy Retirement Cash Balance Plan, No. 8:06-cv-00373-RBH (D.S.C. March 22,
2006) (noting Mr. Godofsky’s appearance on behalf of defendant cash balance plan in a whipsaw
case); Ex. 2, Docket for Lyons v. Georgia-Pacific Co., No. 1:97-cv-00980-JOF (N.D. Ga. May
21, 2004) (noting Mr. Godofsky’s appearance on behalf of defendant cash balance plan in a
whipsaw case); see also Godofsky Tr. (Doc. 112)139:7-139:9; 144:4-6; Ex. 3, 10/23/2009
plan sponsors including against regulations which he deems unduly constraining to cash balance
plan sponsors).
Defendant complains about one exchange during the seven hour Godofsky deposition
2
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which occurred near the start of the deposition.1 Defendant does not reference any other part of
the transcript as reflecting improper behavior on counsel’s part. In fact, apart from the
objections made by defense counsel during the exchange referenced in Defendant’s motion, see
Def. Mtn. at 1-4 (citing Godofsky Tr. 9:7-14:20), a review of the rest of the transcript shows that
defense counsel (Mr. Kramer) did not object to the vast majority of undersigned counsel’s
questions even as to form or foundation during the remainder of the proceeding. See Godofsky
Tr. 15-362:19 (showing defense counsel objected only 36 other times during the 7 hour period,
or approximately 5 per hour). In contrast to his colleague Mr. Casciari, Mr. Kramer understood
the constraints imposed on counsel defending a deposition: by and large, he stated his objections
concisely and in a nonsuggestive manner, i.e., he made his record but otherwise stayed out of the
way. Id. (by and large confining his objections to “argumentative,” “compound,” “legal
The Godofsky exchange in question occurred after counsel attempted to get Mr.
Godofsky to answer a question posed in response to a surprising statement Mr. Godofsky made
in response to counsel’s attempt to begin a series of hypotheticals. See Godofsky Tr. 8:11-9:6.
The statement Mr. Godofsky made was that a pension plan could in some circumstances pay a
benefit from the plan in one or more forms without first calculating the participant’s legally-
1
It was terminated by the defense at exactly seven hours even though Plaintiffs had not finished the
examination. Godofsky Tr. 368:16.
2
That is not what happened during the Warther deposition. Defense counsel there (Mr. Casciari) objected
no less than 215 times (or approximately 30 per hour), with many objections improper speaking
objections followed by obstreperous arguing anytime he was asked to stop. See, e.g., Warther Tr. (Docs.
115-16) 137:18-24 (Mr. Casciari: “For financial economic purposes? Is that your question? Is that what
you’re saying?” Plaintiffs’ counsel: “You were told not to make speaking objections.” Mr. Casciari:
“That’s the problem with your question.”); id,129:13-130:4; 140:10-18; 156:20-157:17; 189:23-190:2;
194:14-15; 212:9-213:21; 277:6-7; 278:1-2; 363:3-4. Two days later, Mr. Casciari was at it again, doing
everything he could to disrupt counsel’s questioning of Mr. Altman. See Pl. Mtn for an Order Re. the
Conduct of Depositions (Doc. 113) at 2.
3
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recognized “accrued benefit.” Id. at 6:2-9:6. The assertion is, to put it mildly, an unusual one –
so counsel wanted to know if Mr. Godofsky, who was holding himself out as an expert qualified
to offer an opinion as to the correct way to calculate the accrued benefit under the Plan in this
case, could back it up with any authority. Godofsky Tr. 6:8-19:16. Mr. Godofsky bobbed,
weaved, argued, quibbled – in short, did everything but answer the simple question whether he
had any authority to support his assertion. He eventually admitted he had none. Godofsky Tr.
17:17-18:5 (“I cannot cite you such an authority”); 19:15-16 (A: “I don't know. I don't know.”
Q: “Thank you”).
Defendant’s version of the exchange provides no context: it starts in the middle, after
Mr. Godofsky has already been given multiple opportunities to answer the question, and
excludes several pages of Mr. Godofsky’s continued, stubborn refusal to admit what he
Defendant objects to two exchanges that occurred during the Warther deposition. In both
cases, Plaintiffs’ counsel’s questioning was a direct response to the witness’s adamant refusal to
answer the questions as posed, with defense counsel’s active encouragement. Dr. Warther is in
essence a professional witness who has previously testified for defense counsel, who before the
time of his deposition had already billed the defense almost $250,000 for his 13-page report and
precedent work, and who has been involved in this case for over a year. See Ex. 4, 10/23/2009
Expert Report of Vincent A. Warther at 1 (describing employment with Compass Lexecon); Ex.
5, Warther Affidavit at 2 (listing fees and expenses of $240,064.72); Warther Tr. 224:18-225:2
(stating he was first contacted on this case in the middle of last year, and that defense counsel
had worked with him on a previous case). Despite this background, he was unable to directly
4
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answer basic questions regarding the case, and despite his experience as a professional expert
witness, engaged in deliberate gamesmanship to evade the questions below, rather than answer
Like the Godofsky exchange discussed above, the first Warther exchange at issue here
occurred near the start of the deposition and came about in a somewhat similar manner. In Dr.
Warther’s case, however, it was not so much what Dr. Warther said but he could not say and
what he would not admit he could not say: i.e., how, as a matter of mathematics, the Plan arrived
at paying the notional account balance as the participant’s lump sum. Warther Tr. 21:8-22:4.
Defendant starts its quotation on page 46 with Plaintiffs’ counsel’s statement “[j]ust
answer it and stop quibbling. Would you please answer my question?” But this omits 25 prior
pages of questioning during which counsel tried to get Dr. Warther to focus on that one simple
question and during which defense counsel repeatedly came to the witness’s aid with speaking
objections which undersigned counsel warned defense counsel were improper. See Warther Tr.
pages of interruptions and non-responsive answers following the quoted passage. In fact, it was
not until page 72 in the deposition transcript that the question is finally answered in any sense,
and then only after witness and defense counsel conferred during a break outside of the
The second Warther exchange Defendant cites, see Def. Mtn. at 5, concerned counsel’s
attempt to get Dr. Warther to answer the simple question whether he knew of any authority that
5
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supports his use of an equity options pricing model (the “Black-Scholes” model) to predict future
returns of an entire portfolio (i.e., one that includes both equities and bonds). Again, Dr. Warther
impertinently refused to answer. He repeatedly claimed that it was “obviously” correct to use
Black-Scholes and, to avoid admitting that there is indeed no support for his use of it here, kept
dodging by saying he had not gone looking for such authority. See Warther Tr. 210:7-210:12 (“I
haven’t done that investigation”.); id. 211:23-212:2 (Q: “You can’t cite and you do not cite in
your study anybody who applies Black-Scholes to an entire portfolio that has not just equities,
but equities and bonds, correct?” A: “I haven’t specifically looked for such cites”); id., 212:9-16
(Q: “You have not ever in your life come across, whether you went searching for it or not,
anybody who advocates use of Black-Scholes for an entire portfolio that is not pure equity,
Whether he had gone looking for such authority was of course not the question – which,
under the circumstances, was completely appropriate for the questioner to point out in an attempt
CONCLUSION
Wherefore, for the reasons set forth above, for such additional reasons as Plaintiffs may
later adduce and/or for such other reasons as may appear to the Court, the instant motion should
denied. Should the Court not deny Defendant’s motion, it should nevertheless decline to order
the relief requested of prohibiting undersigned counsel from taking further depositions. While
there are other attorneys in his firm,3 it is undersigned alone who was appointed class counsel,
3
Mr. Carter, Mr. Ellis and Mr. Sharpe are attorneys with counsel’s firm. Mr. Cohen, referenced in
Defendant’s motion, will be licensed by the end of the month. The reference in the Warther Tr. 84:4-
84:12 to Mr. Cohen as a “lawyer” as the call with the Court was about to begin was, intended to
distinguish him from Plaintiffs’ expert witness Clark Maxam, who attended the deposition and whom
defense counsel requested be excluded from the conference with the Court.
6
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see 2/12/09 Order (Doc. 67), and undersigned counsel who alone, who, especially at this late
date, can as a practical matter take the remaining depositions in this case. If counsel erred, what
Defendant seeks is nevertheless overkill and would greatly and unduly prejudice the class. If a
Respectfully submitted,
/s/Eli Gottesdiener
Eli Gottesdiener
Gottesdiener Law Firm, PLLC
498 7th Street
Brooklyn, New York 11215
Email: eli@gottesdienerlaw.com
Telephone: (718) 788-1500
Telecopier: (718) 788-1650
7
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CERTIFICATE OF SERVICE
electronically submitted the foregoing document, and exhibits, to the Clerk’s Office using the
CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following
CM/ECF registrants:
Mark Casciari
Ronald J. Kramer
Amanda A. Sonneborn
Seyfarth Shaw LLP
131 South Dearborn Street Suite 2400
Chicago, IL 60603-5577
/s/Eli Gottesdiener
8
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Plaintiffs,
Judge Barbara B. Crabb
v. Magistrate Judge Stephen L. Crocker
ALLIANT ENERGY CASH BALANCE
PENSION PLAN,
Defendant.
Defendant, Alliant Energy Cash Balance Pension Plan (“defendant” or the “Plan”), by
and through its attorneys, Seyfarth Shaw LLP, submits this response in opposition to plaintiffs’
Plaintiffs raise three issues in their motion. First, they ask the Court to order the Plan’s
counsel to abstain from making speaking objections at the seven upcoming fact depositions in
the case. Second, they ask the Court to issue an order barring the deposition videographer from
taping any person except the witness. Lastly, they prospectively ask the Court to bar attorneys
Plaintiffs’ motion must be denied for two reasons. First, the ‘facts’ presented in this
motion present a misleading and incorrect version of the depositions that have occurred thus far
in the case. Second, the remedies plaintiffs seek, namely to silence counsel for the Plan and
counsel for third party deponents, have no legal grounding. That plaintiffs filed this motion
underscores the undeniable tension among the parties in this case. The appropriate remedy to
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address this tension is not to silence the Plan’s counsel, but instead to appoint a special master to
oversee the seven upcoming fact depositions. This is the only method capable of restoring
civility to the litigation and protecting the seven fact witnesses from harassment.
Plaintiffs begin their motion with a request to silence all other attorneys in this case.
They justify this strategy by asserting that the Plan’s counsel made impermissible speaking
objections throughout the deposition. This claim is derived from Plaintiffs’ faulty understanding
of what constitutes a speaking objection. For example, during the deposition of the Plan’s expert
Ian Altman, counsel chastised the Plan’s counsel for merely stating the phrase “objection.” The
following exchange provides just one example of the uncivil manner in which Plaintiffs’ counsel
MR. GOTTESDIENER: Q. I'm sorry, that sounds circular. It could be used as an unbiased
estimator because it's an unbiased estimator?
MR. GOTTESDIENER: Mark, why don't you go to law school. You're not the witness.
MR. GOTTESDIENER: You don't have the duty to answer the questions.
MR. GOTTESDIENER: No, you can't finish the that's the whole point. You were
admonished not to make speaking objections.
The above example demonstrates that Plaintiffs’ counsel believes any word said by the
2
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is an objection that serves to guide the witness on how to answer the question. The Plan’s
For instance, during the deposition of Ian Altman the Plan’s counsel heard Plaintiffs’
counsel ask a question that fell outside of the parties agreed stipulation on experts. He
immediately objected and began to say “Objection, our stipulation says discovery may not be -.”
Plaintiffs’ counsel cut him off and said “I don't want to have a discussion. Either instruct [the
witness] not to answer. You're wrong. I can ask the question.” Altman Dep. at 30. In this
interchange counsel for the Plan was merely attempting to assert his right to limit the deposition
Similarly, at various points throughout the deposition the Plan’s counsel attempted to
make statements on the record to document when Plaintiffs’ counsel pointed at the witness,
lunged at the witness and made faces at the witness. For example, early on in the Altman
deposition the Plan’s counsel stated: “I object to your leaning forward to the witness, which is
not I can't get on videotape, but I'll make a record. You're leaning toward the witness, you're
gesticulating, and you're raising your voice.” Id. at 39. Later in the deposition, the Plan’s
counsel stated “Wait, wait, wait. I object. You're leaning toward the witness.” Id. at 190. These
1
By contrast, Plaintiffs' counsel did engage in speaking objections during the deposition of Plaintiff’s
expert Clark Maxam. An example is:
MR. GOTTESDIENER: Objection. Well, I don't know what independent means. What does that mean?
MR. GOTTESDIENER: I --
MR. CASCIARI: No --
3
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are not speaking objections, but instead permissible objections under Rule 30(c)(2) relating to a
When the Plan’s counsel tried to make a record of Plaintiffs’ counsel non-verbal
behavior, Plaintiffs’ counsel accused the Plan’s counsel of being a liar. Id at 39, 90 and 320. It
is for that reason, that the Plan’s counsel instructed the videographer to point the camera on
Plaintiffs’ counsel as well as on the witness. Given the parties’ dispute as to the behavior of
Plaintiffs’ counsel, counsel for the Plan recognized that he needed objective video evidence to
document any improper non-verbal behavior by Plaintiffs’ counsel. See id. at 204-205 (Mr.
Casciari to Mr. Gottesdiener “You're making facial expressions on the witness. I can't record that
if I don't have the camera on you. The record won't indicate it. And the other problem is I can't
say "May the record reflect" because you won't let me.”). Under these circumstances, the Plan’s
counsel had every right to instruct the videographer to record Plaintiffs’ counsel.
requesting that the Plan’s counsel cannot object to his behavior, is trying to suppress any record
from emerging regarding his behavior at the depositions. This is in direct contravention of Rule
30(c)(2). Moreover, in arguing about the nature of the videotaping at the deposition Plaintiffs’
counsel leaves out key facts. Namely, he fails to mention that at both the deposition of Ian
Altman and of Plaintiffs’ expert Clark Maxam, Plaintiffs’ counsel grabbed a hold of the video
camera. See id. at 304; Maxam deposition, Ex. 1 at 114; video recording of deposition of Ian
Altman attached at Ex. 2 at 6:14; and video recording of deposition of Clark Maxam at Ex. 3
attached at 2:43-2:45.
4
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any other aspect of the deposition – must be noted on the record, but the
examination will proceed; the testimony is taken subject to an objection. An
objection must be stated concisely in a nonargumentative and nonsuggestive
manner. A person may instruct a deponent not to answer only when necessary to
preserve a privilege, to enforce a limitation ordered by the court, or to present a
motion under Rule 30(d)(3). (Emphasis added.)
It is already established that Plaintiffs’ counsel routinely cut off and talked over the
witness being deposed. It also is true that he talked over Plan counsel when he tried to preserve
the record in accordance with Rule 30(c)(2), thus creating an impossible situation – Plaintiffs’
counsel simply would not allow Plan counsel to make his record notwithstanding that Plan
counsel had a duty to make a record of form objections and the hostile and badgering manner of
the Plaintiffs’ counsel. The printed word does not make this point, but the audio and video
versions of the depositions, now on file with the Court, do make the point.
The behavior of Plaintiff’s counsel at the four depositions which already have been held
in this case shows an utter lack of civility. His conduct is at odds with the Standards for
Professional Conduct Within the Seventh Federal Judicial Circuit. Paragraph 2 of the Lawyers
Duties to Other Counsel set forth within the Standards for Professional Conduct Within The
Seventh Federal Judicial Circuit, Lawyers Duties to Other Counsel provides: “We will not, even
when called upon by a client to do so, abuse or indulge in offensive conduct directed to other
counsel, parties, or witnesses. We will abstain from disparaging personal remarks or acrimony
toward other counsel, parties, or witnesses. We will treat adverse witnesses and parties with fair
consideration.”
The proper remedy for such proscribed conduct is not to bar the Plan’s counsel or
counsel from a third party from raising objections. Nor is it to bar the videographer from making
a recording that includes plaintiffs’ non-verbal cues. Rather, the appropriate remedy is to
5
Case: 3:08-cv-00127-bbc Document #: 120 Filed: 11/23/09 Page 6 of 7
appoint a special master to oversee the depositions and to insure that the witnesses are treated
6
Case: 3:08-cv-00127-bbc Document #: 120 Filed: 11/23/09 Page 7 of 7
CERTIFICATE OF SERVICE
I, Mark Casciari, an attorney, do hereby certify that I have caused a true and correct copy
REGARDING THE CONDUCT OF DEPOSITIONS, to be served upon the following via the
Court’s ECF system, with Exhibits 2 and 3 of Defendant’s Response being manually filed with
the Clerk of Court and served on the Clerk of Court and the foregoing via Federal Express on
Eli Gottesdiener
Gottesdiener Law Firm, PLLC
498 7th Street
Brooklyn, New York 11215
/s/Mark Casciari
Mark Casciari
CH1 11853776.2
United States District Court, W.D. Wisconsin.
v.
Jurisdiction: W.D.Wis.
Representing: Plaintiff
Appearances:
On behalf of the Plaintiffs and the Proposed Class and Subclasses: Eli
Gottesdiener, Esq.
Brooklyn, NY 11215
718-788-1500.
Chicago, IL 60603-5577
312-460-5000.
866.721.0972 Toll-free
713-683-0401
713-683-8935
depos@digitalreporting.com
digitalreporting.com
Washington, D.C.
CONTENTS
DAVID R. GODOFSKY
EXHIBITS
TABLE
PROCEEDINGS
THE VIDEOGRAPHER: In the United States District Court for the Western
District of Wisconsin, in the matter of Lawrence G. Ruppert and Thomas
A. Larson versus Alliant Energy Cash Balance Pension Plan, case number
3:08-CV-00127.
THE VIDEOGRAPHER: The court reporter is Dennis Dinkel. The video camera
operator is Conway Barker, both on behalf of Digital Court Reporting and
Video.
BY MR. GOTTESDIENER:
Q. Good morning.
A. Good morning.
A. Okay.
Q. First, can we agree for purposes of your report and for purposes of
our discussion today that we're going to assume that IRS Notice 96-8 is a
controlling statement of law?
A. Yes.
Q. Can we agree that Notice 96-8 requires that the accrued benefit
payable as an annuity at normal retirement age must be determined as part
of the calculation of the minimum lump sum?
Q. Sure.
Can we agree that Notice 96-8 requires that the accrued benefit payable
as an annuity at normal retirement age must be determined as part of the
calculation of the minimum lump sum?
And when you have a rate that is not greater than a statutory rate, or a
rate that is deemed to be not greater than a statutory rate, Notice 96-8
states that in a cash balance plan, you can pay the account balance
without going through the exercise of calculating an estimated normal
retirement annuity benefit.
Q. Your first answer was that some yes, some no; there are times when it
does require and does not require the calculation of the accrued benefit
as a step in the determination of the minimum lump sum.
So I want to make sure I understand that you are saying that when 96-8
discusses safe harbor plans in the calculation of the minimum lump sum in
the case of such a plan, that 96-8 is saying that the plan can dispense
with determining the accrued benefit?
I don't believe Notice 96-8 uses the term “safe harbor.” Safe harbor is a
term that I think is often used in discussing 96-8. I've used it
colloquially.
And generally speaking, in other cases, Notice 96-8 would require either
calculation or estimation of an annuity at normal retirement date.
Q. Your initial answer is still your answer: That there are times --
however termed -- where 96-8 says the plan can just dispense with
calculating the accrued benefit?
A. Yes.
A. No.
Q. However, you're wrong that it says that you can dispense with
calculating the accrued benefit, aren't you?
A. I don't think I am. I'd be glad to go through Notice 96-8 with you,
but I don't think so.
Q. You hold yourself out as an expert actuary able to give opinions that
the Court should consider as expert opinions as to the calculation of
benefits from cash balance plans, correct?
A. Yes.
Q. Answer my question: Do you know of any place, sitting here now, sir,
where the law, the regulations, guidance, anything allows you to just
throw the accrued benefit out the window? You don't have to calculate the
accrued benefit? Yes? Or no?
Q. No. I'm asking anyplace in the law. Just right now. Forget 96-8, you
can't name it because you're wrong. You're dead wrong. Name it. Right
now. Any reg, statute, guidance, person who's ever told you, you can just
dispense with the calculation of the accrued benefit?
BY MR. GOTTESDIENER:
Q. Tell me anyplace other than 96-8, do you know of any, yes or no? If
you don't, just say it and we'll move to the next question. We can talk
about 96-8.
Q. Yes --
The difficulty that I have with the question is that in general terms,
the whipsaw calculation is not discussed in detail in most of the things
that you discuss. It is primarily fleshed out in Notice 96-8.
Q. No, you're not. Do you want to rethink your answer and say that you
misspoke, that, in fact, you always have to calculate the accrued
benefit? It just has no effect? I'll let you think about it for a second.
A. No. No.
Q. So you're sticking with your original answer that 96-8 -- sir, your
answer is non-responsive. I move to strike it. Answer my question.
BY MR. GOTTESDIENER:
Q. Sitting here right now, yes or no, forget 96-8. Any defined benefit
plan, tell me, do you know, cite it, what authority allows you to
dispense with the calculation of the accrued benefit?
Q. I'm not.
A. Do I know of any?
Q. Yes. Authority?
BY MR. GOTTESDIENER:
Q. Oh, come on. Your report is full of statements about authorities and
guidance and law. And you're a lawyer. You know perfectly well what my
question means. Authority. Cite it.
Yes or no?
Do you have any authority you can cite sitting here now that allows a
plan to dispense with the calculation of the accrued benefit before
paying a participant in a defined benefit plan?
Q. That's why I'm offering you to backtrack and say that you were wrong.
You always have to calculate the accrued benefit. It just doesn't have an
effect when the statutory rate is the same as the discount rate?
A. Well, I would like to answer your question, but I'd like to give a
complete answer.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
A. Yes.
Q. Where?
A. Two different --
Q. -- give me an authority.
But certainly there are plans that simply say that when you pay a lump
sum, what you pay is the account balance.
Q. Right now, you identified one thing. You say the fact that a
determination letter has issued on a plan that says we will pay the
account balance as a lump sum, that's your authority?
BY MR. GOTTESDIENER:
A. I'm saying that you're asking a question, are there any authorities,
am I aware of any authorities, and can I cite any authorities.
Q. Can you?
Do you have any authority for your proposition that 96-8 or any other
place in the law allows you to dispense with the calculation of the
accrued benefit?
BY MR. GOTTESDIENER:
Q. Do you have right now -- I will ask you for the ninth time -- the
record is absolutely clear -- do you have any authority other than what
you claim to be finding in 96-8 that allows a plan -- an authority, not a
plan document -- an authority that allows the plan to dispense with the
calculation of the accrued benefit before paying a participant in a
defined benefit plan?
A. Sitting here before you right now, without my files in front of me and
without any research services, no. I cannot cite you such an authority.
Q. Nor can you give me a range of authorities? You can't tell me what
section of the code it might be in? You can't describe it? You can't say
what year maybe something was adopted or what body of law you would look
to to find this, can you?
A. Well --
Q. And if you can, tell me what -- as best you can -- where this comes
from.
Q. I asked about defined benefit plans. You are absolutely clear that's
what I asked about. I know that. I repeated it repeatedly.
Tell me anywhere in the law defined benefit plans whether you can
dispense with the calculation of accrued benefit, including cash balance
plans. Not limited to cash balance plans.
Q. You told me about a D letter. Okay? I got the D letter. Anything else?
Q. Thank you.
Now, to the extent that we have an agreement that the accrued benefit
must be calculated as a step in the calculation of the minimum lump sum -
-
A. Well, you don't have to because if you did, the answer that you would
get would be something that is either equal to the account balance or
less than the account balance.
And, therefore, going through that step is, I think, as you would say,
pointless. And so if you're going to go through a calculation that's
always going to produce a number that's equal to zero, do you have to go
through the calculation? Or do you -- or can you just say, well, I know
the answer is going to be he zero in the end?
I don't know how this relates to the plan that we're dealing with.
BY MR. GOTTESDIENER:
Q. No, you're not. You're trying to have some cocktail conversation. I'm
asking a question.
A. Okay. Okay.
A. Do you have a copy of 96-8? Because I'd like to look at section IV.
Q. Yes.
Q. There is no section 5.
Plaintiffs' 1 is 96-8.
BY MR. GOTTESDIENER:
Q. The question is, did we agree for purposes of this deposition that
when we use the term “safe harbor,” we're talking about the plans that
are described in section IV of 96-8 that the IRS says may perform the
calculation and not pay more than the account balance?
Q. Before we get to what's broader, can we try to find what we agree on?
In section III --
A. I agree with that. The answer to that is yes. With respect to the
plans described in section IV, yes, I agree that you can pay the account
balance.
A. Okay. Okay.
Q. The question is, for the purpose of this deposition, can we have the
agreement that when we say safe harbor, we're talking about those plans
described in section IV, where the result of the calculation is that the
plan can pay the account balance without violating the forfeiture
actuarial equivalent or other rules referenced in 96-8? Can we have that
agreement?
A. Well --
Q. -- with you --
A. -- the way --
Q. You can broaden it. You're can tell me there's something they don't
mention --
Q. So all of that is the answer to my question is yes. I'm not saying you
can't add things in.
Q. -- I'm just asking you for the ninth time, could you just agree with
me that safe harbor includes these plans that are described there?
Q. Now, you want to say that there are more things that are
appropriately, in your opinion, safe harbor plans?
A. Well --
A. Yes. Yes.
Q. So you say that there are plans that are not described within the four
corners of section IV of 96-8 that are safe harbor plans?
A. Give me one second to look at section IV again.
As I read section IV, I do believe that there are plans that Notice 96-8
would consider to be safe harbor that are not in section IV, but that are
described in section III.
Q. As you read section IV, you do see that there's nothing in there that
says that you don't have to do the calculation?
Q. There's nothing in any place in 96-8 that says you don't have to do
the calculation, is there?
A. Give me --
Section III.B says you have to do the calculation. And section III.B.2
specifically says you have to do the calculation. III.B.3 just says the
result will be no increase in the lump sum over the account?
A. Hold on a second.
Q. So you have been proven wrong, but you always have to calculate the
accrued benefit and 96-8 not only doesn't support you, it refutes you,
doesn't it?
Q. Yes. I'll give you a chance. That's all you're going to have, because
you're not going to find it.
Go ahead.
A. Well, this is the statement that I interpret as saying that you do not
have to go through the mechanics of the calculation under certain
circumstances.
Where in 96-8 does it say you do not have to calculate the accrued
benefit?
Q. What section?
Q. Would you agree that 417(e) discusses the calculation of the present
value of the accrued benefit and defined benefit plan?
A. Yes.
Q. Okay. So you explain to me how under this section, it's saying -- even
though it's entitled the present value, and that's a reference to the
calculation under 417(e) of accrued benefit -- how it says you don't have
to calculate the accrued benefit?
Q. Which line?
A. Three paragraphs.
Q. In that section?
A. Let --
Q. -- result of the calculation. That doesn't say you don't have to do
it.
THE WITNESS: If you can pay an amount that is equal to the account
balance, and that will not violate sections 411(a) or 417(e), then it is
not necessary to actually calculate what the present value is. In most
cases, that present value will be less than the hypothetical account
balance. And so if you know that you're going to pay a benefit that is
the greater of A or B, and you know that A is greater than or equal to B,
and you pay the participant A, then you have not violated any requirement
by not actually going through the process of calculating B.
BY MR. GOTTESDIENER:
Q. And the refutation of what you just said is the preceding sentences
that say, under such a plan, if you would look up where you said thus --
please look at the paragraph that you claim supports you.
Q. Okay.
Q. But you're still doing the calculation. In your example with the X,
you just knew the answer, but you're just -- you don't dispense with the
calculation. You just knew the answer. So you're saying, you know, I
already know the answer. But the calculation is still there, is it not?
A. Well, what if I don't know what X is? Because you're asking me, do I
need to calculate X.
Q. Yes.
A. If you don't know the value of X, you still know the value of 2X
divided by X.
BY MR. GOTTESDIENER:
A. No.
Yes or no?
A. No. You're wrong. No, you know the answer to the calculation.
A. No. I'm saying that it's not necessary to do a calculation when you
already know what the answer to that calculation is going to be.
Q. And you believe that 96-8 says that you don't have to do the
calculation?
A. Yes.
MR. KRAMER: Objection. Calls for a legal conclusion. You can answer.
BY MR. GOTTESDIENER:
MR. KRAMER: Objection to the legal opinion. But go ahead and answer if
you can.
THE WITNESS: My legal opinion is not different. I do not think that you
have to do a calculation when you know that the result of that
calculation will be irrelevant.
BY MR. GOTTESDIENER:
Q. What if there was a grandfather of the pre-cash balance accrued
benefit?
Q. Oh, so it is irrelevant when the answer is you don't pay more than the
account balance?
Q. Yes. And so you calculate the grandfathered benefit and you know what
that amount is. Why don't you look over at the account balance and say --
you know -- oh, well, because it is a safe harbor plan, I never have to
calculate the accrued benefit?
Q. Yeah. But you're already slipping, sir. Because if you can dispense
with the calculation of the accrued benefit in a safe harbor plan, then
there's not an accrued benefit you're looking at. You're just looking at
a notional account balance, and you're just comparing the 417(e) old plan
benefit to the account balance, right?
A. If you --
Q. No. Wrong. I'm saying it is a safe harbor plan, cash balance; and you
have an old plan benefit that you have to protect.
Don't get semantic. You understand exactly what I'm talking about. It is
a safe harbor cash balance plan.
A. With a grandfather.
Q. With a grandfather.
A. With a caveat, I would agree with you. The caveat is fairly important.
And that is, it would have to depend on when and how that grandfathering
provision was formed.
A. I do understand --
Q. It is a simple fact scenario. I'm not asking for bells and whistles.
At the conversion, there's an old plan benefit. It is a safe harbor plan.
What other caveat do you have?
Q. Sir --
Q. Sir, we have seven hours, and if you want to use all of it, we'll be
here all day, that's fine. I'm talking about plain vanilla cash balance
conversion. You've been around a long time. You've seen a lot of these
things this. This plan was converted in 1998. Just imagine a very simple
conversion and a very simple plain vanilla safe harbor plan.
Isn't your answer just the same? That you're still not calculating the
accrued benefit under the cash balance plan?
Q. No, no, no. We need a clean answer. You have nothing except for the
same answer that there's no calculation of the accrued benefit. We don't
have a problem with the annuity conversion factors. We don't have
anything fancy with the conversion of the -- or the grandfathering
provision not being simultaneous with the conversion to the cash balance
formula. We don't have any problem that it might be a post-PPA plan.
Q. Accrued benefit?
A. -- the benefit payable in the form of an annuity at normal retirement
date. It is possible under the circumstances that you described sometimes
--
Q. No.
Yes.
Q. You are adding -- you are saying yes, but you're trying to slip in
caveats that are not part of my question.
You are saying that you don't calculate the accrued benefit in that
circumstance, the annuity payable at normal retirement age? You don't
have to calculate it, right?
A. You don't have to calculate it in order to figure out how much you're
going to pay the participant. That's correct.
A. No. I don't agree with that unless you allow me to put in the caveat
that under certain circumstances, you do not need to do that calculation
and under other circumstances, you might need to do that calculation.
There was nothing -- there was nothing wrong with my prior three
descriptions of your testimony that you contend that a plan can dispense
with the calculation of the accrued benefit, forgetting that the answer
is going to be known in advance; you are saying that there is no
calculation of the accrued benefit under those circumstances, correct?
Q. I am not.
What -- your testimony is that there are more plans that 96-8 describes
that are safe harbor plans that are within the four corners of section
IV, correct?
A. I believe so, yes.
If you look at section IV, you'll see that the statutory rate, the 30-
year Treasury rate, is not included in section IV.
And I think any fair reading of section III of Notice 96-8 would tell you
that where the interest crediting rate is equal to or always less than
the statutory rate, then the whipsaw calculation is always going to
produce a number -- and the other conditions. That the annuity conversion
factors have to be appropriate.
And I think most people and the IRS, most actuaries, and the IRS, would
consider safe harbor to include the statutory rate, the 30-year Treasury
rate which is not one of the rates listed in section IV.
A. No.
A. Yes. For plans that we have described as a safe harbor plan, I think
it is fair to say that 96-8 says that it is not a violation of section
411(a) or 417(e) to pay an amount equal to the account balance.
And, of course, I think it is also worth saying that there may be any
number of other legal requirements that would cause you to have to pay
out more than the account balance. 96-8 only deals with 411(a) and
417(e). There are many other legal requirements applicable to defined
benefit plans and to cash balance plans; and some of those might require
under certain circumstances payment of more than the account balance.
Q. How can you say that 96-8 doesn't deal with provisions of the plan?
A. 96-8 does not specify every plan provision that might impact the
calculation of somebody's benefit. It just deals with certain plan
provisions that do or do not violate 411(a) and 417(e).
Q. So you're wrong. Your testimony before -- you're changing it now --
you said 96-8 doesn't deal with provisions of the plan. It absolutely
does.
A. No. I'm saying that 96-8 does not give you carte blanche to pay
something less than what the plan requires you to pay.
Q. Now, how can you get a present value under 417(e) without calculating
the accrued benefit?
A. In the same manner that you can tell what the answer to 2X divided by
X is without calculating the value of X. When you have --
A. -- a factor --
A. You have to know that X is not zero. That's the only thing you need to
know about X in order to do that calculation. You don't have to know the
actual value of X.
A. -- but you can get to the right answer without always doing that
calculation.
Q. No, you can't. How in section IV are you saying that you can get to
the right answer without doing the calculation when -- turn to section
III.B.3 again.
It's talking about using the 30-year to project future interest credits?
Why is it doing that, sir, if it is not first arriving at the accrued
benefit?
THE WITNESS: You've asked the question before. I've answered it before.
My answer is going to be the same.
If the --
BY MR. GOTTESDIENER:
Q. Tell me -- this is good. Tell me how else you do the calculation other
than that you project the account balance to normal retirement age, and
you do the conversion, if it's at the 417(e) rate as you discuss in
footnote 5 of your report, it is a wash. And then you apply 417(e) and
arrive at a present value.
A. Well --
Q. Any?
A. Your hypothetical --
A. I don't think there's more than one whipsaw calculation, but I think
there's more than one way of arriving at the answer that the whipsaw
calculation is going to arrive at.
A. Yes.
Q. I'm asking you, is there some other one you want to tell us about? Or
is there just the whipsaw calculation that's mandated by 96-8?
A. Well, you keep saying that's mandated by 96-8.
Q. Great. There's one. We're agreed on that. You accept that there's one
whipsaw calculation, right?
A. Yes.
A. Okay.
Q. No.
A. It is your question.
A. You can't ask me a question and tell me that it wasn't your question.
Q. No. Listen.
A. Okay.
Q. And you agree that in all cases, you have to determine the amount
payable in the form of an annuity commencing at normal retirement age
under the whipsaw calculation, right?
Q. You agree that the unitary whipsaw calculation that you just defined
requires that you always have to determine the present value of the
projected cash balance account payable in the form of an annuity
commencing at normal retirement age?
A. What I --
Q. I just want to know, is that what you are saying. You now deny that?
A. I'm saying that is not always true. You made a statement that is not -
-
A. Okay.
BY MR. GOTTESDIENER:
A. Sometimes you do under the Alliant plan, and sometimes you don't.
A. No.
And, therefore, since you know how much the lump sum is, if you have a
participant that is below normal retirement age at the time of payout, it
is not necessary under those circumstances to calculate an annuity
payable at normal retirement age in order to know what the correct amount
is to pay the participant.
Q. You're still always doing the whipsaw calculation. You just already
know the answer. That's what you're saying, right?
A. I'm saying that when you already know the answer, you don't have to do
a calculation.
Q. No, sir. What you've done is you have taken an hour to backtrack your
prior testimony.
It was always clear that I was saying and you were saying -- you said you
do not have to determine the normal retirement annuity.
A. I'm --
A. Yes. Yes.
MR. KRAMER: Objection as to the legal part. But you can answer for both.
BY MR. GOTTESDIENER:
A. -- the answer to the calculation without doing it and you don't do it,
and you pay the correct amount, that you have not violated any
requirement.
Q. And you deny that section III.B.3 says flat out on the page that you
do the calculation?
A. It's --
Q. So you now know the answer because you did the calculation, and so
you're just saying that I already know the answer, so somehow the
calculation just was never done; that's your testimony?
A. If you know the answer without doing a calculation, and you focused on
a particular part of the calculation, which is not necessary to be done
in order to know the answer to the -- the end answer to the calculation.
So if you know the end answer to the calculation and you pay the
participant the correct amount, you have not violated any requirement
just because you have not actually gone through the steps of the
calculation.
A. No. The law requires that you pay the correct amount.
Q. It is your actuarial and no different legal opinion that the law does
not require you do the calculation --
MR. KRAMER: Objection as to legal opinion, but you can answer.
THE WITNESS: Under certain circumstances, where you know you're getting
the right answer, the law does not require you to go through a pointless
calculation.
BY MR. GOTTESDIENER:
A. Yes.
Q. Can we agree that the minimum lump sum is the accrued benefit under
411(a)(7) with the present value determined under 417(e)?
Q. In a defined benefit plan, you agree that the minimum lump sum is the
accrued benefit under 411(a)(7) with present value determined using
417(e)?
Q. Do you agree with the statement in a defined benefit plan, the minimum
lump sum is the accrued benefit under 411(a)(7) with the present value
determined under 417(e)?
THE WITNESS: What I'm saying is I'm not giving legal opinions.
BY MR. GOTTESDIENER:
Q. Yes.
Q. I'm asking you without regard to your testimony and report. Just
sitting here now, as an actuary, don't you agree that the minimum lump
sum is the accrued benefit under 411(a)(7) with present value determined
under 417(e)?
BY MR. GOTTESDIENER:
Q. Through PPA -- how is that not true? What kind of caveat would you put
on that as an actuary? How is it not true?
Q. Putting that caveat aside, do you have any problem with that?
A. I believe that's the state of the law in the Seventh Circuit; and I
accept that that is the state of the law in the Seventh Circuit.
Q. I'm not asking about what you accept. I'm just saying sitting here as
an actuary --
A. That's my answer. I believe that that is the state of the law in the
Seventh Circuit.
Q. And you don't know the state of the law any other place?
Q. I know. That's why I'm asking you generally as an actuary, is this not
true someplace? Let's ask it that way. Is that false any place?
Q. Apart from the 2002 Alliance decision, do you have any other caveat
that you want to offer?
A. No.
Q. And that caveat, by the way -- that highly legal caveat -- that was
your opinion as an actuary, right?
Q. So the opinions you give in your report that accept as premises for
doing certain calculations propositions of law, all of those opinions are
all legal opinions?
BY MR. GOTTESDIENER:
A. I'm saying --
Q. No. No. No. I'm not asking -- please don't import your advocacy points
of view. Not for purposes of this case. I'm asking you. You took an oath.
I'm asking you a general question. I haven't put on those caveats. So
don't you, please.
A. But you --
Q. Is it true as an actuary is the question -- as an actuary -- is it
true that the minimum lump sum is the 411(a)(7) accrued benefit with
present value determined using 417(e)? Yes or no?
A. With the caveat that you mentioned with respect to the Alliance case,
yes, it is true.
MR. KRAMER: Objection to the legal opinion. But you can answer.
BY MR. GOTTESDIENER:
Q. So in the end, though, we've been through all this: You don't have any
different opinion as an actuary versus as a lawyer to that question?
THE VIDEOGRAPHER: This is the end of tape 1. Off the record at 11:07.
(Recess.)
BY MR. GOTTESDIENER:
Q. Can we have as a shorthand for the deposition that when we say accrued
benefit, that we mean the accrued benefit payable as an annuity at normal
retirement age and just have an agreement that when you and I are saying
that, unless we specify, it is shorthand?
A. Yes.
Q. Okay. Is there any difference between that accrued benefit and the
411(d)(6) accrued benefit?
I would describe the 411(d)(6) as being broader than the way you just
described our shorthand accrued benefit.
A. I would really have to give some thought to that and to look at the
statute.
Q. Now let's consider a specific plan. Let's call it the 123 plan.
A. Okay.
A. Okay.
A. Okay.
And --
A. Okay.
Q. Would you like a pen and a pad to try to keep track of this?
And also, by the way, as I'm going through this, another thing we can
agree that unless either of us specify, everything we're talking about is
pre-PPA, right?
A. Okay.
And final piece is he's got a $50,000 notional account balance on 1-1-
2000.
Q. Yes.
Q. Yes.
A. Yes.
A. Yes.
Q. No. Remember we got that out of the way. Your footnote 5, the Alliant
plan, we don't have that issue. It is a wash. We don't have to worry that
that is going to produce a different result.
Q. Now, let's assume that the results of this calculation which I'm sure
you can do in your head -- I have a calculator if you'd like to do it --
it is $158,609. Let's assume that's the result of the calculation?
A. 158 --
Q. -- 609.
Q. -- 15th power.
A. -- 15th power.
Q. Yes.
Okay.
Q. Okay.
A. I can't do 1.08 to the 15th power in my head, but I'll accept that
that's -- I accept that you've done the calculation.
Q. So let's agree, then, that you don't have any problem agreeing that
the minimum lump sum on 1-1-2000 would be determined by discounting the
158,609 from 2015 to 2000 at the applicable interest rate under 417(e)?
A. Well, you would discount it for that, and possibly for mortality.
There's -- there are two possible discounts. There's an interest discount
at the 417(e) rate. There's also a mortality discount; and some
controversy as to whether or not you use a mortality discount.
Q. For simplicity, why don't we put mortality to the side for a moment.
Do we agree that the calculation would be you take the 158,609, divide it
by 1.05, raised to the 15th power?
A. Yes.
A. Okay.
Q. And do we agree that Joe's interest credit between 1-1-2000 and 1-1-
2008 is 8 percent of $50,000 and so, $4,000?
MR. KRAMER: Could you -- did you say 1-1-2000 and 1-1-2008?
BY MR. GOTTESDIENER:
A. Yes.
Q. For the entire next year, the interest credit he gets is going to be -
- it is 8 percent of $50,000, so it is going to be a $4,000 interest
credit?
A. ‘1.
Q. Yes.
Q. $4,000.
A. He's terminated.
Q. Terminated.
A. Under the hypothetical facts that you've given me, that is not
affected by the plan's actual rate of return, correct.
Q. In no way?
A. Yes.
Q. And let's assume that the applicable interest rate under 417(e) on 1-
1-2001 is still 5 percent?
A. Okay.
Okay?
Q. Sure.
Q. The short answer. Why did you use that number, 1.05?
A. Because the lump sum is growing, under your facts, at 5 percent per
year.
A. The lump sum is growing at the 417(e) rate, yes, under your facts.
Q. And do we -- withdrawn.
You agree, do you not, that the fact that the plan's interest crediting
rate is a fixed rate of 8, say, versus 7 or 9; that doesn't affect the
rate of change?
A. It does not affect the rate of change of the whipsaw lump sum, yes.
Q. And one of those things is that the 417(e) rate doesn't change?
MR. KRAMER: For clarification; you're saying the 417(e) rate in your
hypothetical is 5 percent, that it is fixed? Not that it is still 417(e),
but one year, it could be 5 and the other year, it could be 6.
MR. GOTTESDIENER: No, the 417(e) rate, to help our colleague, that is a
variable rate.
BY MR. GOTTESDIENER:
Q. Okay.
Q. That's right.
MR. KRAMER: All right. I apologize. I wanted to make sure I was on the
same page with you two, then you referred to 417(e) you were referring to
your fixed 5 percent.
THE WITNESS: It happens to be 5 percent.
BY MR. GOTTESDIENER:
Q. Fixed isn't a word we use for 417. You agree with me on that, right?
A. I do.
A. Yes.
Q. And do we agree that this result would be larger than what the result
would be if the applicable interest rate under 417(e) were 5 percent?
A. Yes.
Q. And let's assume that that results in a minimum lump sum for our
friend of 85,645 on 1-1-2001. Okay?
A. Okay.
Now, we agree that the change in the minimum lump sum is much more than 5
percent, when we go from 2000 to 2001 under this scenario?
A. Yes.
Q. And --
A. Yes.
Q. And approximately 7 percent is due to the .5 percent change in the
interest rate compounded for 14 years?
A. Yes. Precisely.
A. Well, when you say Berger v. Xerox, are you referring to the District
Court opinion or the Seventh Circuit opinion?
Q. I'm actually referring to both, but you can assume for this purpose
that I am referring to the affirmance of the District Court's decision to
use the current year's rate as opposed to what else was proposed.
A. I would have to re-read those cases to say that I agree with your
statement.
I do agree that the Seventh Circuit, that among the methods endorsed by
the Seventh Circuit in the Berger opinion is the use of a one-year rate.
Q. The current rate -- okay. So all of that was yes, because my question
was simply, the ruling was that the whipsaw calculation in that case
would be performed by projecting the current notional account to normal
retirement using the current year's rate and assuming that all future
years' interest credits would be the same?
A. Well, my answer is not yes. My answer is that I do agree that that was
one of the methods that the Seventh Circuit said was permissible. But
without reading the cases, I can't tell you.
A. Okay.
And the premise of it was, answering your question what did I mean by
Berger, and I explained very clearly the lower court holding. You're an
attorney.
A. Right.
Q. You are giving an actuarial opinion allegedly. We have a lower court
opinion I said it was done that way and it was affirmed and so I wanted
you to assume that.
All I'm asking you is that was the method that was applied, the District
Court did it, and the Court of Appeals affirmed it. You keep going off
into other -- what else might be possible.
I'm just asking that's what was acceptable and what was done in the
Berger case, right?
A. Are you asking me to assume the answer? Because I'm telling you I
don't remember precisely in the Berger case where the District Court came
out in terms of which particular projection rate to use.
Q. Oh, okay.
A. That's what I'm saying. I don't remember that. I would need to re-read
that case to answer your question precisely.
Q. Can you accept my representation that the District Court opinion uses
the current year's rate? And that that holding was affirmed?
Q. Okay. And there's nothing about what you're accepting that strikes you
as odd or unusual based on your recollection or knowledge of the case or
your actuarial knowledge or your legal knowledge?
A. You're correct.
Q. The result. I'm not asking actually about the result. I'm asking about
the technique that was used to perform the calculation. Maybe you don't
mean anything different, but I just want to make sure the result here --
A. Okay.
A. Okay.
Q. The 456 plan, it is just like the 123 plan, except that the crediting
rate is the one-year T bill plus 1 percent.
And let's say that there is participant Doris; and Doris is just like Joe
except she's working for 456 and in the 456 plan.
And also let's assume that the 456 plan applies whipsaw, pre-PPA, applies
whipsaw in the same manner that we just agreed we'd assume was what
occurred and was affirmed in the Berger case by using the current year's
rate and holding all future years' interest crediting rates constant
assuming that they would be the same?
Q. Well, let's --
Q. Hold on. Hold on. I appreciate that. We'll get to that discussion
perhaps; but I'm not talking about Berger per se. I'm talking about that
456 is the same as 123?
A. Okay.
Q. I'm not saying -- please don't use the fact that it is 1 plus 1 to say
I'm importing the facts of Berger.
A. Okay.
Q. It has the same crediting rate. It operates on that technique for the
whipsaw calculation based on that assumption, but otherwise let's keep
Berger off to the side.
A. Okay.
Q. 6.
Q. Yes. You're --
Q. Yes.
A. Is 5.
Q. Doris is just like her buddy Joe, she has her $50,000 account balance?
Q. We're at 1-1-2000. The plan has done its duty and the plan is using
the 30-year Treasury 417(e).
A. Okay.
A. Well, I don't think we can do that; and let me pause for just a
second. I did tell Dennis that I would give him my acronyms. GATT is G-A-
T-T.
We're now positing that we're in a post-GATT period and that you're --
It is not moot because under the facts that you've given me, the one-year
T bill rate plus 1 percent, I think, is what you described as a safe
harbor rate under 96-8; and I'd like to --
A. Okay.
Q. The plan --
A. But also the plan provision would provide that the projection rate is
the current year's rate. You're saying that. That's a plan provision?
BY MR. GOTTESDIENER:
A. Yes.
Q. 37. 137,952?
A. 7,952. Okay.
A. Yes.
A. Yes.
A. Okay.
Q. And let's also assume that on 1-1-2001, the one-year Treasury rate is
5 percent, not 6 percent. And that the 30-year Treasury rate is 4.5, not
5 percent?
A. Okay.
A. Yes.
A. Yes.
A. Yes.
A. Okay.
Q. And you agree that her minimum lump sum on 1-1-2001 would be
determined by discounting the projected notional account balance at
normal retirement age back to 1-1-2001 using the applicable interest rate
of 4.5?
A. Yes.
A. Yes.
Q. And the change in her lump sum from one year to the next can be broken
into three parts: The part attributable to passage of time; attributable
to the change in the applicable 417(e) rate; and to the change in the
one-year T bill?
Q. And do we agree that the change in Doris's minimum due to the passage
of time and the change in the 417(e) rate is similar to the change that
we talked about with Joe?
MR. KRAMER: Objection. Vague.
That the impact of the passage of time, if you calculate it first here is
going to be that the minimum lump sum increases by 5 percent. There are
three factors.
How much --
BY MR. GOTTESDIENER:
Q. I don't want to cut you off, but I don't mean by number. I mean, by
the formula. It is similar.
Q. Let me show you your report that I'm going to mark as number 2.
BY MR. GOTTESDIENER:
There you indicate, “In projecting that cash balance account, future” --
“the future interest credits to the account are required to be calculated
in a manner that is consistent with and determined by Notice 96-8 as well
as Internal Revenue Code section 417(e) and ERISA section 205(g).”
Q. Yes. I'm just saying that's what you say in paragraph 14, right?
A. Yes. I think you need to read my report as a whole which says that
assuming that --
A. I do. Yes.
BY MR. GOTTESDIENER:
Q. What part of 417(e) -- and we've given you even more, but you can
direct yourself to 417(e) -- what part of 417(e) applies to the manner in
which future interest credits to the account are calculated?
A. The present value shall not be less than the present value calculated
using the applicable mortality table and the applicable interest rate.
A. No.
Q. That's it?
A. That's it.
Q. What part of what you just said has anything to do with the manner in
which future interest credits to the account are calculated?
Q. You know --
A. -- are based on --
BY MR. GOTTESDIENER:
A. Yes.
Q. You say, in projecting that cash balance account, the future interest
credits to the account are required to be calculated in a manner that is
consistent with and determined by Notice 96-8 as well as Internal Revenue
Code section 417(e); and I'm asking you, show me in 417(e) how it says
what manner future interest credits to the account are to be calculated?
Q. Which calculation?
Q. Where --
A. -- interest rate --
Q. What words on the page say the entire calculation as opposed to the
present value calculation?
A. Well, the present value calculation is the entire calculation; and the
present value calculation uses an interest rate, and that interest rate
tells you what you assume invested assets to earn.
A. That's the meaning of the word interest rate is what invested assets
earn.
Q. Where do you find authority for ignoring the word applicable in 417(e)
in front of the word interest rate?
Q. Stop. Stop. Why is that true? What you just said is false. It tells
you exactly how to do it. It defines applicable interest rate. It points
you to a very specific definition.
A. Yes.
A. Yes.
Q. Everything I just said is correct, right?
A. Yes.
Q. Okay. So it tells you, look at where we are pointing you to, this
index prior to PPA that says, use this 30-year Treasury rate and plug it
in when you're doing a discounting, right?
A. No.
Q. I want you to say, are you saying it doesn't cover that or you are
saying it covers something in addition to what I just said?
A. What I'm saying is that the applicable interest rate is the interest
rate and the interest rate is the interest rate that you use in the
present value calculation; and that tells you what invested assets earn.
A. Well, there is. In my mind, it says the present value. And the present
value --
And the present value for purposes of 1 and 2 relates to when a plan may
distribute amounts in excess of a certain dollar limit and when it may
not.
Q. I want to know where on the page you are saying it allows you to say
it applies to the manner in which future interest credits to the account
are calculated?
A. I'm saying that that is an inevitable result in the Alliant plan. When
you use the term present value and you use the term interest rate, it is
not possible to get to any other answer.
A. No. It would not be the result in the 123 or the 456 plan because they
have different plan provisions that implicate different calculations.
Q. So it would apply to any plan that didn't tie the rate to the plan's
rate of return?
A. I'm saying that the term interest rate would not necessarily determine
the interest crediting rate, where the interest crediting rate is not a
function of the rate of return on plan assets.
A. No. Most plans do not base benefits on the rate of return on plan
assets. There's no reason for that to be there.
Q. What words that you can read to me say anything about the rate of
return on plan assets?
A. The words present value and interest rate, which are based on what
invested assets earn.
Q. Where do you come off saying that applicable interest rate has
anything in the world to do with what invested assets earn. Point me to
anything. Law. Conversation you had with somebody about this topic.
Where in the world does that come from other than your fertile mind?
Can you cite anything other than your mind? Anyone agree with you? Name
them.
A. Yes.
Q. -- say that in a plan that uses the plan asset returns, this is what
you do?
BY MR. GOTTESDIENER:
Q. Got that. Anything else that's not cited in your report? Do you have
any other authority for your theory?
Q. Name them. Who? Who agrees with this theory? This specific theory that
you can use the 417(e) applicable interest rate and say that this is what
you do in a plan that uses the plan's rate of return as the interest
crediting rate? Who specifically agrees with you on this?
Q. No one, right?
Q. Name.
Q. Name.
A. I'm -- no. No. It does not mandate the 417(e) rate as the projection
rate. Not at all.
Q. No?
Because of the terms of the plan, you would use 75 percent of the 417(e)
rate or the 4 percent minimum?
A. Or 4 percent because --
Q. I understand your theory. I want to know where you have any authority
for what you're saying that we look to the 417(e) rate to plug in for the
assumed rate of return? Anybody else?
A. As far as I know, the specific facts of this case are a case of first
impression; and as far as I know, nobody has made an opinion one way or
another on the use of the term applicable interest rate for purposes of
this plan, because --
Q. And when did you first get contacted about this case?
Q. And who have you talked to since your initial contact with Mr. Kramer
about testifying, producing a report, anything to do with this case since
you were first contacted?
A. I've spoken with Ron and with a couple of his partners, I believe. And
with Ian Altman, briefly.
Q. When?
A. When did I talk to Ian? A couple of weeks ago maybe. I'd have to look
at my calendar.
A. No.
Q. Did you read his report before you submitted yours, or any draft of
his report?
A. I don't think I did. I have read his report. I don't think I read his
report before I submitted mine.
A. No.
Q. So you've not sought comment from any other actuary as to the validity
of your theory?
A. No.
Q. You have 96-8 in front of you. Tell me where in 96-8 it says, this is
the way that you determine future interest credits to the account in a
plan that's like the Alliant plan?
A. Well, I do believe that these -- the use of the term “interest rate”
is unambiguous; but other than that --
Q. Answer my question.
A. 96-8 does not deal with the Alliant plan in any way.
A. I think it does.
A. No.
A. I think every use of the term interest rate and present value in 96-8
supports my position, because the use of the terms present value and
interest rate assume that the interest rate is the rate at which invested
assets grow.
Q. Didn't you just say a moment ago that 96-8 doesn't cover this kind of
plan?
A. I said that 96-8 does not specifically deal with the facts of the
Alliant plan.
Q. It doesn't deal with any plan that deals with an inside variable
index, does it?
A. When you say inside variable index, you mean based on the rate of
return of plan assets?
A. I want to make sure I understand what you mean by inside and outside.
Outside indices mean something other than the rate of return on plan
assets? Yes?
I don't recall.
BY MR. GOTTESDIENER:
A. Okay.
A. Ah, yes. Variable outside. So you are using the word inside and
outside --
A. I interpret the word outside here to mean a rate that is not based on
the rate of return of the plan.
The -- what other parts of 96-8 other than its use of the term present
value and interest rate support your proposition?
A. Yes. 96-8 --
A. Other than the use of the word present value or interest rate.
Q. Nothing more?
A. Yes. I think there is something more that supports the way I've done
this. And to follow that, you're not going to be able to say, oh, show me
the words on the page here. You have to understand the structure of the
calculation.
When you look at section IV of 96-8, the calculations are based on the
concept of actuarial assumptions that are reasonable in the aggregate and
there's no other way of looking at this.
Could you show me because I never saw it, you underlined one use of
present value or interest rate. What did you underline? Can I see it?
A. Sure.
A. No.
Q. Thank you.
In your report, paragraph 20, you say that the basis for Notice 96-8 is
417(e) which provides that when a participant takes a lump sum benefit,
the lump sum must be sufficient to compensate him for the value of the
annuity that he would otherwise receive in accordance with the actuarial
assumptions mandated by 417(e).
Now, look over to 96-8, and tell me where does 96-8 say that?
In plans that have a fixed interest rate, you can determine precisely the
amount of the annuity at normal retirement date. In plans that have a
variable interest rate, you cannot determine precisely in advance the
amount of the normal retirement benefit.
A. Well --
Q. Is that important?
A. Yes.
Q. Okay.
A. Front-loaded plans are the only kind of plan that you're allowed to
have because back-loaded plans are -- are not permitted.
A. In theory, you could decide -- no. No. I don't think that that's
possible. I don't think if you back-loaded the interest rates, it is
possible to satisfy any of the three back-loading tests except in really
the most bizarre and unusual circumstances.
Q. Okay.
A. And certainly you could never have a plan that always satisfied any
one of those three rules, if you had a back-loaded plan. So, no, I think
that the point of using the word “front-loaded” is to say back-loaded
plans are not permitted; and, therefore, all of the cash balance plans we
are talking about are going to be front-loaded plans, as the Alliant plan
is.
A. Well, in either case, it means the same thing. It means that when you
project the interest rate, when -- I'm sorry, when you project the
interest credits to normal retirement date, you have to have a plan
provision; and that plan provision cannot violate revenue ruling 79-90
and Internal Revenue Code section 401(a)25.
Q. But before you have a plan provision, you could write any provision
you want and it could say anything it wants; but if the underlying credit
is within the employer's control, it wouldn't be definitely determinable,
would it?
A. I'm trying.
A. Okay.
Q. You don't?
A. No.
Q. So are you saying that in all the hours that you've spent on this,
have you ever considered whether or not this plan fails the definitely
determinable requirement?
Q. Tell me what you've done to consider that and what your conclusion is?
A. My conclusion --
Q. How much?
A. I can't really tell you precisely how much time I've spent thinking
about it. I can't really say.
Q. I'm asking.
A. I have thought about it from time to time.
Q. Have you written anything about it in any way, shape, or form, notes,
e-mails, about --
A. I'm going to --
I think that's outside the scope of our agreed agreement with regard to
experts.
MR. GOTTESDIENER: I'm not asking what you discovered. I'm asking what you
did.
BY MR. GOTTESDIENER:
Q. Have you written anything, jotted any notes? I'm not asking anything
about what they were?
A. No. I've not jotted any notes about the definitely determinable
requirement.
Q. Not typed any e-mails, whether sent or -- or sent -- you know, stored
in your draft box?
A. No.
A. Yes.
Did you consult any written materials in thinking about the definitely
determinable issue as to the Alliant plan?
A. Yes.
Q. What?
Q. In what context?
My question is --
A. It actually --
Q. Go ahead.
Q. You are saying there are pre-PPA rules that say you must base it on
plan funding?
A. Yes.
A. Yes.
A. Yes. You are familiar with the top 25 limitation on plan termination?
And actually before plan determination, lump sums payable to the highest
25 paid employees.
A. Oh, no. It requires that you actually not pay certain amounts.
Q. Come on. You want to give a citation. I'm saying it's not talking
about the determination of the accrued benefit, is it?
A. Yes.
A. Well --
BY MR. GOTTESDIENER:
Q. The question is this: Did you consult anything else? You've talked
about two things so far. Did you consult anything else in your
examination of whether or not this Alliant plan fails the definitely
determinable rule because it ties the interest crediting rate to plan
asset returns?
A. No.
Q. I didn' t-- that's right. I didn't say that you did. You looked at
nothing else, considered nothing else?
A. Well, over the years, I've looked at many things; but in the context
of this particular thing, have I taken another look at them? No.
Q. Have you thought about any other authority that you haven't mentioned
to us that over the years you became familiar with, and you didn't have
to crack open again to consider it, but you know, because you knew it so
well, you thought about it and considered it and either applied it or
determined that it didn't apply? Any other authority that you considered,
thought about, that passed through your mind in making whatever
conclusion it is that you reached about this plan?
A. No. Actually, I need to amend my prior answer. I did look at two other
things.
Q. Okay.
Q. And so you amended your prior answer. Now I want to make sure I got my
question answered which is not just looking at, but did you think about
other sources of authority and apply it as a mental process to see
whether or not it would impact your determination and perhaps your
conclusion?
A. No.
Q. Coming in to this deposition, yes or no, did you have an opinion, yes
or no, you said that you thought it was important.
A. I do think it is important.
A. I think that this plan does not violate the definitely determinable
requirement.
THE VIDEOGRAPHER: This is the end of tape 2. Off the record at 12:30.
AFTERNOON SESSION
(1:09 p.m.)
BY MR. GOTTESDIENER:
Q. Directing your attention to your report, paragraph 32, you say, “In
the typical whipsaw calculation, which is dealt with in Notice 96-8, a
pension plan credits interest to an account based on some index that does
not represent a real basket of investments. For example, the plan may
credit interest at a fixed rate of 8 percent specified in the plan
document. Or the plan may credit interest at a rate equal to the yield on
one-year Treasury securities plus 1 percent (this is the rate in Berger
v. Xerox). In both cases, the interest crediting rate is something other
than the actual rate of return on the trust fund, and so the statutory
mandate is not applicable, and the assumption regarding the rate of
interest credits must be reasonable.”
A. Yes.
Q. But that interest rate is the 30-year rate for the period in question,
right?
Q. Why would the statute use an assumption for a real rate of return
using the 30-year Treasury?
A. Why?
Q. Yes.
A. Are you asking me to speculate why they picked that particular index.
A. No.
Q. It is impossible, right?
Q. It is close to impossible?
Q. Your whole theory hinges on the fact this is a real rate of return we
are talking about that we need to project, and we're going to use a
fiction, right? A rate that you can't earn? That's your theory?
A. My theory --
Q. Isn't it?
Q. I'm asking --
A. I'm saying --
Q. When you --
A. -- I'm saying that the interest rate is the projection of what you
think the real rate is going to be or it is a projection --
Q. What sense -- if your whole linchpin is that this has to do with trust
returns, what sense does its make to use as a proxy something that is a
complete fiction that somebody could never actually earn?
A. The sense that it makes is that it is a rate that does not have
discretion in it; and if you look at the history of section 417(e), I
think that it becomes clear --
Q. If I write into the plan after looking at Clark Maxam's report that it
is based on an objective stochastic analysis, this thing can't be less
than 8.5 percent and I write it into the plan document, that's objective,
too? It is based on real returns, possible real returns, isn't it?
A. Well, it may be; and I don't think it is, but it may be that you could
write into the plan that the interest rate used for the projection for
purposes of the projection would be 8 percent or 8.45 percent.
Q. Under your scenario, what you would do is you would actually look at
some kind of baskets of investments and do some sort of analysis that
would look at something that actually could occur for this plan, right?
That's what you were just describing?
Q. You know the statute doesn't say anything like what you are saying,
and that you first thought about this less than a month ago, correct?
This is a case of first impression that you thought about less than a
month ago. You've not talked to anybody about it. You don't have anybody
who backs you up on this? Anything wrong with what I just said?
A. Yes.
Q. Factually, what was wrong with what I just said? You haven't thought
about this for more than a month, have you?
A. About --
Q. Yes or no?
Q. No. About the crediting rate that you would use for projection
purposes in a plan tied to trust assets?
Q. Okay. And you thought before you were hired in this case that if I
were ever to be asked to opine that I would say that it's the 417(e)
rate, right? That's what you thought?
A. Yes.
A. Philip Cook.
A. Gregg Braden.
A. John Parks.
A. John is an actuary.
Q. Okay. Who else? When you talked to Cook and Braden about it, were you
considering an actual plan?
A. Yes.
A. Because that plan wasn't a cash balance plan. It was a different kind
of plan tied --
Q. Okay. The variable annuity plans -- put those to one side. Have you
ever talked about this in the context or thought about this in the
context of a cash balance plan before you got Mr. Kramer's phone call?
A. Yes.
Q. When?
Q. I understand all that. Answer my question. When did you actually think
of this issue?
Q. That's all post-PPA. This is all pre-PPA that I'm asking you about.
Have you ever considered before October when you got Kramer's call, the
question of what the proper projection rate should be for a cash balance
plan pre-PPA that ties to trust assets, the interest credit?
A. Yes. I don't know why you would think that my previous statement was
post-PPA, because I didn't say that.
Q. You said something about variable annuity plans and you just said
something about a plan that would go to trust assets after a conversion.
You're saying that you talked and considered having a client use trust
assets pre-PPA from some other interest crediting rate design?
A. Yes.
Q. Okay. Tell me about that. You don't have to name the client but tell
me as much information as you can about how this came up and what you
thought about it.
A. Yes.
Q. I said no. I want to know about the details of what you considered.
You can talk about a high level of generality. I find it hard to believe
you would seriously consider it. So I want you to explain to me step by
step as best you can what did you think. I'm going to use this theory?
Did you have this theory in mind?
A. I think that there are a lot of issues there; and for a variety of
reasons, the clients that I worked with were not good candidates for
doing this; and the reasons varied from a kind of negative whipsaw that
the clients relied on for funding purposes to other concerns. But I mean,
the simple answer is I do a lot of work with cash balance plans; and I
have given thought to how you do whipsaw calculations on many occasions
in many contexts.
A. It is.
Q. Did you consider this question before you got the call from Kramer as
to how pre-PPA a plan that tied the crediting rate to trust assets would
do a whipsaw calculation? Yes or no?
A. Yes.
BY MR. GOTTESDIENER:
Q. When specifically did you consider that prior to October's call from
Kramer?
A. On various occasions --
A. Probably.
Q. How long ago was the first time you considered it?
Q. And were you aware -- when was the first time you ever became aware --
did you suggest as an actuary -- how did it come to your awareness the
idea of tying it to trust assets? Was that your idea?
Q. When was the first time you ever heard of an actual cash balance plan
that tied returns to trust assets?
A. Oh, I think it was a long time ago. I don't know exactly, but probably
it could be more than 10 years ago.
A. I believe the circumstance, you are asking when I first heard about
it, when I first heard something like that, I'm going to take a guess
that it was at an actuarial conference, I think at the enrolled actuaries
meeting.
Q. Okay.
A. In a discussion --
A. Which I think does not actually tie interest crediting rates to actual
returns; but I think that the Bank of America plan at one point gave
participants some choices as to which interest crediting rate they would
pick, and it was a bunch of different indexes of something very close to
real investments.
A. Not necessarily.
A. I have not seriously thought about the difference between -- you know
-- something very close to real investments versus real investments. I
would say in general, when you're talking about something that's very
close to real investments but not actually real investments, that you
would not be covered by the term interest rate.
In other words, that you would use a reasonable assumption rather than a
statutory assumption.
A. The --
A. The opinion that the statute tells you what interest rate is used,
yes, turns on the fact that you are talking about a real basket of
investments.
A. It might.
A. No.
A. No.
Q. You made numerous references so far during the deposition to your
experience with cash balance plans and years in this area. It is fair to
say that you do consider yourself an expert on cash balance plans, right?
A. Yes.
A. Yes.
A. Yes.
A. Well --
BY MR. GOTTESDIENER:
Q. You know about these cases, right? That they've been pending for
years, right?
Q. It doesn't matter. Are you aware of the plans is obviously even more
basic. Are you aware of the litigation, the plans -- you know that these
things exist. You are telling me you haven't really thought about whether
you would say that the statute requires it in those circumstances, right?
Q. What do you mean studied? You know -- you are putting out there that
you are absolutely clear that rate of return plan assets definitely is
just totally governed by the statute, and it requires this; you know for
a fact before you have given this opinion and sat here today that there
are cash balance plans where participants direct their accounts into real
investments.
Yes or no?
Before you walked in here. I'm putting these questions. You knew it, yes
or no?
A. I'm not clear whether the Bank of America plan actually -- in fact, I
think that it doesn't tie to real investments.
Q. Any other plans? Could you please answer my question? Yes or no?
Before we're talking about this now, walking in here, you know that there
are cash balance plans -- I am not limiting it to the Bank of America --
where the participants' return is based on the return of a real
investment.
Yes or no?
Q. And you were aware of that before you walked in here, right?
A. Yes.
A. I'm hedging about that because I have not studied those plans
specifically and because you're asking me to render an opinion --
Q. What difference would it make? What facts do you need to know right
now to tell me whether or not the PricewaterhouseCoopers plan that has a
401(k) menu would be governed the way you say the statute mandates?
Tell me what facts? I'll give them to you. You don't need to know
anything, do you?
I would want --
Q. You can tell me right now. It is the rate of return on a mutual fund.
That's the facts.
A. Well, it's the rate of return. So you have participants who can elect
various rates on various mutual funds.
Q. I want you to tell me why you can't tell us right now it is governed
by the same interpretation of the statute in 96-8, and examine with me
what facts you need to know and then you'll give me your opinion.
You don't have the opinion now. Tell me what facts are you missing.
A. Yes. You used the word why. Could we get the question read back?
Q. No. I'm asking the question. What fact is missing? I gave you the fact
pattern. You admitted you were aware that there were such designs?
A. Yes.
Q. No. On the plan that you have in mind that you said you came in here
knowing about that there's a plan that has such a crediting menu.
Q. You told us. The testimony is crystal clear, you knew these designs
existed before you walked in here today?
A. Yes.
Q. Okay. You also knew very well about the Fry v. Exelon case, right?
A. Yes.
Q. And you knew the underwriting crediting rate was tied in part to the
return to the S&P 500? Right?
You are an expert in this. Don't play like you don't know.
BY MR. GOTTESDIENER:
Q. The answer is you cannot right now sitting here identify a single fact
that you are missing in order to render that opinion, can you?
Q. Why is that relevant? What does that have anything to do with anything
that you've opined about in your report?
A. It is potentially relevant.
One reason that it's potentially relevant is that -- and by the way, I
want to answer that question, but I do want to say there were several
facts so I don't want you to start telling me there was only one fact I'm
missing, but you did stop my answer mid-answer.
Q. I'm not asking you to identify a fact. You just identified one. I'll
change the fact pattern and say the plan that I want you to have in mind
does not invest in any of the mutual funds that it offers to participants
as their selection.
All it does is invest in individual stocks and bonds and it doesn't use
mutual funds, so it offers participants mutual funds, a series of mutual
funds, low cost mutual funds, real investments; next fact, I've satisfied
you. What is the next thing you need to know in order to tell me whether
or not the statute controls?
Q. You can't. Because I want to know why you would want to look at the
plan document. You can ask anything. I have all these plans memorized.
I'll give you all the answers right now.
You tell me: What is it you need to know next? I've just given you -- you
can't -- you can't either give me an answer as to whether or not the
statute applies or you can't give me a fact you need to know before you
can answer, correct?
BY MR. GOTTESDIENER:
Q. Please answer my last question. You either will not be able to render
an opinion, or you can't identify why you can't render an opinion, right?
BY MR. GOTTESDIENER:
Q. I'm not asking you about your prudence, whether or not you charge
anybody for it. I'm asking you --
Q. -- what expert fact do you need to know to tell me whether or not the
statute controls?
Q. Why?
A. Then how would that -- well, because normally, with real investments,
you can't change every day --
Q. They can change exactly the way anybody who is investing in a mutual
fund can. They get their 4:00 p.m. net asset value and then they can
switch daily. Identical. Exactly the same thing as if they were actually
invested in the plan. No difference.
Next question.
Identify a fact that you need to know before you tell me whether or not
the statute controls.
Q. Just identify a fact you need to know before you answer the underlying
question.
A. You know, I haven't been taking notes. So I want to go back over the
facts that you've already given me. You are saying the plan does not in
fact invest in these notional investments?
Q. Right.
A. It matters --
A. It matters for a variety of reasons. When you have a present value and
you're looking at a plan and the statute is telling you, for example,
that the plan is expected to earn a particular rate of return, and then
you say, well, we're going to give participants the ability to choose a
variety of investments that may or may not be suitable for the plan,
we're going to allow the participants to move their money around in ways
that the plan may not actually do; and in addition to that, as with --
you know -- virtually all cash balance plans, there are certain minimums,
maximums, and limits.
So the fact that the actual plan is not invested in the same way as the
accounts could be material.
Q. This is all covered by the statute, right? The statute explains this?
A. No.
Q. Where do you read that the statute depends on the plan being the
investor as opposed to a third party as opposed to the plan and the third
party are both invested in the same basket of investments?
Q. But you just said here, Mr. Expert, you've been thinking about this
thing for years; and it has come across your desk and your table and your
panel and all that for years.
When it came across your mind, did it or did it not strike you as
material?
You're not thinking about this for the first time? Or are you?
Q. Wait a minute, isn't the Alliant plan a very, very specific and
unusual type of plan?
A. It's a lot more time than I've had to think about your hypotheticals.
Q. You agree that this plan is a very, very special and unusual kind of
plan, correct?
A. I do.
Q. You were not aware of this specific plan design, 75 percent of trust
returns or a minimum, prior to getting Mr. Kramer's call or were you?
A. I was not.
Q. You were unaware entirely of the pendency of this litigation and the
pendency of another case involving the SC Johnson plan?
Q. And you -- do you -- what efforts have you made to, in the past month,
learn about the prevalence of this plan design, if any?
Q. Determine -- have you made any inquiries about who else has this kind
of plan? How is it designed? Who designed it? Anything like that?
A. This particular -- I know a little bit about how the plan was
designed; and who designed it. My understanding is he --
A. Okay.
Q. I'm asking what kind of investigation have you done about other plans
that have a similar design, trust asset returns plus a minimum as a
greater of?
A. I have not attempted to determine how many other plans there are of
that nature.
Q. Okay. And I didn't say determine in the sense of nail it down a
number. Have you made any inquiries or efforts to learn about the
existence of other such plans?
A. No.
Q. Have you made any efforts in the past month to talk to any
practitioners who may or may not have been directly involved in the
creation or administration or litigation of any such plans other than Mr.
Kramer and the partners of his that you referenced?
A. No.
So, for example, if your interest crediting rate were the greater of the
actual rate of return on the plan or something else, then that something
else would not be necessarily tied to the interest -- not necessarily be
equal to the applicable interest.
Q. You're talking about plan provisions that tweak this crediting rate?
A. Right.
Q. But if it's tied to the plan assets, you're saying that the present
value, whenever it is calculated under 417(e), that the interest rate
used in all aspects of that calculation has to be the applicable interest
rate?
A. Yes.
Q. And so when 417(e) applies to a plan, not only is it just the present
value, but also the accrued benefit itself must be determined using the
same interest rate, the rate of return that money invested will receive?
A. -- then that trust return would be the trust return that you assume is
the applicable interest rate, yes.
Q. Now you lost me. The crediting rate is 75 percent of the plan trust
returns or 4 percent?
A. Right.
A. Well, you -- the piece of that that is based on returns of the plan is
the applicable interest rate.
So, for example, if the applicable interest rate is 3 percent, then you
use 4. If the applicable interest rate is 8 percent, you would use 6.
A. Correct.
Q. Okay. So and -- so you would further assume that the current year's
rate -- because we're using the applicable interest rate -- the current
year's rate remains constant for all future years; in other words, the
assumed rate of return for future years will be the same in all future
years as it is in the current year?
What do you mean, in this case it's the structure of the statute?
Q. Yes.
A. -- to determine what plan assets are going to earn in the future from
today.
Q. So it would be mandated, statutorily required, that the current year's
rate remains constant for this projection for all future years? The
assumed rate of return for all future years is going to be the same in
all future years as it is in the current year?
A. Yes.
Q. Now, you agree that 417(e) only applies to 417(e) benefit forms?
A. Well, if the benefit form is not subject to 417(e) then you don't do a
calculation of this type at all. It is not that my argument is
inapplicable. It is that 417(e) is inapplicable as you have specified in
the premise of your question.
A. Correct. Okay.
A. Uri-huh.
A. Okay.
Q. And the plan has an actuarial equivalence; and you need to determine
his accrued benefit?
Q. No?
Q. Yeah.
A. Okay. That annuity payable now under this plan is going to be his
account balance today divided by an annuity factor today. You've said as
our shorthand that accrued benefit means payable at normal retirement
date.
Q. Yes.
A. Okay. And no, you would not determine as part of that calculation what
is his accrued benefit at normal retirement date.
You would take his account balance today and divide it by an annuity
factor today; and that would end the calculation under this plan as I
understand it.
Now, I will say that -- you know -- this is not an issue that has come up
in the litigation as far as I know, and it is not something that --
Q. John comes to you and says you are Mr. Cash Balance and I want to be
sure that these annuity payments were determined using reasonable
actuarial assumptions; and you say, well, I need to rethink my deposition
answer.
Oh, yes, I absolutely would first, John, have to determine your accrued
benefit -- wouldn't you -- in order to test whether or not it was a
reasonable actuarial assumption?
A. (No response.)
A. Well, it can be, because I think that there are certain circumstances
where such a testing would be appropriate.
Q. No. Come on. He's your neighbor. He says I want -- I don't trust these
people. I want to make sure. I read your report. David, come on. I read
your report. Note 6, I want you to get out your abacus and show me that
it is a reasonable actuarial assumption.
A. Well, actually -
A. Actually many plans, in fact, virtually all cash balance plans read
exactly the way that I have said. This is a --
Q. Listen, it could be difficult to calculate it, but it could be done,
right?
Q. You know, you're just wrong about that. You said that repeatedly. The
accrued benefit is a very specific thing. The plan has to cut a check,
doesn't it?
Q. The plan -- accrued benefit -- are you saying the accrued benefit is
an estimate? The accrued benefit is an estimate? Is that what you're
saying?
Q. No, it isn't. You were wrong about that. You repeatedly said it.
Q. There is a provision --
A. Well, if you're saying, do I know for this 40 year old what his
benefit will be if I wait until age 65, the answer is no. I don't know.
Neither does anybody else. And it is not possible to know.
A. It can't.
Q. Okay.
A. Knowing --
Q. No.
A. -- if the person leaves his money in from today until age 65.
Q. Are the actuarial assumptions for John who wants to know whether he's
gotten a single life annuity at age 40 based on reasonable assumptions --
Q. It is this case, this plan. Totally just change the facts and don't
assume the person wants a lump sum.
I'm asking: How would you go about -- would you -- are you required to
use -- under your theory, does the statute mandate that you project using
the 417(e) rate? Or would you do it some other way?
Q. What do you mean at all? Don't you have to figure out his accrued
benefit? He comes to you and says I really would like you to do me this
favor? Could you just check it and make sure?
A. No.
Q. Don't you first have to calculate his accrued benefit?
A. No. We're talking about a Treasury regulation here, not the statutory
language.
Q. Yes. I'm asking, don't you have to calculate his accrued benefit in
order to determine whether this form of annuity is based on reasonable
actuarial assumptions?
In many, many plans; and the Treasury does not in any case that I know of
in interpreting its own statutory provision -- I'm sorry, its own
regulation, require that you do such a projection and determine whether
the payout is reasonable.
Q. Look at 96-8, section III.B.1 first sentence, “In the case of a front-
loaded interest credit plan, an employee's accrued benefit as of any date
before attainment of normal retirement age is based on the employee's
hypothetical account balance as of normal retirement age, including
future interest credits to that age.”
A. First sentence.
A. Yes. That's what that sentence says. And subsequent sentences in that
same paragraph and the next paragraph and the next paragraph after that
explain and expand upon that.
Q. Yes.
A. Which is exactly what Treasury says in Notice 96-8, that you cannot
predict those things in the future unless it is fixed. If it is not
fixed, you don't know what it is.
Q. No. It says -- no. You can't know the accrued benefit as of any date.
This tells you not only does it exist, but what it is. Correct?
Q. It tells you not only does it exist, it tells you what it is, and how
you do it? Doesn't it?
A. No.
Q. What does that -- how is that responsive to what I was just asking
you. In terms of -- what -- it tells you, you have to have a method and,
therefore, once you apply the method, you have the accrued benefit?
A. It should be.
Q. Yes.
Your actual normal retirement benefit in the future is not something the
plan -- it is not something that you know at the time you pay out the
benefit today.
Q. But once the plan does all that, that's not relevant, you are asking
about a counterfactual situation. That's not relevant.
Q. No, you're not. It says in order to comply with 401(a)25 the method,
including actuarial assumptions if applicable, must preclude employer
discretion?
A. Yes.
Q. Tell John how are you going to calculate his 417(a) accrued benefit?
The same way? Or different than 417(e) payout? In this plan? How are you
going to do it?
Q. Yes.
Q. What's the answer to my question? How are you going to deal with
interest credits in determining the accrued benefit?
Q. Yes.
Q. I'm talking about John coming to your kitchen table and asking you to
do the calculation.
A. This is a tax regulation. John isn't -- John isn't the IRS. John isn't
--
A. It is a tax requirement.
A. If the plan specifies a method and that method is approved by the IRS
in a determination letter, then presumably the IRS has looked at it and
determined that the result that you get is a reasonable result based on
reasonable actuarial assumptions, and my recollection --
Q. How would you go about picking the interest rate to answer John's
question?
Q. John. Age 40 --
A. Yes.
Q. -- to test, because he doesn't trust them, he wants to know that it is
a reasonable actuarial assumption converting from his age 65 accrued
benefit to his single life annuity starting at age 40. How do you pick
the interest rate?
Q. Now I understand why it took 15 minutes. You're saying that 417 -- the
417(a) accrued benefit is not the same as the 417(e) accrued benefit?
A. If you're --
Q. So --
A. And so --
Q. Hold on.
A. No. Because --
BY MR. GOTTESDIENER:
A. That's unknowable because the plan document doesn't say what the
417(a) accrued benefit is.
Q. Guess what, you are admitting that you never considered the 417(a)
accrued benefit, whether it was the same as the 417(e) accrued benefit,
correct?
Q. Yes.
I was not aware benefit payments other than lump sums were the issue in
this litigation.
Q. That's because you think there can be two accrued benefits or three,
right?
A. Well, clearly --
Q. Here's the plan. How do you figure out John's question? How do you
answer it? I'm giving it to you.
THE WITNESS: Okay. In the Alliant plan, under the provisions of the plan,
you would project using the 417(e) rate.
BY MR. GOTTESDIENER:
Q. Which is different than the rate that you say is statutorily mandated,
right?
As I read this plan, you would project forward using the 417(e) rate as
the presumed rate of interest credits in determining Joe's benefit in the
form other than a lump sum.
Q. So you have just confirmed that you believe that there are two accrued
benefits under this plan, one if Joe takes a lump sum; and one if Joe
takes an annuity?
For both purposes, for both a lump sum and an annuity, the plan projects
forward the interest crediting rate as if it were the statutory rate
which is, in my view, not what is required for purposes of calculating a
lump sum under Notice 96-8.
So I think that the plan to the extent -- to an extent, in doing its
whipsaw calculation, comes up with a number, generally speaking when the
statutory interest rate is greater than 4 percent the plan's whipsaw
number is greater than the -- the Notice 96-8 whipsaw number. And when
the statutory interest rate is less than 4 percent, the plan is coming up
with a whipsaw number that's less than the Notice 96-8.
BY MR. GOTTESDIENER:
I'm not talking about the amount or the result through going through a
different form.
The accrued benefit. Can there be two of them or does it have to be one?
Q. No, that's the way I -- only when he gets to age 65, it is as of any
date. And you know that.
A. Before then -- before then, yes, the plan could define the projection
or estimation of that future amount in different ways with respect to
different forms.
Q. Yes.
A. I just said those benefits are exactly the same in the Alliant plan.
No. There's only one benefit in the Alliant plan.
There's no statutory mandate. If you are right about the way you
interpreted that, if it were written slightly differently, you could do
one accrued benefit for 417(a) and you'd have a separate interest rate
that's mandated by 417(e)?
A. Yes.
Q. And what you've just done is you eviscerated 417(e) that way, though,
right?
A. No.
Q. Why can't the plan just if we are in pre-PPA territory, just define
the accrued benefit in such a way as you get a lesser benefit through the
form that you elected?
Q. Yes. It is not permitted which is exactly why there's only one accrued
benefit?
A. There's only one accrued benefit when you reach age 65. Before you
reach age 65, what that accrued benefit is is not something that you
actually know. It is something that can be projected based upon plan
provisions. Those plan provisions are going to be limited by actuarial
assumptions. Those actuarial assumptions can and often are different from
one benefit form to another because 417(e) --
Q. The discount rate under 417(e) is irrelevant unless you are already at
normal retirement age?
Q. But the touchstone is the accrued benefit. You are saying it can be
two different things, aren't you?
A. I'm saying that the accrued benefit could be different things for each
different form of benefit because the different forms --
Q. You keep evading the question. I'm saying before you switch forms. The
core form, the J and S, the accrued benefit, you say that it is two
different things depending upon the form elected.
Yes or no?
A. Yes. It is not in this plan. I'm saying it can be.
Q. It can be. So we want the judge to hear that loud and clear that
basically you got one accrued benefit if you take a lump sum the way you
interpret the law, and another accrued benefit if you elect an annuity,
right?
Very possible?
A. It is very possible.
A. I think if you read my report, you'll see that I actually think that
under certain circumstances, this plan violates 417(e). And if 417(e) is
eviscerated, then that would not be possible. So no, I don't think I have
eviscerated 417(e).
Q. Wait a minute. In your report, you say that you are assuming for
purposes of your report that whipsaw during the pre-PPA period is the
law?
A. Yes.
A. Yes.
Q. But you're only doing that for the purposes of your report as an
actuary?
A. Because that's the role that I'm playing here is as an actuary. I'm
not rendering legal opinions. I'm trying not to render legal opinions
despite the fact that you've asked me many times to render legal
opinions.
THE VIDEOGRAPHER: This is the end of tape 3. Off the record at 2:22.
(Recess.)
BY MR. GOTTESDIENER:
Q. Assume the Judge invalidates 1.2 and finds that the plan's deemed
projection rate unreasonable, how would you then go about answering
John's question?
Then for sure you'd have two accrued benefits in this plan, right?
A. Well, I think it would depend on the basis upon which the judge --
Q. It's unreasonable?
A. Well --
Q. 96-8, she reads 96-8, she agrees with our analysis, and says this is
obviously a phony projection rate, it doesn't reflect the -- I mean, the
preamble of the plan says its intent is to pay the account balance, it is
clear what's going on here, and it is just not a reasonable rate.
So how would you then figure out the 417(a) accrued benefit.
Q. Yes. Do it.
Q. No. If the plan -- if the plan -- let's say the plan -- let's try it
another way if you refuse to answer that easy question.
Let's say it doesn't have a provision and you have to come up with a
provision based on what's a reasonable assumption?
A. Well --
Q. You look at section IV -- 1411 of the plan that says if anything is
invalid or -- you're trying to figure out how you do it. How would you go
about picking the interest rate?
A. Well --
Q. Can you just answer whether or not you would use what you claim is the
statutory mandated 417(e) rate?
Q. I know what I'm doing. What I'm doing is not getting an answer.
Q. It is a simple question.
A. Actually, you'll get a simple answer if you just let me get it out.
If you assume that that provision in the plan was not there --
Q. Or struck down and you look at the plan document and it says what you
do when a provision has been struck down?
Q. No what?
A. Then no, I wouldn't use the statutory -- I might not use the statutory
interest rate.
A. I'm saying you have given me a hypothetical with a plan that reads
differently from the Alliant plan and with a judicial decision that has
never been written and that I can't see under which that might be the
answer.
Yes.
You go through paragraphs 35 down to 36 where you talk about plan XYZ,
and this is based on the actual return; and you talk about Mr. Smith; and
you posit that Mr. Smith has an account balance of a thousand dollars.
He's going to reach NRA in a year. The statutory rate is 5 percent. But
an economist looking at how the plan is invested, and by that you mean
its asset allocation?
A. Yes.
A. Yes.
Q. So then what you want to now show is, well, what Maxam and Deutsch do,
that can't be right; that's what you're attempting to establish, right?
A. Yes.
Q. Then you say you do the whipsaw calculation by projecting the thousand
dollars, forwarded 10, that would arrive at 1100, then discount back at
5, and you would arrive at the whipsaw amount of $1,048, right?
A. Yes.
Q. Then you say that's not possible for that to be the present value of
Mr. Smith's benefit?
Q. And then you -- you then set to yourself the task of proving what you
just asserted?
A. Yes.
Q. So you now say, let's assume that in the next year that the XYZ plan
that the economists had expected -- when you say an economist looking at
the plan, you mean there you are basically saying they're kind of like a
group of economists would agree? That's your --
A. Or an economist.
A. Who is --
Q. Who's reasonable?
A. Who's reasonable and whose decision somehow prevails in this case for
doing the calculation.
So I want to be real clear that I understand and the record is clear what
you're saying proves you're right.
A. Yes.
Q. Thank you. Now, when we get over here, you're saying it is proof that
the present value can't be 1048 as follows. That actually even though
this reasonable economist said that it was going to be 10, in fact, it
only turned out to be 5 percent that the plan earned, right?
Q. Let me finish.
A. Okay.
Q. It turns out what the plan earned wasn't what it was in effect by the
economist projected to earn, correct?
A. Correct.
Q. Then -- and I must ask you about this: You throw in there “as the
statute says.”
What are you trying to do there? First let's assume in the next year the
XYZ plan earns 5 percent, although you just told us this is an absolute
reasonable economist you just put in a dig here that says as the statute
says?
Q. What's the relevance -- I thought your whole theory was that what the
law says, you know, the -- as Dickens told us, the law is an ass. It can
be completely unreasonable. Why do you say -- what relevance is it -- why
do you stick in there, as the statute says?
You're basically saying the economist is reasonable but the statute can
be completely unreasonable. Why does it matter to you to say there that
the fact that it earned 5 percent happens to be what the statute says
it's going to earn?
But if they work, if they actually happen, will you get to where you
expected to get.
Right?
A. Well --
Q. Right?
A. I think my answers are really clear, but incomplete, because you never
let me finish.
You asked me, why is it that you have to worry about what would happen if
the plan actually earned the rate that the statute says is the applicable
interest rate.
Let's assume in the next year it only earns 5 percent. His actual account
balance at normal retirement age will be $1,050. Now, you previously
hypothesized that he took his lump sum, right? That he took the lump sum
in the prior year?
A. There are two alternate paths here. You have to see whether the
alternate paths get to the same place. That's what a present value is.
You look at one path. Then you look at the other path.
The 1048 is on the assumption he took his money out? Right? Yes?
A. Yes.
Q. The next thing you're saying here is that he left his money in, right?
A. That's because those are the two paths. That it has to get to the same
place.
Q. He leaves his money in because you change the scenario. He leaves his
money in, but the plan only earns 5 percent.
But his whipsaw lump sum of 1048. Now you are switching back?
A. Yes.
Q. Will have grown?
A. Yes.
Q. Okay.
A. Yes.
Q. Why --
Q. Why does it grow by 5 percent under your sentence here? What is that
growth?
Q. 40. But his whipsaw -- this is the core of your alleged proof of why
you are right about all this -- his whipsaw lump sum of 1048 will have
grown by 5 percent. Why 5 percent? You never explain that?
A. Well, the --
THE WITNESS: Because the assets haven't grown by 5 percent under that --
under that -- under that hypothetical scenario.
BY MR. GOTTESDIENER:
Q. But you're making no sense. He's taken his money out. He got a payment
of 1048?
Q. No. You just don't like 417(e). Why are you using the plan's rate of
return when he's left the plan?
Q. No, in law generally. The whipsaw calculation. Let's say under the
most simple example in 96-8? Where they use an 8 percent fixed rate and
the crediting rate is 6.5 percent. Do you agree pre-PPA as an actuary
that 96-8 is correct?
Q. Do you agree --
Q. Do you agree --
Q. What's your opinion -- so you have -- you are saying you have no
opinion as an actuary?
THE WITNESS: I'm sorry. You've now switched to an 8 percent fixed rate, 6
percent --
BY MR. GOTTESDIENER:
Q. Huh? We're talking about the most basic example. This is your bread
and butter, sir.
A. I'm just trying to get your question right. Your question was that
with an 8 percent fixed interest rate and a 6 percent applicable interest
rate, is 96-8 correct? You're asking for my legal opinion on that,
correct?
Q. Yes.
A. Okay.
My legal opinion on that, informed by a lot of things including all of
the cases, is that the majority view is that 96-8 is a correct statement
of the law, and there is a minority view that leaves that question
somewhat open; and the advice that I have given clients as a lawyer is to
follow Notice 96-8.
Q. Well, actually, my question wasn't for you to give me the legal lay of
the land. I want to know your opinion as a person who has an actuarial
and legal background.
Do you believe in whipsaw pre-PPA under those facts, do you believe 96-8
got it right, whether you characterize that as a personal opinion, a
personal legal opinion, a personal actuarial legal opinion.
Do you believe that it is right, 96-8, in the -- using the most simple
example that it uses of a fixed rate of 8 percent and a discount rate of
-- in 96-8 of 6.5 percent?
MR. KRAMER: Objection to the extent it calls for a legal opinion. But you
can answer.
BY MR. GOTTESDIENER:
A. You're not asking for a legal opinion. I already gave you that.
Do you believe, feel, think as an actuary and as a lawyer that 96-8 got
it right? Yes or no?
I do think there are arguments on both sides of that issue and I think
that the arguments on both sides are non-trivial. And --
Q. So you wouldn't say, let's say, for example, that whipsaw is obviously
correct?
A. If I were -- now, you know, you've kind of jumped back and forth
between an actuary, a lawyer, a person.
A. No. Because when you say I would never say it, you have to jump back
because would I say it, for example, if I were representing a client that
were arguing that whipsaw was wrong? Would it be appropriate for me as a
lawyer to make an argument that I think is valid that whipsaw is --
A. I am smart. And I think that I'm walking into a trap here where you're
going to say, oh, if you were doing this or doing that.
A. My personal opinion?
A. Pre-PPA?
Q. Yes.
A. Is that there are strong arguments on both sides of that, and --
A. You're asking me --
A. You are asking might I have said something in the past about whether
whipsaw is right or wrong; and --
Q. Okay.
A. Number one. And number two, my position on whipsaw has, I would say,
on this legal issue -- not on an actuarial issue, but on the legal issue
-- has evolved as, first of all, judicial opinions have come out; it is
evolved as I had an opportunity to think about it.
Q. That's what you think. That's your opinion. We'll let the judge
decide.
A. We will.
But I wish to --
BY MR. GOTTESDIENER:
Q. Okay.
Q. If it is true --
Q. Let's say it has a lot of support, I'm all wet, and you don't know
where it is, but it has got a lot of support, but is it relevant for her
to know what you think and feel as a human being about this subject, yes
or no?
Q. Let's say recently in the recent past, let's say last year, were you
of the view in your evolving thoughts that whipsaw was obviously
incorrect? That whipsaw should never have had to have been performed pre-
PPA? Yes or no?
A. Yes.
Q. What was the first whipsaw case you were involved in?
A. Well --
Q. Too early?
A. -- judicial case.
Q. Yes.
A. But 1988 would be the first time that I was -- the first time that I
was involved with a cash balance plan that required whipsaw; and I
advised that plan that it had to perform a whipsaw calculation.
And did perform a whipsaw calculation for that plan in 1988. That was the
first. That's what you asked me. Now, I will say that I think there are
strong arguments for and against whipsaw.
Q. So you never would have said in the recent past, you never would have
told anybody, putting aside telling a judge -- not a judge -- whipsaw is
obviously incorrect, whipsaw never should have to be done?
Q. How?
A. I'm sorry?
Q. After all you just said about how you have arguments on one side or
the other, how is that possible that you said that?
A. Because, first of all, not every statement that I make all of the time
is as carefully thought out as something that I would put in an expert
report or something that I would testify to under oath; and --
A. Well --
Q. April 8, 2008, top 10 unresolved issues in PPA. 2008 enrolled
actuaries meeting, that's what you said, right? Do you deny it?
Q. You don't deny it because you said it because that's what you believe.
Do you make things up? Lie to actuaries you address at the enrolled
actuaries meeting?
A. Well, I think --
Q. Thank you.
A. I don't lie.
Q. So the fact is that, in fact, you have believed in the recent past
that whipsaw was never required, should never have been required, and it
is an obviously incorrect proposition, correct?
You believed when you told the actuaries on April 8, 2008 that you
believed that whipsaw never should have been required, and it is an
incorrect proposition that whipsaw was required, that what is set forth
in 96-8 because you believed that? You believed it then? You believe it
now?
A. Well, I think if you look at any fair reading of that discussion, that
you will see that I am actually telling them to apply whipsaw when
legally required, number one. And number two, I think that you also, if
you see a fair reading of that, I believe --
Q. And you admit that you were being honest at the time you were
conveying your personal opinion? Correct?
A. No. No. No. A strong argument that whipsaw should not have been the
law.
A. No. No.
Q. You can put that all aside. Because you are an actuary who is being
asked to perform an expert service, right?
Are you able to put all your personal views aside? Yes or no?
Is anything you are saying today or in your report at all colored by your
view that whipsaw is an incorrect proposition?
Q. Assuming that --
A. And that is --
Q. That --
A. That is --
A. Yes.
Q. We've never left the topic that you don't like 417(e), do you, a
defined benefit plan paying pre-age 65 lump sums? You don't think it is
economically sensible, do you?
Q. It is the exact question, the second sentence says that he's -- after
you say that he -- if he left his money in, it would grow in the plan to
1058; but if he had taken it out, the previous year, and he got a
whipsaw, and his account whipsawed, paid him 1048, it will have grown by
5 percent the next year; and I asked you what's that 5 percent; and you
said it is the plan's -- it is what the plan earned.
And I'm saying, why are you looking at someone who's taken his benefit
out already at what the plan earned?
A. Because you have to compare two things to determine whether you have a
present value. The present value relates one thing to another thing.
Therefore, you have to look at the two different things. One thing --
Q. Why wouldn't Mr. Smith be assumed to earn the plan's rate of return?
Does he have investment advisers? Does he have the economies of scale
that the plan has? Does he get the discounted fees and the expert advice
the plan has?
Isn't it presumed under 417(e) that the participant will earn no more
than the 417(e) rate in order to grow his lump sum to age 65?
Q. So then why -- no. I like your answer. I don't understand then why you
would say the 5 percent is the plan's rate of return rather than the
417(e) rate. That's the test of actuarial equivalence and present value?
A. The test, the test is when you look at two things. You compare them to
one another. In order to compare two things to one another, you have to
follow both paths.
Q. But you have to follow 417(e), do you not, sir? Doesn't 417(e) --
Q. No. You're not. You're not using the comparison of 417(e), are you?
Q. You told me the 5 percent was the plan's rate of return, right?
Q. The transcript is clear. It is also clear what you are now trying to
do. You repeatedly said that you are growing his lump sum at the plan's
rate of return.
BY MR. GOTTESDIENER:
Q. You then say because his whipsaw amount plus interest using this
incorrect method is more than his account balance at normal retirement
age, it is not a present value.
Right?
A. Right. You follow two paths. If you don't get to the same place, one
is not the present value of the other.
A. No.
Q. The only difference is that the 10 percent didn't pan out because the
prediction of the reasonable economist only, in fact, the next year
turned out to be 5 percent.
That accounts for the difference in the size of the lump sums?
A. No. Actually, you get that difference and you end up in a different
place no matter what happens. Under any scenario, where you follow path A
and path B, you end up in a different place.
Q. What are path A and path B, what are you talking about?
A. Okay. You are relating one thing to another in a present value. You
are saying the lump sum --
Q. No. No. Could you just talk about Smith's lump sum. The difference in
the two lump sums is entirely accounted for the fact that the 10 percent
didn't pan out?
A. No. No. No. No. Actually, it doesn't matter. You get to a different
place no matter how much --
Q. Isn't the type of difference we are talking about here inherent in the
natural consequence of the use of any variable interest crediting rate?
A. No.
Correct?
A. No.
Q. Now, in 41, you say alternatively, let's assume the XYZ plan actually
earns 10 percent. Mr. Smith's account balance at normal retirement will
be $1100.
However, his whipsaw lump sum of 1048 will have grown by 10 percent to
1152.
A. No. I'm saying if you follow the two paths, you get to different
places.
Q. You follow the two paths, you get to -- you were a moment ago about to
try to undo your repeated statement that the 5 percent in the previous
paragraph was the plan's rate of return. Then you started to say, oh,
well, there's a coincidence, now I can slip out and say I was using the
417(e) rate. You are not using the 417(e) rate here, are you?
A. No. I'm saying the purpose of using the two interest rates here -- I'm
sorry, the purpose of using the two scenarios is to show the result is
not dependent on any one scenario. The simple fact is --
THE WITNESS: If you listen, it will be sensical. The test is whether you
have a present value.
BY MR. GOTTESDIENER:
The other thing is the account balance that you will have a year from now
if you do not take a lump sum.
Q. You're of the incorrect view that unless those two numbers are always
the same, there's been an error made?
A. I'm --
Q. Wait a minute. Wait a minute. Why are we going there? I want to talk
about Smith.
A. I'm sorry.
A. You're right. In the XYZ plan, in the XYZ plan, the account balance is
the present value. The present --
A. If the account balance is a thousand dollars in the XYZ plan, then the
present value is a thousand dollars in the XYZ plan.
A. Right.
A. But those --
A. I'm sorry?
A. No.
Q. He doesn't?
A. No.
Q. Why?
Is that in the XYZ plan, the present value is a thousand dollars because
regardless of what assets grow to be within that next year --
A. No.
Q. You're saying the statute trumps economics, that's a quote from your
report? You agree with that, right?
Q. Then you agree that even though the economist says it should be 10
percent, it is okay to project 5 percent for that guy, right?
A. Right.
Q. Thank you.
Q. Thank you.
Then in 42, you say, no matter what rate the XYZ plan earns, 1048 can
never be the present value. The amount of money you need to have today
which if invested will earn enough to be his account balance in one year.
The only amount that can be a present value of Mr. Smith's account is
1,000 dollars. Any other amount will always be too much or too little.
In fact, the 1048 is the correct amount if the XYZ plan does earn the
expected 10 percent, right?
A. No.
Q. And so you deny that the correction in the 1048 is directly related to
the difference between the presumed interest crediting rate and the
actual crediting rate in your hypothesis?
Q. Let's look at Mr. Smith again. And I'll have you assume that the
economist can exactly predict. Exactly. That the interest crediting rate
is going to be 10 percent. So the fact that it's 10 percent is already
known.
Isn't the value to the participant of the interest credit 10 percent?
A. Yes.
Q. Okay.
MR. KRAMER: Maybe the last paragraph above B if I'm looking at this
right.
THE WITNESS: II.A is one, two, three, four, five, six paragraphs long. It
is a whole page. Tell me where you're looking.
BY MR. GOTTESDIENER:
“If a cash balance plan provides credits using an interest rate that is
higher” --
Q. Maybe it is III. A.
A. Okay. And starts a sentence that begins with the word “if.
Q. Yes.
A. Yes.
THE WITNESS: You're saying measured after the fact, was it higher? And
that's not what this is talking about. That's just not -- there's no
relationship between the facts that you're giving me now and the facts
that are discussed in this section. You've made an invalid comparison
because this is saying --
BY MR. GOTTESDIENER:
Q. I've asked you to look at that. I'm asking you a simple question,
which is, isn't the interest credit that he receives higher than the
417(e) applicable interest rate. There's 10 percent and there's 5
percent, right?
A. Yes.
And you cannot use hindsight to determine whether or not there's a 411
violation. You cannot say, okay, something happened on January 1, 2001;
and then we're going to wait until January 1, 2002 to decide whether that
thing that happened on January 1, 2001 was a 411 violation.
You have to measure that 411 violation or not. You have to measure that
transaction at the time it occurred.
And at the time it occurred, you did not yet know that the plan was going
to earn more than the 417(e) rate.
A. I'm sorry?
A. No. It's not a safe harbor under 96-8. I agree with that.
Q. Nor is the Alliant plan's interest crediting rate a safe harbor rate,
right?
A. The Alliant plan is not a safe harbor plan rate, I agree with that.
Q. You said -- I want to go back to something you said about how 96-8
proves your point that the statutory rate as the projection rate is
mandated by the statute, and you, when I asked you where could you
specifically point to, you said any time it uses present value or
interest rate.
Remember that?
A. Yes.
Q. And could you grab your copy over there? You underlined some things.
Could I take another look at what you underlined?
A. Sure.
A. Yes.
A. Well, this --
Q. Isn't it?
Q. That's what you say. But I'm asking, isn't the literal language the
rate of return under the plan used in determining the amount of interest
credits? You're saying up and down that it is tied to the return on plan
assets?
A. But I think if you read the entire sentence, which is what you need to
do to understand that --
Q. It is not true?
A. No. I'm saying the phrase “rate of return under the plan” here clearly
does not refer to the rate that the plan's assets have returned.
Q. Okay. Let's assume for now that we won't quibble about that.
Have you ever considered that, though, before? Have you ever seen that
language about rate of return in the past month that you've been spending
time being an expert in this case? Have you ever noticed that it talks
about rate of return under the plan used in determining the amount of
interest credits? Have you ever noticed that before?
A. I can't recall.
Q. So --
Q. You are certainly not remembering that you thought about that in the
past month, right?
A. If I had thought about it, I would have come to the same conclusion.
Q. Thank you. Let's move on to the point that this is section C and it is
saying above section C, it is (b)(3) where it says situations in which
the present value won't exceed the hypothetical account balance and
ending by saying by contrast, if the rate, interest rate, excuse me, or
rate of return of the plan used in determining the amount of interest
credit is high relative to the section 417(e)(3) interest rate, the plan
cannot distribute, and so forth.
Doesn't that disprove your claim that 96-8 every time it is talking about
interest rate is talking about your interest rate? Same thing? Next
sentence.
“If such a plan provided that in providing an accrued benefit, the rate
used for projecting the amount for future interest credits was no greater
than the interest rate under section 417(e)(3).”
Q. Where interest rate is being used there, if the interest rate is high
relative to the section 417(e)(3) interest rate, you have no answer?
You're wrong that every time it uses interest rate it's talking about
your interest rate, aren't you?
THE WITNESS: I would say that here, it's fairly clear that the phrase
interest rate or rate of return under the plan used in determining the
amount of interest credits, that phrase clearly refers to an interest
crediting rate; and yes, within that phrase, you have the words interest
rate and you have the words rate of return; but I think that you're
looking at a single phrase that clearly has a meaning, the meaning is the
interest crediting rate under the plan.
BY MR. GOTTESDIENER:
A. Okay.
Q. You deny you're giving a legal opinion. You think you're giving a
purely actuarial opinion?
A. Yes.
Q. And is it your testimony that your actuarial views are not at all
colored by your legal training?
Q. In this case?
Having said that, in this case, I'm not rendering legal opinions. I am
rendering opinions as to the actuarial meaning of the term interest rate
and present value.
A. Well, no. I don't know that my opinion is absurd. That's the stem of
your question. I don't think that it is absurd.
Q. How do you cancel out the word applicable and create -- why do we even
need your view as to what is sensible? Your entire report turns on the
phrase it seems sensible?
A. No.
Q. It doesn't?
A. No.
Q. I want you to open your report and find the heart of your report where
you say, oh, well, I'm going to ignore the fact that 417(e) is absolutely
defining applicable interest relate, and I'm just going to say, oh, I'm
going to use the word interest rate. Paragraph 23, it, therefore, seems
sensible to give these terms the meanings they have in actuarial science.
Q. You say in your report you don't need guidance for things. If the rate
is specified by the statute, you plug it in?
A. But what rate is specified by the statute? And what is that rate? That
rate is an interest rate. It is the applicable interest rate. It is an
interest rate.
Q. It is a number?
A. Okay.
A. Un-huh.
Q. Yeah.
A. 96-8 --
Q. You haven't answered the question. Assuming the economist is right and
it turns out 10 percent, if Smith's thousand dollar account isn't
projected at 10 percent, how are you doing him right? How are you
reflecting the full value of the interest credit?
A. You're giving him an amount that will grow outside of the plan to be
the same amount that it will grow to inside of the plan.
Q. You can't assume a higher -- you yourself, the linchpin of your own
report, you say that you agreed with 96-8. You said that the heart of 96-
8 that you claim you can accept as correct is that the basis for Notice
96-8 is 417(e), which provides that when a participant take as lump sum
benefit, the lump sum must be sufficient to compensate him for the value
of the annuity that he would otherwise receive in accordance with the
actuarial assumptions mandated by 417(e)?
A. Yes.
Q. You claim to agree with that. But your whole Smith hypothetical
absolutely flies in the face of it? You have to assume 5 percent growth,
not 10 percent growth, not the plan's rate of return, but the 417(e) rate
of return under whipsaw if you're actually honoring it, correct?
A. No. If you, under the XYZ plan, which is where we still are, if you're
saying that the statutory interest rate, the applicable interest rate is
5 percent, then you are presuming that assets are going to grow at 5
percent. What later happens is a different story; but that thousand
dollars that you pay Mr. Smith is going to be his present value. It is
going to grow inside of the plan and outside of the plan.
A. No.
Q. What place does 417(e) have in your world? You're not taking it into
account?
A. 417(e) has a place in --
Q. And when in the history of the world or on some other planet has that
occurred?
Q. The answer to my question is yes, has the 417(e) rate ever been below
4 percent ever?
A. Yes.
Q. When?
A. The 417(e) rate, for example, that was applicable in Berger, I believe
was in the vicinity of 3 percent. I think that's right. I'm not certain.
A. The 417(e) rate before it was the 30-year Treasury rate was the PBGC
rate. Now, if you're going to ask me was the 417 rate ever below 4
percent --
Q. Huh? That was the pending question. If I'm going to ask you. What were
you doing using and answering that you know that it was?
A. I believe that there was a time -- and I'm not sure about this --
A. I could look it up --
Q. You're wrong. It was never below 4 percent. If I'm wrong tell me when
it was?
A. I'll tell you. The 30-year Treasury rate, which is the rate that we
were talking about here --
Q. So you want to amend your answer when you said that it was below 4
percent, right?
Q. Thank you. Let's get back to -- let's get back to this alleged
refutation by your Smith example.
A. It can.
A. Most cash balance plans define the interest crediting rate as the 30-
year Treasury rate.
Q. I should have specified the interest crediting rate was not directly
tied to the applicable interest rate.
Go ahead. In the Alliant plan. Are the actual future interest credits --
not the Alliant plan, let's remain factual, a plan otherwise identical to
the Alliant plan. Would the actual future interest credits in such a plan
be impacted by the basis that the applicable interest rate used, whether
the 30-year Treasury, the PBGC?
A. No. There would be some common causal relationship for those things to
go up and down; but no, the 417(e) rate would not directly affect the
interest crediting rate under the plan.
Q. So the value -- other than what it sounded like you added on which was
some very attenuated relationship, the future interest credits, the
actual future interest credits, they would remain the same?
Q. So they would remain, the actual future interest credit would remain
identical? They'd be the same ones?
So if you're hypothesizing the 30-year Treasury rate goes way up and that
has no impact on the plan, then that's not quite right.
Q. Yes.
Q. Actual --
A. -- interest credit under the Alliant plan, I agree with that, yes.
Q. Yes.
A. Yes.
Q. And you could move back and forth, they would always be the same?
A. Yes.
THE VIDEOGRAPHER: This is the end of tape 4. Off the record at 3:42.
(Recess.)
A. Correct.
Q. But if the value of future interest credit are the same, how can the
present value be the same if the discount rate is different?
Q. But the present values, they won't be the same? Your whole proof about
Smith is you are trying to show that the present values have to always
work out, and you have just established that they won't be the same? If
you project forward at the same rate but discount at a different rate,
you're going to get different present values, correct?
A. Well --
Q. Correct?
A. That's true, but that's not what I said. I didn't say you wouldn't
change the rate --
Q. Wait a minute. You have to change the rate -- you have to get a
different present value if you change the applicable interest rate,
unless there's a big coincidence? And then it would only be a
coincidence, right?
Q. What assumptions are you talking about? I'm talking about an interest
rate and discount rate. What are you talking about?
Q. Why don't you answer my question? What actuarial assumptions are you
talking about? You keep bringing it up any time you find my questions
uncomfortable.
Q. What actuarial assumption are you talking about? I keep asking you
about the present value is going to be different. You acknowledge that if
you project forward at the same rate and you discount a different rate,
unless it is a coincidence, you're going to get different present values,
correct?
A. If you project forward at one rate and don't change the projection
rate --
Q. Yes.
A. -- and you discount for interest at a different rate and you do change
that rate, then you will change the present value that you get --
Q. Therefore --
A. -- yes.
Q. According to you, that's some kind of big proof, that your theory
doesn't work?
Q. That is your whole thing about Smith, that's what your whole thing is,
that it is a different present value and therefore when it changes from
one year to the next, there's some big problem?
Q. No. No. No. I'm sorry. Your whole point about Smith is to prove that
your theory must be correct?
A. I'm proving that the Deutsch-Maxam theory that you can disconnect
these two things is incorrect with respect to XYZ.
Q. Right --
A. If --
A. No.
Q. Isn't that why -- isn't that why you told your fellow enrolled
actuaries last year that whipsaw is obviously incorrect?
A. No.
However, when those two things are the same, when those assumptions are
the same, the crediting rate and the interest rate, then you do the
whipsaw calculation, and what you end up with is a present value that is
equal to or less than the account balance.
96-8 uses assumptions that are reasonable in the aggregate. So, for
example --
Q. What assumptions?
Q. You said 96-8 assumptions. What assumptions are you using in the
aggregate that are reasonable?
A. Well --
A. I've said “for example” three times now. Let me finish the statement.
For example, if you have an interest crediting rate that's equal to the
one-year Treasury rate plus 1 percent, and you have an applicable
interest rate that's the 30-year Treasury rate, 96-8 says that you may
consider the one-year Treasury rate plus 1 percent to be less than the
30-year Treasury rate regardless of whether it actually is.
Q. Less than?
Q. The third time you tried to articulate it, I agree. It says only --
A. -- assumes --
Q. At that point, you said what it says is not greater than the 30 year.
A. That's correct.
A. Okay. So 96-8 does not require you to look at the statutory interest
rate, for example, and look at the one-year Treasury rate plus 1 percent.
Q. I'm sorry. Could you just repeat that? I had a hard time following
that. 96-8 says what?
Q. Yes.
A. -- then you may -- then you may consider it or may deem it to be not
greater than the applicable interest rate.
Q. Uh-huh.
Q. I thought a little while ago you took me to task for asking you about
Mr. Smith and 10 percent. You made a big point of saying in effect, well,
maybe that there may be that 10 percent, 5 percent disconnect in that
year; but that doesn't mean that it is higher than the 417(e) rate?
A. Under 96-8 you may -- you may deem it to be not greater than the 30-
year Treasury rate. It is possible that in a given year, it might
actually be greater.
A. I do find it relevant.
Q. Okay.
Q. Why?
Q. You're incorrect.
All the proposal says is that given the tight historical relationship
between these instruments and these margins, we're not going to make you
pay more than the account balance. That's all it says. You are spinning
out -- there's not a single phrase that you've been using to justify your
assumptions that's in part IV. Show me where part IV says anything like
you're saying. It just says these are very -- these instruments are very
tight historically so they're interchangeable.
We can assume that it won't be greater than. We're going to allow you to
do that because --
Q. The Alliant plan could not be more different in its structure and the
way it moves than the 30-year Treasury, correct?
Q. It could in theory --
A. It is quite different.
Q. Now, in paragraph 43, in your report, you say, and it does not matter
whether the statutory rate is reasonable or not. The statutory rate could
be 2 percent or it could be 25 percent. In either case, Mr. Smith will
have a whipsaw amount of exactly $1,000 and it will be exactly enough to
fund his account at retirement regardless of how much the XYZ plan
actually earns. Thus the statutory rate could be reasonable or
unreasonable, but it will always come up with the right answer for the
XYZ plan provided you use the statutory rate in both parts of the whipsaw
calculation projecting forward and discounting back.
A. Well, in the XYZ plan, the facts are very specific in that the
participant's account is credited with the actual rate of return of the
plan. That's a critical factor in paragraph 43.
Because --
Q. Go ahead.
A. Because whatever assets grow to be, $1,000, plus the actual return on
assets is equal to a thousand dollars plus the actual return on assets.
If you peg that interest crediting rate to something other than the
actual return on assets, you have then disconnected that equivalence. The
equivalence there that a thousand dollars in the account is worth a
thousand dollars outside of the account is dependent entirely on the
facts of the XYZ plan where the account grows at a rate equal to the rate
of return on assets; and, therefore, because it is a real rate of return
on assets that the participant can duplicate or that the plan can
duplicate -- in fact, the plan has to duplicate, the plan always
duplicates, assets simply grow at that rate; and, therefore, a thousand
dollars is worth a thousand dollars.
On the other hand, if you were to say we are going to give Mr. Smith
interest credits of 25 percent regardless of what assets earn, then the
statutory rate would be very relevant and his whipsaw lump sum could be
significantly more than a thousand dollars.
My question was really very simple: Under paragraph 43, I'm not asking
you to restate your theory per se, so please don't use the fact that I
read your paragraph to disregard my question.
Q. Can you tell me what is pointedly wrong about the assertion that if
you are going to in the XYZ plan have years where a reasonable economist
is going to say 10 percent, no question, but you're only going to project
that the 417(e) rate, how can they have any right beyond the 417(e) rate?
A. Well, whatever the plan actually earns, they will get. In the XYZ --
Q. Okay. Hold on. Hold on. Now you're really getting back to -- you know
-- your whipsaw is obviously incorrect stance.
A. No, I'm not.
Q. No. Because you cannot discount at the economic rate. You have to
discount at the 417(e) rate, and that would create whipsaw, so --
Q. Which interest rate now? The second thing you said was interest rate.
Which interest rate do you mean?
A. Interest rate in the XYZ plan is both your projection rate and your
discount rate; but interest rate in a more general case, if you
disconnect the interest crediting rate from the rate that assets earn, if
you disconnect those two things, then you've got two different
assumptions. If you connect them, you have one assumption. If you
disconnect them and you -- you should still set the projection rate at a
rate that is logical given the interest rate. You should set it at a rate
that is reasonable in relation to that.
Q. But -- and I'm -- I'm not fighting you on that. I'm trying to get you
to admit that the guy is -- he has not actually accrued a right to those
future years of 10 percent?
A. No. He has accrued a right to get whatever the plan is going to earn,
whatever that turns out to be. He hasn't accrued a right to 10 percent
unless the plan says the interest crediting rate is 10 percent. The XYZ
plan --
A. But you would also have to say if you believe he could never get more
than the 417(e) rate --
Q. No. No. No. Not ever get. You know where I'm going with this, don't
you?
A. No, but I wonder why you keep not letting me finish my sentences.
Q. You just said he'll never get. I'm not saying he'll never get it. I'm
saying, when does it accrue?
A. No. He has accrued the right. He definitely has accrued the right to
get those future interest credits whatever they turn out to be. As soon
as he gets his pay credit or whatever this plan calls it, I can't
remember --
Q. But in the XYZ plan, he's not accrued in the right --
A. In the XYZ plan, he is accrued. He's one year from normal retirement
date. That's the hypothesis here. He's one year from normal retirement
date. What has he accrued? He's accrued a thousand dollars plus the right
to get whatever interest the plan is going to credit over the next 12
months. That's already accrued, including the right to get that interest.
A. Well --
Q. Is that --
Q. Okay.
A. The way you would analyze that, you would say, okay, what actuarial
assumptions are going to produce a number that is reasonable in the
aggregate, okay?
Q. For doing what now? Are we talking about a projection? For what? I had
another question. You were talking about something else.
Q. No. I want you to finish. I don't understand where you are going with
reasonable actuarial assumptions. I'm saying the guy is in a plan where
we know it is not fixed, but it is not in doubt. We all agree the
economist is on target. It is going to be 10 percent. All things
remaining constant.
Q. And --
Q. If you are an economist who not only got a Ph.D. but went and got a
law degree and learns about 417(e), the economist would say, well, if I
put on that hat, you know, if I know it is going to be 10 percent next
year, but the guy asks for a lump sum, I know that in effect he's got a
subsidy because Congress put an a cap on what we can assume, even though
it may not be good economics, the statute trumps economics. Right?
A. No.
Q. Because you are now saying that whatever the value in reality of
future interest credits that we would all agree this crediting rate might
have, we're just going to cut it off at the knees and it is going to be
the 417(e) rate?
A. No.
Q. How is the guy accrued now in anything more than the 417(e) rate if
you're saying that's what we have to project forward at when we're
determining his 417(e) accrued benefit as opposed to his 417(a) accrued
benefit?
When it does --
A. When the statute requires a result that would not make sense to an
economist, then it simply does. It requires that result.
But the statute does not always require that you arrive at a result that
creates unreasonable results.
A. The statute does not always require that you use assumptions that are
inconsistent with one another. In this case, the economist is saying
we're going to use two different assumptions. We're going to assume that
assets earn 10 percent and we're also going to assume assets earn 5
percent and we're going to use those two inconsistent assumptions to
produce an unrealistic answer.
A. Yes.
Q. And --
The fact that the result of the use of a statutorily mandated assumption
strikes, let's say, you as unreasonable is not proof that it's not
statutorily mandated?
A. Okay.
A. Okay.
A. Okay.
A. Yes.
Q. I'm using that as an example. But you do make blanket statements that
say there's the statute and we have to follow the rules sometimes, right?
A. We have to follow the rules. I just wanted to make a point that the
use of the word preposterous related to the mortality table which is half
male, half female.
A. Correct.
Q. It could --
A. The statute can at times produce absurd results. It does not always
have to produce absurd results. And it is not necessarily essential to
interpret the statute to produce absurd results in some cases. Sometimes
it is unavoidable. Sometimes it is not.
Q. So to recover from your answer at the top of it, we've got your
agreement that the fact that you have an unreasonable result doesn't
prove that the result isn't required by the statute?
However, there are certain tests and there are certain manners in which
something could become unreasonable; but I think that does demonstrate
that it is not consistent with the statute.
A. That alone, the mere fact a result is unreasonable, does not mean that
it is not mandated by the statute. I agree with that.
A. Okay.
And also assume that the answer will be clear once you read the provision
how to apply it. Okay?
First assumption is there's a provision.
A. There's a provision.
Q. You do know, though, from some source, some judge, some legislature,
somebody tells you when you read it, you'll know. Okay? You're know
crystal clear one way or the other, right?
A. Okay.
Q. But you also have the opportunity to know before you read it, the
results that will obtain if you were to look at the statute and want to
make a clear decision, you don't want to know, you don't need to know,
and it shouldn't affect your reading of the statute, the result?
A. No. What I'm saying is that taking a peek, as you say, at the result
may help you understand what the statute says. It's not always true that
taking a peek at the result is completely irrelevant.
And that's the point of my paragraphs 41 -- 40, 41, 42, et cetera, that
sometimes taking a peek does tell you something.
In this case, what it tells you is not just that $1,048 may be an
unreasonable result, but it tells you that $1,048 may not be a present
value. It's not so much that the result is unreasonable as that it does
not fit the definition of the word in the statute “present value.”
A. It can, yes.
Q. And you already admitted that it's the change in the presumption to
what actually happened that accounted for the differences that we saw? We
went through all that.
A. Sometimes it is.
Q. So your proof means nothing other than the totally natural consequence
of the use of a variable rate?
The 1048 is absolutely perfectly correct. You just don't like 417(e). You
just don't like whipsaw.
A. No. The 1048 -- the 1,048 -- the 1,048 in the context of the XYZ plan
is --
Q. You are so wrong. Just as when you said that the accrued benefit is an
estimate, and then you later admitted that you were wrong. The accrued
benefit is not an estimate. It is a real thing that can be calculated as
of any date. The present value, sir, of those numbers are both correct at
the time they're done.
Things change from year-to-year. It is not proof that they don't line up
perfectly. In fact, it would be odd that it would line up perfectly?
A. I agree with you that there are circumstances where it would be odd
when it lines up perfectly. But there are also circumstances where it's
necessary that they line up perfectly.
You're growing the lump sum at the plan's rate of return? What sense does
that make under 417(e)? Under your own testimony is that you have to make
the person whole on the actuarial assumption of 417(e).
Q. No. You're now talking about the projection rate. I'm talking about
the discount rate?
Q. Look at 45 and 46. Tell me how your paragraphs 45 and 46 are anything
different than you just simply arguing whipsaw is wrong?
A. Well --
Q. You just don't like whipsaw. If you read 45 and 46, it just reads like
things that have been written for years, just saying, oh, look at these
results. Those results are just you not liking that the 417(e) rate is
used as the discount rate. You don't like that Congress mandates the use
of 5 percent?
A. No. What 45 and 46 demonstrate is that in the XYZ plan, where you
specifically tie the interest crediting rate to the rate that the trust
fund actually earns, that you get the wrong answer using this particular
brand of whipsaw.
A. Yes.
A. Because --
Q. Oh.
A. If you have a fixed rate, if, for example, the plan were crediting a
fixed rate of 10 percent and the statute tells you that assets are going
to earn 5 percent, your ability to earn 10 percent, your ability to get a
greater rate of return than assets actually are expected to earn has
value. But the ability to get a rate of return that is equal to the rate
at which assets actually grow does not create a value that's greater than
the original amount. It creates a value that's equal to the original
amount.
In other situations --
A. Uh-huh.
A. The yield?
Q. Yes.
A. On Treasury bonds is only a real rate of return if you are going to
hold that Treasury bond until maturity, exactly maturity, no sooner, no
later; and it is a real rate of return on that Treasury bond.
In this case, you're not tying the interest crediting rate to any
particular Treasury bond. It is not like you've gone out and bought a
Treasury bond that matures at the precise moment that that particular
individual reaches normal retirement age.
A. Not yet.
A. Section IV.
Beyond the safe harbors where does it allow that the projected interest
crediting rate should be developed in a manner consistent with the
statutory rate?
A. -- section IV, the entire thrust of section IV is that there are rates
that may be deemed to be not greater than --
Q. No. Beyond safe harbors. I asked you to identify all safe harbors you
could. The only one you could come up with is the one that is in there,
the 30-year Treasury. You haven't been able to identify any safe harbor
rate outside of section IV. My question is beyond safe harbors, where
does 96-8 allow that the projected interest crediting rate should be
developed as you claim in a manner consistent with the statutory rate?
A. Well, you couldn't get to the results in section IV unless that was
the case.
A. You couldn't get to the results in section III unless that was the
case.
Q. Huh? What? I'm asking where does 96-8 point to language where it says
in developing section III projection rates that need to be definitely
determinable and set forth in the plan document, where does it say, go
ahead and develop those consistent with the statutory rate? It doesn't,
does it?
BY MR. GOTTESDIENER:
A. That's because you are not an actuary. One of the things that
actuaries do is they develop actuarial assumptions; and there are two
types of actuarial assumptions that you can develop. There are
individually reasonable actuarial assumptions and there are reasonable
actuarial assumptions that are reasonable in the aggregate.
A. Okay.
Q. I'm just a poor lawyer who is not an actuary. I want to read it.
Q. Oh. Thank you. The answer to my question is no. I asked you five times
outside of section IV, and beyond safe harbors, where does 96-8 allow it,
and the answer is nowhere?
A. I would like to -- I would like to make the point that you are
mischaracterizing my answers even before you allow me to make them.
You've asked me a question. You will not allow me to answer the question.
And then having refused to allow me to answer the question, you are then
mischaracterizing the testimony that I have not yet given.
Is there any place before you get to section IV, which is the end of 96-
8, can you point me to anything outside of the safe harbor provision,
outside of safe harbor rates, in the rest of 96-8 that says when you
don't have a safe harbor rate, you're allowed to develop your projection
rate in a manner consistent with the statutory rate?
Q. I don't want to interrupt your answers, but could you try to channel
it towards interest crediting rates that are not based on one of the safe
harbor rates? You can just continue with your non-responsive answer. But
try to work in -- I'm talking about interest crediting rates that are not
discussed in section IV.
Take it away.
A. Well, you're asking me, does 96-8 discuss interest rates that are not
discussed in 96-8.
Q. No.
A. 96-8 discussions only in the most vague and general terms interest
crediting rates that are greater than the applicable interest rate or
interest rates that are not greater than the applicable interest rate;
and then it talks about some specific things, some specific examples of
things that may be deemed to be not greater than.
A. The concept there is that you end up with actuarial assumptions that
are reasonable in the aggregate underpinning the results.
A. Right.
A. Yes. Despite the fact that it might actually be greater than the 30-
year Treasury rate.
Q. And that was actually coincidentally that was the rate used in the
Xerox plan, right?
A. Yes. Although the rate in the Xerox plan was -- no. In the Xerox plan,
the applicable interest rate was not the 30-year Treasury rate. That's a
fairly important point in the Xerox plan.
Q. Well, on this logic, however, shouldn't the Court have ruled that the
plan was correct in using the applicable rate to project account balances
to normal retirement age?
A. No. Because Notice 96-8 compares the one-year Treasury rate plus a
hundred basis points to the 30-year Treasury rate.
And in the Berger v. Xerox case, the 30-year Treasury rate was not the
applicable interest rate. The applicable interest rate was the PBGC rate.
The PBGC rate was less than the 30-year Treasury rate.
Q. It does not. They should have -- what you do in your report is you
misquote 96-8. You switch -- when convenient -- the 30 year and
statutory, you keep talking about the statutory when all it's talking
about is the 30 year?
A. Well, 96-8 --
Q. Under your theory, there was no whipsaw in Berger and Berger was
wrongly decided?
A. No.
Q. Under your theory, they should have been able to project that the
statutory interest rate?
A. No. Because this -- what you call a safe harbor specifically relates
to the 30-year Treasury rate. It does not specifically relate to the PBGC
rate. The PBGC rate is a different rate. Those relationships are
different. That's why you got a different relationship in Berger.
Berger said 96-8 is an authoritative statement of the law; and yet Berger
did not look at section IV and say, oh, wait a minute, here's a safe
harbor rate. Berger said 96-8 is an authoritative statement of the law
and recognized that this relationship relates one year Treasuries plus 1
percent to the 30-year Treasury rate. It doesn't relate it to the PBGC
rate; and that is consistent with the idea that these assumptions are
established to be reasonable in the aggregate.
Q. And again, you've just -- thank you. You've just again articulated why
your theory is all wrong.
You already admitted when you switch the basis for the 417(e) rate, it
doesn't affect the value of future interest credits. So the present value
is going to be different.
A. It doesn't affect --
The basis of your statement there is your contention that the projected
interest crediting rate should be based on the statutory rate?
A. That the projected interest crediting rate in the Alliant plan should
be the statutory rate, three quarters of the statutory rate, or 4
percent, whichever is greater. Yes.
Q. If the interest crediting rate under the plan is not related to the
statutory rate, if you are wrong, then if the expected future value of
the interest crediting rate under the plan were determined, why would
that projection reflect the statutory rate?
Q. Yes. The theory that you have held for four weeks, if that theory is
not adopted, yes.
BY MR. GOTTESDIENER:
Q. Yes.
Q. No what?
A. Should not have been influenced by the statutory rate. I don't know
whether he was or not. He should not have been.
Q. Okay. If you were the actuary, how would you have reflected the
statutory rate when selecting the assumed future interest crediting rate?
A. Well, the statutory rate does not apply. The 417(e) does not apply for
any purpose other than calculating a lump sum. It doesn't apply for
purposes of calculating your funding assumptions. It doesn't apply for
purposes -- for a variety of other purposes. Doesn't apply for those
purposes.
Q. I just -- let me interrupt. When you say apply, do you mean it's
mandated to be used? Or are you just saying apply, that -- you know -- it
doesn't enter into the decision?
Q. But does it have any -- would it have any impact? Would it play any
role in selecting the rate, the future assumed rate of return on plan
assets?
A. Well, there are certain purposes for which you develop interest rates
that at various times have been related to the 417(e) rate.
Generally speaking, you do not use the 417(e) rate for purposes other
than calculating lump sums and certain other closely related forms of
benefits. You don't use it, generally speaking, for funding calculations.
You don't use it, generally speaking, for back-loading calculations.
Q. Yes.
Q. And no question that the interest crediting rate under the plan is
purely a function of the plan's actual rate of return in any particular
year?
Q. So the only reason that Maxam or Deutsch would reflect the statutory
rate in developing a projected interest crediting rate is if they agreed
with your theory that the law mandates the use of the statutory rate?
A. No. I don't agree with that. I don't agree that that's the only reason
you would take the statutory rate into account in developing an interest
crediting rate. I think even if you threw out my theory and even if you
said we're going to disconnect these two things that are connected, that
there's still any number of reasons that you would take the statutory
rate into account in developing this other assumption.
Q. Such as?
A. Well, for example, you have the requirement that we discussed several
times that the whipsaw calculation be written into the plan, and not
subject to employer discretion. And so if you're going to say we're going
to write something into the plan, you can't say --
Q. What point in time are you at? Are you at the plan's been in operation
and somebody has filed a lawsuit? Or are you at the inception of the
plan?
A. I'm saying plan inception. You write the plan. You say, well, how are
we going to -- how are we going to determine how benefits are calculated?
How are we going to determine how lump sum benefits are calculated; and
so you would then say, we have to come up with a formula; and that
formula --
A. If you hypothesize that, then you disconnect those rates. Okay? And
then you say okay --
A. I'm telling you how you would then go about -- one of many ways that
you could go about establishing a rate that you would put into the plan.
You wouldn't necessarily use the statutory rate to do that. But you
could. You asked me the question --
A. How could you. That's what you asked me. I'm trying to answer that
question.
A. The answer is -- the answer is -- the answer is you come up with plan
provision that can be applied on a uniform non-discriminatory basis in
the future.
Q. Yeah, but --
A. And that plan provision might reasonably say we are going to use the
statutory rate or some function of the statutory rate, statutory rate
plus something, minus something.
A. Well, that depends on what you think the plan is going to be invested
in in the future. I think that's a very important question.
A. Most plans are not like this plan. This plan has some very obvious
characteristics, to cause a 60-40 stock-bond split to create some
negative funding results, which I believe the plan has seen.
Q. But you don't he know -- you didn't -- did you educate yourself as to
all the reasons why the plan adopted this crediting rate?
A. Statutory rate --
Q. -- go into the history and the purpose of the interest crediting rate
that was adopted? Did you educate yourself on that? Are you aware --
A. The purpose of the rate that was adopted? The statutory rate that was
adopted?
Q. Interest --
A. Yes.
Q. Wait a minute. There are parts of Dr. Maxam's report where it is not
just him saying things. He's quoting and pulling together, in effect, the
legislative history of the crediting rate.
Did you not really think that that was very important. Did you focus on
that?
A. I did focus on that. And frankly, you know, looking at Maxam and
Deutsch's reports, I think that there is some interesting information
there, but I do not assume that the information there is --
Q. Accurate?
A. -- complete or --
Q. You do?
Q. So you read them and you -- because you haven't independently verified
them, you just put them on the shelf?
A. You asked me, do I know why the rate, why that 75 percent or 4
percent, why that was adopted.
Q. Where we started was about the asset allocation. And you started
making statements about, well, a plan like this, you know, might not
adopt this because it would have negative effects under some
circumstances on funding.
A. Yes.
Q. I reasonably asked you, well, you're starting to, in part, get into
the intent of the plan's sponsor as to what kind of benefit they're
attempting to deliver and at what cost it might be?
Q. Hold on.
You're just assuming if there's a funding problem that that's not what
the sponsor -- the sponsor because they converted to a cash balance plan
wanted a contribution holiday?
A. Well --
A. No. No. There is a difference. The sponsor makes two different kinds
of decisions.
Q. Then let's not cover that if you're not going to express an opinion on
that.
BY MR. GOTTESDIENER:
A. Yes.
Q. Does the letter suggest in any manner whatsoever that the correct
projection rate is the statutory rate?
A. No.
BY MR. GOTTESDIENER:
Q. You're -- you've listed this and other letters between the IRS and
counsel for the Alliant plan on your report, right?
Q. You're aware that the IRS is saying to this plan, currently, and
you're aware that the IRS is saying to other plans with respect to the
pre-PPA period, that the projection rate, if it is under the actual
interest crediting rate, must be increased to meet the actual interest
crediting rate? You are aware of the IRS's position?
Q. And you're aware that there are other correspondence with Alliant
where it is consistently taking that position as well?
A. Well, I have to confess that I have not read all of the correspondence
between Alliant and the IRS on the determination letter issue. So I can't
say that it's all consistent.
Q. That wasn't my question. I said you've seen other things that are
consistent with this? You haven't seen anything that's inconsistent?
Let's put it that way.
A. This doesn't say increase. This says have the same crediting rate and
projection rate.
A. Well --
Q. Right?
Q. Could you just answer that question before you tell me about the
impact of it?
A. Well --
Q. Jim Holland is saying they have to be the same. You have to -- you
have to project at the actual crediting rate, right? You don't know doubt
when Maxam and -- sorry, when Deutsch says this is the IRS position, you
don't have any doubt that that's the IRS position, right?
BY MR. GOTTESDIENER:
A. Yes, but you've asked three different questions. Can I answer them
one, two, three?
A. The first is, am I aware that they've taken this position in this
case?
Yes.
Q. Okay.
And so I'm not sure that I could say that the position it has taken --
that I am familiar with any particular other cases in which it has taken
this particular position.
Q. But analogous?
A. Similar.
Q. Okay.
A. Similar.
Q. Third point?
A. The third point is, am I confident that that is the single IRS
position? The answer is no. I've seen -- the answer is no. That I've seen
the IRS move off of this position on to a somewhat related position
involving what's described in the second part of this.
Q. To what?
A. The interest crediting rate and the statutory rate, although in the
example that I can give you, it is very, very -- the rates are very
close, but they're not identical.
A. No. There is no whipsaw. Because the rates were -- there was a whipsaw
provision written into the plan. That whipsaw provision produced a
projection forward and a discount back that were at the same rate for all
applicable periods --
Q. What was the underlying interest crediting rate in the plan you are
talking about?
A. The underlying interest crediting rate in the plan I'm talking about
was a 30-year Treasury rate as of a different date than the applicable
rate for that plan.
Q. Okay.
A. And a minimum of 4 percent.
A. No. No. I'm not equating them. You asked me if this is the position
that the IRS takes consistently all the time and I'm saying I am not sure
it is.
THE VIDEOGRAPHER: This is the end of tape 5. Off the record at 5:12.
(Recess.)
BY MR. GOTTESDIENER:
Q. Now, in paragraph 67 of your report, you say whether the plan has one
accrued benefit or three is not the issue here.
Let's assume for a moment that you actually agree there's only one
accrued benefit under 411(a)(7). Would that accrued benefit be the same
for purposes of 401(a)(4), 411(b) and, 417(e)?
Q. 417(e)?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. Directly refers to the 411(a)(7) benefit, doesn't it, sir? Handing you
Exhibit 7? You have to determine the 411(a)(7) accrued benefit before you
can determine the normal accrual rate?
Q. Yes.
A. If you --
A. Well, however, I think to be fair, you get different results under the
different regulations; and so the idea --
Q. You don't get different results. It is all the same accrued benefit.
A. No. You don't get the same accrued benefit. You follow --
Q. I have your testimony on that. I have your testimony. You think there
are different accrued benefits?
Q. And 96-8 says that it not only has to be in the plan, it not only has
to preclude employer discretion, but it also cannot understate the value
of those credits?
A. Yes.
Q. And you agreed already that the minimum lump sum under 417(e) is based
on the current accrued benefit table at normal retirement in the form of
an annuity, right?
Q. The minimum lump sum where we started under 417(e) is based on the
accrued benefit payable at normal retirement age in the form of an
annuity?
A. Yes.
Q. If you look at 67 in your report, where you are talking about the non-
discrim regs, you say in the calculation the plan is required by Treasury
regulations to use an interest rate between 7.5 and 8.5 percent?
A. Yes.
Q. And looking at 7 again, the Treasury reg that I just showed you as to
how you have to first determine the 411(a)(7) benefit, the plan didn't do
what you were saying that it should do? I mean, your opinion, if the
testing interest raid is 7.5 percent, then the 411(a)(7) accrued benefit
is determined by assuming that the rate of return on plan assets will be
7.5 percent for all future plan years?
Q. Your theory is not that? Then I don't understand. You are saying that
this is a -- only limited to the payment of lump sums?
A. I do agree that the plan did not follow the theory that I have with
respect to 417(e) in demonstrating to the IRS that it is non-
discriminatory under 401(a)(4), I do agree with that, yes.
Q. And your report, you don't mention at all the plan's projection rate
of the 30-year Treasury as the deemed future interest crediting rate.
Why is that?
Q. Because?
Q. Why would the plan not pay a whipsaw amount? You are saying that in --
if it is deemed to be -- is it --
A. If you follow --
Q. -- the example --
Q. I got it.
Q. Why didn't you say that? Why didn't you say that in your report? Why
didn't you say the projection rate is invalid?
A. I'm pretty sure I did. It would take me a while to find it, but I'm
print sure --
Q. You don't say -- you are aware that until you arrived, the plan's
entire defense is that that's a reasonable projection rate?
A. I'm aware that that is the position that Ian Altman takes in his
report. I have not seen any briefs or other arguments prepared by counsel
in this case.
Q. But no, you haven't read anything, any briefs that the plaintiffs have
filed?
A. Other than times when the statutory interest rate falls below 4
percent, it produces results that are not prohibited under 96-8. It is
not, in my mind, technically a correct whipsaw calculation, although
you've hypothesized that my theory would be wrong, in which case, then
that's a different issue.
Q. But if we put your theory to the side and if we put the situation of
the discount rate being less than 4 percent to the side, I just want to
ask about --
A. Okay.
Q. -- otherwise --
A. Well, it would --
Q. No --
A. -- chosen.
Q. -- not the statutory rate? The projection rate that's written into --
A. No.
Q. Would that be relevant to know whether it was valid or not?
And you can do something that is valid and have completely irrational
reasons for doing it. You can do something that's invalid, and have very
good reasons for doing it.
Q. What about if the -- you're aware that the plan document itself states
in the preamble that the intent is to only pay the account balance?
A. Yes.
Q. Now, does that, if you're coming to this with a completely open mind -
-
A. Yes.
Q. And you want to know whether or not the projection rate is compliant
with 96-8, is that not important information for you as an expert, as an
actuary, to be aware of when you're looking --
A. Yes.
Q. Wouldn't that --
Q. And what you're saying is that that would make you skeptical that the
projection methodology was selected to fully value -- it's not
dispositive, but it would make you skeptical that it was selected with
the intent to just let the chips fall where they may and fully value the
interest credits?
But I think in general I would agree with your statement that -- you know
-- if the plan's sponsor said, well, we only want to pay the lump sum and
we don't really care what the law requires.
v.
ALLIANT ENERGY CASH BALANCE PENSION PLAN, Defendant.
Jurisdiction: W.D.Wis.
Representing: Plaintiff
Appearances:
On behalf of the Plaintiffs and the Proposed Class and Subclasses: Eli
Gottesdiener, Esq.
Brooklyn, NY 11215
718-788-1500.
Chicago, IL 60603-5577
312-460-5000.
866.721.0972 Toll-free
713-683-0401
713-683-8935
depos@digitalreporting.com
digitalreporting.com
Washington, D.C.
CONTENTS
DAVID R. GODOFSKY
EXHIBITS
TABLE
PROCEEDINGS
THE VIDEOGRAPHER: In the United States District Court for the Western
District of Wisconsin, in the matter of Lawrence G. Ruppert and Thomas
A. Larson versus Alliant Energy Cash Balance Pension Plan, case number
3:08-CV-00127.
Will counsel please identify yourselves and state whom you represent?
BY MR. GOTTESDIENER:
Q. Good morning.
A. Good morning.
A. Okay.
Q. First, can we agree for purposes of your report and for purposes of
our discussion today that we're going to assume that IRS Notice 96-8 is a
controlling statement of law?
A. Yes.
Q. Can we agree that Notice 96-8 requires that the accrued benefit
payable as an annuity at normal retirement age must be determined as part
of the calculation of the minimum lump sum?
Q. Sure.
Can we agree that Notice 96-8 requires that the accrued benefit payable
as an annuity at normal retirement age must be determined as part of the
calculation of the minimum lump sum?
A. That would be the general rule, unless there's an exception; and the
exception would apply if you have a rate that the IRS presumes to be not
greater than the statutory rate; and there are a series of rates that are
included in Notice 96-8 that are deemed to be not greater than the
statutory rate, despite the fact that occasionally they are greater than
the statutory rate. They are deemed to be not greater than the statutory
rate.
And when you have a rate that is not greater than a statutory rate, or a
rate that is deemed to be not greater than a statutory rate, Notice 96-8
states that in a cash balance plan, you can pay the account balance
without going through the exercise of calculating an estimated normal
retirement annuity benefit.
Q. Your first answer was that some yes, some no; there are times when it
does require and does not require the calculation of the accrued benefit
as a step in the determination of the minimum lump sum.
So I want to make sure I understand that you are saying that when 96-8
discusses safe harbor plans in the calculation of the minimum lump sum in
the case of such a plan, that 96-8 is saying that the plan can dispense
with determining the accrued benefit?
I don't believe Notice 96-8 uses the term “safe harbor.” Safe harbor is a
term that I think is often used in discussing 96-8. I've used it
colloquially.
And generally speaking, in other cases, Notice 96-8 would require either
calculation or estimation of an annuity at normal retirement date.
Q. Your initial answer is still your answer: That there are times --
however termed -- where 96-8 says the plan can just dispense with
calculating the accrued benefit?
A. Yes.
A. No.
Q. However, you're wrong that it says that you can dispense with
calculating the accrued benefit, aren't you?
A. I don't think I am. I'd be glad to go through Notice 96-8 with you,
but I don't think so.
Q. You hold yourself out as an expert actuary able to give opinions that
the Court should consider as expert opinions as to the calculation of
benefits from cash balance plans, correct?
A. Yes.
Q. Answer my question: Do you know of any place, sitting here now, sir,
where the law, the regulations, guidance, anything allows you to just
throw the accrued benefit out the window? You don't have to calculate the
accrued benefit? Yes? Or no?
Q. No. I'm asking anyplace in the law. Just right now. Forget 96-8, you
can't name it because you're wrong. You're dead wrong. Name it. Right
now. Any reg, statute, guidance, person who's ever told you, you can just
dispense with the calculation of the accrued benefit?
BY MR. GOTTESDIENER:
Q. Tell me anyplace other than 96-8, do you know of any, yes or no? If
you don't, just say it and we'll move to the next question. We can talk
about 96-8.
Q. Yes --
Q. Yes or no? Yes or no? Do you know of anyplace anywhere other than 96-8
-- which we'll look at in a second -- that allows a plan to ignore the
calculation of the accrued benefit when paying a participant? Yes or no?
The difficulty that I have with the question is that in general terms,
the whipsaw calculation is not discussed in detail in most of the things
that you discuss. It is primarily fleshed out in Notice 96-8.
Q. Move to strike as non-responsive.
Q. No, you're not. Do you want to rethink your answer and say that you
misspoke, that, in fact, you always have to calculate the accrued
benefit? It just has no effect? I'll let you think about it for a second.
A. No. No.
Q. So you're sticking with your original answer that 96-8 -- sir, your
answer is non-responsive. I move to strike it. Answer my question.
BY MR. GOTTESDIENER:
Q. Sitting here right now, yes or no, forget 96-8. Any defined benefit
plan, tell me, do you know, cite it, what authority allows you to
dispense with the calculation of the accrued benefit?
Q. I'm not.
Q. No. I'm not going to allow you to filibuster. Do you know any
authority -- yes or no -- that allows a plan to dispense with a
calculation of the accrued benefit in a defined benefit plan?
A. Do I know of any?
Q. Yes. Authority?
BY MR. GOTTESDIENER:
Q. Oh, come on. Your report is full of statements about authorities and
guidance and law. And you're a lawyer. You know perfectly well what my
question means. Authority. Cite it.
Yes or no?
Do you have any authority you can cite sitting here now that allows a
plan to dispense with the calculation of the accrued benefit before
paying a participant in a defined benefit plan?
Q. That's why I'm offering you to backtrack and say that you were wrong.
You always have to calculate the accrued benefit. It just doesn't have an
effect when the statutory rate is the same as the discount rate?
A. Well, I would like to answer your question, but I'd like to give a
complete answer.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
A. Yes.
Q. Where?
A. Two different --
Q. -- give me an authority.
But certainly there are plans that simply say that when you pay a lump
sum, what you pay is the account balance.
Q. Right now, you identified one thing. You say the fact that a
determination letter has issued on a plan that says we will pay the
account balance as a lump sum, that's your authority?
BY MR. GOTTESDIENER:
A. I'm saying that you're asking a question, are there any authorities,
am I aware of any authorities, and can I cite any authorities.
Q. Can you?
BY MR. GOTTESDIENER:
Q. Do you have right now -- I will ask you for the ninth time -- the
record is absolutely clear -- do you have any authority other than what
you claim to be finding in 96-8 that allows a plan -- an authority, not a
plan document -- an authority that allows the plan to dispense with the
calculation of the accrued benefit before paying a participant in a
defined benefit plan?
A. Sitting here before you right now, without my files in front of me and
without any research services, no. I cannot cite you such an authority.
Q. Nor can you give me a range of authorities? You can't tell me what
section of the code it might be in? You can't describe it? You can't say
what year maybe something was adopted or what body of law you would look
to to find this, can you?
A. Well --
Q. And if you can, tell me what -- as best you can -- where this comes
from.
Q. I asked about defined benefit plans. You are absolutely clear that's
what I asked about. I know that. I repeated it repeatedly.
Tell me anywhere in the law defined benefit plans whether you can
dispense with the calculation of accrued benefit, including cash balance
plans. Not limited to cash balance plans.
If you can, give me the authority. You've already admitted sitting here
today, you can't cite something specific. Now I'm saying cite something
general other than 96-8.
Q. Thank you.
Now, to the extent that we have an agreement that the accrued benefit
must be calculated as a step in the calculation of the minimum lump sum -
-
A. Well, you don't have to because if you did, the answer that you would
get would be something that is either equal to the account balance or
less than the account balance.
And, therefore, going through that step is, I think, as you would say,
pointless. And so if you're going to go through a calculation that's
always going to produce a number that's equal to zero, do you have to go
through the calculation? Or do you -- or can you just say, well, I know
the answer is going to be he zero in the end?
I don't know how this relates to the plan that we're dealing with.
BY MR. GOTTESDIENER:
Q. No, you're not. You're trying to have some cocktail conversation. I'm
asking a question.
A. Okay. Okay.
Q. Safe harbor, for the purposes of this deposition, is a plan that is
described in section IV of 96-8?
A. Do you have a copy of 96-8? Because I'd like to look at section IV.
Q. Yes.
Q. There is no section 5.
Plaintiffs' 1 is 96-8.
BY MR. GOTTESDIENER:
Q. The question is, did we agree for purposes of this deposition that
when we use the term “safe harbor,” we're talking about the plans that
are described in section IV of 96-8 that the IRS says may perform the
calculation and not pay more than the account balance?
Q. Before we get to what's broader, can we try to find what we agree on?
In section III --
A. I agree with that. The answer to that is yes. With respect to the
plans described in section IV, yes, I agree that you can pay the account
balance.
A. Okay. Okay.
Q. The question is, for the purpose of this deposition, can we have the
agreement that when we say safe harbor, we're talking about those plans
described in section IV, where the result of the calculation is that the
plan can pay the account balance without violating the forfeiture
actuarial equivalent or other rules referenced in 96-8? Can we have that
agreement?
A. That that's the definition of safe harbor?
A. Well --
Q. -- with you --
A. -- the way --
Q. You can broaden it. You're can tell me there's something they don't
mention --
Q. So all of that is the answer to my question is yes. I'm not saying you
can't add things in.
Q. -- I'm just asking you for the ninth time, could you just agree with
me that safe harbor includes these plans that are described there?
Q. Now, you want to say that there are more things that are
appropriately, in your opinion, safe harbor plans?
A. Well --
A. Yes. Yes.
Q. So you say that there are plans that are not described within the four
corners of section IV of 96-8 that are safe harbor plans?
As I read section IV, I do believe that there are plans that Notice 96-8
would consider to be safe harbor that are not in section IV, but that are
described in section III.
Q. As you read section IV, you do see that there's nothing in there that
says that you don't have to do the calculation?
Q. There's nothing in any place in 96-8 that says you don't have to do
the calculation, is there?
A. Give me --
Section III.B says you have to do the calculation. And section III.B.2
specifically says you have to do the calculation. III.B.3 just says the
result will be no increase in the lump sum over the account?
A. Hold on a second.
Q. So you have been proven wrong, but you always have to calculate the
accrued benefit and 96-8 not only doesn't support you, it refutes you,
doesn't it?
Q. Yes. I'll give you a chance. That's all you're going to have, because
you're not going to find it.
Go ahead.
A. Well, this is the statement that I interpret as saying that you do not
have to go through the mechanics of the calculation under certain
circumstances.
Where in 96-8 does it say you do not have to calculate the accrued
benefit?
Q. What section?
A. Yes.
Q. Okay. So you explain to me how under this section, it's saying -- even
though it's entitled the present value, and that's a reference to the
calculation under 417(e) of accrued benefit -- how it says you don't have
to calculate the accrued benefit?
Q. Which line?
A. Three paragraphs.
Q. In that section?
A. Let --
THE WITNESS: If you can pay an amount that is equal to the account
balance, and that will not violate sections 411(a) or 417(e), then it is
not necessary to actually calculate what the present value is. In most
cases, that present value will be less than the hypothetical account
balance. And so if you know that you're going to pay a benefit that is
the greater of A or B, and you know that A is greater than or equal to B,
and you pay the participant A, then you have not violated any requirement
by not actually going through the process of calculating B.
BY MR. GOTTESDIENER:
Q. And the refutation of what you just said is the preceding sentences
that say, under such a plan, if you would look up where you said thus --
please look at the paragraph that you claim supports you.
Q. Okay.
Q. But you're still doing the calculation. In your example with the X,
you just knew the answer, but you're just -- you don't dispense with the
calculation. You just knew the answer. So you're saying, you know, I
already know the answer. But the calculation is still there, is it not?
A. Well, what if I don't know what X is? Because you're asking me, do I
need to calculate X.
Q. Yes.
A. If you don't know the value of X, you still know the value of 2X
divided by X.
BY MR. GOTTESDIENER:
A. No.
Q. But the only way you know the answer is by doing the calculation?
Using the safe harbor assumption that you can just use the 30-year
Treasury?
Yes or no?
A. No. You're wrong. No, you know the answer to the calculation.
Q. So the calculation doesn't exist?
A. No. I'm saying that it's not necessary to do a calculation when you
already know what the answer to that calculation is going to be.
Q. And you believe that 96-8 says that you don't have to do the
calculation?
A. Yes.
MR. KRAMER: Objection. Calls for a legal conclusion. You can answer.
BY MR. GOTTESDIENER:
MR. KRAMER: Objection to the legal opinion. But go ahead and answer if
you can.
THE WITNESS: My legal opinion is not different. I do not think that you
have to do a calculation when you know that the result of that
calculation will be irrelevant.
BY MR. GOTTESDIENER:
Q. Oh, so it is irrelevant when the answer is you don't pay more than the
account balance?
A. When you know the outcome of a calculation, it is not necessarily
necessary to go through every step in the calculation; but in the
situation that you just hypothesized, you changed the facts; and under
your changed facts, you don't know the answer to the calculation; and so
yes, you would have to do it.
Q. Yes. And so you calculate the grandfathered benefit and you know what
that amount is. Why don't you look over at the account balance and say --
you know -- oh, well, because it is a safe harbor plan, I never have to
calculate the accrued benefit?
Q. Yeah. But you're already slipping, sir. Because if you can dispense
with the calculation of the accrued benefit in a safe harbor plan, then
there's not an accrued benefit you're looking at. You're just looking at
a notional account balance, and you're just comparing the 417(e) old plan
benefit to the account balance, right?
A. If you --
Q. No. Wrong. I'm saying it is a safe harbor plan, cash balance; and you
have an old plan benefit that you have to protect.
Don't get semantic. You understand exactly what I'm talking about. It is
a safe harbor cash balance plan.
A. With a grandfather.
Q. With a grandfather.
A. With a caveat, I would agree with you. The caveat is fairly important.
And that is, it would have to depend on when and how that grandfathering
provision was formed.
Q. It is a simple fact scenario. I'm not asking for bells and whistles.
At the conversion, there's an old plan benefit. It is a safe harbor plan.
What other caveat do you have?
Q. Sir --
Q. Sir, we have seven hours, and if you want to use all of it, we'll be
here all day, that's fine. I'm talking about plain vanilla cash balance
conversion. You've been around a long time. You've seen a lot of these
things this. This plan was converted in 1998. Just imagine a very simple
conversion and a very simple plain vanilla safe harbor plan.
Isn't your answer just the same? That you're still not calculating the
accrued benefit under the cash balance plan?
Q. No, no, no. We need a clean answer. You have nothing except for the
same answer that there's no calculation of the accrued benefit. We don't
have a problem with the annuity conversion factors. We don't have
anything fancy with the conversion of the -- or the grandfathering
provision not being simultaneous with the conversion to the cash balance
formula. We don't have any problem that it might be a post-PPA plan.
Q. Accrued benefit?
Q. No.
Yes.
Q. You are adding -- you are saying yes, but you're trying to slip in
caveats that are not part of my question.
You are saying that you don't calculate the accrued benefit in that
circumstance, the annuity payable at normal retirement age? You don't
have to calculate it, right?
A. You don't have to calculate it in order to figure out how much you're
going to pay the participant. That's correct.
A. No. I don't agree with that unless you allow me to put in the caveat
that under certain circumstances, you do not need to do that calculation
and under other circumstances, you might need to do that calculation.
There was nothing -- there was nothing wrong with my prior three
descriptions of your testimony that you contend that a plan can dispense
with the calculation of the accrued benefit, forgetting that the answer
is going to be known in advance; you are saying that there is no
calculation of the accrued benefit under those circumstances, correct?
Q. I am not.
What -- your testimony is that there are more plans that 96-8 describes
that are safe harbor plans that are within the four corners of section
IV, correct?
If you look at section IV, you'll see that the statutory rate, the 30-
year Treasury rate, is not included in section IV.
And I think any fair reading of section III of Notice 96-8 would tell you
that where the interest crediting rate is equal to or always less than
the statutory rate, then the whipsaw calculation is always going to
produce a number -- and the other conditions. That the annuity conversion
factors have to be appropriate.
And I think most people and the IRS, most actuaries, and the IRS, would
consider safe harbor to include the statutory rate, the 30-year Treasury
rate which is not one of the rates listed in section IV.
A. No.
A. Yes. For plans that we have described as a safe harbor plan, I think
it is fair to say that 96-8 says that it is not a violation of section
411(a) or 417(e) to pay an amount equal to the account balance.
And, of course, I think it is also worth saying that there may be any
number of other legal requirements that would cause you to have to pay
out more than the account balance. 96-8 only deals with 411(a) and
417(e). There are many other legal requirements applicable to defined
benefit plans and to cash balance plans; and some of those might require
under certain circumstances payment of more than the account balance.
Q. How can you say that 96-8 doesn't deal with provisions of the plan?
A. 96-8 does not specify every plan provision that might impact the
calculation of somebody's benefit. It just deals with certain plan
provisions that do or do not violate 411(a) and 417(e).
A. No. I'm saying that 96-8 does not give you carte blanche to pay
something less than what the plan requires you to pay.
Q. Now, how can you get a present value under 417(e) without calculating
the accrued benefit?
A. In the same manner that you can tell what the answer to 2X divided by
X is without calculating the value of X. When you have --
A. -- a factor --
A. You have to know that X is not zero. That's the only thing you need to
know about X in order to do that calculation. You don't have to know the
actual value of X.
A. -- but you can get to the right answer without always doing that
calculation.
Q. No, you can't. How in section IV are you saying that you can get to
the right answer without doing the calculation when -- turn to section
III.B.3 again.
It's talking about using the 30-year to project future interest credits?
Why is it doing that, sir, if it is not first arriving at the accrued
benefit?
THE WITNESS: You've asked the question before. I've answered it before.
My answer is going to be the same.
If the --
BY MR. GOTTESDIENER:
Q. Tell me -- this is good. Tell me how else you do the calculation other
than that you project the account balance to normal retirement age, and
you do the conversion, if it's at the 417(e) rate as you discuss in
footnote 5 of your report, it is a wash. And then you apply 417(e) and
arrive at a present value.
A. Well --
Q. Any?
A. Your hypothetical --
A. I don't think there's more than one whipsaw calculation, but I think
there's more than one way of arriving at the answer that the whipsaw
calculation is going to arrive at.
A. Yes.
Q. I'm asking you, is there some other one you want to tell us about? Or
is there just the whipsaw calculation that's mandated by 96-8?
Q. Great. There's one. We're agreed on that. You accept that there's one
whipsaw calculation, right?
A. Yes.
Q. The one whipsaw calculation always requires the calculation of the
accrued benefit at normal retirement age by projecting the account
balance to normal retirement age and then by applying 417(e), correct?
A. Okay.
Q. No.
A. It is your question.
A. You can't ask me a question and tell me that it wasn't your question.
Q. No. Listen.
Q. I asked you what is the definition. You gave me a definition. Then you
went off to try to say other things. I got your definition. Thank you.
A. Okay.
Q. And you agree that in all cases, you have to determine the amount
payable in the form of an annuity commencing at normal retirement age
under the whipsaw calculation, right?
A. What I --
Q. I just want to know, is that what you are saying. You now deny that?
A. I'm saying that is not always true. You made a statement that is not -
-
A. Okay.
BY MR. GOTTESDIENER:
A. Sometimes you do under the Alliant plan, and sometimes you don't.
A. No.
A. When the statutory rate is less than 4 percent, then you can not do
the whipsaw calculation without calculating an annuity at normal
retirement date. When the statutory rate is above 4 percent, it is
possible to figure out what the result of the whipsaw calculation will
be, or it is possible to figure out that the result of the whipsaw
calculation will be something less than the account balance.
And, therefore, since you know how much the lump sum is, if you have a
participant that is below normal retirement age at the time of payout, it
is not necessary under those circumstances to calculate an annuity
payable at normal retirement age in order to know what the correct amount
is to pay the participant.
Q. You're still always doing the whipsaw calculation. You just already
know the answer. That's what you're saying, right?
A. I'm saying that when you already know the answer, you don't have to do
a calculation.
Q. No, sir. What you've done is you have taken an hour to backtrack your
prior testimony.
It was always clear that I was saying and you were saying -- you said you
do not have to determine the normal retirement annuity.
A. I'm --
A. Yes. Yes.
MR. KRAMER: Objection as to the legal part. But you can answer for both.
BY MR. GOTTESDIENER:
A. -- the answer to the calculation without doing it and you don't do it,
and you pay the correct amount, that you have not violated any
requirement.
Q. And you deny that section III.B.3 says flat out on the page that you
do the calculation?
A. It's --
Q. So you now know the answer because you did the calculation, and so
you're just saying that I already know the answer, so somehow the
calculation just was never done; that's your testimony?
A. If you know the answer without doing a calculation, and you focused on
a particular part of the calculation, which is not necessary to be done
in order to know the answer to the -- the end answer to the calculation.
So if you know the end answer to the calculation and you pay the
participant the correct amount, you have not violated any requirement
just because you have not actually gone through the steps of the
calculation.
A. No. The law requires that you pay the correct amount.
Q. It is your actuarial and no different legal opinion that the law does
not require you do the calculation --
THE WITNESS: Under certain circumstances, where you know you're getting
the right answer, the law does not require you to go through a pointless
calculation.
BY MR. GOTTESDIENER:
A. Yes.
Q. Can we agree that the minimum lump sum is the accrued benefit under
411(a)(7) with the present value determined under 417(e)?
Q. In a defined benefit plan, you agree that the minimum lump sum is the
accrued benefit under 411(a)(7) with present value determined using
417(e)?
Q. Do you agree with the statement in a defined benefit plan, the minimum
lump sum is the accrued benefit under 411(a)(7) with the present value
determined under 417(e)?
THE WITNESS: What I'm saying is I'm not giving legal opinions.
BY MR. GOTTESDIENER:
Q. Yes.
BY MR. GOTTESDIENER:
Q. Through PPA -- how is that not true? What kind of caveat would you put
on that as an actuary? How is it not true?
Q. Putting that caveat aside, do you have any problem with that?
A. I believe that's the state of the law in the Seventh Circuit; and I
accept that that is the state of the law in the Seventh Circuit.
Q. I'm not asking about what you accept. I'm just saying sitting here as
an actuary --
A. That's my answer. I believe that that is the state of the law in the
Seventh Circuit.
Q. And you don't know the state of the law any other place?
Q. I know. That's why I'm asking you generally as an actuary, is this not
true someplace? Let's ask it that way. Is that false any place?
Q. Apart from the 2002 Alliance decision, do you have any other caveat
that you want to offer?
A. No.
Q. And that caveat, by the way -- that highly legal caveat -- that was
your opinion as an actuary, right?
Q. So the opinions you give in your report that accept as premises for
doing certain calculations propositions of law, all of those opinions are
all legal opinions?
BY MR. GOTTESDIENER:
A. I'm saying --
Q. No. No. No. I'm not asking -- please don't import your advocacy points
of view. Not for purposes of this case. I'm asking you. You took an oath.
I'm asking you a general question. I haven't put on those caveats. So
don't you, please.
A. But you --
A. With the caveat that you mentioned with respect to the Alliance case,
yes, it is true.
MR. KRAMER: Objection to the legal opinion. But you can answer.
BY MR. GOTTESDIENER:
Q. So in the end, though, we've been through all this: You don't have any
different opinion as an actuary versus as a lawyer to that question?
THE VIDEOGRAPHER: This is the end of tape 1. Off the record at 11:07.
(Recess.)
BY MR. GOTTESDIENER:
Q. Can we have as a shorthand for the deposition that when we say accrued
benefit, that we mean the accrued benefit payable as an annuity at normal
retirement age and just have an agreement that when you and I are saying
that, unless we specify, it is shorthand?
A. Yes.
Q. Okay. Is there any difference between that accrued benefit and the
411(d)(6) accrued benefit?
A. The 411(d)(6) accrued benefit includes more than the accrued benefit
as you just defined it. It also includes a panoply of actuarial
assumptions or factors that are used to convert the accrued benefit into
other forms.
I would describe the 411(d)(6) as being broader than the way you just
described our shorthand accrued benefit.
A. I would really have to give some thought to that and to look at the
statute.
If you're looking at pre-PPA, I would need to look at the statutory
provision to give some thought.
Q. Now let's consider a specific plan. Let's call it the 123 plan.
A. Okay.
A. Okay.
A. Okay.
And --
A. Okay.
Q. Would you like a pen and a pad to try to keep track of this?
And also, by the way, as I'm going through this, another thing we can
agree that unless either of us specify, everything we're talking about is
pre-PPA, right?
A. Okay.
And final piece is he's got a $50,000 notional account balance on 1-1-
2000.
Q. Yes.
Q. Yes.
A. Yes.
A. Yes.
Q. No. Remember we got that out of the way. Your footnote 5, the Alliant
plan, we don't have that issue. It is a wash. We don't have to worry that
that is going to produce a different result.
Q. Now, let's assume that the results of this calculation which I'm sure
you can do in your head -- I have a calculator if you'd like to do it --
it is $158,609. Let's assume that's the result of the calculation?
A. 158 --
Q. -- 609.
A. And you're saying that would be 1.08 to the --
Q. -- 15th power.
A. -- 15th power.
Q. Yes.
Okay.
Q. Okay.
A. I can't do 1.08 to the 15th power in my head, but I'll accept that
that's -- I accept that you've done the calculation.
Q. So let's agree, then, that you don't have any problem agreeing that
the minimum lump sum on 1-1-2000 would be determined by discounting the
158,609 from 2015 to 2000 at the applicable interest rate under 417(e)?
A. Well, you would discount it for that, and possibly for mortality.
There's -- there are two possible discounts. There's an interest discount
at the 417(e) rate. There's also a mortality discount; and some
controversy as to whether or not you use a mortality discount.
Q. For simplicity, why don't we put mortality to the side for a moment.
Do we agree that the calculation would be you take the 158,609, divide it
by 1.05, raised to the 15th power?
A. Yes.
A. Okay.
Q. And do we agree that Joe's interest credit between 1-1-2000 and 1-1-
2008 is 8 percent of $50,000 and so, $4,000?
MR. KRAMER: Could you -- did you say 1-1-2000 and 1-1-2008?
BY MR. GOTTESDIENER:
A. Yes.
Q. For the entire next year, the interest credit he gets is going to be -
- it is 8 percent of $50,000, so it is going to be a $4,000 interest
credit?
A. ‘1.
Q. Yes.
Q. $4,000.
A. He's terminated.
Q. Terminated.
A. Under the hypothetical facts that you've given me, that is not
affected by the plan's actual rate of return, correct.
Q. In no way?
A. Yes.
Q. And let's assume that the applicable interest rate under 417(e) on 1-
1-2001 is still 5 percent?
A. Okay.
Q. Do we agree the minimum lump sum on 1-1-2001 would be determined as
158,609 divided by 1.05 raised to the 14th power?
Okay?
Q. Sure.
Q. The short answer. Why did you use that number, 1.05?
A. Because the lump sum is growing, under your facts, at 5 percent per
year.
A. The lump sum is growing at the 417(e) rate, yes, under your facts.
Q. And do we -- withdrawn.
You agree, do you not, that the fact that the plan's interest crediting
rate is a fixed rate of 8, say, versus 7 or 9; that doesn't affect the
rate of change?
A. It does not affect the rate of change of the whipsaw lump sum, yes.
Q. And one of those things is that the 417(e) rate doesn't change?
MR. KRAMER: For clarification; you're saying the 417(e) rate in your
hypothetical is 5 percent, that it is fixed? Not that it is still 417(e),
but one year, it could be 5 and the other year, it could be 6.
MR. GOTTESDIENER: No, the 417(e) rate, to help our colleague, that is a
variable rate.
BY MR. GOTTESDIENER:
Q. Okay.
Q. That's right.
MR. KRAMER: All right. I apologize. I wanted to make sure I was on the
same page with you two, then you referred to 417(e) you were referring to
your fixed 5 percent.
BY MR. GOTTESDIENER:
Q. Fixed isn't a word we use for 417. You agree with me on that, right?
A. I do.
Q. Do we agree if the applicable 417(e) rate is not 5 percent, but is 4.5
percent, then the minimum lump sum is going to be determined by taking
158,609 dividing it by 1.045 raised to the 14th power on 1-1-2001 for
Joe?
A. Yes.
Q. And do we agree that this result would be larger than what the result
would be if the applicable interest rate under 417(e) were 5 percent?
A. Yes.
Q. And let's assume that that results in a minimum lump sum for our
friend of 85,645 on 1-1-2001. Okay?
A. Okay.
Now, we agree that the change in the minimum lump sum is much more than 5
percent, when we go from 2000 to 2001 under this scenario?
A. Yes.
Q. And --
A. Yes.
A. Yes. Precisely.
A. Well, when you say Berger v. Xerox, are you referring to the District
Court opinion or the Seventh Circuit opinion?
Q. I'm actually referring to both, but you can assume for this purpose
that I am referring to the affirmance of the District Court's decision to
use the current year's rate as opposed to what else was proposed.
A. I would have to re-read those cases to say that I agree with your
statement.
I do agree that the Seventh Circuit, that among the methods endorsed by
the Seventh Circuit in the Berger opinion is the use of a one-year rate.
Q. The current rate -- okay. So all of that was yes, because my question
was simply, the ruling was that the whipsaw calculation in that case
would be performed by projecting the current notional account to normal
retirement using the current year's rate and assuming that all future
years' interest credits would be the same?
A. Well, my answer is not yes. My answer is that I do agree that that was
one of the methods that the Seventh Circuit said was permissible. But
without reading the cases, I can't tell you.
A. Okay.
And the premise of it was, answering your question what did I mean by
Berger, and I explained very clearly the lower court holding. You're an
attorney.
A. Right.
All I'm asking you is that was the method that was applied, the District
Court did it, and the Court of Appeals affirmed it. You keep going off
into other -- what else might be possible.
I'm just asking that's what was acceptable and what was done in the
Berger case, right?
A. Are you asking me to assume the answer? Because I'm telling you I
don't remember precisely in the Berger case where the District Court came
out in terms of which particular projection rate to use.
Q. Oh, okay.
A. That's what I'm saying. I don't remember that. I would need to re-read
that case to answer your question precisely.
Q. Can you accept my representation that the District Court opinion uses
the current year's rate? And that that holding was affirmed?
Q. Okay. And there's nothing about what you're accepting that strikes you
as odd or unusual based on your recollection or knowledge of the case or
your actuarial knowledge or your legal knowledge?
A. You're correct.
Q. The result. I'm not asking actually about the result. I'm asking about
the technique that was used to perform the calculation. Maybe you don't
mean anything different, but I just want to make sure the result here --
A. Okay.
A. Okay.
Q. The 456 plan, it is just like the 123 plan, except that the crediting
rate is the one-year T bill plus 1 percent.
And let's say that there is participant Doris; and Doris is just like Joe
except she's working for 456 and in the 456 plan.
And also let's assume that the 456 plan applies whipsaw, pre-PPA, applies
whipsaw in the same manner that we just agreed we'd assume was what
occurred and was affirmed in the Berger case by using the current year's
rate and holding all future years' interest crediting rates constant
assuming that they would be the same?
Q. Well, let's --
Q. Hold on. Hold on. I appreciate that. We'll get to that discussion
perhaps; but I'm not talking about Berger per se. I'm talking about that
456 is the same as 123?
A. Okay.
Q. I'm not saying -- please don't use the fact that it is 1 plus 1 to say
I'm importing the facts of Berger.
A. Okay.
Q. It has the same crediting rate. It operates on that technique for the
whipsaw calculation based on that assumption, but otherwise let's keep
Berger off to the side.
A. Okay.
Q. 6.
Q. Yes. You're --
Q. Yes.
Q. Is 5.
A. Is 5.
Q. Doris is just like her buddy Joe, she has her $50,000 account balance?
A. We're post GATT here, not pre-GATT.
Q. We're at 1-1-2000. The plan has done its duty and the plan is using
the 30-year Treasury 417(e).
A. Okay.
A. Well, I don't think we can do that; and let me pause for just a
second. I did tell Dennis that I would give him my acronyms. GATT is G-A-
T-T.
We're now positing that we're in a post-GATT period and that you're --
It is not moot because under the facts that you've given me, the one-year
T bill rate plus 1 percent, I think, is what you described as a safe
harbor rate under 96-8; and I'd like to --
A. Okay.
Q. The plan --
A. But also the plan provision would provide that the projection rate is
the current year's rate. You're saying that. That's a plan provision?
BY MR. GOTTESDIENER:
A. Yes.
Q. 37. 137,952?
A. 7,952. Okay.
A. Yes.
A. Yes.
A. Okay.
Q. And let's also assume that on 1-1-2001, the one-year Treasury rate is
5 percent, not 6 percent. And that the 30-year Treasury rate is 4.5, not
5 percent?
A. Okay.
A. Yes.
Q. And do we agree that her projected account balance at normal
retirement age as of 1-1-2001 would be determined by projecting the
current notional account on that date to NRA at 1-1-2001, the current
crediting rate of 6?
A. Yes.
A. Yes.
A. Okay.
Q. And you agree that her minimum lump sum on 1-1-2001 would be
determined by discounting the projected notional account balance at
normal retirement age back to 1-1-2001 using the applicable interest rate
of 4.5?
A. Yes.
A. Yes.
Q. And the change in her lump sum from one year to the next can be broken
into three parts: The part attributable to passage of time; attributable
to the change in the applicable 417(e) rate; and to the change in the
one-year T bill?
Q. And do we agree that the change in Doris's minimum due to the passage
of time and the change in the 417(e) rate is similar to the change that
we talked about with Joe?
How much --
BY MR. GOTTESDIENER:
Q. I don't want to cut you off, but I don't mean by number. I mean, by
the formula. It is similar.
Q. Let me show you your report that I'm going to mark as number 2.
BY MR. GOTTESDIENER:
There you indicate, “In projecting that cash balance account, future” --
“the future interest credits to the account are required to be calculated
in a manner that is consistent with and determined by Notice 96-8 as well
as Internal Revenue Code section 417(e) and ERISA section 205(g).”
Q. Yes. I'm just saying that's what you say in paragraph 14, right?
A. Yes. I think you need to read my report as a whole which says that
assuming that --
Q. I have read your report as a whole. We're talking about it as a whole,
in part, all these great things. I'm asking do you say that in paragraph
14?
A. I do. Yes.
BY MR. GOTTESDIENER:
Q. What part of 417(e) -- and we've given you even more, but you can
direct yourself to 417(e) -- what part of 417(e) applies to the manner in
which future interest credits to the account are calculated?
A. The present value shall not be less than the present value calculated
using the applicable mortality table and the applicable interest rate.
A. No.
Q. That's it?
A. That's it.
Q. What part of what you just said has anything to do with the manner in
which future interest credits to the account are calculated?
Q. You know --
A. -- are based on --
BY MR. GOTTESDIENER:
A. Yes.
Q. You say, in projecting that cash balance account, the future interest
credits to the account are required to be calculated in a manner that is
consistent with and determined by Notice 96-8 as well as Internal Revenue
Code section 417(e); and I'm asking you, show me in 417(e) how it says
what manner future interest credits to the account are to be calculated?
Q. Which calculation?
Q. Where --
A. -- interest rate --
Q. What words on the page say the entire calculation as opposed to the
present value calculation?
A. Well, the present value calculation is the entire calculation; and the
present value calculation uses an interest rate, and that interest rate
tells you what you assume invested assets to earn.
A. That's the meaning of the word interest rate is what invested assets
earn.
Q. Where do you find authority for ignoring the word applicable in 417(e)
in front of the word interest rate?
Q. Stop. Stop. Why is that true? What you just said is false. It tells
you exactly how to do it. It defines applicable interest rate. It points
you to a very specific definition.
A. Yes.
A. Yes.
Q. Okay. So it tells you, look at where we are pointing you to, this
index prior to PPA that says, use this 30-year Treasury rate and plug it
in when you're doing a discounting, right?
A. No.
Q. I want you to say, are you saying it doesn't cover that or you are
saying it covers something in addition to what I just said?
A. What I'm saying is that the applicable interest rate is the interest
rate and the interest rate is the interest rate that you use in the
present value calculation; and that tells you what invested assets earn.
A. Well, there is. In my mind, it says the present value. And the present
value --
And the present value for purposes of 1 and 2 relates to when a plan may
distribute amounts in excess of a certain dollar limit and when it may
not.
Q. I want to know where on the page you are saying it allows you to say
it applies to the manner in which future interest credits to the account
are calculated?
A. I'm saying that that is an inevitable result in the Alliant plan. When
you use the term present value and you use the term interest rate, it is
not possible to get to any other answer.
Q. Would this be the result in the 123, or the 456 plan?
A. No. It would not be the result in the 123 or the 456 plan because they
have different plan provisions that implicate different calculations.
Q. So it would apply to any plan that didn't tie the rate to the plan's
rate of return?
A. I'm saying that the term interest rate would not necessarily determine
the interest crediting rate, where the interest crediting rate is not a
function of the rate of return on plan assets.
A. No. Most plans do not base benefits on the rate of return on plan
assets. There's no reason for that to be there.
Q. What words that you can read to me say anything about the rate of
return on plan assets?
A. The words present value and interest rate, which are based on what
invested assets earn.
Q. Where do you come off saying that applicable interest rate has
anything in the world to do with what invested assets earn. Point me to
anything. Law. Conversation you had with somebody about this topic.
Where in the world does that come from other than your fertile mind?
Can you cite anything other than your mind? Anyone agree with you? Name
them.
Anybody ever --
A. Yes.
Q. -- say that in a plan that uses the plan asset returns, this is what
you do?
BY MR. GOTTESDIENER:
Q. Got that. Anything else that's not cited in your report? Do you have
any other authority for your theory?
Q. Name them. Who? Who agrees with this theory? This specific theory that
you can use the 417(e) applicable interest rate and say that this is what
you do in a plan that uses the plan's rate of return as the interest
crediting rate? Who specifically agrees with you on this?
Q. No one, right?
Q. Name.
Q. Name.
Q. No?
Because of the terms of the plan, you would use 75 percent of the 417(e)
rate or the 4 percent minimum?
A. Or 4 percent because --
Q. I understand your theory. I want to know where you have any authority
for what you're saying that we look to the 417(e) rate to plug in for the
assumed rate of return? Anybody else?
A. As far as I know, the specific facts of this case are a case of first
impression; and as far as I know, nobody has made an opinion one way or
another on the use of the term applicable interest rate for purposes of
this plan, because --
Q. And when did you first get contacted about this case?
Q. And who have you talked to since your initial contact with Mr. Kramer
about testifying, producing a report, anything to do with this case since
you were first contacted?
A. I've spoken with Ron and with a couple of his partners, I believe. And
with Ian Altman, briefly.
Q. When?
A. When did I talk to Ian? A couple of weeks ago maybe. I'd have to look
at my calendar.
Q. Did you read his report before you submitted yours, or any draft of
his report?
A. I don't think I did. I have read his report. I don't think I read his
report before I submitted mine.
A. No.
Q. So you've not sought comment from any other actuary as to the validity
of your theory?
A. No.
Q. You have 96-8 in front of you. Tell me where in 96-8 it says, this is
the way that you determine future interest credits to the account in a
plan that's like the Alliant plan?
A. Well, I do believe that these -- the use of the term “interest rate”
is unambiguous; but other than that --
Q. Answer my question.
A. 96-8 does not deal with the Alliant plan in any way.
A. I think it does.
A. No.
A. I think every use of the term interest rate and present value in 96-8
supports my position, because the use of the terms present value and
interest rate assume that the interest rate is the rate at which invested
assets grow.
Q. Didn't you just say a moment ago that 96-8 doesn't cover this kind of
plan?
A. I said that 96-8 does not specifically deal with the facts of the
Alliant plan.
Q. It doesn't deal with any plan that deals with an inside variable
index, does it?
A. When you say inside variable index, you mean based on the rate of
return of plan assets?
A. I want to make sure I understand what you mean by inside and outside.
Outside indices mean something other than the rate of return on plan
assets? Yes?
I don't recall.
BY MR. GOTTESDIENER:
A. Okay.
A. Ah, yes. Variable outside. So you are using the word inside and
outside --
A. I interpret the word outside here to mean a rate that is not based on
the rate of return of the plan.
The -- what other parts of 96-8 other than its use of the term present
value and interest rate support your proposition?
A. Yes. 96-8 --
A. Other than the use of the word present value or interest rate.
Q. Nothing more?
A. Yes. I think there is something more that supports the way I've done
this. And to follow that, you're not going to be able to say, oh, show me
the words on the page here. You have to understand the structure of the
calculation.
When you look at section IV of 96-8, the calculations are based on the
concept of actuarial assumptions that are reasonable in the aggregate and
there's no other way of looking at this.
Could you show me because I never saw it, you underlined one use of
present value or interest rate. What did you underline? Can I see it?
A. Sure.
A. No.
Q. Thank you.
In your report, paragraph 20, you say that the basis for Notice 96-8 is
417(e) which provides that when a participant takes a lump sum benefit,
the lump sum must be sufficient to compensate him for the value of the
annuity that he would otherwise receive in accordance with the actuarial
assumptions mandated by 417(e).
Now, look over to 96-8, and tell me where does 96-8 say that?
In plans that have a fixed interest rate, you can determine precisely the
amount of the annuity at normal retirement date. In plans that have a
variable interest rate, you cannot determine precisely in advance the
amount of the normal retirement benefit.
A. Well --
Q. Is that important?
A. Yes.
Q. Okay.
A. Front-loaded plans are the only kind of plan that you're allowed to
have because back-loaded plans are -- are not permitted.
A. In theory, you could decide -- no. No. I don't think that that's
possible. I don't think if you back-loaded the interest rates, it is
possible to satisfy any of the three back-loading tests except in really
the most bizarre and unusual circumstances.
Q. Okay.
A. And certainly you could never have a plan that always satisfied any
one of those three rules, if you had a back-loaded plan. So, no, I think
that the point of using the word “front-loaded” is to say back-loaded
plans are not permitted; and, therefore, all of the cash balance plans we
are talking about are going to be front-loaded plans, as the Alliant plan
is.
A. Well, in either case, it means the same thing. It means that when you
project the interest rate, when -- I'm sorry, when you project the
interest credits to normal retirement date, you have to have a plan
provision; and that plan provision cannot violate revenue ruling 79-90
and Internal Revenue Code section 401(a)25.
Q. But before you have a plan provision, you could write any provision
you want and it could say anything it wants; but if the underlying credit
is within the employer's control, it wouldn't be definitely determinable,
would it?
A. I'm trying.
A. Okay.
Q. You don't?
A. No.
Q. So are you saying that in all the hours that you've spent on this,
have you ever considered whether or not this plan fails the definitely
determinable requirement?
Q. Tell me what you've done to consider that and what your conclusion is?
A. My conclusion --
Q. How much?
A. I can't really tell you precisely how much time I've spent thinking
about it. I can't really say.
Q. I'm asking.
A. I have thought about it from time to time.
Q. Have you written anything about it in any way, shape, or form, notes,
e-mails, about --
A. I'm going to --
I think that's outside the scope of our agreed agreement with regard to
experts.
MR. GOTTESDIENER: I'm not asking what you discovered. I'm asking what you
did.
BY MR. GOTTESDIENER:
Q. Have you written anything, jotted any notes? I'm not asking anything
about what they were?
A. No. I've not jotted any notes about the definitely determinable
requirement.
Q. Not typed any e-mails, whether sent or -- or sent -- you know, stored
in your draft box?
A. No.
A. Yes.
Did you consult any written materials in thinking about the definitely
determinable issue as to the Alliant plan?
A. Yes.
Q. What?
Q. In what context?
My question is --
A. It actually --
Q. Go ahead.
Q. You are saying there are pre-PPA rules that say you must base it on
plan funding?
A. Yes.
A. Yes.
A. Yes. You are familiar with the top 25 limitation on plan termination?
And actually before plan determination, lump sums payable to the highest
25 paid employees.
A. Oh, no. It requires that you actually not pay certain amounts.
Q. Come on. You want to give a citation. I'm saying it's not talking
about the determination of the accrued benefit, is it?
A. Yes.
A. Well --
BY MR. GOTTESDIENER:
Q. The question is this: Did you consult anything else? You've talked
about two things so far. Did you consult anything else in your
examination of whether or not this Alliant plan fails the definitely
determinable rule because it ties the interest crediting rate to plan
asset returns?
A. No.
Q. I didn' t-- that's right. I didn't say that you did. You looked at
nothing else, considered nothing else?
A. Well, over the years, I've looked at many things; but in the context
of this particular thing, have I taken another look at them? No.
Q. Have you thought about any other authority that you haven't mentioned
to us that over the years you became familiar with, and you didn't have
to crack open again to consider it, but you know, because you knew it so
well, you thought about it and considered it and either applied it or
determined that it didn't apply? Any other authority that you considered,
thought about, that passed through your mind in making whatever
conclusion it is that you reached about this plan?
A. No. Actually, I need to amend my prior answer. I did look at two other
things.
Q. Okay.
Q. And so you amended your prior answer. Now I want to make sure I got my
question answered which is not just looking at, but did you think about
other sources of authority and apply it as a mental process to see
whether or not it would impact your determination and perhaps your
conclusion?
A. No.
Q. Coming in to this deposition, yes or no, did you have an opinion, yes
or no, you said that you thought it was important.
A. I do think it is important.
A. I think that this plan does not violate the definitely determinable
requirement.
THE VIDEOGRAPHER: This is the end of tape 2. Off the record at 12:30.
AFTERNOON SESSION
(1:09 p.m.)
BY MR. GOTTESDIENER:
Q. Directing your attention to your report, paragraph 32, you say, “In
the typical whipsaw calculation, which is dealt with in Notice 96-8, a
pension plan credits interest to an account based on some index that does
not represent a real basket of investments. For example, the plan may
credit interest at a fixed rate of 8 percent specified in the plan
document. Or the plan may credit interest at a rate equal to the yield on
one-year Treasury securities plus 1 percent (this is the rate in Berger
v. Xerox). In both cases, the interest crediting rate is something other
than the actual rate of return on the trust fund, and so the statutory
mandate is not applicable, and the assumption regarding the rate of
interest credits must be reasonable.”
A. Yes.
Q. But that interest rate is the 30-year rate for the period in question,
right?
Q. Why would the statute use an assumption for a real rate of return
using the 30-year Treasury?
A. Why?
Q. Yes.
A. Are you asking me to speculate why they picked that particular index.
A. No.
Q. It is impossible, right?
Q. It is close to impossible?
Q. Your whole theory hinges on the fact this is a real rate of return we
are talking about that we need to project, and we're going to use a
fiction, right? A rate that you can't earn? That's your theory?
A. My theory --
Q. Isn't it?
Q. I'm asking --
A. I'm saying --
Q. When you --
A. -- I'm saying that the interest rate is the projection of what you
think the real rate is going to be or it is a projection --
Q. What sense -- if your whole linchpin is that this has to do with trust
returns, what sense does its make to use as a proxy something that is a
complete fiction that somebody could never actually earn?
A. The sense that it makes is that it is a rate that does not have
discretion in it; and if you look at the history of section 417(e), I
think that it becomes clear --
Q. If I write into the plan after looking at Clark Maxam's report that it
is based on an objective stochastic analysis, this thing can't be less
than 8.5 percent and I write it into the plan document, that's objective,
too? It is based on real returns, possible real returns, isn't it?
A. Well, it may be; and I don't think it is, but it may be that you could
write into the plan that the interest rate used for the projection for
purposes of the projection would be 8 percent or 8.45 percent.
Q. Under your scenario, what you would do is you would actually look at
some kind of baskets of investments and do some sort of analysis that
would look at something that actually could occur for this plan, right?
That's what you were just describing?
Q. You know the statute doesn't say anything like what you are saying,
and that you first thought about this less than a month ago, correct?
This is a case of first impression that you thought about less than a
month ago. You've not talked to anybody about it. You don't have anybody
who backs you up on this? Anything wrong with what I just said?
A. Yes.
Q. Factually, what was wrong with what I just said? You haven't thought
about this for more than a month, have you?
A. About --
Q. Yes or no?
Q. No. About the crediting rate that you would use for projection
purposes in a plan tied to trust assets?
Q. Okay. And you thought before you were hired in this case that if I
were ever to be asked to opine that I would say that it's the 417(e)
rate, right? That's what you thought?
A. Yes.
A. Philip Cook.
A. Gregg Braden.
A. John Parks.
A. John is an actuary.
Q. Okay. Who else? When you talked to Cook and Braden about it, were you
considering an actual plan?
A. Yes.
A. Because that plan wasn't a cash balance plan. It was a different kind
of plan tied --
Q. Okay. The variable annuity plans -- put those to one side. Have you
ever talked about this in the context or thought about this in the
context of a cash balance plan before you got Mr. Kramer's phone call?
A. Yes.
Q. When?
Q. I understand all that. Answer my question. When did you actually think
of this issue?
Q. That's all post-PPA. This is all pre-PPA that I'm asking you about.
Have you ever considered before October when you got Kramer's call, the
question of what the proper projection rate should be for a cash balance
plan pre-PPA that ties to trust assets, the interest credit?
A. Yes. I don't know why you would think that my previous statement was
post-PPA, because I didn't say that.
Q. You said something about variable annuity plans and you just said
something about a plan that would go to trust assets after a conversion.
You're saying that you talked and considered having a client use trust
assets pre-PPA from some other interest crediting rate design?
A. Yes.
Q. Okay. Tell me about that. You don't have to name the client but tell
me as much information as you can about how this came up and what you
thought about it.
A. Yes.
Q. I said no. I want to know about the details of what you considered.
You can talk about a high level of generality. I find it hard to believe
you would seriously consider it. So I want you to explain to me step by
step as best you can what did you think. I'm going to use this theory?
Did you have this theory in mind?
A. I think that there are a lot of issues there; and for a variety of
reasons, the clients that I worked with were not good candidates for
doing this; and the reasons varied from a kind of negative whipsaw that
the clients relied on for funding purposes to other concerns. But I mean,
the simple answer is I do a lot of work with cash balance plans; and I
have given thought to how you do whipsaw calculations on many occasions
in many contexts.
A. It is.
Q. Did you consider this question before you got the call from Kramer as
to how pre-PPA a plan that tied the crediting rate to trust assets would
do a whipsaw calculation? Yes or no?
A. Yes.
BY MR. GOTTESDIENER:
Q. When specifically did you consider that prior to October's call from
Kramer?
A. On various occasions --
A. Probably.
Q. How long ago was the first time you considered it?
Q. And were you aware -- when was the first time you ever became aware --
did you suggest as an actuary -- how did it come to your awareness the
idea of tying it to trust assets? Was that your idea?
Q. When was the first time you ever heard of an actual cash balance plan
that tied returns to trust assets?
A. Oh, I think it was a long time ago. I don't know exactly, but probably
it could be more than 10 years ago.
A. I believe the circumstance, you are asking when I first heard about
it, when I first heard something like that, I'm going to take a guess
that it was at an actuarial conference, I think at the enrolled actuaries
meeting.
Q. Okay.
A. In a discussion --
A. Which I think does not actually tie interest crediting rates to actual
returns; but I think that the Bank of America plan at one point gave
participants some choices as to which interest crediting rate they would
pick, and it was a bunch of different indexes of something very close to
real investments.
A. Not necessarily.
A. I have not seriously thought about the difference between -- you know
-- something very close to real investments versus real investments. I
would say in general, when you're talking about something that's very
close to real investments but not actually real investments, that you
would not be covered by the term interest rate.
In other words, that you would use a reasonable assumption rather than a
statutory assumption.
A. The --
A. The opinion that the statute tells you what interest rate is used,
yes, turns on the fact that you are talking about a real basket of
investments.
A. It might.
A. No.
A. No.
Q. You made numerous references so far during the deposition to your
experience with cash balance plans and years in this area. It is fair to
say that you do consider yourself an expert on cash balance plans, right?
A. Yes.
A. Yes.
A. Yes.
A. Well --
BY MR. GOTTESDIENER:
Q. You know about these cases, right? That they've been pending for
years, right?
Q. It doesn't matter. Are you aware of the plans is obviously even more
basic. Are you aware of the litigation, the plans -- you know that these
things exist. You are telling me you haven't really thought about whether
you would say that the statute requires it in those circumstances, right?
Q. What do you mean studied? You know -- you are putting out there that
you are absolutely clear that rate of return plan assets definitely is
just totally governed by the statute, and it requires this; you know for
a fact before you have given this opinion and sat here today that there
are cash balance plans where participants direct their accounts into real
investments.
Yes or no?
Before you walked in here. I'm putting these questions. You knew it, yes
or no?
A. I'm not clear whether the Bank of America plan actually -- in fact, I
think that it doesn't tie to real investments.
Q. Any other plans? Could you please answer my question? Yes or no?
Before we're talking about this now, walking in here, you know that there
are cash balance plans -- I am not limiting it to the Bank of America --
where the participants' return is based on the return of a real
investment.
Yes or no?
Q. And you were aware of that before you walked in here, right?
A. Yes.
A. I'm hedging about that because I have not studied those plans
specifically and because you're asking me to render an opinion --
Q. What difference would it make? What facts do you need to know right
now to tell me whether or not the PricewaterhouseCoopers plan that has a
401(k) menu would be governed the way you say the statute mandates?
Tell me what facts? I'll give them to you. You don't need to know
anything, do you?
I would want --
Q. You can tell me right now. It is the rate of return on a mutual fund.
That's the facts.
A. Well, it's the rate of return. So you have participants who can elect
various rates on various mutual funds.
Q. I want you to tell me why you can't tell us right now it is governed
by the same interpretation of the statute in 96-8, and examine with me
what facts you need to know and then you'll give me your opinion.
You don't have the opinion now. Tell me what facts are you missing.
A. Yes. You used the word why. Could we get the question read back?
Q. No. I'm asking the question. What fact is missing? I gave you the fact
pattern. You admitted you were aware that there were such designs?
A. Yes.
Q. No. On the plan that you have in mind that you said you came in here
knowing about that there's a plan that has such a crediting menu.
Q. You told us. The testimony is crystal clear, you knew these designs
existed before you walked in here today?
A. Yes.
Q. Okay. You also knew very well about the Fry v. Exelon case, right?
A. Yes.
Q. And you knew the underwriting crediting rate was tied in part to the
return to the S&P 500? Right?
You are an expert in this. Don't play like you don't know.
BY MR. GOTTESDIENER:
Q. The answer is you cannot right now sitting here identify a single fact
that you are missing in order to render that opinion, can you?
Q. Why is that relevant? What does that have anything to do with anything
that you've opined about in your report?
A. It is potentially relevant.
One reason that it's potentially relevant is that -- and by the way, I
want to answer that question, but I do want to say there were several
facts so I don't want you to start telling me there was only one fact I'm
missing, but you did stop my answer mid-answer.
Q. I'm not asking you to identify a fact. You just identified one. I'll
change the fact pattern and say the plan that I want you to have in mind
does not invest in any of the mutual funds that it offers to participants
as their selection.
All it does is invest in individual stocks and bonds and it doesn't use
mutual funds, so it offers participants mutual funds, a series of mutual
funds, low cost mutual funds, real investments; next fact, I've satisfied
you. What is the next thing you need to know in order to tell me whether
or not the statute controls?
Q. You can't. Because I want to know why you would want to look at the
plan document. You can ask anything. I have all these plans memorized.
I'll give you all the answers right now.
You tell me: What is it you need to know next? I've just given you -- you
can't -- you can't either give me an answer as to whether or not the
statute applies or you can't give me a fact you need to know before you
can answer, correct?
BY MR. GOTTESDIENER:
Q. Please answer my last question. You either will not be able to render
an opinion, or you can't identify why you can't render an opinion, right?
BY MR. GOTTESDIENER:
Q. I'm not asking you about your prudence, whether or not you charge
anybody for it. I'm asking you --
Q. -- what expert fact do you need to know to tell me whether or not the
statute controls?
Q. Why?
A. Then how would that -- well, because normally, with real investments,
you can't change every day --
Q. They can change exactly the way anybody who is investing in a mutual
fund can. They get their 4:00 p.m. net asset value and then they can
switch daily. Identical. Exactly the same thing as if they were actually
invested in the plan. No difference.
Next question.
Identify a fact that you need to know before you tell me whether or not
the statute controls.
Q. Just identify a fact you need to know before you answer the underlying
question.
A. You know, I haven't been taking notes. So I want to go back over the
facts that you've already given me. You are saying the plan does not in
fact invest in these notional investments?
Q. Right.
A. It matters --
A. It matters for a variety of reasons. When you have a present value and
you're looking at a plan and the statute is telling you, for example,
that the plan is expected to earn a particular rate of return, and then
you say, well, we're going to give participants the ability to choose a
variety of investments that may or may not be suitable for the plan,
we're going to allow the participants to move their money around in ways
that the plan may not actually do; and in addition to that, as with --
you know -- virtually all cash balance plans, there are certain minimums,
maximums, and limits.
So the fact that the actual plan is not invested in the same way as the
accounts could be material.
Q. This is all covered by the statute, right? The statute explains this?
A. No.
Q. Where do you read that the statute depends on the plan being the
investor as opposed to a third party as opposed to the plan and the third
party are both invested in the same basket of investments?
Q. But you just said here, Mr. Expert, you've been thinking about this
thing for years; and it has come across your desk and your table and your
panel and all that for years.
When it came across your mind, did it or did it not strike you as
material?
You're not thinking about this for the first time? Or are you?
Q. Wait a minute, isn't the Alliant plan a very, very specific and
unusual type of plan?
A. It's a lot more time than I've had to think about your hypotheticals.
Q. You agree that this plan is a very, very special and unusual kind of
plan, correct?
A. I do.
Q. You were not aware of this specific plan design, 75 percent of trust
returns or a minimum, prior to getting Mr. Kramer's call or were you?
A. I was not.
Q. You were unaware entirely of the pendency of this litigation and the
pendency of another case involving the SC Johnson plan?
Q. And you -- do you -- what efforts have you made to, in the past month,
learn about the prevalence of this plan design, if any?
Q. Determine -- have you made any inquiries about who else has this kind
of plan? How is it designed? Who designed it? Anything like that?
A. This particular -- I know a little bit about how the plan was
designed; and who designed it. My understanding is he --
A. Okay.
Q. I'm asking what kind of investigation have you done about other plans
that have a similar design, trust asset returns plus a minimum as a
greater of?
A. I have not attempted to determine how many other plans there are of
that nature.
Q. Okay. And I didn't say determine in the sense of nail it down a
number. Have you made any inquiries or efforts to learn about the
existence of other such plans?
A. No.
Q. Have you made any efforts in the past month to talk to any
practitioners who may or may not have been directly involved in the
creation or administration or litigation of any such plans other than Mr.
Kramer and the partners of his that you referenced?
A. No.
So, for example, if your interest crediting rate were the greater of the
actual rate of return on the plan or something else, then that something
else would not be necessarily tied to the interest -- not necessarily be
equal to the applicable interest.
Q. You're talking about plan provisions that tweak this crediting rate?
A. Right.
Q. But if it's tied to the plan assets, you're saying that the present
value, whenever it is calculated under 417(e), that the interest rate
used in all aspects of that calculation has to be the applicable interest
rate?
A. Yes.
Q. And so when 417(e) applies to a plan, not only is it just the present
value, but also the accrued benefit itself must be determined using the
same interest rate, the rate of return that money invested will receive?
A. -- then that trust return would be the trust return that you assume is
the applicable interest rate, yes.
Q. Now you lost me. The crediting rate is 75 percent of the plan trust
returns or 4 percent?
A. Right.
A. Well, you -- the piece of that that is based on returns of the plan is
the applicable interest rate.
So, for example, if the applicable interest rate is 3 percent, then you
use 4. If the applicable interest rate is 8 percent, you would use 6.
A. Correct.
Q. Okay. So and -- so you would further assume that the current year's
rate -- because we're using the applicable interest rate -- the current
year's rate remains constant for all future years; in other words, the
assumed rate of return for future years will be the same in all future
years as it is in the current year?
What do you mean, in this case it's the structure of the statute?
Q. Yes.
A. -- to determine what plan assets are going to earn in the future from
today.
Q. So it would be mandated, statutorily required, that the current year's
rate remains constant for this projection for all future years? The
assumed rate of return for all future years is going to be the same in
all future years as it is in the current year?
A. Yes.
Q. Now, you agree that 417(e) only applies to 417(e) benefit forms?
A. Well, if the benefit form is not subject to 417(e) then you don't do a
calculation of this type at all. It is not that my argument is
inapplicable. It is that 417(e) is inapplicable as you have specified in
the premise of your question.
A. Correct. Okay.
A. Uri-huh.
A. Okay.
Q. And the plan has an actuarial equivalence; and you need to determine
his accrued benefit?
Q. No?
Q. Yeah.
A. Okay. That annuity payable now under this plan is going to be his
account balance today divided by an annuity factor today. You've said as
our shorthand that accrued benefit means payable at normal retirement
date.
Q. Yes.
A. Okay. And no, you would not determine as part of that calculation what
is his accrued benefit at normal retirement date.
You would take his account balance today and divide it by an annuity
factor today; and that would end the calculation under this plan as I
understand it.
Now, I will say that -- you know -- this is not an issue that has come up
in the litigation as far as I know, and it is not something that --
Q. John comes to you and says you are Mr. Cash Balance and I want to be
sure that these annuity payments were determined using reasonable
actuarial assumptions; and you say, well, I need to rethink my deposition
answer.
Oh, yes, I absolutely would first, John, have to determine your accrued
benefit -- wouldn't you -- in order to test whether or not it was a
reasonable actuarial assumption?
A. (No response.)
A. Well, it can be, because I think that there are certain circumstances
where such a testing would be appropriate.
Q. No. Come on. He's your neighbor. He says I want -- I don't trust these
people. I want to make sure. I read your report. David, come on. I read
your report. Note 6, I want you to get out your abacus and show me that
it is a reasonable actuarial assumption.
A. Well, actually -
A. Actually many plans, in fact, virtually all cash balance plans read
exactly the way that I have said. This is a --
Q. Listen, it could be difficult to calculate it, but it could be done,
right?
Q. You know, you're just wrong about that. You said that repeatedly. The
accrued benefit is a very specific thing. The plan has to cut a check,
doesn't it?
Q. The plan -- accrued benefit -- are you saying the accrued benefit is
an estimate? The accrued benefit is an estimate? Is that what you're
saying?
Q. No, it isn't. You were wrong about that. You repeatedly said it.
Q. There is a provision --
A. Well, if you're saying, do I know for this 40 year old what his
benefit will be if I wait until age 65, the answer is no. I don't know.
Neither does anybody else. And it is not possible to know.
A. It can't.
Q. Okay.
A. Knowing --
Q. No.
A. -- if the person leaves his money in from today until age 65.
Q. Are the actuarial assumptions for John who wants to know whether he's
gotten a single life annuity at age 40 based on reasonable assumptions --
Q. It is this case, this plan. Totally just change the facts and don't
assume the person wants a lump sum.
I'm asking: How would you go about -- would you -- are you required to
use -- under your theory, does the statute mandate that you project using
the 417(e) rate? Or would you do it some other way?
Q. What do you mean at all? Don't you have to figure out his accrued
benefit? He comes to you and says I really would like you to do me this
favor? Could you just check it and make sure?
A. No.
Q. Don't you first have to calculate his accrued benefit?
A. No. We're talking about a Treasury regulation here, not the statutory
language.
Q. Yes. I'm asking, don't you have to calculate his accrued benefit in
order to determine whether this form of annuity is based on reasonable
actuarial assumptions?
In many, many plans; and the Treasury does not in any case that I know of
in interpreting its own statutory provision -- I'm sorry, its own
regulation, require that you do such a projection and determine whether
the payout is reasonable.
Q. Look at 96-8, section III.B.1 first sentence, “In the case of a front-
loaded interest credit plan, an employee's accrued benefit as of any date
before attainment of normal retirement age is based on the employee's
hypothetical account balance as of normal retirement age, including
future interest credits to that age.”
A. First sentence.
A. Yes. That's what that sentence says. And subsequent sentences in that
same paragraph and the next paragraph and the next paragraph after that
explain and expand upon that.
Q. Yes.
A. Which is exactly what Treasury says in Notice 96-8, that you cannot
predict those things in the future unless it is fixed. If it is not
fixed, you don't know what it is.
Q. No. It says -- no. You can't know the accrued benefit as of any date.
This tells you not only does it exist, but what it is. Correct?
Q. It tells you not only does it exist, it tells you what it is, and how
you do it? Doesn't it?
A. No.
Q. What does that -- how is that responsive to what I was just asking
you. In terms of -- what -- it tells you, you have to have a method and,
therefore, once you apply the method, you have the accrued benefit?
A. It should be.
Q. Yes.
Your actual normal retirement benefit in the future is not something the
plan -- it is not something that you know at the time you pay out the
benefit today.
Q. But once the plan does all that, that's not relevant, you are asking
about a counterfactual situation. That's not relevant.
Q. No, you're not. It says in order to comply with 401(a)25 the method,
including actuarial assumptions if applicable, must preclude employer
discretion?
A. Yes.
Q. Tell John how are you going to calculate his 417(a) accrued benefit?
The same way? Or different than 417(e) payout? In this plan? How are you
going to do it?
Q. Yes.
Q. What's the answer to my question? How are you going to deal with
interest credits in determining the accrued benefit?
Q. Yes.
Q. I'm talking about John coming to your kitchen table and asking you to
do the calculation.
A. This is a tax regulation. John isn't -- John isn't the IRS. John isn't
--
A. It is a tax requirement.
A. If the plan specifies a method and that method is approved by the IRS
in a determination letter, then presumably the IRS has looked at it and
determined that the result that you get is a reasonable result based on
reasonable actuarial assumptions, and my recollection --
Q. How would you go about picking the interest rate to answer John's
question?
Q. John. Age 40 --
A. Yes.
Q. -- to test, because he doesn't trust them, he wants to know that it is
a reasonable actuarial assumption converting from his age 65 accrued
benefit to his single life annuity starting at age 40. How do you pick
the interest rate?
Q. Now I understand why it took 15 minutes. You're saying that 417 -- the
417(a) accrued benefit is not the same as the 417(e) accrued benefit?
A. If you're --
Q. So --
A. And so --
Q. Hold on.
A. No. Because --
BY MR. GOTTESDIENER:
A. That's unknowable because the plan document doesn't say what the
417(a) accrued benefit is.
Q. Guess what, you are admitting that you never considered the 417(a)
accrued benefit, whether it was the same as the 417(e) accrued benefit,
correct?
Q. Yes.
I was not aware benefit payments other than lump sums were the issue in
this litigation.
Q. That's because you think there can be two accrued benefits or three,
right?
A. Well, clearly --
Q. Here's the plan. How do you figure out John's question? How do you
answer it? I'm giving it to you.
THE WITNESS: Okay. In the Alliant plan, under the provisions of the plan,
you would project using the 417(e) rate.
BY MR. GOTTESDIENER:
Q. Which is different than the rate that you say is statutorily mandated,
right?
As I read this plan, you would project forward using the 417(e) rate as
the presumed rate of interest credits in determining Joe's benefit in the
form other than a lump sum.
Q. So you have just confirmed that you believe that there are two accrued
benefits under this plan, one if Joe takes a lump sum; and one if Joe
takes an annuity?
For both purposes, for both a lump sum and an annuity, the plan projects
forward the interest crediting rate as if it were the statutory rate
which is, in my view, not what is required for purposes of calculating a
lump sum under Notice 96-8.
So I think that the plan to the extent -- to an extent, in doing its
whipsaw calculation, comes up with a number, generally speaking when the
statutory interest rate is greater than 4 percent the plan's whipsaw
number is greater than the -- the Notice 96-8 whipsaw number. And when
the statutory interest rate is less than 4 percent, the plan is coming up
with a whipsaw number that's less than the Notice 96-8.
BY MR. GOTTESDIENER:
I'm not talking about the amount or the result through going through a
different form.
The accrued benefit. Can there be two of them or does it have to be one?
Q. No, that's the way I -- only when he gets to age 65, it is as of any
date. And you know that.
A. Before then -- before then, yes, the plan could define the projection
or estimation of that future amount in different ways with respect to
different forms.
Q. Yes.
A. I just said those benefits are exactly the same in the Alliant plan.
No. There's only one benefit in the Alliant plan.
There's no statutory mandate. If you are right about the way you
interpreted that, if it were written slightly differently, you could do
one accrued benefit for 417(a) and you'd have a separate interest rate
that's mandated by 417(e)?
A. Yes.
Q. And what you've just done is you eviscerated 417(e) that way, though,
right?
A. No.
Q. Why can't the plan just if we are in pre-PPA territory, just define
the accrued benefit in such a way as you get a lesser benefit through the
form that you elected?
Q. Yes. It is not permitted which is exactly why there's only one accrued
benefit?
A. There's only one accrued benefit when you reach age 65. Before you
reach age 65, what that accrued benefit is is not something that you
actually know. It is something that can be projected based upon plan
provisions. Those plan provisions are going to be limited by actuarial
assumptions. Those actuarial assumptions can and often are different from
one benefit form to another because 417(e) --
Q. The discount rate under 417(e) is irrelevant unless you are already at
normal retirement age?
Q. But the touchstone is the accrued benefit. You are saying it can be
two different things, aren't you?
A. I'm saying that the accrued benefit could be different things for each
different form of benefit because the different forms --
Q. You keep evading the question. I'm saying before you switch forms. The
core form, the J and S, the accrued benefit, you say that it is two
different things depending upon the form elected.
Yes or no?
A. Yes. It is not in this plan. I'm saying it can be.
Q. It can be. So we want the judge to hear that loud and clear that
basically you got one accrued benefit if you take a lump sum the way you
interpret the law, and another accrued benefit if you elect an annuity,
right?
Very possible?
A. It is very possible.
A. I think if you read my report, you'll see that I actually think that
under certain circumstances, this plan violates 417(e). And if 417(e) is
eviscerated, then that would not be possible. So no, I don't think I have
eviscerated 417(e).
Q. Wait a minute. In your report, you say that you are assuming for
purposes of your report that whipsaw during the pre-PPA period is the
law?
A. Yes.
A. Yes.
Q. But you're only doing that for the purposes of your report as an
actuary?
A. Because that's the role that I'm playing here is as an actuary. I'm
not rendering legal opinions. I'm trying not to render legal opinions
despite the fact that you've asked me many times to render legal
opinions.
THE VIDEOGRAPHER: This is the end of tape 3. Off the record at 2:22.
(Recess.)
BY MR. GOTTESDIENER:
Q. Assume the Judge invalidates 1.2 and finds that the plan's deemed
projection rate unreasonable, how would you then go about answering
John's question?
Then for sure you'd have two accrued benefits in this plan, right?
A. Well, I think it would depend on the basis upon which the judge --
Q. It's unreasonable?
A. Well --
Q. 96-8, she reads 96-8, she agrees with our analysis, and says this is
obviously a phony projection rate, it doesn't reflect the -- I mean, the
preamble of the plan says its intent is to pay the account balance, it is
clear what's going on here, and it is just not a reasonable rate.
So how would you then figure out the 417(a) accrued benefit.
Q. Yes. Do it.
Q. No. If the plan -- if the plan -- let's say the plan -- let's try it
another way if you refuse to answer that easy question.
Let's say it doesn't have a provision and you have to come up with a
provision based on what's a reasonable assumption?
A. Well --
Q. You look at section IV -- 1411 of the plan that says if anything is
invalid or -- you're trying to figure out how you do it. How would you go
about picking the interest rate?
A. Well --
Q. Can you just answer whether or not you would use what you claim is the
statutory mandated 417(e) rate?
Q. I know what I'm doing. What I'm doing is not getting an answer.
Q. It is a simple question.
A. Actually, you'll get a simple answer if you just let me get it out.
If you assume that that provision in the plan was not there --
Q. Or struck down and you look at the plan document and it says what you
do when a provision has been struck down?
Q. No what?
A. Then no, I wouldn't use the statutory -- I might not use the statutory
interest rate.
A. I'm saying you have given me a hypothetical with a plan that reads
differently from the Alliant plan and with a judicial decision that has
never been written and that I can't see under which that might be the
answer.
Yes.
You go through paragraphs 35 down to 36 where you talk about plan XYZ,
and this is based on the actual return; and you talk about Mr. Smith; and
you posit that Mr. Smith has an account balance of a thousand dollars.
He's going to reach NRA in a year. The statutory rate is 5 percent. But
an economist looking at how the plan is invested, and by that you mean
its asset allocation?
A. Yes.
A. Yes.
Q. So then what you want to now show is, well, what Maxam and Deutsch do,
that can't be right; that's what you're attempting to establish, right?
A. Yes.
Q. Then you say you do the whipsaw calculation by projecting the thousand
dollars, forwarded 10, that would arrive at 1100, then discount back at
5, and you would arrive at the whipsaw amount of $1,048, right?
A. Yes.
Q. Then you say that's not possible for that to be the present value of
Mr. Smith's benefit?
Q. And then you -- you then set to yourself the task of proving what you
just asserted?
A. Yes.
Q. So you now say, let's assume that in the next year that the XYZ plan
that the economists had expected -- when you say an economist looking at
the plan, you mean there you are basically saying they're kind of like a
group of economists would agree? That's your --
A. Or an economist.
A. Who is --
Q. Who's reasonable?
A. Who's reasonable and whose decision somehow prevails in this case for
doing the calculation.
So I want to be real clear that I understand and the record is clear what
you're saying proves you're right.
A. Yes.
Q. Thank you. Now, when we get over here, you're saying it is proof that
the present value can't be 1048 as follows. That actually even though
this reasonable economist said that it was going to be 10, in fact, it
only turned out to be 5 percent that the plan earned, right?
Q. Let me finish.
A. Okay.
Q. It turns out what the plan earned wasn't what it was in effect by the
economist projected to earn, correct?
A. Correct.
Q. Then -- and I must ask you about this: You throw in there “as the
statute says.”
What are you trying to do there? First let's assume in the next year the
XYZ plan earns 5 percent, although you just told us this is an absolute
reasonable economist you just put in a dig here that says as the statute
says?
Q. What's the relevance -- I thought your whole theory was that what the
law says, you know, the -- as Dickens told us, the law is an ass. It can
be completely unreasonable. Why do you say -- what relevance is it -- why
do you stick in there, as the statute says?
You're basically saying the economist is reasonable but the statute can
be completely unreasonable. Why does it matter to you to say there that
the fact that it earned 5 percent happens to be what the statute says
it's going to earn?
But if they work, if they actually happen, will you get to where you
expected to get.
Right?
A. Well --
Q. Right?
A. I think my answers are really clear, but incomplete, because you never
let me finish.
You asked me, why is it that you have to worry about what would happen if
the plan actually earned the rate that the statute says is the applicable
interest rate.
Let's assume in the next year it only earns 5 percent. His actual account
balance at normal retirement age will be $1,050. Now, you previously
hypothesized that he took his lump sum, right? That he took the lump sum
in the prior year?
A. There are two alternate paths here. You have to see whether the
alternate paths get to the same place. That's what a present value is.
You look at one path. Then you look at the other path.
The 1048 is on the assumption he took his money out? Right? Yes?
A. Yes.
Q. The next thing you're saying here is that he left his money in, right?
A. That's because those are the two paths. That it has to get to the same
place.
Q. He leaves his money in because you change the scenario. He leaves his
money in, but the plan only earns 5 percent.
But his whipsaw lump sum of 1048. Now you are switching back?
A. Yes.
Q. Will have grown?
A. Yes.
Q. Okay.
A. Yes.
Q. Why --
Q. Why does it grow by 5 percent under your sentence here? What is that
growth?
Q. 40. But his whipsaw -- this is the core of your alleged proof of why
you are right about all this -- his whipsaw lump sum of 1048 will have
grown by 5 percent. Why 5 percent? You never explain that?
A. Well, the --
THE WITNESS: Because the assets haven't grown by 5 percent under that --
under that -- under that hypothetical scenario.
BY MR. GOTTESDIENER:
Q. But you're making no sense. He's taken his money out. He got a payment
of 1048?
Q. No. You just don't like 417(e). Why are you using the plan's rate of
return when he's left the plan?
Q. No, in law generally. The whipsaw calculation. Let's say under the
most simple example in 96-8? Where they use an 8 percent fixed rate and
the crediting rate is 6.5 percent. Do you agree pre-PPA as an actuary
that 96-8 is correct?
Q. Do you agree --
Q. Do you agree --
Q. What's your opinion -- so you have -- you are saying you have no
opinion as an actuary?
THE WITNESS: I'm sorry. You've now switched to an 8 percent fixed rate, 6
percent --
BY MR. GOTTESDIENER:
Q. Huh? We're talking about the most basic example. This is your bread
and butter, sir.
A. I'm just trying to get your question right. Your question was that
with an 8 percent fixed interest rate and a 6 percent applicable interest
rate, is 96-8 correct? You're asking for my legal opinion on that,
correct?
Q. Yes.
A. Okay.
My legal opinion on that, informed by a lot of things including all of
the cases, is that the majority view is that 96-8 is a correct statement
of the law, and there is a minority view that leaves that question
somewhat open; and the advice that I have given clients as a lawyer is to
follow Notice 96-8.
Q. Well, actually, my question wasn't for you to give me the legal lay of
the land. I want to know your opinion as a person who has an actuarial
and legal background.
Do you believe in whipsaw pre-PPA under those facts, do you believe 96-8
got it right, whether you characterize that as a personal opinion, a
personal legal opinion, a personal actuarial legal opinion.
Do you believe that it is right, 96-8, in the -- using the most simple
example that it uses of a fixed rate of 8 percent and a discount rate of
-- in 96-8 of 6.5 percent?
MR. KRAMER: Objection to the extent it calls for a legal opinion. But you
can answer.
BY MR. GOTTESDIENER:
A. You're not asking for a legal opinion. I already gave you that.
Do you believe, feel, think as an actuary and as a lawyer that 96-8 got
it right? Yes or no?
I do think there are arguments on both sides of that issue and I think
that the arguments on both sides are non-trivial. And --
Q. So you wouldn't say, let's say, for example, that whipsaw is obviously
correct?
A. If I were -- now, you know, you've kind of jumped back and forth
between an actuary, a lawyer, a person.
A. No. Because when you say I would never say it, you have to jump back
because would I say it, for example, if I were representing a client that
were arguing that whipsaw was wrong? Would it be appropriate for me as a
lawyer to make an argument that I think is valid that whipsaw is --
A. I am smart. And I think that I'm walking into a trap here where you're
going to say, oh, if you were doing this or doing that.
A. My personal opinion?
A. Pre-PPA?
Q. Yes.
A. Is that there are strong arguments on both sides of that, and --
A. You're asking me --
A. You are asking might I have said something in the past about whether
whipsaw is right or wrong; and --
Q. Okay.
A. Number one. And number two, my position on whipsaw has, I would say,
on this legal issue -- not on an actuarial issue, but on the legal issue
-- has evolved as, first of all, judicial opinions have come out; it is
evolved as I had an opportunity to think about it.
Q. That's what you think. That's your opinion. We'll let the judge
decide.
A. We will.
But I wish to --
BY MR. GOTTESDIENER:
Q. Okay.
Q. If it is true --
Q. Let's say it has a lot of support, I'm all wet, and you don't know
where it is, but it has got a lot of support, but is it relevant for her
to know what you think and feel as a human being about this subject, yes
or no?
Q. Let's say recently in the recent past, let's say last year, were you
of the view in your evolving thoughts that whipsaw was obviously
incorrect? That whipsaw should never have had to have been performed pre-
PPA? Yes or no?
A. Yes.
Q. What was the first whipsaw case you were involved in?
A. Well --
Q. Too early?
A. -- judicial case.
Q. Yes.
A. But 1988 would be the first time that I was -- the first time that I
was involved with a cash balance plan that required whipsaw; and I
advised that plan that it had to perform a whipsaw calculation.
And did perform a whipsaw calculation for that plan in 1988. That was the
first. That's what you asked me. Now, I will say that I think there are
strong arguments for and against whipsaw.
Q. So you never would have said in the recent past, you never would have
told anybody, putting aside telling a judge -- not a judge -- whipsaw is
obviously incorrect, whipsaw never should have to be done?
Q. How?
A. I'm sorry?
Q. After all you just said about how you have arguments on one side or
the other, how is that possible that you said that?
A. Because, first of all, not every statement that I make all of the time
is as carefully thought out as something that I would put in an expert
report or something that I would testify to under oath; and --
A. Well --
Q. April 8, 2008, top 10 unresolved issues in PPA. 2008 enrolled
actuaries meeting, that's what you said, right? Do you deny it?
Q. You don't deny it because you said it because that's what you believe.
Do you make things up? Lie to actuaries you address at the enrolled
actuaries meeting?
A. Well, I think --
Q. Thank you.
A. I don't lie.
Q. So the fact is that, in fact, you have believed in the recent past
that whipsaw was never required, should never have been required, and it
is an obviously incorrect proposition, correct?
You believed when you told the actuaries on April 8, 2008 that you
believed that whipsaw never should have been required, and it is an
incorrect proposition that whipsaw was required, that what is set forth
in 96-8 because you believed that? You believed it then? You believe it
now?
A. Well, I think if you look at any fair reading of that discussion, that
you will see that I am actually telling them to apply whipsaw when
legally required, number one. And number two, I think that you also, if
you see a fair reading of that, I believe --
Q. And you admit that you were being honest at the time you were
conveying your personal opinion? Correct?
A. No. No. No. A strong argument that whipsaw should not have been the
law.
A. No. No.
Q. You can put that all aside. Because you are an actuary who is being
asked to perform an expert service, right?
Are you able to put all your personal views aside? Yes or no?
Is anything you are saying today or in your report at all colored by your
view that whipsaw is an incorrect proposition?
Q. Assuming that --
A. And that is --
Q. That --
A. That is --
A. Yes.
Q. We've never left the topic that you don't like 417(e), do you, a
defined benefit plan paying pre-age 65 lump sums? You don't think it is
economically sensible, do you?
Q. It is the exact question, the second sentence says that he's -- after
you say that he -- if he left his money in, it would grow in the plan to
1058; but if he had taken it out, the previous year, and he got a
whipsaw, and his account whipsawed, paid him 1048, it will have grown by
5 percent the next year; and I asked you what's that 5 percent; and you
said it is the plan's -- it is what the plan earned.
And I'm saying, why are you looking at someone who's taken his benefit
out already at what the plan earned?
A. Because you have to compare two things to determine whether you have a
present value. The present value relates one thing to another thing.
Therefore, you have to look at the two different things. One thing --
Q. Why wouldn't Mr. Smith be assumed to earn the plan's rate of return?
Does he have investment advisers? Does he have the economies of scale
that the plan has? Does he get the discounted fees and the expert advice
the plan has?
Isn't it presumed under 417(e) that the participant will earn no more
than the 417(e) rate in order to grow his lump sum to age 65?
Q. So then why -- no. I like your answer. I don't understand then why you
would say the 5 percent is the plan's rate of return rather than the
417(e) rate. That's the test of actuarial equivalence and present value?
A. The test, the test is when you look at two things. You compare them to
one another. In order to compare two things to one another, you have to
follow both paths.
Q. But you have to follow 417(e), do you not, sir? Doesn't 417(e) --
Q. No. You're not. You're not using the comparison of 417(e), are you?
Q. You told me the 5 percent was the plan's rate of return, right?
Q. The transcript is clear. It is also clear what you are now trying to
do. You repeatedly said that you are growing his lump sum at the plan's
rate of return.
BY MR. GOTTESDIENER:
Q. You then say because his whipsaw amount plus interest using this
incorrect method is more than his account balance at normal retirement
age, it is not a present value.
Right?
A. Right. You follow two paths. If you don't get to the same place, one
is not the present value of the other.
A. No.
Q. The only difference is that the 10 percent didn't pan out because the
prediction of the reasonable economist only, in fact, the next year
turned out to be 5 percent.
That accounts for the difference in the size of the lump sums?
A. No. Actually, you get that difference and you end up in a different
place no matter what happens. Under any scenario, where you follow path A
and path B, you end up in a different place.
Q. What are path A and path B, what are you talking about?
A. Okay. You are relating one thing to another in a present value. You
are saying the lump sum --
Q. No. No. Could you just talk about Smith's lump sum. The difference in
the two lump sums is entirely accounted for the fact that the 10 percent
didn't pan out?
A. No. No. No. No. Actually, it doesn't matter. You get to a different
place no matter how much --
Q. Isn't the type of difference we are talking about here inherent in the
natural consequence of the use of any variable interest crediting rate?
A. No.
Correct?
A. No.
Q. Now, in 41, you say alternatively, let's assume the XYZ plan actually
earns 10 percent. Mr. Smith's account balance at normal retirement will
be $1100.
However, his whipsaw lump sum of 1048 will have grown by 10 percent to
1152.
A. No. I'm saying if you follow the two paths, you get to different
places.
Q. You follow the two paths, you get to -- you were a moment ago about to
try to undo your repeated statement that the 5 percent in the previous
paragraph was the plan's rate of return. Then you started to say, oh,
well, there's a coincidence, now I can slip out and say I was using the
417(e) rate. You are not using the 417(e) rate here, are you?
A. No. I'm saying the purpose of using the two interest rates here -- I'm
sorry, the purpose of using the two scenarios is to show the result is
not dependent on any one scenario. The simple fact is --
THE WITNESS: If you listen, it will be sensical. The test is whether you
have a present value.
BY MR. GOTTESDIENER:
The other thing is the account balance that you will have a year from now
if you do not take a lump sum.
Q. You're of the incorrect view that unless those two numbers are always
the same, there's been an error made?
A. I'm --
Q. Wait a minute. Wait a minute. Why are we going there? I want to talk
about Smith.
A. I'm sorry.
A. You're right. In the XYZ plan, in the XYZ plan, the account balance is
the present value. The present --
A. If the account balance is a thousand dollars in the XYZ plan, then the
present value is a thousand dollars in the XYZ plan.
A. Right.
A. But those --
A. I'm sorry?
A. No.
Q. He doesn't?
A. No.
Q. Why?
Is that in the XYZ plan, the present value is a thousand dollars because
regardless of what assets grow to be within that next year --
A. No.
Q. You're saying the statute trumps economics, that's a quote from your
report? You agree with that, right?
Q. Then you agree that even though the economist says it should be 10
percent, it is okay to project 5 percent for that guy, right?
A. Right.
Q. Thank you.
Q. Thank you.
Then in 42, you say, no matter what rate the XYZ plan earns, 1048 can
never be the present value. The amount of money you need to have today
which if invested will earn enough to be his account balance in one year.
The only amount that can be a present value of Mr. Smith's account is
1,000 dollars. Any other amount will always be too much or too little.
In fact, the 1048 is the correct amount if the XYZ plan does earn the
expected 10 percent, right?
A. No.
Q. And so you deny that the correction in the 1048 is directly related to
the difference between the presumed interest crediting rate and the
actual crediting rate in your hypothesis?
Q. Let's look at Mr. Smith again. And I'll have you assume that the
economist can exactly predict. Exactly. That the interest crediting rate
is going to be 10 percent. So the fact that it's 10 percent is already
known.
Isn't the value to the participant of the interest credit 10 percent?
A. Yes.
Q. Okay.
MR. KRAMER: Maybe the last paragraph above B if I'm looking at this
right.
THE WITNESS: II.A is one, two, three, four, five, six paragraphs long. It
is a whole page. Tell me where you're looking.
BY MR. GOTTESDIENER:
“If a cash balance plan provides credits using an interest rate that is
higher” --
Q. Maybe it is III. A.
A. Okay. And starts a sentence that begins with the word “if.
Q. Yes.
A. Yes.
THE WITNESS: You're saying measured after the fact, was it higher? And
that's not what this is talking about. That's just not -- there's no
relationship between the facts that you're giving me now and the facts
that are discussed in this section. You've made an invalid comparison
because this is saying --
BY MR. GOTTESDIENER:
Q. I've asked you to look at that. I'm asking you a simple question,
which is, isn't the interest credit that he receives higher than the
417(e) applicable interest rate. There's 10 percent and there's 5
percent, right?
A. Yes.
And you cannot use hindsight to determine whether or not there's a 411
violation. You cannot say, okay, something happened on January 1, 2001;
and then we're going to wait until January 1, 2002 to decide whether that
thing that happened on January 1, 2001 was a 411 violation.
You have to measure that 411 violation or not. You have to measure that
transaction at the time it occurred.
And at the time it occurred, you did not yet know that the plan was going
to earn more than the 417(e) rate.
A. I'm sorry?
A. No. It's not a safe harbor under 96-8. I agree with that.
Q. Nor is the Alliant plan's interest crediting rate a safe harbor rate,
right?
A. The Alliant plan is not a safe harbor plan rate, I agree with that.
Q. You said -- I want to go back to something you said about how 96-8
proves your point that the statutory rate as the projection rate is
mandated by the statute, and you, when I asked you where could you
specifically point to, you said any time it uses present value or
interest rate.
Remember that?
A. Yes.
Q. And could you grab your copy over there? You underlined some things.
Could I take another look at what you underlined?
A. Sure.
A. Yes.
A. Well, this --
Q. Isn't it?
Q. That's what you say. But I'm asking, isn't the literal language the
rate of return under the plan used in determining the amount of interest
credits? You're saying up and down that it is tied to the return on plan
assets?
A. But I think if you read the entire sentence, which is what you need to
do to understand that --
Q. It is not true?
A. No. I'm saying the phrase “rate of return under the plan” here clearly
does not refer to the rate that the plan's assets have returned.
Q. Okay. Let's assume for now that we won't quibble about that.
Have you ever considered that, though, before? Have you ever seen that
language about rate of return in the past month that you've been spending
time being an expert in this case? Have you ever noticed that it talks
about rate of return under the plan used in determining the amount of
interest credits? Have you ever noticed that before?
A. I can't recall.
Q. So --
Q. You are certainly not remembering that you thought about that in the
past month, right?
A. If I had thought about it, I would have come to the same conclusion.
Q. Thank you. Let's move on to the point that this is section C and it is
saying above section C, it is (b)(3) where it says situations in which
the present value won't exceed the hypothetical account balance and
ending by saying by contrast, if the rate, interest rate, excuse me, or
rate of return of the plan used in determining the amount of interest
credit is high relative to the section 417(e)(3) interest rate, the plan
cannot distribute, and so forth.
Doesn't that disprove your claim that 96-8 every time it is talking about
interest rate is talking about your interest rate? Same thing? Next
sentence.
“If such a plan provided that in providing an accrued benefit, the rate
used for projecting the amount for future interest credits was no greater
than the interest rate under section 417(e)(3).”
Q. Where interest rate is being used there, if the interest rate is high
relative to the section 417(e)(3) interest rate, you have no answer?
You're wrong that every time it uses interest rate it's talking about
your interest rate, aren't you?
THE WITNESS: I would say that here, it's fairly clear that the phrase
interest rate or rate of return under the plan used in determining the
amount of interest credits, that phrase clearly refers to an interest
crediting rate; and yes, within that phrase, you have the words interest
rate and you have the words rate of return; but I think that you're
looking at a single phrase that clearly has a meaning, the meaning is the
interest crediting rate under the plan.
BY MR. GOTTESDIENER:
A. Okay.
Q. You deny you're giving a legal opinion. You think you're giving a
purely actuarial opinion?
A. Yes.
Q. And is it your testimony that your actuarial views are not at all
colored by your legal training?
Q. In this case?
Having said that, in this case, I'm not rendering legal opinions. I am
rendering opinions as to the actuarial meaning of the term interest rate
and present value.
A. Well, no. I don't know that my opinion is absurd. That's the stem of
your question. I don't think that it is absurd.
Q. How do you cancel out the word applicable and create -- why do we even
need your view as to what is sensible? Your entire report turns on the
phrase it seems sensible?
A. No.
Q. It doesn't?
A. No.
Q. I want you to open your report and find the heart of your report where
you say, oh, well, I'm going to ignore the fact that 417(e) is absolutely
defining applicable interest relate, and I'm just going to say, oh, I'm
going to use the word interest rate. Paragraph 23, it, therefore, seems
sensible to give these terms the meanings they have in actuarial science.
Q. You say in your report you don't need guidance for things. If the rate
is specified by the statute, you plug it in?
A. But what rate is specified by the statute? And what is that rate? That
rate is an interest rate. It is the applicable interest rate. It is an
interest rate.
Q. It is a number?
A. Okay.
A. Un-huh.
Q. Yeah.
A. 96-8 --
Q. You haven't answered the question. Assuming the economist is right and
it turns out 10 percent, if Smith's thousand dollar account isn't
projected at 10 percent, how are you doing him right? How are you
reflecting the full value of the interest credit?
A. You're giving him an amount that will grow outside of the plan to be
the same amount that it will grow to inside of the plan.
Q. You can't assume a higher -- you yourself, the linchpin of your own
report, you say that you agreed with 96-8. You said that the heart of 96-
8 that you claim you can accept as correct is that the basis for Notice
96-8 is 417(e), which provides that when a participant take as lump sum
benefit, the lump sum must be sufficient to compensate him for the value
of the annuity that he would otherwise receive in accordance with the
actuarial assumptions mandated by 417(e)?
A. Yes.
Q. You claim to agree with that. But your whole Smith hypothetical
absolutely flies in the face of it? You have to assume 5 percent growth,
not 10 percent growth, not the plan's rate of return, but the 417(e) rate
of return under whipsaw if you're actually honoring it, correct?
A. No. If you, under the XYZ plan, which is where we still are, if you're
saying that the statutory interest rate, the applicable interest rate is
5 percent, then you are presuming that assets are going to grow at 5
percent. What later happens is a different story; but that thousand
dollars that you pay Mr. Smith is going to be his present value. It is
going to grow inside of the plan and outside of the plan.
A. No.
Q. What place does 417(e) have in your world? You're not taking it into
account?
A. 417(e) has a place in --
Q. And when in the history of the world or on some other planet has that
occurred?
Q. The answer to my question is yes, has the 417(e) rate ever been below
4 percent ever?
A. Yes.
Q. When?
A. The 417(e) rate, for example, that was applicable in Berger, I believe
was in the vicinity of 3 percent. I think that's right. I'm not certain.
A. The 417(e) rate before it was the 30-year Treasury rate was the PBGC
rate. Now, if you're going to ask me was the 417 rate ever below 4
percent --
Q. Huh? That was the pending question. If I'm going to ask you. What were
you doing using and answering that you know that it was?
A. I believe that there was a time -- and I'm not sure about this --
A. I could look it up --
Q. You're wrong. It was never below 4 percent. If I'm wrong tell me when
it was?
A. I'll tell you. The 30-year Treasury rate, which is the rate that we
were talking about here --
Q. So you want to amend your answer when you said that it was below 4
percent, right?
Q. Thank you. Let's get back to -- let's get back to this alleged
refutation by your Smith example.
A. It can.
A. Most cash balance plans define the interest crediting rate as the 30-
year Treasury rate.
Q. I should have specified the interest crediting rate was not directly
tied to the applicable interest rate.
Go ahead. In the Alliant plan. Are the actual future interest credits --
not the Alliant plan, let's remain factual, a plan otherwise identical to
the Alliant plan. Would the actual future interest credits in such a plan
be impacted by the basis that the applicable interest rate used, whether
the 30-year Treasury, the PBGC?
A. No. There would be some common causal relationship for those things to
go up and down; but no, the 417(e) rate would not directly affect the
interest crediting rate under the plan.
Q. So the value -- other than what it sounded like you added on which was
some very attenuated relationship, the future interest credits, the
actual future interest credits, they would remain the same?
Q. So they would remain, the actual future interest credit would remain
identical? They'd be the same ones?
So if you're hypothesizing the 30-year Treasury rate goes way up and that
has no impact on the plan, then that's not quite right.
Q. Yes.
Q. Actual --
A. -- interest credit under the Alliant plan, I agree with that, yes.
Q. Yes.
A. Yes.
Q. And you could move back and forth, they would always be the same?
A. Yes.
THE VIDEOGRAPHER: This is the end of tape 4. Off the record at 3:42.
(Recess.)
A. Correct.
Q. But if the value of future interest credit are the same, how can the
present value be the same if the discount rate is different?
Q. But the present values, they won't be the same? Your whole proof about
Smith is you are trying to show that the present values have to always
work out, and you have just established that they won't be the same? If
you project forward at the same rate but discount at a different rate,
you're going to get different present values, correct?
A. Well --
Q. Correct?
A. That's true, but that's not what I said. I didn't say you wouldn't
change the rate --
Q. Wait a minute. You have to change the rate -- you have to get a
different present value if you change the applicable interest rate,
unless there's a big coincidence? And then it would only be a
coincidence, right?
Q. What assumptions are you talking about? I'm talking about an interest
rate and discount rate. What are you talking about?
Q. Why don't you answer my question? What actuarial assumptions are you
talking about? You keep bringing it up any time you find my questions
uncomfortable.
Q. What actuarial assumption are you talking about? I keep asking you
about the present value is going to be different. You acknowledge that if
you project forward at the same rate and you discount a different rate,
unless it is a coincidence, you're going to get different present values,
correct?
A. If you project forward at one rate and don't change the projection
rate --
Q. Yes.
A. -- and you discount for interest at a different rate and you do change
that rate, then you will change the present value that you get --
Q. Therefore --
A. -- yes.
Q. According to you, that's some kind of big proof, that your theory
doesn't work?
Q. That is your whole thing about Smith, that's what your whole thing is,
that it is a different present value and therefore when it changes from
one year to the next, there's some big problem?
Q. No. No. No. I'm sorry. Your whole point about Smith is to prove that
your theory must be correct?
A. I'm proving that the Deutsch-Maxam theory that you can disconnect
these two things is incorrect with respect to XYZ.
Q. Right --
A. If --
A. No.
Q. Isn't that why -- isn't that why you told your fellow enrolled
actuaries last year that whipsaw is obviously incorrect?
A. No.
However, when those two things are the same, when those assumptions are
the same, the crediting rate and the interest rate, then you do the
whipsaw calculation, and what you end up with is a present value that is
equal to or less than the account balance.
96-8 uses assumptions that are reasonable in the aggregate. So, for
example --
Q. What assumptions?
Q. You said 96-8 assumptions. What assumptions are you using in the
aggregate that are reasonable?
A. Well --
A. I've said “for example” three times now. Let me finish the statement.
For example, if you have an interest crediting rate that's equal to the
one-year Treasury rate plus 1 percent, and you have an applicable
interest rate that's the 30-year Treasury rate, 96-8 says that you may
consider the one-year Treasury rate plus 1 percent to be less than the
30-year Treasury rate regardless of whether it actually is.
Q. Less than?
Q. The third time you tried to articulate it, I agree. It says only --
A. -- assumes --
Q. At that point, you said what it says is not greater than the 30 year.
A. That's correct.
A. Okay. So 96-8 does not require you to look at the statutory interest
rate, for example, and look at the one-year Treasury rate plus 1 percent.
Q. I'm sorry. Could you just repeat that? I had a hard time following
that. 96-8 says what?
Q. Yes.
A. -- then you may -- then you may consider it or may deem it to be not
greater than the applicable interest rate.
Q. Uh-huh.
Q. I thought a little while ago you took me to task for asking you about
Mr. Smith and 10 percent. You made a big point of saying in effect, well,
maybe that there may be that 10 percent, 5 percent disconnect in that
year; but that doesn't mean that it is higher than the 417(e) rate?
A. Under 96-8 you may -- you may deem it to be not greater than the 30-
year Treasury rate. It is possible that in a given year, it might
actually be greater.
A. I do find it relevant.
Q. Okay.
Q. Why?
Q. You're incorrect.
All the proposal says is that given the tight historical relationship
between these instruments and these margins, we're not going to make you
pay more than the account balance. That's all it says. You are spinning
out -- there's not a single phrase that you've been using to justify your
assumptions that's in part IV. Show me where part IV says anything like
you're saying. It just says these are very -- these instruments are very
tight historically so they're interchangeable.
We can assume that it won't be greater than. We're going to allow you to
do that because --
Q. The Alliant plan could not be more different in its structure and the
way it moves than the 30-year Treasury, correct?
Q. It could in theory --
A. It is quite different.
Q. Now, in paragraph 43, in your report, you say, and it does not matter
whether the statutory rate is reasonable or not. The statutory rate could
be 2 percent or it could be 25 percent. In either case, Mr. Smith will
have a whipsaw amount of exactly $1,000 and it will be exactly enough to
fund his account at retirement regardless of how much the XYZ plan
actually earns. Thus the statutory rate could be reasonable or
unreasonable, but it will always come up with the right answer for the
XYZ plan provided you use the statutory rate in both parts of the whipsaw
calculation projecting forward and discounting back.
A. Well, in the XYZ plan, the facts are very specific in that the
participant's account is credited with the actual rate of return of the
plan. That's a critical factor in paragraph 43.
Because --
Q. Go ahead.
A. Because whatever assets grow to be, $1,000, plus the actual return on
assets is equal to a thousand dollars plus the actual return on assets.
If you peg that interest crediting rate to something other than the
actual return on assets, you have then disconnected that equivalence. The
equivalence there that a thousand dollars in the account is worth a
thousand dollars outside of the account is dependent entirely on the
facts of the XYZ plan where the account grows at a rate equal to the rate
of return on assets; and, therefore, because it is a real rate of return
on assets that the participant can duplicate or that the plan can
duplicate -- in fact, the plan has to duplicate, the plan always
duplicates, assets simply grow at that rate; and, therefore, a thousand
dollars is worth a thousand dollars.
On the other hand, if you were to say we are going to give Mr. Smith
interest credits of 25 percent regardless of what assets earn, then the
statutory rate would be very relevant and his whipsaw lump sum could be
significantly more than a thousand dollars.
My question was really very simple: Under paragraph 43, I'm not asking
you to restate your theory per se, so please don't use the fact that I
read your paragraph to disregard my question.
Q. Can you tell me what is pointedly wrong about the assertion that if
you are going to in the XYZ plan have years where a reasonable economist
is going to say 10 percent, no question, but you're only going to project
that the 417(e) rate, how can they have any right beyond the 417(e) rate?
A. Well, whatever the plan actually earns, they will get. In the XYZ --
Q. Okay. Hold on. Hold on. Now you're really getting back to -- you know
-- your whipsaw is obviously incorrect stance.
A. No, I'm not.
Q. No. Because you cannot discount at the economic rate. You have to
discount at the 417(e) rate, and that would create whipsaw, so --
Q. Which interest rate now? The second thing you said was interest rate.
Which interest rate do you mean?
A. Interest rate in the XYZ plan is both your projection rate and your
discount rate; but interest rate in a more general case, if you
disconnect the interest crediting rate from the rate that assets earn, if
you disconnect those two things, then you've got two different
assumptions. If you connect them, you have one assumption. If you
disconnect them and you -- you should still set the projection rate at a
rate that is logical given the interest rate. You should set it at a rate
that is reasonable in relation to that.
Q. But -- and I'm -- I'm not fighting you on that. I'm trying to get you
to admit that the guy is -- he has not actually accrued a right to those
future years of 10 percent?
A. No. He has accrued a right to get whatever the plan is going to earn,
whatever that turns out to be. He hasn't accrued a right to 10 percent
unless the plan says the interest crediting rate is 10 percent. The XYZ
plan --
A. But you would also have to say if you believe he could never get more
than the 417(e) rate --
Q. No. No. No. Not ever get. You know where I'm going with this, don't
you?
A. No, but I wonder why you keep not letting me finish my sentences.
Q. You just said he'll never get. I'm not saying he'll never get it. I'm
saying, when does it accrue?
A. No. He has accrued the right. He definitely has accrued the right to
get those future interest credits whatever they turn out to be. As soon
as he gets his pay credit or whatever this plan calls it, I can't
remember --
Q. But in the XYZ plan, he's not accrued in the right --
A. In the XYZ plan, he is accrued. He's one year from normal retirement
date. That's the hypothesis here. He's one year from normal retirement
date. What has he accrued? He's accrued a thousand dollars plus the right
to get whatever interest the plan is going to credit over the next 12
months. That's already accrued, including the right to get that interest.
A. Well --
Q. Is that --
Q. Okay.
A. The way you would analyze that, you would say, okay, what actuarial
assumptions are going to produce a number that is reasonable in the
aggregate, okay?
Q. For doing what now? Are we talking about a projection? For what? I had
another question. You were talking about something else.
Q. No. I want you to finish. I don't understand where you are going with
reasonable actuarial assumptions. I'm saying the guy is in a plan where
we know it is not fixed, but it is not in doubt. We all agree the
economist is on target. It is going to be 10 percent. All things
remaining constant.
Q. And --
Q. If you are an economist who not only got a Ph.D. but went and got a
law degree and learns about 417(e), the economist would say, well, if I
put on that hat, you know, if I know it is going to be 10 percent next
year, but the guy asks for a lump sum, I know that in effect he's got a
subsidy because Congress put an a cap on what we can assume, even though
it may not be good economics, the statute trumps economics. Right?
A. No.
Q. Because you are now saying that whatever the value in reality of
future interest credits that we would all agree this crediting rate might
have, we're just going to cut it off at the knees and it is going to be
the 417(e) rate?
A. No.
Q. How is the guy accrued now in anything more than the 417(e) rate if
you're saying that's what we have to project forward at when we're
determining his 417(e) accrued benefit as opposed to his 417(a) accrued
benefit?
When it does --
A. When the statute requires a result that would not make sense to an
economist, then it simply does. It requires that result.
But the statute does not always require that you arrive at a result that
creates unreasonable results.
A. The statute does not always require that you use assumptions that are
inconsistent with one another. In this case, the economist is saying
we're going to use two different assumptions. We're going to assume that
assets earn 10 percent and we're also going to assume assets earn 5
percent and we're going to use those two inconsistent assumptions to
produce an unrealistic answer.
A. Yes.
Q. And --
The fact that the result of the use of a statutorily mandated assumption
strikes, let's say, you as unreasonable is not proof that it's not
statutorily mandated?
A. Okay.
A. Okay.
A. Okay.
A. Yes.
Q. I'm using that as an example. But you do make blanket statements that
say there's the statute and we have to follow the rules sometimes, right?
A. We have to follow the rules. I just wanted to make a point that the
use of the word preposterous related to the mortality table which is half
male, half female.
A. Correct.
Q. It could --
A. The statute can at times produce absurd results. It does not always
have to produce absurd results. And it is not necessarily essential to
interpret the statute to produce absurd results in some cases. Sometimes
it is unavoidable. Sometimes it is not.
Q. So to recover from your answer at the top of it, we've got your
agreement that the fact that you have an unreasonable result doesn't
prove that the result isn't required by the statute?
However, there are certain tests and there are certain manners in which
something could become unreasonable; but I think that does demonstrate
that it is not consistent with the statute.
A. That alone, the mere fact a result is unreasonable, does not mean that
it is not mandated by the statute. I agree with that.
A. Okay.
And also assume that the answer will be clear once you read the provision
how to apply it. Okay?
First assumption is there's a provision.
A. There's a provision.
Q. You do know, though, from some source, some judge, some legislature,
somebody tells you when you read it, you'll know. Okay? You're know
crystal clear one way or the other, right?
A. Okay.
Q. But you also have the opportunity to know before you read it, the
results that will obtain if you were to look at the statute and want to
make a clear decision, you don't want to know, you don't need to know,
and it shouldn't affect your reading of the statute, the result?
A. No. What I'm saying is that taking a peek, as you say, at the result
may help you understand what the statute says. It's not always true that
taking a peek at the result is completely irrelevant.
And that's the point of my paragraphs 41 -- 40, 41, 42, et cetera, that
sometimes taking a peek does tell you something.
In this case, what it tells you is not just that $1,048 may be an
unreasonable result, but it tells you that $1,048 may not be a present
value. It's not so much that the result is unreasonable as that it does
not fit the definition of the word in the statute “present value.”
A. It can, yes.
Q. And you already admitted that it's the change in the presumption to
what actually happened that accounted for the differences that we saw? We
went through all that.
A. Sometimes it is.
Q. So your proof means nothing other than the totally natural consequence
of the use of a variable rate?
The 1048 is absolutely perfectly correct. You just don't like 417(e). You
just don't like whipsaw.
A. No. The 1048 -- the 1,048 -- the 1,048 in the context of the XYZ plan
is --
Q. You are so wrong. Just as when you said that the accrued benefit is an
estimate, and then you later admitted that you were wrong. The accrued
benefit is not an estimate. It is a real thing that can be calculated as
of any date. The present value, sir, of those numbers are both correct at
the time they're done.
Things change from year-to-year. It is not proof that they don't line up
perfectly. In fact, it would be odd that it would line up perfectly?
A. I agree with you that there are circumstances where it would be odd
when it lines up perfectly. But there are also circumstances where it's
necessary that they line up perfectly.
You're growing the lump sum at the plan's rate of return? What sense does
that make under 417(e)? Under your own testimony is that you have to make
the person whole on the actuarial assumption of 417(e).
Q. No. You're now talking about the projection rate. I'm talking about
the discount rate?
Q. Look at 45 and 46. Tell me how your paragraphs 45 and 46 are anything
different than you just simply arguing whipsaw is wrong?
A. Well --
Q. You just don't like whipsaw. If you read 45 and 46, it just reads like
things that have been written for years, just saying, oh, look at these
results. Those results are just you not liking that the 417(e) rate is
used as the discount rate. You don't like that Congress mandates the use
of 5 percent?
A. No. What 45 and 46 demonstrate is that in the XYZ plan, where you
specifically tie the interest crediting rate to the rate that the trust
fund actually earns, that you get the wrong answer using this particular
brand of whipsaw.
A. Yes.
A. Because --
Q. Oh.
A. If you have a fixed rate, if, for example, the plan were crediting a
fixed rate of 10 percent and the statute tells you that assets are going
to earn 5 percent, your ability to earn 10 percent, your ability to get a
greater rate of return than assets actually are expected to earn has
value. But the ability to get a rate of return that is equal to the rate
at which assets actually grow does not create a value that's greater than
the original amount. It creates a value that's equal to the original
amount.
In other situations --
A. Uh-huh.
A. The yield?
Q. Yes.
A. On Treasury bonds is only a real rate of return if you are going to
hold that Treasury bond until maturity, exactly maturity, no sooner, no
later; and it is a real rate of return on that Treasury bond.
In this case, you're not tying the interest crediting rate to any
particular Treasury bond. It is not like you've gone out and bought a
Treasury bond that matures at the precise moment that that particular
individual reaches normal retirement age.
A. Not yet.
A. Section IV.
Beyond the safe harbors where does it allow that the projected interest
crediting rate should be developed in a manner consistent with the
statutory rate?
A. -- section IV, the entire thrust of section IV is that there are rates
that may be deemed to be not greater than --
Q. No. Beyond safe harbors. I asked you to identify all safe harbors you
could. The only one you could come up with is the one that is in there,
the 30-year Treasury. You haven't been able to identify any safe harbor
rate outside of section IV. My question is beyond safe harbors, where
does 96-8 allow that the projected interest crediting rate should be
developed as you claim in a manner consistent with the statutory rate?
A. Well, you couldn't get to the results in section IV unless that was
the case.
A. You couldn't get to the results in section III unless that was the
case.
Q. Huh? What? I'm asking where does 96-8 point to language where it says
in developing section III projection rates that need to be definitely
determinable and set forth in the plan document, where does it say, go
ahead and develop those consistent with the statutory rate? It doesn't,
does it?
BY MR. GOTTESDIENER:
A. That's because you are not an actuary. One of the things that
actuaries do is they develop actuarial assumptions; and there are two
types of actuarial assumptions that you can develop. There are
individually reasonable actuarial assumptions and there are reasonable
actuarial assumptions that are reasonable in the aggregate.
A. Okay.
Q. I'm just a poor lawyer who is not an actuary. I want to read it.
Q. Oh. Thank you. The answer to my question is no. I asked you five times
outside of section IV, and beyond safe harbors, where does 96-8 allow it,
and the answer is nowhere?
A. I would like to -- I would like to make the point that you are
mischaracterizing my answers even before you allow me to make them.
You've asked me a question. You will not allow me to answer the question.
And then having refused to allow me to answer the question, you are then
mischaracterizing the testimony that I have not yet given.
Is there any place before you get to section IV, which is the end of 96-
8, can you point me to anything outside of the safe harbor provision,
outside of safe harbor rates, in the rest of 96-8 that says when you
don't have a safe harbor rate, you're allowed to develop your projection
rate in a manner consistent with the statutory rate?
Q. I don't want to interrupt your answers, but could you try to channel
it towards interest crediting rates that are not based on one of the safe
harbor rates? You can just continue with your non-responsive answer. But
try to work in -- I'm talking about interest crediting rates that are not
discussed in section IV.
Take it away.
A. Well, you're asking me, does 96-8 discuss interest rates that are not
discussed in 96-8.
Q. No.
A. 96-8 discussions only in the most vague and general terms interest
crediting rates that are greater than the applicable interest rate or
interest rates that are not greater than the applicable interest rate;
and then it talks about some specific things, some specific examples of
things that may be deemed to be not greater than.
A. The concept there is that you end up with actuarial assumptions that
are reasonable in the aggregate underpinning the results.
A. Right.
A. Yes. Despite the fact that it might actually be greater than the 30-
year Treasury rate.
Q. And that was actually coincidentally that was the rate used in the
Xerox plan, right?
A. Yes. Although the rate in the Xerox plan was -- no. In the Xerox plan,
the applicable interest rate was not the 30-year Treasury rate. That's a
fairly important point in the Xerox plan.
Q. Well, on this logic, however, shouldn't the Court have ruled that the
plan was correct in using the applicable rate to project account balances
to normal retirement age?
A. No. Because Notice 96-8 compares the one-year Treasury rate plus a
hundred basis points to the 30-year Treasury rate.
And in the Berger v. Xerox case, the 30-year Treasury rate was not the
applicable interest rate. The applicable interest rate was the PBGC rate.
The PBGC rate was less than the 30-year Treasury rate.
Q. It does not. They should have -- what you do in your report is you
misquote 96-8. You switch -- when convenient -- the 30 year and
statutory, you keep talking about the statutory when all it's talking
about is the 30 year?
A. Well, 96-8 --
Q. Under your theory, there was no whipsaw in Berger and Berger was
wrongly decided?
A. No.
Q. Under your theory, they should have been able to project that the
statutory interest rate?
A. No. Because this -- what you call a safe harbor specifically relates
to the 30-year Treasury rate. It does not specifically relate to the PBGC
rate. The PBGC rate is a different rate. Those relationships are
different. That's why you got a different relationship in Berger.
Berger said 96-8 is an authoritative statement of the law; and yet Berger
did not look at section IV and say, oh, wait a minute, here's a safe
harbor rate. Berger said 96-8 is an authoritative statement of the law
and recognized that this relationship relates one year Treasuries plus 1
percent to the 30-year Treasury rate. It doesn't relate it to the PBGC
rate; and that is consistent with the idea that these assumptions are
established to be reasonable in the aggregate.
Q. And again, you've just -- thank you. You've just again articulated why
your theory is all wrong.
You already admitted when you switch the basis for the 417(e) rate, it
doesn't affect the value of future interest credits. So the present value
is going to be different.
A. It doesn't affect --
The basis of your statement there is your contention that the projected
interest crediting rate should be based on the statutory rate?
A. That the projected interest crediting rate in the Alliant plan should
be the statutory rate, three quarters of the statutory rate, or 4
percent, whichever is greater. Yes.
Q. If the interest crediting rate under the plan is not related to the
statutory rate, if you are wrong, then if the expected future value of
the interest crediting rate under the plan were determined, why would
that projection reflect the statutory rate?
Q. Yes. The theory that you have held for four weeks, if that theory is
not adopted, yes.
BY MR. GOTTESDIENER:
Q. Yes.
Q. No what?
A. Should not have been influenced by the statutory rate. I don't know
whether he was or not. He should not have been.
Q. Okay. If you were the actuary, how would you have reflected the
statutory rate when selecting the assumed future interest crediting rate?
A. Well, the statutory rate does not apply. The 417(e) does not apply for
any purpose other than calculating a lump sum. It doesn't apply for
purposes of calculating your funding assumptions. It doesn't apply for
purposes -- for a variety of other purposes. Doesn't apply for those
purposes.
Q. I just -- let me interrupt. When you say apply, do you mean it's
mandated to be used? Or are you just saying apply, that -- you know -- it
doesn't enter into the decision?
Q. But does it have any -- would it have any impact? Would it play any
role in selecting the rate, the future assumed rate of return on plan
assets?
A. Well, there are certain purposes for which you develop interest rates
that at various times have been related to the 417(e) rate.
Generally speaking, you do not use the 417(e) rate for purposes other
than calculating lump sums and certain other closely related forms of
benefits. You don't use it, generally speaking, for funding calculations.
You don't use it, generally speaking, for back-loading calculations.
Q. Yes.
Q. And no question that the interest crediting rate under the plan is
purely a function of the plan's actual rate of return in any particular
year?
Q. So the only reason that Maxam or Deutsch would reflect the statutory
rate in developing a projected interest crediting rate is if they agreed
with your theory that the law mandates the use of the statutory rate?
A. No. I don't agree with that. I don't agree that that's the only reason
you would take the statutory rate into account in developing an interest
crediting rate. I think even if you threw out my theory and even if you
said we're going to disconnect these two things that are connected, that
there's still any number of reasons that you would take the statutory
rate into account in developing this other assumption.
Q. Such as?
A. Well, for example, you have the requirement that we discussed several
times that the whipsaw calculation be written into the plan, and not
subject to employer discretion. And so if you're going to say we're going
to write something into the plan, you can't say --
Q. What point in time are you at? Are you at the plan's been in operation
and somebody has filed a lawsuit? Or are you at the inception of the
plan?
A. I'm saying plan inception. You write the plan. You say, well, how are
we going to -- how are we going to determine how benefits are calculated?
How are we going to determine how lump sum benefits are calculated; and
so you would then say, we have to come up with a formula; and that
formula --
A. If you hypothesize that, then you disconnect those rates. Okay? And
then you say okay --
A. I'm telling you how you would then go about -- one of many ways that
you could go about establishing a rate that you would put into the plan.
You wouldn't necessarily use the statutory rate to do that. But you
could. You asked me the question --
A. How could you. That's what you asked me. I'm trying to answer that
question.
A. The answer is -- the answer is -- the answer is you come up with plan
provision that can be applied on a uniform non-discriminatory basis in
the future.
Q. Yeah, but --
A. And that plan provision might reasonably say we are going to use the
statutory rate or some function of the statutory rate, statutory rate
plus something, minus something.
A. Well, that depends on what you think the plan is going to be invested
in in the future. I think that's a very important question.
A. Most plans are not like this plan. This plan has some very obvious
characteristics, to cause a 60-40 stock-bond split to create some
negative funding results, which I believe the plan has seen.
Q. But you don't he know -- you didn't -- did you educate yourself as to
all the reasons why the plan adopted this crediting rate?
A. Statutory rate --
Q. -- go into the history and the purpose of the interest crediting rate
that was adopted? Did you educate yourself on that? Are you aware --
A. The purpose of the rate that was adopted? The statutory rate that was
adopted?
Q. Interest --
A. Yes.
Q. Wait a minute. There are parts of Dr. Maxam's report where it is not
just him saying things. He's quoting and pulling together, in effect, the
legislative history of the crediting rate.
Did you not really think that that was very important. Did you focus on
that?
A. I did focus on that. And frankly, you know, looking at Maxam and
Deutsch's reports, I think that there is some interesting information
there, but I do not assume that the information there is --
Q. Accurate?
A. -- complete or --
Q. You do?
Q. So you read them and you -- because you haven't independently verified
them, you just put them on the shelf?
A. You asked me, do I know why the rate, why that 75 percent or 4
percent, why that was adopted.
Q. Where we started was about the asset allocation. And you started
making statements about, well, a plan like this, you know, might not
adopt this because it would have negative effects under some
circumstances on funding.
A. Yes.
Q. I reasonably asked you, well, you're starting to, in part, get into
the intent of the plan's sponsor as to what kind of benefit they're
attempting to deliver and at what cost it might be?
Q. Hold on.
You're just assuming if there's a funding problem that that's not what
the sponsor -- the sponsor because they converted to a cash balance plan
wanted a contribution holiday?
A. Well --
A. No. No. There is a difference. The sponsor makes two different kinds
of decisions.
Q. Then let's not cover that if you're not going to express an opinion on
that.
BY MR. GOTTESDIENER:
A. Yes.
Q. Does the letter suggest in any manner whatsoever that the correct
projection rate is the statutory rate?
A. No.
BY MR. GOTTESDIENER:
Q. You're -- you've listed this and other letters between the IRS and
counsel for the Alliant plan on your report, right?
Q. You're aware that the IRS is saying to this plan, currently, and
you're aware that the IRS is saying to other plans with respect to the
pre-PPA period, that the projection rate, if it is under the actual
interest crediting rate, must be increased to meet the actual interest
crediting rate? You are aware of the IRS's position?
Q. And you're aware that there are other correspondence with Alliant
where it is consistently taking that position as well?
A. Well, I have to confess that I have not read all of the correspondence
between Alliant and the IRS on the determination letter issue. So I can't
say that it's all consistent.
Q. That wasn't my question. I said you've seen other things that are
consistent with this? You haven't seen anything that's inconsistent?
Let's put it that way.
A. This doesn't say increase. This says have the same crediting rate and
projection rate.
A. Well --
Q. Right?
Q. Could you just answer that question before you tell me about the
impact of it?
A. Well --
Q. Jim Holland is saying they have to be the same. You have to -- you
have to project at the actual crediting rate, right? You don't know doubt
when Maxam and -- sorry, when Deutsch says this is the IRS position, you
don't have any doubt that that's the IRS position, right?
BY MR. GOTTESDIENER:
A. Yes, but you've asked three different questions. Can I answer them
one, two, three?
A. The first is, am I aware that they've taken this position in this
case?
Yes.
Q. Okay.
And so I'm not sure that I could say that the position it has taken --
that I am familiar with any particular other cases in which it has taken
this particular position.
Q. But analogous?
A. Similar.
Q. Okay.
A. Similar.
Q. Third point?
A. The third point is, am I confident that that is the single IRS
position? The answer is no. I've seen -- the answer is no. That I've seen
the IRS move off of this position on to a somewhat related position
involving what's described in the second part of this.
Q. To what?
A. The interest crediting rate and the statutory rate, although in the
example that I can give you, it is very, very -- the rates are very
close, but they're not identical.
A. No. There is no whipsaw. Because the rates were -- there was a whipsaw
provision written into the plan. That whipsaw provision produced a
projection forward and a discount back that were at the same rate for all
applicable periods --
Q. What was the underlying interest crediting rate in the plan you are
talking about?
A. The underlying interest crediting rate in the plan I'm talking about
was a 30-year Treasury rate as of a different date than the applicable
rate for that plan.
Q. Okay.
A. And a minimum of 4 percent.
A. No. No. I'm not equating them. You asked me if this is the position
that the IRS takes consistently all the time and I'm saying I am not sure
it is.
THE VIDEOGRAPHER: This is the end of tape 5. Off the record at 5:12.
(Recess.)
BY MR. GOTTESDIENER:
Q. Now, in paragraph 67 of your report, you say whether the plan has one
accrued benefit or three is not the issue here.
Let's assume for a moment that you actually agree there's only one
accrued benefit under 411(a)(7). Would that accrued benefit be the same
for purposes of 401(a)(4), 411(b) and, 417(e)?
Q. 417(e)?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. Directly refers to the 411(a)(7) benefit, doesn't it, sir? Handing you
Exhibit 7? You have to determine the 411(a)(7) accrued benefit before you
can determine the normal accrual rate?
Q. Yes.
A. If you --
A. Well, however, I think to be fair, you get different results under the
different regulations; and so the idea --
Q. You don't get different results. It is all the same accrued benefit.
A. No. You don't get the same accrued benefit. You follow --
Q. I have your testimony on that. I have your testimony. You think there
are different accrued benefits?
Q. And 96-8 says that it not only has to be in the plan, it not only has
to preclude employer discretion, but it also cannot understate the value
of those credits?
A. Yes.
Q. And you agreed already that the minimum lump sum under 417(e) is based
on the current accrued benefit table at normal retirement in the form of
an annuity, right?
Q. The minimum lump sum where we started under 417(e) is based on the
accrued benefit payable at normal retirement age in the form of an
annuity?
A. Yes.
Q. If you look at 67 in your report, where you are talking about the non-
discrim regs, you say in the calculation the plan is required by Treasury
regulations to use an interest rate between 7.5 and 8.5 percent?
A. Yes.
Q. And looking at 7 again, the Treasury reg that I just showed you as to
how you have to first determine the 411(a)(7) benefit, the plan didn't do
what you were saying that it should do? I mean, your opinion, if the
testing interest raid is 7.5 percent, then the 411(a)(7) accrued benefit
is determined by assuming that the rate of return on plan assets will be
7.5 percent for all future plan years?
Q. Your theory is not that? Then I don't understand. You are saying that
this is a -- only limited to the payment of lump sums?
A. I do agree that the plan did not follow the theory that I have with
respect to 417(e) in demonstrating to the IRS that it is non-
discriminatory under 401(a)(4), I do agree with that, yes.
Q. And your report, you don't mention at all the plan's projection rate
of the 30-year Treasury as the deemed future interest crediting rate.
Why is that?
Q. Because?
Q. Why would the plan not pay a whipsaw amount? You are saying that in --
if it is deemed to be -- is it --
A. If you follow --
Q. -- the example --
Q. I got it.
Q. Why didn't you say that? Why didn't you say that in your report? Why
didn't you say the projection rate is invalid?
A. I'm pretty sure I did. It would take me a while to find it, but I'm
print sure --
Q. You don't say -- you are aware that until you arrived, the plan's
entire defense is that that's a reasonable projection rate?
A. I'm aware that that is the position that Ian Altman takes in his
report. I have not seen any briefs or other arguments prepared by counsel
in this case.
Q. But no, you haven't read anything, any briefs that the plaintiffs have
filed?
A. Other than times when the statutory interest rate falls below 4
percent, it produces results that are not prohibited under 96-8. It is
not, in my mind, technically a correct whipsaw calculation, although
you've hypothesized that my theory would be wrong, in which case, then
that's a different issue.
Q. But if we put your theory to the side and if we put the situation of
the discount rate being less than 4 percent to the side, I just want to
ask about --
A. Okay.
Q. -- otherwise --
A. Well, it would --
Q. No --
A. -- chosen.
Q. -- not the statutory rate? The projection rate that's written into --
A. No.
Q. Would that be relevant to know whether it was valid or not?
And you can do something that is valid and have completely irrational
reasons for doing it. You can do something that's invalid, and have very
good reasons for doing it.
Q. What about if the -- you're aware that the plan document itself states
in the preamble that the intent is to only pay the account balance?
A. Yes.
Q. Now, does that, if you're coming to this with a completely open mind -
-
A. Yes.
Q. And you want to know whether or not the projection rate is compliant
with 96-8, is that not important information for you as an expert, as an
actuary, to be aware of when you're looking --
A. Yes.
Q. Wouldn't that --
Q. And what you're saying is that that would make you skeptical that the
projection methodology was selected to fully value -- it's not
dispositive, but it would make you skeptical that it was selected with
the intent to just let the chips fall where they may and fully value the
interest credits?
But I think in general I would agree with your statement that -- you know
-- if the plan's sponsor said, well, we only want to pay the lump sum and
we don't really care what the law requires.
But I think in general I would agree with your statement that -- you know
-- if the plan's sponsor said, well, we only want to pay the lump sum and
we don't really care what the law requires.
Q. Well, I'm not saying that. Hold it. You were okay until you said that.
We just want to pay the lump sum and we selected this as our methodology;
and we think it is an appropriate methodology and it is compliant.
You would want to know that, and it would make you skeptical that the
methodology was appropriately selected, all other things being equal?
A. Yes.
A. Well, you're putting it aside, but I'm not putting it aside. The
reason I'm not putting it aside is because --
A. It has never been below 4 percent, but they didn't know that when they
wrote that.
A. That intent may have been carried through to their plan design, so
they might have gone to their actuaries and said, please design for us an
interest crediting rate that is going to not create whipsaw. And the
actuaries may have said, well, here, we're designing something that's not
going to create whipsaw. And in other words, I don't know that that
necessarily suggests that they were lax about complying with the law.
It does suggest that they thought they were getting to the result where
the amount paid is the account balance, and that's what they wanted and
they thought their plan design got there. I think their plan design
didn't quite get there. You asked me to set aside the reason, but I think
it didn't quite get there.
Q. I'm asking you to tell me if the documents establish beyond any doubt,
and the testimony will establish beyond any doubt that the intent of the
sponsor at the time that the plan was designed and put into place was to
deliver to participant accounts on a consistent basis an average of 9 to
10 percent, then wouldn't that inform your view as to the purpose for
which the projection rate was deemed to be always constant, consistent
with the applicable interest rate coupled with the statement in the
preamble of the document that our intention is to pay the account
balance?
Q. It is one question with three parts to it. They're all factual. I want
you to assume they're all factual.
A. Assuming they're all factual. We start with the intent of the plan's
sponsor to earn -- did you say 9 percent?
Q. 9 to 10 percent?
And --
Let me ask you about the -- you say that in terms of asset allocation in
76, you say the plan's past and present allocation has no bearing on
future returns, only the likely future asset allocations could possibly
have a bearing on future returns?
A. If you think those things are different, then yes, I think that's a
true statement.
Q. And I just want to make sure I understand: You are saying that -- I
mean, you're not denying that the asset allocation has a bearing on
future interest credits?
A. No. But if you believe that the past, present, and future are three
different things and the future allocations may not be the same as the
past, then you should be taking that into account and you should be
saying, well, if the asset allocation in the future is different, then
the investment returns in the past are not going to say a lot about the
investment returns in the future.
Q. I don't know what you just said; but I'm putting the plan into effect
in 1998 and I have to put a definitely determinable provision in there,
assuming that can be done in this kind of plan, don't I have to make an
assumption as to what the future asset allocation is going to be, at
least a range, in order to -- you know -- peg the right future interest
crediting rate?
BY MR. GOTTESDIENER:
Q. Well, yeah.
Q. You don't know of anything in 1998, using what the plan was doing at
that time, that makes a 65 percent asset allocation an unreasonable
assumption?
Q. What that you know factually about the plan would have made that, if
somebody were writing a definitely determinable provision at that point
in time, why would that have been unreasonable. It was the asset
allocation, wasn't it?
Q. You are saying that somebody with foresight would have known that it
would shift substantially?
Q. ‘98?
A. ‘98.
I remember 1998. I've had a long career. I remember the crash of ‘87, and
I remember the crash of 73, 72-73. And I think if you were sitting there
in 1998, having seen asset values going up and up and up, and if you
attended conferences at which --
Q. Anyway, the point is --
A. -- that you would say -- that you would say, that having a 65 to 70
percent allocation to stocks in the long run under this plan is going to
produce a fair amount of volatility, and could take it through one or
more crash cycles; and if you look at something like a 1987 crash cycle,
that that creates a very undesirable funding result for the plan.
Q. In 1998?
Q. The sponsor in this plan, you agree, has a direct or indirect control
over the asset allocation selected, right?
Q. Yeah.
A. No.
Q. No?
BY MR. GOTTESDIENER:
Q. Let's make the interesting question actually very specific and hand
you Exhibit 8 and direct your attention to 411(d)(4) Q&A 4. Question 4 is
“may a plan provide that the employer may, through the exercise of
discretion, deny a participant a section 411(d)(6) protected benefit for
which the participant is otherwise eligible?”
You see at the start of the answer, answer 4, it says, in general “except
as provided in paragraph D of Q&A 2(a)(2) of this section with respect to
ESOP plans, a plan that permits the employer either directly or
indirectly through the exercise of discretion to deny a participant a
section 411(d)(6) protected benefit provided under the plan for which
participant is otherwise eligible but for the employer's exercise of
discretion violates the requirements of section 411(d)(6).”
Right?
A. Well --
Q. You agreed earlier at the very beginning of the deposition that the
accrued benefit that the 411(d)(6) protected benefit, that there's the
accrued benefit and the 411(d)(6) offers more protection, but it
certainly everything that is the accrued benefit is covered by 411(d)(6),
right? You are adding things to the protection, correct?
A. Yes.
A. No. I don't agree with that. I do agree with the general concern that
Jimmie Holland mentioned that I mentioned earlier in the deposition, that
if you're basing benefits on funding levels, which is --
Q. There's not one here. I want you to answer my questions about this.
A. I believe -- I believe --
Q. -- concerns --
Q. Do you know that? If you know that, let's get that done. Because to
try to separate them out is impermissible under the regulation.
Q. Good. Keep going with why you are saying it doesn't apply?
Q. And, therefore --
A. If they did, if they did, if the employees had a right to expect that
the assets be invested imprudently --
Q. No.
Q. Got that.
A. It is my belief and understanding that every time this issue has come
up in any context, that the result has been a determination that the
exercise of discretion as to how to invest the assets is not the kind of
discretion that causes a problem under that sentence in the regulations.
Q. In a defined benefit cash balance plan where the plan assets are
controlling the interest crediting rate? Do you know of any other case
where that's come up? You're talking about every other time. When has it
come up that you're aware of?
A. Yes.
Q. The IRS has said, “No problemo as long as you are prudently investing
the assets.”
A. Yes.
Q. You would agree that would make one challenge the validity of your
first reason, right? Why wouldn't the IRS say --
Q. Okay.
Q. Thank you.
A. No. I don't agree with that. I think there is a right that the
participants have. I believe that that right is the right to have the
plan assets invested prudently.
Q. Ah.
A. I do think that if you said, well, we're just going to take this --
take these assets and -- you know -- for no particularly good reason
invest them in something that's -- you know -- less than a reasonable
risk adjusted return --
Q. No. That's the guaranteed minimum. You weren't following what I was
saying.
A. Correct.
A. Well, let me just say that I think that when the -- the employees have
a right to a prudent asset allocation. That doesn't mean that they have a
right to a particular individual prudent --
Q. -- individual no, it is --
A. No. No. No. There is not one asset allocation they have a right to.
What they have a right to is that the asset allocation be prudent. So if
you had an asset allocation that was imprudent, I think the participants
would have a claim. But --
Q. The plan --
Q. -- back-loaded --
A. No. They have a right to get the actual return on the plan.
Q. Have you read the brief that the plaintiffs filed in the SC Johnson
case after that judicial opinion came down?
A. No.
BY MR. GOTTESDIENER:
Q. The argument --
A. The argument that you made after the opinion came down.
Q. In fact, the argument was that the opinion should have come out the
other way because one of the consequences is going to be the plan will
fail the back-loading test. There will be worse of a problem. You haven't
considered that before I just put that question to you, right?
A. Right.
Q. Okay.
Q. Well, maybe those are things you should have thought about, I would
say.
What do you think all relevant factors used to compute benefits means in
a plan like this, the Alliant plan? Would the interest crediting rate be
a relevant factor?
BY MR. GOTTESDIENER:
Q. What do you think? Some people, for example, you mean Jimmie Holland
at the IRS?
BY MR. GOTTESDIENER:
Q. What people are you thinking of?
A. Well, I know that there are people at Treasury and the IRS who believe
that, because Harlan Weller and Jimmie Holland represented to me that
there are people who think that.
Q. Okay.
A. They did not specifically tell me whether it was them or not. In other
words, they didn't say my fingerprints are on this.
Q. Okay.
A. They said more like, well, we have some people here who think such and
such.
Q. Now, you would agree that in the Alliant plan, there's -- there's
really a choice. It is either the interest crediting rate or the asset
allocation that would -- something has to be constant?
Q. But you took it upon yourself to be an expert in a case where this was
absolutely affirmatively discussed very specifically in Mr. Deutsch's
report. And he actually -- he discussed both of these things. He
discussed the IRS's position and he himself took a position. So you had
the IRS's position and you had Deutsch's position. Do you agree with
either of them? Disagree with either of them? Or you have no opinion?
That doesn't --
Q. Yes, but he's not talking about as an ongoing thing. He's saying this
would have to be done just as in Berger where there wasn't a correct
methodology put in place. So it would just be done once. It is not
something that would be subject to employer discretion on an ongoing
basis?
A. Well, I think you have to satisfy the back-loading rules every year.
Q. What is --
A. I think Deutsch's --
Q. What's your third way, sir, that this plan can satisfy the back-
loading rules or do you not know?
A. Yes. The --
A. What's that?
A. If the pay credits are flat, then I think that issue does not need to
be resolved for the Alliant plan, because an interest crediting rate of 4
percent would be plenty to determine that the plan is not back-loaded.
And since the interest crediting rate is always 4 percent or more, it
kind of becomes hypothetical as to what you're actually going to set it
at.
So you could say, well, I don't know what the answer is, but I know -- I
don't know what the answer is as to what is going to be held constant,
but it doesn't actually matter what's held constant because if the pay
credits are flat, the plan is going pass the back-loading test no matter
what, no matter what you hold flat.
Q. I'm asking the question as to what factor with respect to the interest
crediting rate has to be held constant?
A. Held constant for the back-loading test. The answer is I don't know
that, because that's an unsettled area of law.
Q. And how is it that with the -- you have no reason other than a
fiduciary standard that you believe that this is a definitely
determinable interest crediting rate? How do you possibly explain when
the employer can monkey with the asset allocation and directly affect the
interest credits?
MR. KRAMER: You can answer the question if you can, yes.
BY MR. GOTTESDIENER:
A. Yes.
A. Yes.
BY MR. GOTTESDIENER:
Q. Really?
Q. Can you name any of these plans? I thought you don't know of any plans
like this other than the SC Johnson plan? I'm not talking about variable
annuity plans. There's no plan like this.
A. No. No. A variable annuity plan has the exact same defect, number one.
Number two, number two, this is rather -- has the same supposed defect.
Number two. I think this is very important. When Congress passed the
Pension Protection Act, it did not change the definitely determinable
requirement at all, not one bit, and yet it does appear that the Pension
Protection Act endorses the concept of cash balance plans that have a
crediting rate equal to the rate earned by the plan.
A. Yes.
And so if you were to interpret that rule to say you can't have this type
of a plan provision, you would have to say that Congress when it wrote
PPA deliberately created a plan that always violates some other
preexisting rule that it didn't eliminate.
A. You've asked me for my legal opinion. I'm giving you my legal opinion
despite the fact --
Q. Do you have any other bases for arguing that it's not -- doesn't
completely fail the definitely determinable requirement. There's
constraint by fiduciary duties which denotes constraint. And the statute
later on on a going forward basis says under some circumstances, we can
have this kind of plan?
Q. So?
A. Treasury and the IRS have consistently approved plans that have the
same supposed --
Q. Name a cash balance plan, not a variable annuity plan. A cash balance
plan --
THE WITNESS: I'll finish my answer. I don't think the distinction between
cash balance and other types of plans is meaningful. What's meaningful
here is the question of whether the benefit amount varies based on the
actual rate of return of the plan; and I have seen plans where it does; I
am aware --
BY MR. GOTTESDIENER:
A. I have not personally worked on any cash balance plan that has that
particular feature to it; but I have worked on other plans that have a
feature like that that has the same impact on benefits that the rate of
return of plan's trust fund affects the benefits.
THE WITNESS: I just told you it doesn't have to be a cash balance plan to
be the exact same issue. The cash balance plans do not have different
definitely determinable requirements that I know of. The definitely
determinable requirement is what it is.
So if you have a plan where the benefit changes as the rate of return on
assets changes, then you have that same argument; but it is not
definitely determinable. And yet --
BY MR. GOTTESDIENER:
A. Where the employer is in control. You have that argument. And yet,
that's not the position that Treasury has taken with respect to those;
and Treasury is the governmental authority that enforces tax rules, and
this is a tax rule.
We reserve signature.
v.
Jurisdiction: W.D.Wis.
Representing: Defendant
Appearances:
INDEX
WITNESS:
VINCENT A. WARTHER
Exhibit No. 14 - Estimates of the equity risk premium from the academic
literature (Exhibits C) ... 10
MR. GOTTESDIENER: Counsel for defendant has arrived with someone from his
office who apparently has some kind of taping system and wants to make a
tape of this deposition. We object. The defendant had the ability to
bring a certified videographer or certified audiographer and did not do
so.
And there is no provision for someone who is not issued a notice to bring
their own device, their own recording that the other side does not have,
does not have certified, and in particular there is an entire section of
Rule 30 that talks about the officer's duties with respect to the
transcription of the deposition and unless the parties stipulate, which
we don't, there is a requirement that copies of the transcripts or
recording, unless otherwise stipulated or ordered by the court, the
officer must retain the stenographic notes of the deposition taken
stenographically or a copy of the recording of a deposition taken by
another method.
MR. CASCIARI: Okay. My response is that first of all I did advise you
that I was going to videotape or tape record this deposition and you
agreed --
MR. CASCIARI: -- and depositions are public events unless the court
orders otherwise. Jose is entitled to be here with a tape recorder.
MR. GOTTESDIENER: I don't object to Jose being present but -- excuse me.
Would you turn the thing off now? Otherwise, we're just going to --
you've got the tape recorder on now.
And I don't --
MR. GOTTESDIENER: Why do you need it? Why don't you cut to the chase? Why
do you need it?
MR. CASCIARI: Well, why do you have Clark Maxam at this deposition and
this other gentleman here? I mean, I don't see any difference. The tape
recorder --
Now, we already had one deposition. Was that taped without my knowledge?
MR. GOTTESDIENER: Yes, the officer. So we've already had one deposition
of an expert. Now we have a second deposition of an expert --
She can give you an overnight copy of this if you want. You have the
ability to have a videographer.
What I would suggest you do is have Jose have a videographer -- you went
through the trouble of having a videographer last time and apparently you
realized it was a big expense for no reason but you can do it but it's
got to be an officer. A videographer is an officer.
MR. CASCIARI: Well, Ms. Court Reporter, will you provide as counsel
suggested a copy of your tape to me along with a transcript for a fee?
THE COURT REPORTER: Can I check with my --
(Witness sworn.)
Q. I put in front of you Exhibits 10 and 11. Those are your affidavit and
report in this case respectively; is that correct?
A. Yes, and the report is my report but without the exhibits, yes.
MR. GOTTESDIENER: Okay. Why don't we go ahead and mark the exhibits as
separate exhibits here. Your report has attached to it four exhibits.
BY MR. GOTTESDIENER:
A. 12 is my CV.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
A. That's correct.
A. That's correct.
BY MR. GOTTESDIENER:
A. That's correct.
MR. GOTTESDIENER: And so we have it handy, I'm going to also mark 16, Dr.
Maxam's report.
BY MR. GOTTESDIENER:
A. I see that.
Q. And how are your opinions, the number of opinions you say you have,
relevant to the question as to whether or not the lump sum methodology
was illegal?
A. Again, I'm not an attorney. I'm not here to offer legal opinions.
In what ways my opinions may be relevant to the legality of, you know,
this particular issue I'm not sure, and I'm just leaving open the
possibility that my opinions may be relevant to that question in some
way.
Q. And you also don't have an opinion as to whether your opinions may be
relevant to the question of legality?
Q. Are you saying that that's an expert opinion that you have that it may
be relevant, your opinions as an economist?
Q. You said that you're leaving open the possibility, and I'm asking you
are you stating an opinion as an expert economist that your expert
economist opinions may be relevant to the legal question --
BY MR. GOTTESDIENER:
Q. -- yes or no?
BY MR. GOTTESDIENER:
THE WITNESS: I believe that I've already answered that question. I would
refer back to that previous answer.
In an attempt to move this along, I will attempt to reply to this
particular question. I think that --
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
MR. CASCIARI: Wait, wait, wait. I object to your not letting the witness
answer the question. Let him answer the question.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. Go ahead.
Q. You object?
A. -- of my answer.
THE WITNESS: I would like the record to reflect that Mr. Gottesdiener's
actions --
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
MR. CASCIARI: We're taking a break. Hold it. We're taking a break.
BY MR. GOTTESDIENER:
Q. Sir --
MR. CASCIARI: We're taking a break and we'll be back in a few minutes.
Could you please, Court Reporter, note the time that the parties have
left the room.
(Whereupon, the witness and Mr. Casciari left the room at 9:46 a.m. and
returned at 9:47 a.m.)
BY MR. GOTTESDIENER:
Q. What did you talk about with Mr. Casciari when you left the room?
Q. I didn't ask what you thought. I asked what conversation you had with
Mr. Casciari. You told me something he said. What did you say to him?
Q. Is there some reason why you need to be closing your eyes and you
can't look at me while I'm asking the questions?
A. Sometimes I prefer to close my eyes. It helps me concentrate more on
the questions, and I hope to answer the questions more accurately.
Sometimes I open them. Sometimes I close them.
Q. So right now for the last answer your eyes were closed, correct?
A. That's correct.
Q. Could you please focus on my question. The last question was very
specific. The answer is yes, right?
(Read back.)
MR. GOTTESDIENER: Ma'am, I'm sorry. I'm asking the very last question
about his eyes being closed.
(Read back.)
(Read back.)
BY MR. GOTTESDIENER:
MR. CASCIARI: That doesn't call for a yes or no answer. I object to the
characterization.
THE WITNESS: I believe when I was answering the last question I was
concentrating on the question and trying to answer it as best I can.
BY MR. GOTTESDIENER:
Q. And you just answered the last question with your eyes closed,
correct?
A. That's correct.
I'd like the record to note that Mr. Gottesdiener took away the exhibits
that he previously gave me.
Q. Yes, because you were staring into your report when I was asking you a
very simple question, which is: Do you have an opinion -- these are my
exhibits, sir.
Q. So you don't have an opinion as to whether or not the Plan's lump sum
methodology is valid?
BY MR. GOTTESDIENER:
A. I explained that.
Q. Okay. You didn't. Do you have any other answer to give other than the
nonresponsive one you've already given?
BY MR. GOTTESDIENER:
A. As best I recall I believe that the Plan would pay out to the Plan
participant the cash balance in their account at the time -- at the time
that they left.
Q. Anything else?
Q. Does the Plan use any kind of calculation in paying lump sums during
the period at issue here, 1998 to 2006?
Q. You're not sure that the Plan -- what are you sure of as to what the
Plan does in determining the amount of lump sum for a participant during
that period of time?
BY MR. GOTTESDIENER:
A. Relevant to what?
Q. To the case.
A. An opinion as to what?
Q. It's your understanding that that's what the case is about, right?
THE WITNESS: As I sit here now, I'm not sure of what else I would call
central to the case. There may very well be issues of statute of
limitations. There may be many other legal issues.
The opinions expressed by Dr. Maxam and by the other experts in this case
may be central to this case also.
BY MR. GOTTESDIENER:
MR. CASCIARI: Same objection. You're asking him to interpret the Rules of
Evidence.
MR. GOTTESDIENER: Okay. Mark, I'm going to have the Court on the phone
and sanction you because you keep making speaking objections. Your
objections are to form only.
I'll read the rule to you if you need that rule read to you as well. When
it's to form --
MR. GOTTESDIENER: Stop -- well, then just say that and stop coaching.
BY MR. GOTTESDIENER:
Q. Sir, how are their opinions relevant to the issues in the case?
A. Because they may bear on the issue of how much Plan participants were
due -- were due to be paid out.
You said the Plan's methodology was to pay out the cash balance account?
A. I don't believe that's exactly what I said, but I think that's my best
understanding of it --
Q. And --
Q. Okay. And you're saying that you don't know how they determined, the
Plan, that is, and the people who run it, how they would arrive at paying
out the account?
A. As I understand it there was a long and complicated record with regard
to how the Plan arrived at the payouts that it arrived at. I have -- I
think I've read something about that.
Q. Well, it raises a new question, which is: You've read something about
a long and complicated record of how it arrived at paying out the
account? What long and complicated record are you talking about?
A. Well, the various pleadings in this case which talk about how the Plan
acted over time. That's what comes to mind now.
Q. Pleadings about how the Plan acted over time. So what is it that you
learned about how the Plan arrived at the determination to pay out the
account balance?
A. (Indicating.)
A. Not necessarily.
Q. Not necessarily. You wouldn't have said it if I cut you off as I did?
A. I don't know.
Q. Did you ever know how it was that the Plan arrived at the
determination that it was proper to pay out the account balance?
A. Exactly how the Plan arrived at its decisions as to what to pay out
was a issue I did not investigate since it's a heavily fact issue, fact-
based issue, and would depend on, I assume, various internal documents,
you know, various conversations with people, various deliberations at
various times.
BY MR. GOTTESDIENER:
I'm asking you there's a methodology and you're the one who raised it in
your report that the plaintiff is saying that the methodology was illegal
and then we moved to validity of the methodology.
And I'm asking you if you knew what the methodology was. You said it was
paying out the account. And I'm trying to ask you a very narrow question,
which is: By what means did the Plan determine as a matter of economics,
if you will, of math that it was proper to pay the account as the lump
sum in this defined benefit pension plan?
The question is: Did you ever determine -- did you ever know how the Plan
determined as a mathematical matter how the Plan said that's how we
arrive at paying the account?
Q. So could you just tell me what that was because I didn't really
understand your answer?
A. Okay. Well --
Q. I'm not talking about conversations with people. I'm saying when they
made a payment did they do any calculation or did they just look at the
account balance?
BY MR. GOTTESDIENER:
Q. How about not exactly what it did. Do you know what it did, if
anything, to arrive at a mathematical determination to pay out the
account?
Q. Did you ever know how -- did the Plan use an interest rate in
calculating lump sums?
A. I haven't made a effort to understand exactly what the Plan did, what
sort of calculations it went through to arrive --
BY MR. GOTTESDIENER:
Q. So the answer is you don't know whether or not the Plan used an
interest rate in calculating lump sums, correct?
A. That's correct.
Q. And you never knew that one way or another, did you? Not just sitting
here today, now I'm saying in the course of working on your report before
coming here you never knew the answer to that question whether or not the
Plan used an interest rate?
A. That's correct.
Q. And did you read any expert reports on the defense side?
A. Yes, I have.
Q. Did you speak with either Mr. Godofsky or Mr. Altman prior to your
report being finished?
A. I spoke --
MR. GOTTESDIENER: And I'm not asking for the question. You're wrong.
BY MR. GOTTESDIENER:
MR. GOTTESDIENER: Are you instructing him not to answer, yes or no?
MR. CASCIARI: I'm trying to get words out of my mouth, and it's not easy
with you.
BY MR. GOTTESDIENER:
Q. Did you -- just answer yes or no. Did you speak with either expert,
yes or no, prior to finalizing your report?
BY MR. GOTTESDIENER:
MR. CASCIARI: -- you will not ask him for background to his report nor
can I ask your experts --
And we are not seeking any of that. What we are entitled to do is to find
out how -- what work he did in terms of coming to the conclusions he did.
MR. CASCIARI: May I see what you're reading, please? Thank you.
MR. GOTTESDIENER: I am not asking him what he spoke about with you, and
I'm not asking at this moment -- go ahead.
MR. GOTTESDIENER: It's not work product to get an answer to the question.
MR. GOTTESDIENER: No, because you need to listen and focus because we're
not going to spend 20 minutes on this.
I can get a yes or no. Are you instructing him not to answer?
MR. CASCIARI: It's ten more words. Would you just listen?
MR. GOTTESDIENER: You're not focused on the point that I have not asked
for the substance of the communications. I'm just first now trying to ask
yes or no.
Would you let me ask my questions and think before you object?
MR. CASCIARI: I want to get five more words on the stipulation out on the
record. Do you mind?
MR. GOTTESDIENER: Why don't you reference the prior sentence, then, if
you're going to do that?
MR. GOTTESDIENER: Okay. It is not work product for one expert to talk to
another.
BY MR. GOTTESDIENER:
And if you instruct him not to answer, then we'll have an issue and then
we'll move on.
Yes or no, did you talk to Godofsky or Altman prior to the conclusion of
your report?
A. Yes, I did.
Q. When?
Q. And without disclosing anything that you spoke with him regarding
conversations that you or he had with counsel, did he provide you any
factual information that you in any way considered in connection with
your report?
Q. Was there more than one conversation between you and Mr. Altman?
Q. Was there any other purpose you understood for you speaking with Mr.
Altman?
Q. I appreciate your answer, but my question was broader, not just that
conversation.
What did you do to educate yourself generally apart from perhaps, but, as
you said, you don't remember asking Mr. Altman any of that -- other than
asking Mr. Altman, did you do anything to educate yourself about the way
plans typically calculated lump sums --
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. How in the operation of the Cash Balance Plan that you're opining
about would the Plan perform a calculation such that the account balance
would be the result if it were to have performed a calculation using an
interest rate?
BY MR. GOTTESDIENER:
Q. And how does the Plan project the interest crediting rate?
Q. We're talking about the Plan, the Alliant Plan. How does the Alliant
Plan project the interest crediting rate?
Q. You've defined the interest crediting rate, but you haven't answered
how it projects that crediting rate into the future.
Q. -- how you believe the Plan's -- excuse me. I've been asking you for
20 minutes about the Plan's lump sum methodology. Your first answer was
that it paid the account balance.
Then I tried to find out, well, how did it arrive at the account balance.
And we have your answers, such as they were.
Then I asked you now after the passage of time you're now talking about
the projection of the interest crediting rate and present value using
417(e).
So you keep saying what the interest crediting rate is, and I'm asking
you how would the Plan have mathematically arrived at paying the account
balance? And you've not answered that and I would ask you to please
direct your attention to my question.
BY MR. GOTTESDIENER:
Q. Well, could --
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. You told me already that the Plan looks at the account balance and
pays it. Now I'm saying mathematically you're an expert. You've got a
PhD. You do have a PhD., right?
A. That's correct.
Q. And you charged a quarter of a million dollars for the work you've
done in connection with your report through your company, haven't you?
Q. For your report, Exhibit 11, that without attachments and not counting
your signature page, which is a separate page, is a 13-page document. I
put it in front of you.
A. That is correct.
Q. Your report is 13 pages and you and your company billed the defendant
almost a quarter of a million dollars. Exhibit 10 you state $240,000,
right?
A. You have a lot of things in there, some of which are not completely
accurate.
Q. So --
Q. Okay. I want to ask you do you think it's misleading to say that you
and your company charged the defendant almost a quarter of a million
dollars for your report?
A. That's not correct. Not all of that billing was for the report. We did
--
Q. Well --
A. The work we did was background work in this case. In some ways it --
it built my background about the case. It built my understanding about
the case, and I used some of what I learned from that in writing my
report.
Q. What did you learn from this background work you did?
A. I learned about the Plan. I learned about the case, about the
pleadings in this case. I did some calculations of potential alleged
underpayments in this case.
Q. But you didn't learn how the Plan calculated lump sums?
BY MR. GOTTESDIENER:
Q. That's what you said before, and now you're only answering in part
after I've asked questions for about a half hour about it.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. When?
Q. I mean, you do have records to support the $240,000 listing that you
have in your sworn declaration, right?
A. That may be a legal question. I'm not sure. This document is entitled
“Affidavit”.
Q. Okay. In your sworn statement, would you agree that it's a sworn
statement in your affidavit?
Q. I'm sorry. When you signed the thing, didn't you believe you were
signing it under penalty of perjury to tell the truth?
A. That is correct.
Q. So this is your sworn statement?
A. I --
Answer --
MR. CASCIARI: No. No. You are -- now you're raising your voice.
MR. CASCIARI: May the record reflect you're raising your voice.
MR. GOTTESDIENER: The record will reflect that you keep interrupting my
deposition --
MR. CASCIARI: I --
Q. Sir, you've billed, you and your company, the defendant almost a
quarter of a million dollars for working on this case, yes or no?
A. That is correct.
Q. Now, with respect to the way the Plan mathematically arrived at paying
the account balance, I've been asking you that question. How does the
Plan mathematically arrive at paying the account balance?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. -- is that correct?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. It's the same, but go ahead and answer it.
A. I'm sorry.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. The question is: Mathematically how does the Plan end up paying the
account balance?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. Do you think it's your role to comment back if you think that you're
on the other end of comments that you don't like? Aren't you supposed to
be a neutral advocate only for the truth, sir?
BY MR. GOTTESDIENER:
Q. Oh, so you don't -- that's -- that's all? You don't see yourself as an
officer of the court trying to provide the Court assistance in arriving
at the truth?
MR. CASCIARI: Objection.
THE WITNESS: There's some legal questions in there, such as whether I'm
an officer of the court. I do not know the answer to --
BY MR. GOTTESDIENER:
Q. As a lay person --
MR. CASCIARI: Wait. Wait. Let him answer. Eli, let him answer.
MR. GOTTESDIENER: I got his answer. Stop interrupting me. I can interrupt
the witness.
MR. GOTTESDIENER: Yes, I can. Show me a rule that says I can't. It's my
question. I can withdraw the question and ask a new one.
MR. GOTTESDIENER: Go ahead. Go get the Judge on the phone while I ask
questions.
BY MR. GOTTESDIENER:
Q. Could you --
MR. CASCIARI: May the record reflect that Mr. Gottesdiener is lurching
toward the witness. He's physically lurching toward the witness staring
at him, lurching.
BY MR. GOTTESDIENER:
Q. Well, it doesn't matter because, Mr. Witness, your eyes are closed,
are they not?
BY MR. GOTTESDIENER:
Q. Could you please answer my question? Your eyes are closed now, right?
Q. Sir, I'm sorry. We are going to have to get the Judge on the phone. I
have a question.
BY MR. GOTTESDIENER:
Q. My question is: Mathematically how does the Plan pay the account
balance? Can you answer that, please?
A. I believe I answered that question because the way you're asking that
particular question sounds like a factual question as to this particular
Plan, exactly what did it do to arrive at the payment that it ultimately
arrived at. And I believe that's a factual question which has to do with
what (sic) did the Plan do it, when did they do it, who did it, who
talked to whom, what sort of calculations they did.
So I believe that particular question, the way you asked that particular
question, is a factual question.
You went on to ask another question which was prefaced by some language
with regard to mathematically. That I believe is a different question.
Q. And I've been asking it and asking it and asking it Do you have an
answer, yes or no, to the mathematical question?
BY MR. GOTTESDIENER:
Q. Can you explain mathematically how the Plan arrives at paying the
account balance, yes or no?
THE WITNESS: Well, first of all, your comment that you've been asking and
asking and asking and I have --
BY MR. GOTTESDIENER:
A. -- attempted to --
MR. CASCIARI: Are you withdrawing all your questions from the past --
MR. CASCIARI: -- from the past at least half hour? Is that what you're --
BY MR. GOTTESDIENER:
Q. Good --
A. -- questions.
Q. I am --
Q. During 1998 to 2006 how did the Plan as a mathematical matter arrive
at paying the account balance as the lump sum?
A. As a mathematical --
Q. -- as a mathematical matter --
BY MR. GOTTESDIENER:
Q. Can you explain in the abstract how a cash balance pension plan with
an interest crediting rate of 4 percent or the greater of 4 percent or 75
percent of the plan trust returns could mathematically in the abstract,
regardless of facts, who said what to whom, pay the account balance to a
departing participant who requests a lump sum prior to them reaching
normal retirement age during this relevant period? Any cash balance plan,
can you mathematically explain how that would occur?
A. -- you just asked me. There was also the question you asked me prior
to that which I was not allowed to finish.
Q. Sir, I want you to please attempt to stop talking about this stuff
about facts and stop commenting about how you weren't allowed to finish.
If that's the case, the record will reflect it.
I am asking a completely new question that you've now heard once, and you
haven't yet answered.
The pending question is: Any plan, cash balance pension plan, that had a
rate like the Alliant Plan, how mathematically could it arrive at paying
the account balance to a pre-normal retirement age participant asking for
a lump sum distribution during the relevant period? Mathematically please
explain it. And if you can't, I'll ask my next question.
Q. No, sir, we have one. Why is it difficult for you just to please not
talk about prior questions?
Q. If what's true?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. -- what is pending.
MR. CASCIARI: Wait, wait. Let the record reflect that -- Mr.
Gottesdiener, you're lurching again at the witness.
THE WITNESS: I vigorously deny that I have been making things up.
MR. CASCIARI: Hold it. Hold it. Hold it. Hold it. Hold it. Hold it.
BY MR. GOTTESDIENER:
MR. CASCIARI: Eli, let's get the Judge on the phone. Okay. This is
disintegrating now. We need to get the Judge on the phone.
MR. GOTTESDIENER: I'm going to ask one more question, and I'm going to
try it again. Okay.
MR. GOTTESDIENER: You know what, you're right about that and your witness
is too much of an advocate.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. -- prior questions and I ask you, sir, please, to try, as much as you
don't like this, to put out of your mind what happened in prior
questions.
Are you ready for a new question?
BY MR. GOTTESDIENER:
I'm asking you a question. Are you ready for a new question? Can you
focus on a new question or will you insist on talking about old
questions?
BY MR. GOTTESDIENER:
Q. Because that's what we're going to have to raise with the Judge now. I
want --
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. I am asking you a new question, sir. Please, I beg you do not require
us to get on the phone just to get you focused on a new question.
I am asking you, please, no matter how much you think I misstated what
you were saying, I am asking you a new question.
BY MR. GOTTESDIENER:
MR. CASCIARI: Okay. Let's stop the deposition and get on the phone. You
gave me that option.
MR. GOTTESDIENER: No, I didn't say I have the option. I think you are
obstructing. We have limited time and I --
MR. CASCIARI: Let's get on the phone with the Judge, Eli.
I would like to offer the witness the opportunity to start anew. If the
witness believes that I did anything wrong, I certainly believe the
witness did lots of things wrong, I am going to say let's have bygones be
bygones. Let's try to focus just on the pending question.
BY MR. GOTTESDIENER:
Q. Will you attempt to do that with me, sir, so we get through the
deposition and you can answer the questions that I have?
BY MR. GOTTESDIENER:
A. Yes.
Q. What you should do, one thing that might help is even if you need to
close your eyes on occasion, it would help if you would look at me once
in awhile and try to focus on the specific question as opposed to try to
figure out where I'm going with it, as opposed to trying to make comments
on other things that have already occurred in the deposition.
I am asking you. You will have plenty of time. When I interrupt you, my
judgment is that you are not answering the question I want, that it's
nonresponsive, or I want to move on and ask you a new question.
You do not have to worry about getting time to answer a question if you
are responsive to the question as posed.
So with the mathematical thing, I would like to give it a try where all I
ask is the question about can you tell me -- I mean, I think you don't
want to admit that you don't know the answer, and I understand that you
may be reluctant to make that admission. However, unfortunately, you have
to answer the question as posed and stop talking about prior things that
keep changing the subject.
I really would like to ask you a new question now. Will you entertain a
new question?
MR. CASCIARI: I have the Court on the phone. I'd like to get the Court on
the phone.
BY MR. GOTTESDIENER:
Q. Will you --
MR. CASCIARI: I'm asking to get -- I have the Judge -- I'm trying to get
the Judge.
MR. CASCIARI: This deposition is going forward. I'm trying to get the
Judge on the phone.
MR. CASCIARI: (Via phone) Can we speak with the clerk of Judge Crocker,
please? We're in the middle of a deposition of a case before him and
we're having some trouble.
MR. GOTTESDIENER: Well, then the witness needs to step out of the room if
you're getting the Judge on the phone.
MR. CASCIARI: Sure. Vince, why don't you step out of the room.
MR. CASCIARI: (Via phone) Hi, can we speak with Magistrate Judge Crocker
in a case we have before him? We're in the middle of a deposition and
we're not getting along and we need his help.
MR. GOTTESDIENER: You keep saying “we”. And if you're not stopping it,
you have no business calling the Court.
MR. CASCIARI: Eli, the record will reflect that you agreed to call the
Court.
MR. GOTTESDIENER: No, we're not going to check on the record. You're
going to listen.
MR. CASCIARI: Yes. You said that we could call the Court.
MR. GOTTESDIENER: Sir, do you understand the first thing about law? The
only way you can stop a deposition is if you stop it.
I said I would abide by your stopping it. That's all. I didn't say I
agreed to stop it. I said if that's what you're doing, it is an extreme
thing and I'm going to ask that you be sanctioned because you are
interfering with the deposition.
MR. GOTTESDIENER: That I'm going to -- you know, if you stop the
deposition, I'm not going to keep asking him questions. That's all I
said. You need to listen.
I don't agree. You should not be calling the Court. This is outrageous.
I'm asking him a mathematical question, and he refuses to answer.
MR. CASCIARI: (Via phone) Yes. We're having a deposition before a case
before the Judge and we're having a breakdown here in this deposition.
MR. CASCIARI: (Via phone) Is there any way we can get the Judge on the
phone?
CONNIE: (Via speaker phone) Could I trouble you for the case name and the
attorneys that are there?
MR. CASCIARI: Yes. I'm the one who called. My name is Mark Casciari. I
represent the defendant, and the case is Ruppert versus Alliant Energy
Cash Balance Pension Plan, Ruppert, R-u-p-p-e-r-t.
MR. CASCIARI: And the plaintiffs are represented by Eli Gottesdiener who
is the one asking the questions in this deposition and that's the problem
we're having.
MR. GOTTESDIENER: When you say “we,” could you please say defendant so
it's clear?
CONNIE: (Via speaker phone) Yes. I apologize, Counsel. I'm certain that
he would be happy to talk to you and help you out.
CONNIE: (Via speaker phone) It's just that he just went down for a 10:30
hearing. So as soon as he comes back up, could I trouble you for a phone
number where I can reach you?
MR. CASCIARI: Okay. And Mr. Gottesdiener, who is the plaintiffs' lawyer,
would like to make a statement.
CONNIE: (Via speaker phone) And I'm sorry to interrupt but can you tell
me is there a court reporter present?
CONNIE: (Via speaker phone) Okay. Good, because I know that's one
question he will ask.
So it's not -- it's not that we're jointly calling seeking guidance. It's
that the defendant -- maybe the defendant's counsel was under the
impression that I was agreeing that we needed to call the Court.
My point is very simply the witness is not answering very simple
questions and that we shouldn't be getting the Court involved and
stopping the deposition for that.
CONNIE: (Via speaker phone) Sure. Mr. Gottesdiener, for what it's worth,
Judge Crocker does this fairly often. It's not uncommon for attorneys to
perhaps get to this point in a deposition and we will receive a phone
call and that's what he's here for.
CONNIE: (Via speaker phone) That's his position that that's what he's
here for. He's happy to help. And anything he can do to help make
discovery go more smoothly, particularly with the speed with this court,
he's happy to do that.
CONNIE: (Via speaker phone) I'll give you a call. As soon as he comes up
from the courtroom I will give you a call and hopefully we can assist.
MR. GOTTESDIENER: And we will have -- in the interim we'll have somebody
from my office send a 1-800 call-in number so we're not doing this all
on, you know, one cell phone and a speaker phone. So we'll have that. So
whenever you --
CONNIE: (Via speaker phone) No problem. Thank you. We'll talk to you
soon.
MR. GOTTESDIENER: You can have Candis call -- have Candis call the
chambers and say that when --
MR. GOTTESDIENER: No, because I want to have my own phone, and I don't
want to try to have a call with you, you know, talking at the same time.
So you can send him the 800 number. You can use that phone if you want.
And so have her send or you can send him directly the 800 number and the
call-in and essentially all we need is the court clerk or secretary to
say he's ready to talk and then we'd all call in to the 800 number and we
can have an unobstructed call.
And then you could also -- you know, could call from a separate room or I
could call from over here and then you would, if the Court allows it, you
would be able to hear and transcribe it.
BY MR. GOTTESDIENER:
A. Well, one way it might arrive at that result is to project forward the
balance at the 417(e) rate. That would mathematically result in paying
out the cash balance.
THE WITNESS: Because that wasn't the question you asked and because the
circumstances were different.
BY MR. GOTTESDIENER:
Q. What were you doing -- you had a ten-minute break outside and you were
thinking about the pending question, right?
A. Actually, I wasn't.
Q. No, so --
BY MR. GOTTESDIENER:
Q. So you -- and you said one way. What other way is possible to come up
with that result?
A. Well, mathematically there are other possible ways. You could use
different crediting rates for different years in the future such that
mathematically when you perform the entire calculation the end result
resulted in paying out the cash balance.
Q. I don't understand your answer. How is that different than using the
417(e) rate?
Q. And how -- how mathematically could you back into figuring out what
those rates are? How would you do that?
A. Well, you would back into it by knowing the end result, that the end
result of the entire calculation was to pay out the account balance and
then it's a matter of choosing numbers such that that is the end result.
Q. I understand that, sir, and I'm asking you what steps would you take.
We got the end result and you know the 417(e) rate. So how would you go
about -- you know, mechanically, mathematically, how would you do it?
Q. But what -- what means would you use? Would you use a program? How
would you -- if you had somebody who had 20 years until retirement, how
would you go about doing that?
A. Well, the -- in that case the equation you would construct would be
roughly (1 plus R sub 1) (1 plus R sub 2), et cetera, to (1 plus R to the
20th) is equal to 1 plus R -- (1 plus R 417(e)) to the 20th power.
Q. Could you write into the plan a formula that would apply for everyone
at all times in the future that would arrive at the account balance using
that method?
Q. And where did you get the understanding that 1 it's roughly equal to
the 30-year treasury rate? 1
Q. And you come to an opinion in this case as to 1 what the -- what the
future interest crediting rate 1 should have been if the Plan was
required to do a 1 projection using an estimate of future interest 1
crediting rates?
Q. When you say you roughly do it, do you mean that you don't actually
select the specific rate?
Q. Well, could you just tell me what -- what you're thinking of when you
say it could be inaccurate in some subtle way?
Q. But you don't actually say what assumptions a court should use or
should be used, if you want to take out the legal aspect of it? You don't
actually have an opinion that a certain set of assumptions should be used
and then present the number?
A. I think which rate the Court should use depends on certain factors
which are ultimately going to be up to the Court's discretion.
Q. Well, what do you -- you don't give the Court any guidance as to how
to select among the three volatility assumptions you used, do you?
And I talk in the report about how, you know, the estimate I use is based
on a volatility estimate from 2000 through 2006 which also corresponds to
a volatility estimate by the Alliant Plan itself.
And then there's a question about whether it's permissible to use that
information because it comes after the beginning of the relevant period
and in which case the information that was available prior to the
relevant period was the volatility on the three predecessor funds.
And if the Court feels that it must adhere only to information available
prior to the beginning of the relevant period, then it might feel that
the estimate based on the three predecessor funds is the appropriate one.
Q. Okay. But you don't say -- you don't discuss for the Court, you don't
say if the Court is limiting itself to information available prior to the
start of the period, it should use this data set to arrive at a
volatility assumption?
Q. But you don't actually determine that the data set that you use for
arriving at that number is the correct data set to use?
Q. Okay. So that -- then that leads you to -- it's the correct data set,
however, in part, only because it's the only data available?
Your view is that it's the correct data set because that was the
available data and that if more data from predecessor Plan volatility
information were available, would you include that or do you believe that
the period that you've discussed for which there is data available is
actually the correct period to use?
If the facts and circumstances were different and I had different data
available to me, I would examine it to see if that had any effect on my
opinions.
Q. Well, isn't it the case that you're only using that -- that amount of
data, that data, because that's all you had available to you, looking at
it from that perspective?
A. That's roughly correct. That was the data I had available to me. I
used it. And if I had other data available, I would examine that and see
if that had any effect on my opinions.
Q. Sir, isn't it fair to say that if you had more data you would have
used it flat out? You wouldn't have had to examine it beyond confirming
that it was as valid as the data that you used because it would make your
volatility numbers more statistically significant?
A. Not necessarily.
Q. Okay. Could you explain your answer? If I said I found a couple more
years of data from those plans and it's otherwise identical to the form
and nature of the data that you had, how is it that you would have
excluded that data?
Q. I'm --
Q. Could you --
BY MR. GOTTESDIENER:
THE WITNESS: And given that, I would have to make a judgment based on new
information.
BY MR. GOTTESDIENER:
Q. I'm saying it's exact. That's the hypothetical. It's the exact
information. In fact, I'll make the hypothetical even easier.
You made a mistake. You looked at all the data and you didn't realize
that there was another pile of data that you had looked at at one period
of time before, you had a file, you messed it up, and you didn't include
it but you had already reached the determination that all the data was
usable for this purpose, wouldn't the inclusion of the additional data
under that hypothetical make your volatility assumption more
statistically significant?
A. Not necessarily.
A. Well, one thing that comes to mind is if the new data was not, in
fact, comparable to the other data, that it occurred at a different point
in time, if there was a reason to believe that data at a different point
in time was less relevant. There are many reasons why it could be -- why
I would not do what you're suggesting.
Q. You absolutely for the second time changed what I told you was the
hypothetical, that it was the identical quality and nature. It was just
more years of data. The only thing in your answer is you said there may
be a reason why particular years might not be relevant.
Why under the methodology that you used would the prior two years if they
were available not be relevant where the ‘87 to ‘97 period was relevant?
THE WITNESS: Because it's data from a different time period; therefore,
it is not -- it is inherently not identical to the other data. So I would
have --
BY MR. GOTTESDIENER:
Q. I'm asking you in what way would it be less relevant than the data
that you used?
CONNIE: (Via speaker phone) And I've been on hold for five minutes and
nobody joined me. So I thought I would call the number you had given me.
MR. CASCIARI: Okay. We'll call that conference number now. We were
waiting for you to call here and tell us to call.
CONNIE: (Via speaker phone) Oh, I thought I was just supposed to call
into the conference call. I'm sorry about that. I'll dial back in, then.
MR. GOTTESDIENER: Would you please step outside, unless the Court wants
you inside.
CONNIE: (Via speaker phone) Hi, this is Connie at Judge Crocker's office.
MR. CASCIARI: Hi, Connie. It's Mark Casciari, and Eli Gottesdiener is
here as well.
CONNIE: (Via speaker phone) Wonderful. If you'll hold on just a moment,
I'll transfer you in to the Judge.
MR. GOTTESDIENER: Okay. Well, wouldn't you want him to hear what the
Judge has to say?
(Whereupon, the following conference call with the Judge was had.)
I don't know if you want this on the record. I can record it or you have
your court reporter there, but let's find out who's on line first.
MR. CASCIARI: Judge, first of all, you have two other individuals in
here.
Is Mr. Maxam stepping out? There's a witness who's stepping out now.
Okay.
MR. CASCIARI: You have another lawyer with Mr. Gottesdiener's firm Steven
Cohen. And my name is Mark Casciari. I represent the defendant plan, and
this is on the record through our court reporter here in Chicago.
MAGISTRATE JUDGE CROCKER: Which is fine.
All right. I understand you're having some concerns with the deposition
and you would like the Court to referee those concerns. So who would like
to start, please?
MR. CASCIARI: Your Honor, this is Mr. Casciari. I would like to start if
I could because I was the one who started the call. MAGISTRATE JUDGE
CROCKER: That's fine.
First and foremost, he will not permit the witness to finish his answer
to questions if he doesn't like the way the answer is proceeding.
And those are my principal concerns and I could refer the Court to the
interchange we had before I made my phone call and you could get a feel
for what I'm talking about.
I will also add that if Mr. Gottesdiener does not like what the witness
is saying, he physically lurches towards the witness and creates a very
hostile environment for a deposition.
MAGISTRATE JUDGE CROCKER: All right. So why don't you read me your
excerpt and then I'll hear from Mr. Gottesdiener in response.
MR. CASCIARI: Can you take us back to before I made the phone call to the
clerk? Could you find it on the tape?
MAGISTRATE JUDGE CROCKER: Well, you know, don't really need to because
I'll hear from Mr. Gottesdiener, but I think the ruling is going to be
the same no matter what.
But let's find out what Mr. Gottesdiener would like to say. I'm sure he's
got his own perspective on what's been happening.
The prior deposition was an expert who the Court would be surprised to
hear is not only an actuarial expert but also is a lawyer. And if one can
think about the problems that could come up when you have a lawyer
questioning a lawyer, you know, the Court can imagine and I'm sure has
had some cases like that.
The deposition went fine. One of the reasons the deposition went fine is
the witness doesn't do this as a profession. Another reason the
deposition went fine is that there was other defense counsel there that
understood the rules about making speaking objections.
In this deposition things are not going fine, Your Honor. What's
happening in this deposition is this is of a PhD economist. For 25
minutes, because, in effect, and this is my perception, the witness was
absolutely flummoxed about an extremely basic question about the way in
which this plan operates. He's trying to peg a crediting rate to minimize
damages, an expert, by the way, Your Honor, who has charged the defendant
a quarter of a million dollars for his 13-page report.
I then change the question and I say, “In this Plan how would it arrive
mathematically at this result?” Very simple. He doesn't know the answer.
When he took a break after about a half hour I think he finally realized
what he needed to say. I changed the facts again before that break. I
said, “In any plan mathematically.” He kept saying, “As I've answered
before.”
MAGISTRATE JUDGE CROCKER: Okay. Well, Mr. Gottesdiener, let me ask you
this -- and I think either one of you can answer it. It's a housekeeping
question. Is this a discovery deposition or is this a trial deposition
that the parties are going to have to edit and present at trial?
We don't get them in every case. We don't even get them in a small
percentage of our cases but we do get them a couple three times a month
and the Court is always put in an awkward position because I'm not there.
I can't watch it happen like I can in a courtroom and determine where the
equities lie.
All I can do is remind everybody what the rules require and then give
everyone the opportunity for after-the-fact relief if, in fact, what
they're claiming to be true continues to occur after the Court gets off
the telephone.
So, again, I'm not going to pretend this is rocket science, but let me
just remind and direct the parties that this is what has to happen. First
of all, the witness has to answer the question actually asked and can't
just filibuster.
Mr. Gottesdiener, you obviously know how to ask questions. And if this is
a discovery deposition and if you're posing open-ended questions, then I
think you have to take an open-ended answer even if it's repetitive.
If you want to make it clearer and get shorter answers, then you might
have to switch to leading the witness or asking yes or no questions and
then asking for follow-up, but you know that. There's really nothing the
Court can do to require the witness to stop answering just because you
think he's filibustering or doing something else.
But you're the master of your questions and the witness is the master of
his answers and there's really not much the Court can do about that.
As for compound questions, again, I'm not there. I can't referee those on
a question-by-question basis, but I think we all know as a matter of
common sense and just trial practice that if a question is compound, then
you're going to get a compound and probably a confusing answer.
So, Mr. Gottesdiener, if, in fact, that's happening, and I'm not finding
that it is, the best way for you to get your record is to break this out
a hit more.
Mr. Gottesdiener, if that means that sometimes you just have to listen to
a 15-minute answer to a question, that may be what you have to do. But
the reason I'm not overly concerned about any of this is that if this is
merely a discovery deposition then the parties have the opportunity to
fine tune this and make it more usable for the jury, if we get that far.
And, again, we're simply assuming for today's purposes we get that far. I
have no idea if this case is going to trial or not or why it might not
get there.
So, Mr. Gottesdiener, you do have the right to stop an answer but not by
interrupting and certainly not by yelling at the witness. Just give him
the high sign and, Mr. Casciari, your witness then has to stop talking
because the question is being asked by Mr. Gottesdiener. If he's
satisfied with the answer or if he's done with what he's heard, then he
gets to say so.
I think that's all I'm capable of providing at this point. Let me just
reemphasize a point that if after this is all said and done either party
feels sufficiently aggrieved and you think you're entitled to your costs
or something else, you can always file a motion with the Court, provide a
transcript of the deposition, and I will be in a better position to call
the balls and strikes at that point.
But based on what I'm hearing from both sides, the best I can give you is
a sort of general overview that I do expect both sides to follow.
MAGISTRATE JUDGE CROCKER: Mr. Gottesdiener, I'll let you start. Any
additional input, questions, or concerns about where we're headed?
MR. GOTTESDIENER: Yes, Your Honor, and I apologize because I -- you know,
everyone lives in their own world. This is not going to a jury under any
circumstance. This is an ERISA class action involving --
MAGISTRATE JUDGE CROCKER: I'm sorry. And I did not focus on that. But the
point is --
MR. GOTTESDIENER: But it's not a discovery deposition in the sense that I
--
MAGISTRATE JUDGE CROCKER: Don't worry about that. What I'm saying is if
it's a discovery deposition, you haven't lost your opportunity to present
the evidence in a more meaningful form and to get rulings from a judicial
officer --
MR. GOTTESDIENER: Your Honor, I'm sorry to interrupt, but -- I'm sorry to
interrupt.
What I'm trying to get across to the Court is the schedule was we were
required to submit our expert reports. It's not discovery at all. This is
not discovery in the sense of obviously I don't know if Judge Crabb is
going to want to hear from anybody, but I don't think she is.
We were required to put in our expert reports first and they then put in
their reports a month later commenting on ours. We have no opportunity
under the scheduling order to put in a rebuttal report.
We are taking the deposition essentially to move for summary judgment and
the issue in the case is really damages and how much of damages and we
are -- I've been doing my darndest to ask close-ended questions, to --
you know, once in awhile, sure, I have an open-ended question but it's
not for the purpose of discovery. It's for the purpose of ultimately
demonstrating that the witness is making things up.
My questions are very focused. I should also note, Your Honor, I totally
disagree with the characterizations of, you know, what I'm doing but, to
put it in context, this is, again, a professional witness who right from
the get-go before there was any dispute about anything he closes his
eyes, literally. There have been questions about that.
You know, he will not look at me. This has nothing to do with me. I
didn't say anything before -- he just immediately closes his eyes, looks
away, and that I want the Court to know is part of the context.
I also would ask the Court to remind counsel that objections are not to
be speaking objections because the witness, again, who is very practiced
at being a witness immediately then incorporates, you know, asked and
answered, “Oh, well, I already answered that” and doesn't -- doesn't
answer the question. He actually never did answer the question, but he
just goes on a soliloquy and then it's encouraged by improper objections.
Under the rule the objections are to be made as in a courtroom, and he's
either to instruct him not to answer because of some privilege or he's
just to identify form and then stop. That's not what's been going on.
What's been going on is Mr. Casciari has been extremely vocal, very loud,
and making all kinds of gestures and interrupting. And I didn't bring
that up first but there's plenty of that. So you've got effectively a two
on one.
And I am from Brooklyn but that's not what's going on. What's going on is
we've got a quarter-of-a-million-dollar witness who won't look at the
questioner, who closes his eyes, looks away, stares at the report when
his eyes are open and defense counsel who is absolutely obstructing the
deposition and a prior deposition that went swimmingly because the other
counsel understood the rules. So there was no such problem.
MAGISTRATE JUDGE CROCKER: I'll let Mr. Casciari speak in a moment, but
let me just pick up on one point.
I mean, as you pointed out and as we all know, the only reason to
instruct a witness not the answer is a claim of privilege. Certainly
speaking objections are not to be countenanced.
Just keep asking your questions, get your answers. And if he starts
veering off in directions that you think are inappropriate, you have the
right to make him stop and Mr. Casciari will have to -- because this is
your deposition.
Mr. Casciari, what else did you want to tell the Court, if anything at
this point?
MR. CASCIARI: First of all, Judge, just if you could understand one of
the key reasons for the witness to close his eyes was to concentrate and
also react to the physical proximity of Mr. Gottesdiener, especially when
he lurches to the witness. It's quite -- they're quite close together.
MAGISTRATE JUDGE CROCKER: Why? Why not just get a bigger room and a
bigger table?
MR. CASCIARI: We have a big enough room and he's just positioned himself
at a table very close to the witness and if he could move back five feet
that would probably help a little bit, two feet, three feet.
MAGISTRATE JUDGE CROCKER: Well, the rule I would use in a jury trial, and
I understand, Mr. Gottesdiener, this is a bench trial with Judge Crabb,
but the rule in my courtroom is nobody gets close enough to touch the
jury rail physically. So you have to be at least arm's length away. If
you stretch out your arms, you cannot touch the witness.
MAGISTRATE JUDGE CROCKER: Okay. Other than that, I don't care where you
sit.
MR. GOTTESDIENER: Your Honor, not only -- not only am I well beyond that,
but there's a whole chair and a box of documents separating the two of
us. MAGISTRATE JUDGE CROCKER: Well, then, I'm not worried. That's all I
would require.
MR. CASCIARI: Right. Your Honor, you have to understand the physical
layout of this room and the lunching forward that Mr. Gottesdiener has
been doing towards the witness to appreciate my point.
Secondly, I think you said earlier that when Mr. Gottesdiener wants to
cut the witness off from an answer -- and I do not believe this witness
at all can be characterized the way that he's been characterized by Mr.
Gottesdiener, not in the least. I think his answers are succinct and to
the point. He simply cant get them out of his mouth and --
MAGISTRATE JUDGE CROCKER: Mr. Casciari, Let me interrupt and add this as
a qualifier and then you can continue. So hold your thought.
To the extent, then, that the witness wants to amplify his answer in an
affidavit in response to whatever the transcript says, I can't imagine
that the Court would forbid that.
Now, I'm not the decider on summary judgment, but, again, both sides are
entitled to make the best record available. If Mr. Gottesdiener thinks
he's getting a nonresponsive answer, he can hold up his hand and stop it.
You're entitled to note that for the record and if you think that your
witness has more to say that's actually responsive, you won't be
forbidden later from putting that in.
Again, it's very hard for the Court to micro-manage this because normally
the parties can talk this through. And I take it on faith that the last
witness who played better with both sides got through this swimmingly --
MR. CASCIARI: I'm sorry, Judge. I don't think you can call it swimmingly.
I disagree with that characterization.
MR. CASCIARI: Well, I read the transcript. I don't think anyone would
call it --
MR. CASCIARI: As I understand it, when Mr. Gottesdiener wants the witness
to stop an answer, he should put his hand up as opposed to saying “You're
not answering my question. Let me ask a different question.”
In other words, the rule that we're operating here is if Mr. Gottesdiener
or if I, for that matter, or anyone on the defense is stopping a witness
from answering a question when the witness isn't complete, the way that
will be done is by raising your hand? Am I correct on that?
MAGISTRATE JUDGE CROCKER: Yes. However, let me add this as well. To the
extent that Mr. Gottesdiener wants to make a record as to why he's
raising his hand, he may say so for the record, not as an accusation to
the witness but simply he can say something to the effect of “I'd like
you to stop. It's my view that you're no longer answering my question. I
will now pose a new one.”
MAGISTRATE JUDGE CROCKER: We're past that now. Everyone's got to find
their happy place and just do this in a more Zen-like fashion.
Mr. Casciari, I'll finish up with you and then I think Mr. Gottesdiener
wants to be heard again, but let's finish up with Mr. Casciari.
MR. CASCIARI: Judge, two -- three other points. One, may we call you
again if it gets out of hand?
MR. CASCIARI: Okay. Secondly, can we call you for other depositions down
the road in the coming weeks?
MAGISTRATE JUDGE CROCKER: But it's not an open invitation. I want the
parties to try to work this out, but if you cannot I am always available.
That's part of what I do here.
MAGISTRATE JUDGE CROCKER: I would like you to try first. I don't want to
go looking for trouble, but the door is never closed.
This afternoon I cant help you because I wont be available. I've got
other hearings in the courtroom, but that's the only reason. It's not
because of I'm tired of hearing from you guys.
MR. CASCIARI: Okay. Your Honor, can you advise us on the time? We've been
here for two hours already. It's no longer than a seven-hour deposition.
My position is that he's got five to go.
MAGISTRATE JUDGE CROCKER: I'm not going to worry about that with a
professional witness with the clock on. I cant micro-manage that.
If you think I want the deposition to conclude even if it takes nine
hours, if you think that's been abused and if you think you're entitled
to recompense for that, you can file a motion after the fact.
Usually the parties get along better and they work it all out and there
aren't disagreements. But if the Court has to intervene, the Court's
usual answer, which I can give you here, is seven hours is presumptive
but it's not dispositive.
MR. CASCIARI: Okay. My last question is I make a request that I can bring
a tape recorder to the deposition just so that I have a tape recorder as
evidence of what's happening here and down the road perhaps the Court
could hear the tone of voice that we're experiencing.
MAGISTRATE JUDGE CROCKER: I think that's something you should ask your
court reporter to do. If you're not videotaping these, I think many court
reporters have the capability for audio recording. I'd rather have it
done by the neutral because I can just see where this is headed. You
know, there's going to be allegations that it was cherry picking or
something like that and I just don't want that to happen.
MR. CASCIARI: Mr. Gottesdiener just flashed his hand in front of my face.
MR. GOTTESDIENER: That I exactly said we went through this, Your Honor,
before. I took out the rules. I read him Rule 30, and he said he didn't
know what I was talking about.
He brought somebody, Jose, from his law firm here and he started taping
and, you know, we went through all this and I said exactly what the Court
just ruled.
MAGISTRATE JUDGE CROCKER: Well, let me suggest this. You can say
“withdrawn,” but if the witness continues to close his eyes because
that's how he thinks, then it's going to be up to Mr. Casciari to gently
touch him on the elbow or shoulder or whatever when Mr. Casciari sees
your hand go up.
Now, I'm not going to cancel this deposition because apparently this
witness costs a lot of money, but I want you all to try a little bit
harder to make it work under the directions I've just given you.
The only available relief you've got now is after the fact and I will
call it the way I see it at that point and you won't know until then if
you're the sanctioned party or not. And if it comes down to it, the
sanctions could be severe for either side.
I'm very hopeful that we never get there. I want this thing to finish
out. I want the questions to get asked and answered, and I want you all
to get home in time for dinner with your families or whatever your plans
are tonight, but I want you all to make it work. You guys are trained
professionals, and you've done this before.
Mr. Gottesdiener, I don't know if you had anything else at this point?
MR. CASCIARI: I'll sit next to him. I'll sit next to him
I'm just wondering, Your Honor, if- all I would ask the Court is that --
certainly I will start to try to use the hand if that's -- but he's not
looking at me and so there's -- then there's the whole --
MAGISTRATE JUDGE CROCKER: Mr. Gottesdiener, now we've descended from the
ridiculous into the sublime and maybe that's a good place, but I don't
think so.
Make it work. Okay. Everybody stay calm. Stay focused. Make it work
Understood?
MR. GOTTESDIENER: Let's go on the record for this point. I need to say
the Judge has spoken. I urge counsel if he wants to talk to his witness
about what the Court ruled and his reasoning, he should take a moment and
take it outside.
If he wants to instruct him about what the Court said in front of me,
we're just going to get into more debate about what the Judge just said.
I don't think that's productive. I think we should take a moment and the
witness should go outside with counsel because I'm sure based on what's
occurred we're going to have a different perception of what the Court
just ruled. What he ruled is what he ruled.
MR. CASCIARI: Mr. Warther, when Mr. Gottesdiener asks you a question and
you haven't finished your answer and he raises his hand, you are to stop
with your answer.
If your eyes are closed, I will touch you on your leg. All right?
MR. CASCIARI: The Judge said down the road you can supplement that answer
with an affidavit if necessary. Okay?
BY MR. GOTTESDIENER:
MR. CASCIARI: Excuse me for a second. Could you mark on the tape where
the Judge left off roughly in case we have to go back to it?
Q. Why don't you have an opinion as to whether using the 30-year treasury
rate to reflect the value of future interest credits properly reflected
the value of those credits?
A. Yes.
Q. Okay. I want the record to be clear that you are saying that you
understood the question which literally was “Do you have an opinion as to
whether using the 30-year treasury rate to reflect the value of future
interest credits properly reflected the value of those credits” to be
asking you about the discount rate?
Is that a question?
THE WITNESS: That's correct. That's the way I understood your question.
BY MR. GOTTESDIENER:
Q. Your answer to that question -- I want to talk about your answer and
statement that you understood me to be asking about the discount rate.
Okay. Do you have that in mind?
A. Yes.
Q. How did you just construe a question that said I want to know if you
have an opinion about whether the 30-year treasury rate reflected the
value of future interest credits and whether it did properly reflect the
value of those credits, how did you understand that to be a question
about the discount rate?
THE WITNESS: Well, first of all, it's because the 30-year treasury rate I
had in mind reminded me of the 417(e) and I thought that that's what you
were talking about.
BY MR. GOTTESDIENER:
A. That is not clear to me, and we're quickly getting into, you know,
legal issues here because there's a history of where this comes from and
how it's interpreted. So it is not clear to me why that is mandated.
Q. And, so, it's your belief, though, that it's mandated that the 30-year
treasury be used?
A. Because I was keying on the word “value” and when you talk about value
it sounded like you were talking about the present value of those future
interest crediting rates. And the 30-year treasury rate as mandated by
417(e) is an essential part of that calculation.
Q. Okay. I don't believe you are addressing my question when you say
“present value” because would you not agree that the second leg of the
present value calculation bringing it back to the present is using the
mandated rate?
Q. The second leg of the present value calculation you just referenced
uses a mandated rate, correct?
A. That's my understanding.
Q. So I was asking about whether or not the use of the 30-year treasury,
which you had before the break said was one of two ways you identified
that the Plan could mathematically end up paying the account balance,
whether you had an opinion as to whether use of that rate properly
reflected the value of future interest credits, and I'm still not
understanding how you could have rationally been thinking that I was
talking about the discount rate.
MR. CASCIARI: Objection.
BY MR. GOTTESDIENER:
Q. Could you please articulate what thoughts went through your head when
you told me that your answer was not your answer because you had
misunderstood and you were thinking that I was talking about the discount
rate?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. Why would I be asking whether use of the 30-year reflected the value
of future interest credits properly?
THE WITNESS: That doesn't make any sense to me at all. I'm sorry. I just
can't understand that.
BY MR. GOTTESDIENER:
Q. All right. Well, I will try it again because I don't understand how
you could have confused a question that said whether use of the 30-year
as the projection rate to reflect future values, how could you have been
thinking I was asking about the 30-year treasury discount rate which is a
mandated rate?
THE WITNESS: The way you just put the question was not the way you put
the question originally, so...
BY MR. GOTTESDIENER:
Q. Well, then, tell me -- I disagree, but if you could please just tell
me -- the way the question was put originally, I have it written out and
I'll read it to you.
THE WITNESS: As best I can reconstruct it, I was keying in on the words
“reflect the value” and I took that to mean the present value calculation
and, therefore, the 417(e) rate is a critical part of that calculation.
And, so, you could reasonably say does using the 417(e) rate, you know,
reasonably reflect the value of the interest crediting rates.
BY MR. GOTTESDIENER:
Q. Despite the fact that you have said you knew at the time you answered
the question that it was a mandated rate by law?
Q. And using the mandated, the 417(e) rate, putting aside the mandate,
just as an economic matter you're saying is wrong?
BY MR. GOTTESDIENER:
Q. And have you thought -- did you have this thought that use of the
mandated 30-year treasury in a plan that uses a risky interest crediting
rate like this one is wrong, have you thought about that before just
giving your answer just now?
A. Yes.
A. Yes.
Q. Mr. Altman, did you speak with him about your view that use of the
417(e) rate as the discount rate in this case is wrong?
A. I don't recall.
(Brief interruption.)
BY MR. GOTTESDIENER:
Q. I'm putting my hand up because I'm not asking did you research the
issue of your belief that it was wrong. I'm asking did you research the
issue of, well, is there anything that can be done about the fact that
economically this doesn't make any sense?
(Brief interruption.)
BY MR. GOTTESDIENER:
Q. It's fair to say that it's your view that using the 30-year treasury
as a discount rate in this situation is economically nonsenseable?
Q. How does that factor into any of the work that you did or the
conclusions that you've reached?
Could you succinctly reiterate the point you were making as to how vis-a-
vis this interest crediting rate, the use of the 30-year doesn't make
sense, just so I hear it again?
A. Because the 30-year treasury rate is a riskless or near riskless
discount rate and it's appropriate for discounting riskless cash flows.
However, the cash flows to the interest crediting rate are risky and,
therefore, it's an inappropriate rate for discounting risky cash flows.
Q. So when you use this inappropriate rate for discounting risky cash
flows when in this situation a participant is asking for a cash-out,
you're, in effect, putting your thumb on the scale and overvaluing the
present value of the future interest credits?
How is the overvaluing the fact that there is this putting the thumb on
the scales in favor of the participant reflected in your report as an
economic matter?
Q. By doing what?
A. I can't think of any other ways off the top of my head now.
A. I believe that's what we've been saying a number of times here, yes.
Q. And I thank you for your answer but you said “we”. I just wanted to
make sure that's your answer?
A. That's correct.
There may be other reasons because there are many legal considerations
here. There may be actuarial considerations which make it the correct
rate, but from my perspective that's not true.
Q. From financial economics it's just as we went through that it's wrong
to discount at the 30-year, it's -- it's also just wrong to project this
risky interest crediting rate at the 30-year treasury, correct, just as a
matter of financial economics?
So it's not clear to me that you couldn't justify using the 30-year
treasury rate as a projection rate to compensate for this tension.
Q. If the law says that one side of the equation is governed by statute
but the other side of the equation is governed by financial economics,
you agree that it's not proper to use the 30-year treasury?
BY MR. GOTTESDIENER:
Q. It's a financial economics question. I'm just asking you the other
side of the same coin.
Q. Could you answer what that is because I don't know what that is?
You agree with me that putting aside -- let me say it another way. You
just gave an answer that I thought is helpful to include in this
question, which is you said that you could justify projecting at the 30-
year to compensate for the mistake, the financial economic mistake, of
using the 30-year treasury, right?
A. That's possible.
Q. Okay. And I grant you that as a matter of logic that because you're
using -- and I want to make sure you're in agreement with me that I'm not
getting this wrong, that if you are forced to use this nonsensical
discount rate as a matter of financial economics, in fact, you would go
further? You would say you actually should use the 30-year as the
projection rate to correct for the other mistake? Is that fair just as
financial economics?
A. No, that's not really fair because then the projection rate would be
correct in the sense that it gives you the correct answer.
Q. And aren't you just really saying the same thing I just asked in my
question that you're going to arrive at the right result by taking the
wrong rate and figuring out how to mirror the error and cancel out the
error, right?
A. Yes.
Q. No, no.
Q. Okay. I'm not asking that. I'm telling you -- forgot about that. I'm
telling you who knows what the discount rate is. You're just being asked
the projection rate. Forget whatever the discount rate is. You would want
to get the projection rate right as a mater of financial economics,
correct?
Q. And you wouldn't and you didn't use the 30-year treasury to project
future interest credits in this Plan, would you?
A. That's correct. And I said that before, that I arrive at what I arrive
at and it is not equal to the 30-year treasury rate, but I can understand
that in other circumstances or with other approaches somebody might
arrive at the 30-year treasury rate as being correct.
Q. Okay. I think you are close to answering, but I think you're still
importing law.
When you say you can't agree with it, you mean only that you can't agree
in the sense that if you were being asked to come out with the right
present value and you were being forced to use the 30-year as the
discount rate in this Plan, as a matter of financial economics you would
want to adjust your projection? That's what you mean by caveating?
Q. What are you -- this is not that complicated. What is it that you
mean?
THE WITNESS: It's getting quite convoluted here because there's an entire
legal layer going on here as to what is given, what is not given, what
are we trying to accomplish.
MR. CASCIARI: May I suggest -- don't -- please don't stick the hand right
in the guy's face.
MR. GOTTESDIENER: It's held up, and I'm holding it up to you. Thank you.
BY MR. GOTTESDIENER:
Q. I want you to forget about the discount rate. Please forget about the
discount rate. Don't assume that this is a defined benefit pension plan
regulated by Congress. It's just an instrument, financial instrument. You
wouldn't use the 30-year treasury, right?
Q. For projection?
A. Under other circumstances with other objectives somebody might use the
30-year treasury rate and it would be consistent with financial
economics.
Q. How?
Q. Only looking at the projection rate and not considering the discount
rate, you do agree as a matter of financial economics that it would be
wrong to use the 30-year treasury, right? That's what you just said?
Q. Isn't it correct, however, that you believe that you didn't use the
30-year, your results are consistently different than the 30-year, and
you don't agree that a risky rate like this can be estimated by using a
risk-free rate like the 30-year treasury, correct?
Q. You can't justify -- you said something about legal and actuarial but
you yourself can't justify using it without looking at the incorrect
discount rate, correct? You yourself, you can't come up with any of these
caveats?
I'm asking putting aside legal and actuarial considerations and putting
aside the discount rate, you don't have sitting here now --
A. Yes.
Q. But could I ask a question about what you're just asking me here? How
is that different than putting aside the discount rate?
MR. CASCIARI: Hold it. If that's the end of your question, I object to
form.
BY MR. GOTTESDIENER:
Q. Okay. So you're just now making sure that there's no -- nothing you're
missing. When I say forget about the discount rate, would you agree that
when you say does that include present value that we're talking about
bringing -- bringing that projected value back to a present time?
A. Yes.
Q. Okay. If your task is not to consider the second leg of the equation
and just leave it to somebody else, you're just trying to get out to the
future, apart from legal and actuarial considerations as to which you're
offering no opinion, as a financial economics matter using the 30-year
treasury is wrong?
Q. Correct.
Q. Correct.
A. No.
BY MR. GOTTESDIENER:
Q. Did you -- do you -- the Alliant Plan returns are risky, right?
Q. And you said it's not appropriate to project the future value of risky
assets at the risk-free rate, right?
BY MR. GOTTESDIENER:
Q. Yes. You said it's not appropriate to project the future value of
risky assets at the risk-free rate?
A. I don't know if that's true. It's not proper to discount them at the
risk-free rate.
Q. We just -- we just went through all of this for 15 minutes about, you
know, the reason why in isolation from the improper discount rate you
would never use the risk-free rate to project this interest crediting
rate into the future is because it's a risky asset and it's not
appropriate to use a risk-free rate.
BY MR. GOTTESDIENER:
A. I don't --
BY MR. GOTTESDIENER:
Q. Right?
Q. You don't under -- what part of the question don't you understand when
the question is simply it's not appropriate to project a risky asset at a
risk-free rate? What part is hard to understand?
A. You should project it at the appropriate rate, whatever that might be.
I don't understand the question.
Q. One thing it's not -- one thing it's not, though, is the risk-free
rate?
BY MR. GOTTESDIENER:
Q. Okay. Are you undoing all of your prior answers? You want to undo all
of those?
A. No.
Q. Okay. So you agree with everything you said before these last couple
of questions that you're saying you don't understand, right?
A. That's correct.
BY MR. GOTTESDIENER:
Q. Well, isn't it actually the case that you assume this to be true? Your
whole report does?
Q. Well, what was the point, then, in saying that, because you don't say
“For purposes of my report, I'm assuming this to be true”? You just said
that the plaintiff claims.
A. This was intended to provide background to the report. This is the way
I chose to put it. I --
A. I don't have any -- I don't know that I have any disagreement with it.
Q. Well, you do --
Q. Well, actually, I don't see the point of why you said that that way.
BY MR. GOTTESDIENER:
Q. So I'm asking can you tell me -- or -- or did the report get written
in such a way that you didn't take the care to say I assume that this
allegation is true but you're saying that's what you meant?
Q. Okay. So --
THE WITNESS: I'd say that the tenor of the report is that I accept it
because I use it in various ways throughout the report.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. And it's at the heart of your whole project, the assumption that that
assertion is true?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. You already went through the report. Can you answer the question?
I did not specifically state in exactly the words that I accept this to
be true, but I think it comes out rather clearly in the report.
Q. But you don't at -- near the end of it say “I accept this for the
purpose of the report,” right?
BY MR. GOTTESDIENER:
Q. -- is there?
THE WITNESS: It's a true fact that the plaintiff claims this.
BY MR. GOTTESDIENER:
Q. And --
Q. But the only relevance is that you accept it but you don't say that,
correct?
Q. What's the relevance, then, sir, if it's not solely that you accept it
for you to make the statement of what the plaintiff claims?
Q. Now, in Paragraph 6 you say that Mr. Lawrence Deutsch, Mr. Deutsch,
submitted an expert report in this case, the Deutsch report, in which he
concludes, among other things, that in no event should the interest rate
for projections be less than 8 percent.
A. I see that.
A. Yes.
A. I have read his report. I did not make a great effort to understand
everything in his report.
Q. How about this, did you make any effort to understand his assertion
that in no event should the interest rate for projections be less than 8
percent?
Q. What is it?
A. I don't recall off the top of my head. I did not commit it to memory.
Q. Did you ever understand the basis upon which he makes that assertion?
Q. Okay. You never knew what the basis for his assertion was, yes or no?
A. Yes, I've read his report. I understood what he claims to be the basis
for this.
Q. What is it?
Q. Why do you say that Mr. Deutsch says this if it is not relevant to
your report?
Q. You have nothing more specific than those answers you've been giving,
that it's useful background, right?
Q. But you don't know -- whether they're inconsistent or not, do you have
an opinion that the basis for his assertion is incorrect?
Q. So you put something into the report about what Mr. Deutsch is saying
and you can't justify putting it in if it turns out that that statement,
in fact, has nothing do with the Maxam report?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. If you assume that, what is that doing in your report, that statement?
THE WITNESS: I'm not sure how to answer that because that's an incorrect
assumption as the Deutsch report does refer to the Maxam report, and so
it is relevant.
BY MR. GOTTESDIENER:
Q. Excuse me. You're not listening. I said the percent assertion has
nothing to do with the Maxam report. Also I asked you to assume it to be
true for purposes of the question.
So on two grounds I would ask you to please listen to the question again
and then answer it.
Why is that in there? If you assume it's true that Mr. Deutsch's
assertion about that the projection rate shouldn't ever be less than
eight has nothing to do with anything in the Maxam report, why is that in
your report?
BY MR. GOTTESDIENER:
A. Yes, I did.
A. That's correct.
Q. And you would say that you were the one who personally wrote every
sentence and assertion in your report?
A. I believe that's true. I don't want to rule out the possibility that
somebody helped me draft some part of this at my direction.
Q. Okay. Well, let's look at it and you tell me what are the -- what's
the part that might have been drafted by somebody else?
Q. Okay. So as you sit here now you believe that you wrote all of the
report, correct?
A. That's not quite accurate. I believe I did, but, you know, it's
possible that somebody drafted some portions of this at my request. It
would have been very small.
Q. Okay. And what would it have related to? What small part of it would
it have related to?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. Okay. So you're remembering that there was some small portion that you
may have delegated to somebody else?
Q. So you're speculating?
Q. Well, you know, it's possible that pigs fly, but you don't say that --
you're not going to caveat that pigs fly.
BY MR. GOTTESDIENER:
Q. I'm asking what is the basis -- is it your habit for you to delegate
some small portion of your expert reports that are in length 13 pages or
approximately that length to other persons?
BY MR. GOTTESDIENER:
A. Of any one.
Q. Okay. Because you have in mind the question is what is your habit?
A. Right. And I was trying to answer that with regard to my habit with
regard to other reports.
Q. And you were searching your mind and what did that search yield?
A. That's correct.
Q. Now, in Paragraph 7 you say that I've been asked by counsel for
Defendant, Seyfart Shaw, LLP, (“Seyfarth”), to examine the economic
evidence with regard to the claims of Plaintiff's experts, Dr. Maxam,
and, to the extent they rely upon his findings, Mr. Deutsch and Mr.
Lowman.
I'm confused. What is the purpose of your report, to examine the economic
evidence?
Q. So you were just asked to read some reports and examine the evidence
in those reports?
Q. Okay. So you were asked to examine the Maxam report and see if there
was other economic evidence that you could find regarding the claims that
Dr. Maxam made; is that fair?
A. No. I was asked to examine the economic evidence with regard to the
claims of Plaintiff's experts, and I think that's pretty clear.
Q. Well, I'm asking. So, you know, you then added in that you went and
looked at other things. You looked for evidence, economic evidence, with
respect to their -- with respect to Dr. Maxam's claims that weren't
contained in his report?
A. Yes, I did.
Q. What did you do for that? On that basis what did you do?
Q. So you're saying -- did you -- well, let me ask you, you continue on
in Paragraph 8 you reached these opinions and these are opinions
regarding what?
Other than you explaining in your report why you liked the results
better, on what basis do you make this statement that your method is more
accurate?
A. I look for all the reasons outlined in this report because it does not
require an estimate of the expected returns to stocks in the future,
which is a highly uncertain estimate. It also does not have the biases
that Dr. Maxam has in his analysis.
Q. But I'm asking -- you say that your method is more accurate. Do you
have any statistical analysis or results of any tests that you performed
to back up your statement that your method is more accurate?
Q. And you don't have any statistical proof or any specific results of a
test that you ran to compare the accuracy of the results that you reach
and the ones that Dr. Maxam reaches?
A. I did the work that I did, the tests that I did, and that's the basis
for this statement.
Q. So there's no basis for you to say that it's more accurate? You have
nothing statistical, numerical, or an output of any tests where you
compared your results with his, correct?
BY MR. GOTTESDIENER:
Q. Where is it?
A. The basis for this statement is what I've laid out in my report.
Q. Where's the test? Where is the test? Did you attach a test where you
said my results are this percent accurate and his results are this
percent accurate; therefore, mine's more accurate? That's not included in
your report, correct?
BY MR. GOTTESDIENER:
Q. I'm asking.
THE WITNESS: This gets back to what we were saying before about how under
different approaches there may be some reasons to use something
different.
BY MR. GOTTESDIENER:
Q. Okay. Putting aside, you know, deus ex machina legal rulings and so
forth, as a financial economics matter it would be wrong in your opinion
to use a rate lower to 6.59 percent, right?
THE WITNESS: I would want to refer back to the long series of questions
we had before.
BY MR. GOTTESDIENER:
Q. I don't want that. I'm raising my hand, and I'm asking you a question.
And the Court was very clear, you have to answer questions and you can't
start incorporating by reference.
MR. CASCIARI: Wait a minute. Wait a minute. The Court said he can answer
questions and if you don't like it --
MR. CASCIARI: He can answer questions to the best of his ability and then
you move on and ask another question. That's what the Judge said.
BY MR. GOTTESDIENER:
Q. Answer this question, if you will, please. Do you not agree that it
would be wrong to use a rate lower than 6.59 percent if we're not
importing any corrections of the discount rate?
THE WITNESS: Okay. In your question you implicitly talked about other
considerations that might make other discount rates appropriate, and I
want to acknowledge that there may be other considerations which can make
other discount rates appropriate.
Within the particular context of the analysis I have done, which is, as
we talked about before, you know, narrow in scope, then in this
particular context using a rate less than 6.59 percent would not be
appropriate.
BY MR. GOTTESDIENER:
THE WITNESS: It doesn't make any sense to talk about predicting the past
when you're assuming the past.
BY MR. GOTTESDIENER:
Q. I'm asking.
Q. And you just- so you don't dispute the reasonableness of Dr. Maxam's
methodology, you dispute some of the assumptions?
A. That's close to accurate. The methods he's using are used by various
reasonable people in some circumstances. So I don't believe that the
methodology itself is, you know, unreasonable in all circumstances.
Q. Well, how about -- I'm not following really what you just said because
you seem to start by saying I agree that his methodology is reasonable,
but I don't agree with all of his assumptions and then you did -- didn't
stop there. You started veering off and saying that you wouldn't use that
in this circumstance. Is that a fair summary?
A. Not really. I mean, I say what I say is that there are two --
BY MR. GOTTESDIENER:
Q. I'm asking you what your opinion is. Okay. So you don't have to look
at me, but I want to know what you think.
A. That's part of it, and also it requires him to estimate something that
is very difficult to estimate.
Q. And the circumstances that it's reasonable under is when the financial
economist is using reasonable assumptions?
A. That's not true because it also has the problem of uncertainty as that
you're estimating something that's highly uncertain and also
controversial.
BY MR. GOTTESDIENER:
Q. I said you agreed that both you and he have the problem of
uncertainty, right?
A. That's correct.
A. And I also raise doubts about his assumptions about how he calculated
the expected future returns to stocks, that there is a large and
contentious literature with regard to that and that raises a problem with
his approach.
Q. But isn't --
Q. So -- but you said that in your opinion the -- the appropriate equity
premium to assume is the one that Cochran assumes and that you modified
Maxam's report to account for?
Q. So you're saying you have -- you don't have an opinion as to what the
correct equity premium is?
Q. Okay. I'm not asking that you don't have to. I'm saying that, you
know, with all due respect you do have to.
I'm asking you do you have an opinion as to -- I mean, this is your area
-- what is the correct equity premium?
Q. Yeah.
Q. Okay. So he reflects just one view, and you picked him because you
just drew him out of a hat?
A. That's correct.
But you use it and, you know, in the end of your discussion of Dr.
Maxam's approach and results you effectively have the two of you joining
together in coming out with approximately the same result if there is
modifications of the assumptions that you don't think are reasonable that
he makes?
THE WITNESS: That's not quite true. What I'm doing is showing that the
difference between his results and my results can be explained by the two
factors that I focus on, one being the expected -- the equity risk
premium and the second being the volatility.
BY MR. GOTTESDIENER:
Q. Well, if the Judge says, you know, I like the Maxam approach but I'm
open to thinking about other assumptions, you don't have an opinion as to
what assumptions should be used, right?
THE WITNESS: That's correct. I'm not expressing an opinion about that.
BY MR. GOTTESDIENER:
Q. But -- and you don't have -- and you acknowledge that apart from his
assumptions and apart from the problem of uncertainty that your model
also has that the approach is a reasonable one?
A. -- if executed correctly.
Q. Okay. Well, you know, when you say under some circumstances if
executed correctly, you know that there are people who under the
circumstances of this Plan used his approach, don't you?
A. I'm aware that people in this Plan used a similar approach, yes.
Q. Yeah. And what did you do to educate yourself about the approach that
they used?
Q. And what method did Towers Perrin use to make that determination?
A. They used a method similar to Dr. Maxam's but not exactly the same.
A. Yes.
Q. And did you read that and say, you know, I -- I think they did it all
wrong?
Q. Did you identify anything in particular that you thought they did
wrong?
A. No.
Q. Well, do you recall the value of the interest crediting rate that
Towers determined based on Alliant's asset portfolio mix at the time?
BY MR. GOTTESDIENER:
Showing you 17, this is referenced in your report. Can you turn to Page
19, please. Now, doesn't this show that the expected interest crediting
rate for the Plan over 15 years is 8.23 percent?
Q. And you saw this. Did you look at any other studies that projected
future interest credit rates for this Plan performed by or for Alliant?
A. There were other -- other reports similar to this that I looked at.
A. I believe so.
A. That's my recollection.
Q. And you're saying that you think this was something that was done by
Towers but you're not sure?
A. I don't recall.
A. Yes.
Q. Did you ask anyone in connection with the case to provide you with
materials like this once you realized that there was an asset liability
study using a methodology the same as Dr. Maxam's to find out whether
there were other such reports?
A. I believe I did.
Q. The documents listed, and so that would have included the documents
you just referenced that you think was from around 2000 that also reached
the same result?
Q. And without getting into any of the details, you made this request of
counsel?
A. Yes. Generally I asked for documents from counsel and they provided
documents.
Q. And you wanted to get all the information you could because, as you
said in the top of your report, that, you know, you were asked by counsel
to look at the economic evidence that exists regarding the claims that
Dr. Maxam made, right?
A. I asked for documents. These are the documents I received. I'm not
sure how else to answer that question.
BY MR. GOTTESDIENER:
Q. You asked for documents because you put it as your purpose to find
out, you know, hey, is there any economic evidence to back up what this
guy is saying. You wanted to know if there was such evidence, correct?
BY MR. GOTTESDIENER:
Q. You wanted the evidence no matter how the chips fell, right?
A. That's correct.
Q. And this chip falls in the Maxam camp and corroborates what he did and
the results he reached, correct?
THE WITNESS: I think this contradicts his report because this is finding
in 8.23 which is below his lowest number.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. But you don't have any reason specifically that you can give me here
now to say this is different than what he did in form or substance other
than the different date inputs that it would have relied upon?
Q. Now, why -- what is -- does the -- did you have a problem -- do you
have a problem with the model that Maxam used? I didn't hear that before.
THE WITNESS: I have the comments that I've laid out in my report.
MR. CASCIARI: Well, but you've been saying that for the past 45 minutes.
Come on. One question. Go ahead, Eli.
BY MR. GOTTESDIENER:
Q. So all the things that you -- you don't cite anything in the report
that questions the model per se that Dr. Maxam uses?
A. I have the comments that I have which I've laid out in my report. I
don't have comments beyond that.
BY MR. GOTTESDIENER:
MR. CASCIARI: I am not going -- we'll reconvene another day. I'm not
going into the evening. I've got to get home. I have obligations at home.
So we're ending this thing at, I don't know, 5:30 or so. I'm just telling
you right now. We'll bring him back. The Judge said we can bring him back
and go at it again another day. I'm not going into the evening.
MR. GOTTESDIENER: I'm not sure --
MR. CASCIARI: The Judge said you can bring him back, bring him back.
MR. CASCIARI: No. I can't do it tomorrow. We'll get him back. Don't
worry. We will. Discovery is not closed for a long time.
MR. CASCIARI: When do you want to bring him back? Oh, you really do? You
want to put this in the summary judgment?
MR. GOTTESDIENER: Oh, this is great. I'll see you guys after lunch.
MR. CASCIARI: Okay. Then give me some alternative dates when we get back.
Okay.
v.
Jurisdiction: W.D.Wis.
Representing: Defendant
Present:
Gottesdiener
(718) 788-1500
eli@gottesdienerlaw.com
(312) 460-5000
mcasciari@seyfarth.com
appeared on behalf of defendant.
INDEX
VOLUME I
IAN H. ALTMAN
DEPOSITION EXHIBITS
IAN H. ALTMAN
TABLE
MR. CASCIARI: Eli, can I say something before we start? This witness has a
plane to catch back to San Francisco. We need to leave at 5:00. If we take
a half an hour for lunch, you get your 7 hours anyway.
MR. GOTTESDIENER: We can address this at some other point. I'm sorry if he
misses his plane, but we're going as long as the deposition requires.
-- by 5:00 --
MR. GOTTESDIENER: No. I'm not interested. We're not coming back. We are
here all day. You didn't give me any advance notice of it. And you're
interrupting me, and I'd like to start my deposition, please.
MR. CASCIARI: If you don't finish by 5:00, we will schedule another day,
which is what the Magistrate Judge said.
IAN H. ALTMAN called as a witness herein, having been first duly sworn,
was examined and testified as follows:
EXAMINATION
BY MR. GOTTESDIENER:
Q. Sir, let's start by seeing if we can agree on the meaning of some terms
and concepts, okay?
A. All right.
Q. First, can we agree that for the purposes of your report in this case
and for purposes of our discussion today, unless we say otherwise, we're
going to assume that IRS notice 96-8 is a controlling statement of law?
BY MR. GOTTESDIENER:
Q. Do you believe that separate and apart from your agreement to assume it
for purposes of this deposition?
A. That's a legal matter. I'm not opining on that question, but I will
assume it, as you requested.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. I understood your two prior answers that you believe it's a legal
question. But in the way that you view it, do you believe it's a
controlling question -- do you believe that it is an accurate statement of
the law?
A. I'm sorry, you asked me twice, three times. I'll give you the same
answer.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. When 96-8 came out, you didn't advise any of your clients who had cash
balance plans that 96-8 had to be complied with, correct?
Q. Tell me what client you told that to after 96-8 came out.
MR. CASCIARI: Hold it. As the Magistrate Judge said, if you're going to
interrupt the witness, raise your hand, Eli.
BY MR. GOTTESDIENER:
Q. What client or clients did you tell needed to comply with notice 96-8
after it came out?
A. That isn't quite what I said, but I advised clients to adhere to 96-8
when it came out.
Q. You can cite me two. When it came out, you didn't do anything for more
than 2 years and until you learned that there was litigation about
advising clients to follow 96-8, correct?
A. And I was prepared to identify for you two clients where after --
Q. You nodded. Could you please answer yes or no? Was my statement
correct?
Q. The two clients you're talking about are the San Francisco Opera and
the Jewish Federation, right?
Q. And you didn't tell them to do anything about their fixed 7 percent
interest crediting rate until more than 2 years after IRS notice 96-8 came
out and not until you learned that there was actual pending litigation
using IRS 96-8 as its premise, correct?
As I just testified, I don't know when I began talking with them about the
issue. I know that I advised them to consider changing, and that both of
those plans changed a few years after the notice was released.
Q. And they were changed a few years after the notice was released only
because it was only 2 years or more and only after you learned that
litigation was pending that you told your clients to consider changing
their interest crediting rate, correct?
A. Yes.
Q. I'm just talking about sequentially. It is a fact that you did not tell
either of those clients to do anything about their interest crediting rate
or consider doing anything until 2 years had passed or more and
sequentially you had already learned that there was litigation? It's a yes
or no.
A. And I'm repeating myself. I don't know when I first spoke with them
about that.
BY MR. GOTTESDIENER:
You didn't tell anybody to comply until after you knew participants had
filed lawsuits, correct? Just sequentially. I'm not asking the date.
Correct?
A. I don't know.
Q. You gave testimony under oath recently in another whipsaw cash balance
case, correct?
A. Correct.
I know when they changed. I don't know when we first started discussing
plan changes.
Q. Can you please in the answers that you're giving reference your
awareness of litigation by participants?
MR. CASCIARI: Objection.
BY MR. GOTTESDIENER:
Q. Are you denying that you only told these people they should consider or
should change their interest crediting rate sequentially after you learned
of litigation?
A. I'm not confirming or denying that. As I said, I'm not sure when I
first advised these clients to consider amending their plans.
BY MR. GOTTESDIENER:
Q. But the testimony that you gave in Traylor v. Avnet was true?
A. It was --
Q. I'm just asking you were you being truthful in your testimony?
I don't recall specifically when I first advised these clients they needed
to look at their interest rate.
A. And the issue of the notice and what the industry was doing.
Q. So you're saying that it's possible that you told them to do something
the day after the notice came out and before you knew anything about any
litigation?
A. I don't know that it was the day after, but it's possible that some --
well, I know that some time after the notice came out I advised these
clients to look at their interest rate. I don't know how long that elapsed
time was. I don't know what role the attorneys played in the process.
BY MR. GOTTESDIENER:
Are you now testifying that you told them to do something about their
interest crediting rate before you knew any participant in another plan
had filed a lawsuit with 96-8 as its premise?
I do not deny that I was aware that there was litigation on this topic,
and that would -- on the issue of crediting rates, and that would have
influenced the advise I gave.
BY MR. GOTTESDIENER:
Q. And it was only after you learned of litigation that you told your
clients to do something about it, correct?
A. I don't know.
But for now we're going to agree, you and I, that for purposes of this
discussion, notice 96-8 is controlling law, right?
Q. And we're going to also assume the relevant period of time in terms of
96-8 being controlling is for the purposes of this Plan January 1, 1998
through August 17, 2006; is that agreed?
Q. I guess you misunderstood. I'm saying the entire period January 1, 1998
until August 17, 2006, you understand that if the Plan is only operative
or benefits are paid as lump sums only after August, that it wouldn't
matter. We would just not ever discuss January through August, but it
would be encompassed in what I'm asking you to assume.
A. Okay.
A. That's fine.
BY MR. GOTTESDIENER:
Q. And you understood that when you gave your answer about August, right?
BY MR. GOTTESDIENER:
Q. Okay. So now we're clear that January 1, 1998, August 17, 2006, those
are our book ends.
A. Yes.
Q. Okay. And can we agree that notice 96-8 requires that the accrued
benefit payable as an annuity at normal retirement age must be determined
as part of the calculation of the minimum lump sum?
Q. I'm asking you to confirm if 96-8 is the law, and it's an accurate
statement, what it says in it, it is true that it requires the accrued
benefit payable as an annuity at normal retirement age to be determined as
part of the calculation of the minimum lump sum.
A. Yes.
Q. Have you done calculations ever intended to conform with notice 96-8?
A. Yes.
Q. I'm sorry, I don't understand your answer. I'm talking about lump sums,
and you're saying that you performed that calculation in an attempt to
comply with notice 96-8 while you were calculating nonlump sum benefits?
A. I didn't understand your question to be focused solely on lump sums.
Q. I guess I'm still not understanding your answer, and maybe you're not
understanding my question.
BY MR. GOTTESDIENER:
Q. Let's assume, as you said you would, that 96-8 is controlling. Can we
do that?
A. Yes.
A. Yes.
Q. When you do those calculations, you always recognize that you must know
what the accrued benefit is payable at normal retirement age in order to
accurately determine the minimum lump sum?
Q. You're still doing the calculation, the calculation is still done, you
just know the outcome?
Q. Okay. Could we just say for the moment -- we'll talk about other forms
of payment maybe -- but could we stay for the moment focused on the lump
sum?
A. Sure.
Q. Whenever you, and let's just stick with what you did as it goes to
theory of what other people may do and what other people may believe, when
you calculated benefits under 96-8 at times where you've said that you
have assumed that it is the law, every time you did that explicitly or
implicitly, you were always projecting the account balance to normal
retirement age determining the annuity before determining what the minimum
lump sum was?
A. No, that's not a correct statement.
Q. When -- again, we're now just sticking with historically what you did -
-
A. Uh-huh.
A. Right.
Q. And when did you do the actual calculations in order to prepare your
expert report?
A. A matter of a few weeks before the report was signed. So I think that
places it sometime in late summer/early fall.
Q. And when you were doing those calculations, you assumed that you were
required before calculating the minimum lump sum to project the account
balance to normal retirement age, determine the annuity under the Plan
before determining what the minimum lump sum was, right?
And so we projected the cash balance to age 65 and then discounted back,
correct.
A. Interest rates.
Q. Are you talking about a formula or were you talking about you were
given specific interest rates?
Q. Well, the interest credit -- what are the interest crediting rates that
you're referring to that you use in your report?
Q. And just, again, semantics so we can make sure we can get through this
promptly, you really don't mean interest crediting rate.
Those rates that you just referred to, those were projection rates?
Q. We're not arguing. I'm just trying to understand so that we're on the
same page.
A. We're discussing.
Q. Neither of the two rates you just mentioned actually ever were rates
that were achieved by the operation of the Plan's crediting rate formula
in any particular year that you're aware of?
Q. But you do agree that it's more appropriate terminology than saying
it's the interest crediting rate?
A. I'm not sure it's more appropriate. I will proceed with that
terminology.
BY MR. GOTTESDIENER:
If you want to -- I'm sorry, if you want to, I will refer to those as
projection rates.
Q. I've got that already, and I appreciate that. I'm just really -- I'm
really just trying to understand.
You said something. You used the term. And I just want to know did you
misspeak when you said interest crediting rates or can you identify any
time that it would be accurate to refer to either of those numbers that
you used in your calculations as interest crediting rates?
BY MR. GOTTESDIENER:
Q. If they had never actually been achieved using the interest crediting
rate formula of the plan?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Go ahead.
BY MR. GOTTESDIENER:
Q. Why?
A. I was --
Q. The Plan just -- so the record is very clear, if the Plan never
actually paid it hypothetically as a contribution to a hypothetical
account, why would that be an accurate use of that term to label those two
numbers as you say that you did properly?
Q. In the future?
A. In the future. We know that it was never specifically that in the past.
A. I'm not sure they're precisely synonymous, but they are close. And in
this usage I think they convey similar concepts.
A. Well, we already discussed that those rates were not actually ever
credited in a particular year, but they are calculations of what rate
might be credited in the future, and that rate would be used to project --
we use that rate to project cash balances to normal retirement age.
BY MR. GOTTESDIENER:
Q. Okay. What's a correct statement about that? You had your own idea that
is reflected in Mr. Godofsky's report?
A. Well, solely for the purpose of calculating the lump sum in a plan that
has a what we'll refer to as a safe harbor interest crediting rate, the
value of the lump sum will be the cash balance account.
Q. But aren't you doing that, and doesn't 96-8 require that that be done?
It simply allows in the case of the Plan with the safe harbor rate that
the actuary can use the 30-year treasury as, in effect, the proxy?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. So --
Q. But the exercise is in the background and is the way 96-8 requires the
benefit to be calculated.
It just says you'll know the answer when you look at the account balance
so you don't have to get out your calculator.
A. Again, I'm telling you in practice that that calculation is not made.
Go ahead.
A. I don't know.
BY MR. GOTTESDIENER:
Q. So you don't know in theory, you don't know the theoretical basis
behind the safe harbor rules?
When you said you don't know, you're just incapable of answering that
question?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. It just tells you that the answer is going to be the account balance;
isn't that correct?
A. I don't know. We --
BY MR. GOTTESDIENER:
Q. I've got your answer. You don't know. And you're incapable, and you've
been asked this question several times.
Do you want to think about it some more or we'll just leave it with you
don't know?
Q. Do you agree with Mr. Godofsky's assertion that in terms for terms --
in terms of projecting the account balance in a plan that has an interest
crediting rate that is, in part, based on plan asset returns, that it is
permissible or even required to project at the -- at -- using the Plan
asset return assumption that it will equal the 417(e) rate?
BY MR. GOTTESDIENER:
Q. You never thought about that before reading his report or speaking with
him about his report?
Q. And when did you first read his report, after it was finalized?
A. Yes.
Q. Did you speak with him before you and he finalized your reports?
MR. CASCIARI: You know, he was speaking -- you asked him if he was
speaking on the phone with counsel because we --
If you're instructing him not to answer, do that, and we'll deal with
that. Otherwise say “Objection, form.”
Either instruct him not to answer and we'll get on the phone with the
Judge at a break or let me ask my question.
And listen to the question. I am not asking other things that you may be
worried about. I have a predicate question. Let me ask it or instruct him
not to answer and stop interfering with my deposition. And the witness is
going to miss his plane for sure.
We also need to get on the phone with the Judge to make sure the witness
does not leave because I'm not coming back to try to fit this in when we
have other depositions to do.
MR. CASCIARI: I suggest you get on the phone with the Judge because the
witness is leaving at 5:00.
BY MR. GOTTESDIENER:
Q. Sir, did you speak with Mr. Godofsky before you and he finalized your
reports?
A. Yes.
Q. When?
A. Yes.
A. Yes.
Q. Did you learn, it's a yes or no, did you learn of Godofsky's theory
during that call?
A. Yes.
Q. Did you do anything between the time that you learned of that theory
and the time you actually read his report to investigate that theory?
A. You used the word “investigate.” The answer is no. I thought about it
some, but I did nothing further.
A. I had two weeks. I certainly didn't think about it all of the time, but
I gave it brief periodic consideration during the two-week period.
Q. Okay. And that was the first time on that call when you learned of that
theory, that was the first time you had heard of the theory?
Q. Did you speak with anyone, yes or no, other than the two people on that
call about the theory between the time you first learned of it and when
you finished your report and Godofsky finished his report and you read his
report?
Q. Anyone else you speak with about it during that period of time?
Q. So you thought about it, but you didn't speak with anyone else other
than the persons you've mentioned during that period of time, and you
didn't do any research or specific analysis with respect to that theory?
A. Correct.
Q. And then you read his report, and you had not prior to reading his
report, you had not seen anything in writing describing it? That's a yes
or no. That would include things from counsel.
A. No.
Q. After you read Godofsky's explication of the theory, did you speak with
anyone about it between that time and the time you read the transcript of
his deposition in this case?
Q. What would it take in terms of your comfort level for you to be able to
give an opinion on it one way or another?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. That's the premise of the question. So you could just assume that in
the next question I'll ask you.
BY MR. GOTTESDIENER:
Q. And, if not, what would you need to form an opinion one way or another?
BY MR. GOTTESDIENER:
A. I would read the law, I would read 96-8, I would talk to people, I
would try to learn as much about the subject as I could.
Q. Now, you list the law as materials that you considered before
finalizing your report?
A. Yes.
Q. And you talked to people before you finalized your report, correct?
A. Yes.
Q. And you did not receive any instruction that you were constrained in
the things that you needed or not, that you never received any instruction
that you were constrained in what you did to make sure that your report
was complete and accurate and covered the topics that are at issue in the
case, as you understood them?
A. Is that a question?
Q. Yes. You didn't get any -- you know, you weren't limited by -- were you
on a leash in terms of how much money you spent on your report?
A. I don't believe so. And nobody told me not to do the research you're
describing or I was describing.
Q. And nobody told you don't, you know, if you like this Godofsky theory,
nobody told you, you know, “We don't want you to have an opinion on it”?
BY MR. GOTTESDIENER:
Q. That's not my question. Nobody asked you not to form an opinion on it?
Q. Nobody told you not to educate yourself for your own purposes one way
or another as to whether or not you thought it was a valid theory?
Q. Okay. I'm asking you now to form an opinion. Do you agree or disagree
with Godofsky?
BY MR. GOTTESDIENER:
Q. Why?
Q. You need to do legal research. You said you need to read the law, you
need to read 96-8, you need to talk to people.
All of those things you need to do because you've thought about it, you've
heard it, you've read it, you've read a transcript discussing it, and you
can't form an opinion based on that.
So, therefore, it's a fair assertion that the reason you can't form an
opinion is because you actually consider it a legal opinion.
MR. CASCIARI: Objection. I want the record to reflect that this witness
has offered an opinion in a report --
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
You said that you had listened to the theory, you read the theory, you
read a transcript of conversations between counsel and the person who
holds the theory, you've thought about it, you spoke with Tim about it,
you would want to read more things about it, read the law about it, and
talk to people about it.
And sitting here now you don't have an opinion one way or another, putting
aside the fact that you weren't asked by the defense. You know that I want
to know your opinion, and you can't render one because you consider it a
legal opinion?
MR. GOTTESDIENER: You are lying, sir, and I am sick and tired of your
lies. The record will reflect -- camera, please pan on me right now. This
is what's going on.
Show how far away I am from the witness, ma'am, and then pan back to the
witness. And put it back where the witness is, and that is where we're
going to assume.
This is what happens in a deposition of professionals when a paid witness
is not responding to questions that are being asked because the person
who's paying him is making improper speaking objections.
BY MR. GOTTESDIENER:
In fact, you consider that -- you may not have thought about this before
you walked in here or heard my last two questions, but you've been sitting
there thinking about my question.
And search yourself, sir. The reason you can't give an opinion on that is
that bottom, you think that Mr. Godofsky's theory is a legal call and
you're not a lawyer?
BY MR. GOTTESDIENER:
Q. Yes or no?
A. No.
BY MR. GOTTESDIENER:
Q. Hand is up.
A. And I stopped.
Q. And -- thank you. And I now understand you to be changing your last
answer, because your last answer was no, it's not a legal opinion.
But then when I asked you so it's an actuarial opinion, you said you don't
know if it's an actuarial opinion or a legal opinion; is that correct?
BY MR. GOTTESDIENER:
Q. Is that correct?
MR. CASCIARI: Let me finish. Mr. Altman did not offer an opinion about the
subject that you're going into, and I instruct him not to answer.
MR. GOTTESDIENER: Your objection is frivolous. Are you saying the question
is calling for privileged information? Yes or no?
MR. GOTTESDIENER: You do not under- -- yes, I can. You don't understand
the first thing about law or litigation, sir.
BY MR. GOTTESDIENER:
Q. Mr. Altman, you are here to answer questions. My last question actually
was quite simple. And you waived your objection because all I asked him
was didn't you already just say you don't know if it's an actuarial or a
legal opinion? Is that a yes or no, something you can answer yes or no?
Didn't you just a moment ago say “I don't know if it's an actuarial
opinion or a legal opinion”? Yes or no?
Q. I want a yes or no. Are you -- do you want to change your testimony?
A. Given time to think about and analyze the issue, I would be competent
to identify an actuarial opinion.
BY MR. GOTTESDIENER:
Q. And that's not something that you're capable of doing having had in
advance the conversation with Godofsky and defense counsel, learning of
the theory, then reading the report, then reading the transcript.
After all of that time, you're incapable of telling in this case whether
Godofsky's theory is an actuarial opinion or not?
BY MR. GOTTESDIENER:
Q. Is that correct?
BY MR. GOTTESDIENER:
Q. Now, let's assume that the accrued benefit under 96-8 requires the
calculation of the annuity at normal retirement age to determine the
minimum lump sum.
Q. And when it's a safe harbor, we'll both agree that the assumption is
the calculation is done, you just know the answer without getting out the
abacus?
Q. Thank you. And can we agree under that circumstance that the minimum
lump sum is the accrued benefit under 411(a)(7) with the present value
determined using 417(e)?
Q. And can we agree that if the Plan provides for a larger lump sum than
the amount that would be determined under 417(e), then the Plan cannot pay
a participant a smaller lump sum than under the terms of the Plan?
BY MR. GOTTESDIENER:
Q. Right. I'm just using -- if I could interrupt, because I think it would
be quicker.
If, for example, in the Avnet case at age 65 the factors were such that
you couldn't just pay if you have a subsidy at age 65?
A. We understand. Yes.
Q. So the Plan document would provide such. Under that circumstance you
couldn't pay less than the amount called for by the terms of the Plan?
A. Correct.
Q. And still trying to get past the first page of my questions here is I
want to know can we have an agreement that we will call this the accrued
benefit, what we've been describing, this payable as an annuity at normal
retirement anal?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. Now, is there any difference between that accrued benefit and the
411(d)(6) accrued benefit?
A. I don't know.
Q. And if the client came to you and said, you know, “We're the Alliant
Plan, not in an expert witness context but as a consultant,” what would
you tell them as to whether or not there's any difference between that
accrued benefit and the 411(d)(6) accrued benefit?
BY MR. GOTTESDIENER:
A. That would certainly be one answer I would give them. I might read the
code and the regs and see if it was a question I felt that I could answer
without giving legal advice.
Q. But sitting here now you are saying that that's not a question that
you're competent to answer?
A. Without anything in front of me, no, I'm not confident to answer that
question.
Q. Competent.
A. With a P?
Q. Yes. Competent.
A. Without those texts in front of me, I'm not in a position to give that
answer.
Q. I mean, don't you advise clients with respect to that question all of
the time?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. And you can't tell me what the difference under the Alliant Plan is
between the accrued benefit we were discussing and the 411(d)(6) accrued
benefit?
BY MR. GOTTESDIENER:
MR. GOTTESDIENER: Yes. I just want to make sure that he has everything he
needs.
BY MR. GOTTESDIENER:
A. Yes, please.
Q. Okay. And if you had all of those things in front of you, you would
then need to read the Plan, read the law.
And when you did that, you would then know whether or not you could
provide an answer or whether you'd have to involve a lawyer; is that fair?
BY MR. GOTTESDIENER:
Q. Okay. Well, you -- when you read the Godofsky transcript, you had
already completed your expert report in the case?
A. Yes.
A. Correct.
Q. So you saw what his answer was. Did you agree or disagree with it?
BY MR. GOTTESDIENER:
A. Correct.
BY MR. GOTTESDIENER:
Q. And you didn't have an opinion whether or not based on his input as an
attorney having read the Plan documents and read the law, whether or not
the difference, if any, between the accrued benefit and the 411(d)(6)
accrued benefit is an actuarial opinion or a legal opinion?
A. I don't recall.
BY MR. GOTTESDIENER:
Q. I'm asking sitting here right now at the time you read the transcript
if you don't recall what you thought then, what do you think now having
read what he said, knowing that he's a lawyer, knowing that he -- that, in
effect, you consulted him by, you know, reading his answer to that
question.
BY MR. GOTTESDIENER:
A. Correct.
Q. In the Avnet case the question arose as to whether or not 96-8 applied
to plans that defined the accrued benefit other than the annual benefit
payable starting at normal retirement age as a matter of a Plan document?
A. Yes.
A. Correct.
Q. The issue arose during the case whether or not there was a difference
in terms of 96-8 applying or not applying when a plan defines the accrued
benefit as the account balance versus the annual benefit payable
commencing at normal retirement age?
A. That wasn't exactly the issue that arose, but there was discussion in
that case about 96-8's treatment of such plans.
Q. How does your answer not track my question? I'm not understanding.
I think you just said the same thing, but tell me if I'm wrong.
A. The discussion wasn't whether or not 96-8 applied to that type of plan.
The discussion we had was recognition of the fact that 96-8 identified
those plans specifically, and then what treatment, if any, was different
about it.
Q. There arose in the Avnet case the question as to whether or not the law
required a different treatment for calculating minimum lump sums when the
Plan defined the accrued benefit as the account balance versus the way the
Plan document in this place -- case, the Alliant case, defines the accrued
benefit?
A. Correct.
A. I don't recall.
A. I'm sorry, I just don't recall all of the opinions I gave in Avnet and
how they -- I just don't recall the opinions I gave in Avnet.
Q. So it could have been an actuarial opinion and not a legal opinion?
BY MR. GOTTESDIENER:
Q. My question is the question that arose in the Avnet case could have
been an actuarial question and not a legal question?
Q. Could you just focus on that issue? I haven't asked about any other
issue.
Q. So you agree that that was something that was an actuarial opinion?
BY MR. GOTTESDIENER:
Q. Well, I'm asking about the issue sitting here now, change the facts, it
turns out we all were looking at the wrong copy of the Av- -- the Alliant
plan.
And just before it was signed somebody came in and said in 1997 December,
before it went into operation, they said “You know what? Let's define the
accrued benefit as the account balance.”
And now the question is put to you in any way, whether you're testifying,
you're just being asked as an actuary, are you able to say whether or not
that makes a difference in terms of the Plan's requirements for
calculating lump sums?
BY MR. GOTTESDIENER:
Q. Or is that something that's beyond your pay grade, that that's a legal
question?
BY MR. GOTTESDIENER:
Q. So how is Godofsky's opinion any different than the issue raised in the
Avnet case as to whether or not lump sums and 417(e) and the application
of the general accrued benefit rules apply, how is his opinion that
there's a difference because of the way the interest crediting rate has a
basis in the Plan's rate of return, how does that, in kind, differ from
the issue in Avnet?
BY MR. GOTTESDIENER:
A. I don't know the answer. There would be legal ramifications. There may
be actuarial ramifications.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. In the circumstance where we are assuming 96-8 is the law, I want you
to consider a plan that we're going to call the ABC plan.
A. All right.
Q. And the ABC plan is identical to the Alliant plan in all respects,
except that the interest credits are a flat fixed 8 percent in all years.
Okay?
A. All right.
A. Okay.
Q. So we'll agree that we can refer to the accrued benefit in terms of the
projected notional account at normal retirement age?
A. Okay.
Q. And we can agree that NRA is shorthand for Normal Retirement Age?
A. Yes.
Q. And do you agree that the accrued benefit under the circumstances would
be determined by projecting the current notional account to normal
retirement age at 8 percent?
A. I'm sorry, we weren't talking about lump sum. You asked me -- we're
dealing with a hypothetical where the interest crediting rate is 8
percent.
And you asked me how would you -- basically you're asking me how to
calculate the accrued benefit at normal retirement age.
Q. Yes.
A. If that's not what you asked me, then that's what I understood.
Q. Yes. So wait. The accrued benefit at normal retirement age, and there's
no other factors. There's not a special discount rate you used. There's no
conversion factors at age 65. You understood all of that, right?
A. To age 65.
Q. Yes.
Q. Right.
A. Then it's not $50,000 a month. I'm sorry, I'm not -- something's not --
A. Okay.
Q. Okay. And do you want -- it may be helpful, you saw we did this with
Mr. Godofsky to keep some of the numbers, keep track of them, it may be
helpful to jot them down?
MR. GOTTESDIENER: Okay, if you want to take a restroom break now. Let's
keep it short.
(Recess taken.)
BY MR. GOTTESDIENER:
A. It could be affected by the form and the timing of what the individual
elects.
Q. Based on what?
Q. This is the Alliant Plan remember except for the fact that the
crediting rate is fixed at 8 percent.
A. I don't know. I'd have to tear it apart and think about it.
Q. Okay. And just as you go to different sections, if you do, just let me
know what sections you're going to.
A. The 4.1 says that, of course, payment is available any time after
termination, which could be well before normal retirement age.
A. Right.
Q. Right.
A. Right.
Q. Okay.
A. It's something related to the accrued benefit. I'm sorry, I'm missing -
-
Q. You can continue. I just want to make sure that we're on the same page.
A. Right.
Q. Okay.
Q. Well, the ultimate question you're saying you want to know why you're
looking at the Plan document?
A. Right.
Q. I'm asking does it change the form that somebody wants the benefit in,
does that change the 8 percent projection? Does that have an effect on the
8 percent?
Q. Are you just saying that the timing, then you'd have to -- what do you
mean by the “timing”?
The form of payment doesn't affect the 8 percent projection, but the
timing does?
Q. But how does that affect the projection to normal retirement age?
A. It may be that it says you take the account balance and convert it to
annuity at age 40.
Q. Okay.
A. And see if I can determine that from this. I'm looking for the
definition of single life annuity. It doesn't help.
Q. I appreciate it. I'm checking in to see if you now know the answer.
Q. Prior to normal retirement age, that's not the approved benefit, right?
A. Right. This is the case of somebody who wants to get paid at age 40
when they quit as an annuity.
And an actuarial equivalent has a lump sum definition and an optional form
definition.
So it appears that you would convert in this example the age 40,
nonforfeitable cash balance account, into an annuity using the actuarial
equivalent factors described in 1.2(b), and I suppose those would be the
factors under (b)2, which is the 8 percent 83 GAM table.
And so, as I read this, you'd make that calculation, and it wouldn't
involve projecting the nominal cash balance account to age 65.
Q. I don't follow that. You're now saying that there's no -- not only does
it affect the 8 percent, there's no projection at all? That's your
testimony?
Q. Okay.
THE WITNESS: There we go. I lose half of my -- the door was closed.
Sorry, that's not the answer. I'm just noting that they opened the doors
for heat, but now the person outside closed the door.
BY MR. GOTTESDIENER:
Q. At 8 percent.
A. At 8 percent.
A. I'm sorry, is there any -- please repeat the question. I'll try.
Q. Is there any circumstance under which you would not do the 8 percent
projection?
Q. And you're telling me that you are able to assume that 96-8 is the law?
A. In this Plan except for fixing the interest rate, the interest
crediting rate at 8 percent. That's the hypothetical. Or are you changing
the hypothetical now?
A. This Plan, the Alliant Plan, except for we're crediting 8 percent
increase a year?
Now, that's what this says. I don't know if that comports with 96-8 or
not, but that's what this says, and I wouldn't do otherwise.
Q. I'm asking the fact the guy wants the immediate annuity doesn't change
that you have to project to determine the accrued benefit at age 65 using
8 percent, right?
A. And that's where we aren't agreeing because I read the Plan document,
and I identified for you the circumstance where somebody who terminates at
age 40, they want an annuity, they -- at least the document says you
convert the cash balance at age 40 to an annuity.
A. And as I read this document, the form and timing do affect the way you
make the calculation.
A. This Plan document says you don't -- it doesn't talk about projecting
the cash balance account to age 65 converting to an annuity, and then
applying some sort of actuarial reduction factor to that annuity. It says
--
Q. Look at 1.2(a.)
Q. Yes. And?
Q. And is there any circumstance there that it says you would determine
the accrued benefit other than projecting to normal retirement age and
under this hypothetical at 8 percent?
A. Well, I'm reading from 1.2(a), Accrued Benefit. And the last sentence
says “For this purpose the Plan shall apply an interest credit rate of 4
percent for a partial year and deem it reasonable to credit future
interest on the participant's cash balance account at the rate described
in 1.2(b)1 determined as if the date the accrued benefit is calculated as
the participant's annuity starting date.”
A. Well, again, I'm not opining as to whether or not this comports with
96-8 or not.
I'm reading this document and telling you as an actuary what I think it
says.
Q. Oh, come on. We're not talking about -- the early retirement benefit is
not the accrued benefit, right? Could you just answer that?
A. The --
A. Right.
Q. And it may be based on the accrued benefit, but it is not the accrued
benefit, right?
A. Right.
Q. So the accrued benefit under all circumstances this Plan only changing
it to a fixed 8 percent is always the projected account balance at 8
percent to NRA? Yes or no?
What you asked me was are there any circumstances where the form of
benefit would affect this projection, and I think the answer is yes the
way the Plan is written.
BY MR. GOTTESDIENER:
Q. Let's go back to Joe. He's got his $50,000 account balance on 1/1/2000,
and do we agree that his -- the formula for the projection is $50,000
times 1.08 percent raised to the 15th power?
A. That gives you the projected cash balance account at normal retirement
age, right.
A. Yes.
Q. And do we agree that the minimum lump sum on 1/1/2008 ignoring the
impact of mortality would be determined by discounting the 158,609 from
1/1/2015 to 1/1/2000 at the applicable interest rate under 417(e)?
Q. Yes. Yes.
Q. Yes.
Q. Right.
A. And now your question is -- I'm sorry, please repeat your question.
Q. Wouldn't you determine the minimum lump sum by discounting the 158,609
from 2015 to 2000 at the applicable interest rate under 417(e)?
A. I think you would convert to an annuity form and then convert back to a
lump sum, but it has the effect of discounting.
Q. You would convert to the annuity form, convert back to a lump sum at
age 65?
A. You would convert to an annuity form at 65, and then you would take the
lump sum value of that discounting using 417(e.)
Q. Right. And but before you did the discounting, that you would arrive at
what number?
A. 158,609.
A. Right. That's --
A. Meaning when you projected the cash balance account to 265, we got
158,609.
Q. Then you converted into an annuity and back into a lump sum form at age
65?
You do that calculation, but it doesn't have any effect on the number
you're about to discount to present value?
A. To the extent that it produces the same value or the same argument as
to whether or not it has to be done or we can just skip it.
Q. No. Well, you had said when you started to do that, I said, well, you
said it's, you know, more or less the same. And then you said “Well, you'd
have to do that calculation.”
And I'm saying that is a calculation even though you don't have to get out
the calculator to do it, right?
A. Right. That is, again, the theoretical construct that you would not
have to do it in practice because you come out with the same number.
Q. It's your words that the calculation was done. You raised it.
You said there's a calculation that has to be done. Yes or no? Did you say
that before I asked you anything?
BY MR. GOTTESDIENER:
Q. Yes or no?
BY MR. GOTTESDIENER:
Q. Simple question.
MR. CASCIARI: Objection.
BY MR. GOTTESDIENER:
Q. Did you say that on your own before I asked you anything?
BY MR. GOTTESDIENER:
A. Right.
No. The reason you said calculation, it wasn't considered, you knew
because we twice went over that there's no annuity whipsaw in this Plan?
Did we not? Yes or no?
Did we not go over that twice during this deposition, and you had no doubt
that that was the operation of this Plan?
You did calculations, you actually did calculations. And you know you did
no annuity whipsaw calculation. You had all of that in mind.
And yet on your own you said that calculation has to be done even though
it arrives at the same number. Yes or no?
BY MR. GOTTESDIENER:
Q. Yes?
BY MR. GOTTESDIENER:
Q. We have your word on that, sir.
The answer is that you would determine the minimum lump sum by discounting
the 158,609 at the 417(e), correct?
A. Yes.
A. Yes.
A. All right.
A. Yes.
A. Yes.
Q. So we agree?
A. Yes.
Q. And on that date do we agree that it would be the same, 158,609 that it
was on 1/1/2000?
A. Right.
Q. Now, let's assume that the applicable interest rate on -- under 417 on
that date, 1/1/2001, is 5 percent.
A. That's fine. Then I agree with your position that it would be the
158,609 discounted by 1.05 for 14 years.
A. All right.
Q. And do we agree under the circumstances that the expected change in the
minimum lump sum for Joe between 1/1/2000 and 1/1/2001 is 1 year's
interest at 5 percent?
A. Right.
A. Right.
A. Right.
Q. And do we agree that the fact that the Plan's interest crediting rate
is fixed and at 8 versus 7 or 9, that's not going to affect the rate of
change in the minimum lump sum that he's due between 1/1/2000 and
1/1/2001, and that so long as the rate is fixed, the increase is going to
be driven by the 417(e) change, the 5 percent?
A. Yes.
Q. Then the minimum lump sum is going to be that same calculation, 158,609
divided by 1.045 raised to the 14th power?
A. Correct.
Q. And we agree that the result is going to be larger than the result than
if the interest rate was 5 percent?
A. Yes.
A. 85,645?
Q. Right. As of 1/1/2001.
A. All right.
Q. So the change between 1/1/2000 and 1/1/2001 would be much more than 5
percent?
A. Right.
Q. And the increase is it's going from 76 and change to 85,000 and change,
right?
A. Right.
Q. And the magnitude of the difference is between those two dates assuming
the applicable interest rate changes from 5 to 4.5 is about 12.3 percent?
A. Right.
Q. And about 7 percent is the 50 basis point change in the 417(e) rate?
A. Right.
A. Yes.
Q. Now, you're familiar with the opinion that you discuss known as Berger
v. Xerox, right?
A. I have.
Q. In Berger v. Xerox, the Court said that the whipsaw calculation would
be performed there by projecting the notional account to NRA using the
current year's interest crediting rate, and assuming that all future year
interest crediting rate would be the same as the current year's interest
crediting rate?
A. Yes.
Q. Now, consider a different plan, not the ABC Alliant Plan with an 8
percent fix, but consider the DEF plan.
And it is the same plan as ABC except for the interest crediting rate.
We're now going to change it. It's going to be the 1-year T-bill plus 1
percent. Do you have to that in mind?
A. Yes.
A. All right.
Q. Except for he's in this plan. And we're also still assuming that --
withdrawn.
This Plan applies -- this Plan has a whipsaw provision in it. So there's
no question about -- it says you do the whipsaw calculation using the
interest crediting rate.
So it's not something that's read into the Plan by some Judge somewhere.
Do you follow?
A. All right.
A. I will try.
Q. Well, you are familiar with plans that do have whipsaw written into
them, don't you? Aren't you?
A. Yes. Obviously, this is a rate that under 96-8 would qualify for safe
harbor treatment.
A. Yes.
Q. Okay. Now, assume that on 1/1/2000 the 1-year T-bill is 6 percent, and
the 30-year treasury is 5 percent. And we still have the same $50,000
account balance.
A. So 1-year T-bill is 6 percent. 30-year treasury is 5.
A. Right.
Q. And do you agree that John's projected notional account at NRA is going
to be determined by projecting the current notional account to NRA at the
current interest crediting rate of 7?
A. Assuming Berger, assuming that the rate we will use to project 1-year
treasuries plus 1 percent is going to be based on 6?
Q. Yes. Well, the 6 rate and plus 1, correct. At that time it's 6 percent.
A. Right. But in order to know what the -- what rate to use for projecting
in the future, you're telling me to assume that the 6 percent rate will
remain forever?
A. Yes.
Q. But if you want to break it down to component parts, yes, that's true
too.
A. That I -- right. So you were saying that I'm to assume that we're going
to use 6 percent as the 1-year treasury, so we're projecting 7 percent.
Q. To all --
A. For all years going forward. Yes, I understand that. I will assume
that.
A. Yes.
A. Uh-huh.
A. Yes.
A. All right.
Q. And now change the facts again where we have 1/1/2001, the 1-year
treasury is at 5.
A. Uh-huh.
A. Okay.
A. Right.
Q. Do we agree that on that date that his projected notional account would
be determined by projecting the current account to NRA at the interest
crediting rate of 6?
A. Right.
Q. And we could express it by 53,500 times 1.06 raised to the 14th power?
A. Right.
A. Uh-huh.
Q. And that we would then discount that back at 1.045 raised to the 14th
power, and we get 65,314, right?
A. Yes.
Q. And it's not surprising because of the changes that we just made?
A. Because there were changes in both the projecting and discounting rate.
Q. And do we agree that the change in the minimum lump sum that we just
saw and that you just referenced, we could break it down into three parts.
There is the passage of time?
A. Right.
A. Yes.
A. Right.
Q. And do we agree that the change in his minimum lump sum is similar. His
change through the passage of time and the change in the 417(e) rate to
the change that we discussed with the first guy, Joe, under that plan with
the fixed rate between 1/1/2000 and 1/1/2001?
Q. Sure. Do you agree that the change in John's minimum lump sum between
those two dates due to the passage of time and due to the change in the
417(e) rate are similar to the change we discussed and saw with Joe?
A. Yes.
A. All right.
Q. And assume this plan has been in effect for 50 years, and it's got
thousands of participants. Okay?
A. Uh-huh.
Q. You would --
A. You would look to see what the turnover rates in past years have been.
Q. And you would do what -- you would compare to what others have
selected?
There are industry or workforce body tables that are published, but you
would look at the Plan's experience, and then you would also look forward
for what you thought would occur in the future.
Q. Yeah, well, I don't understand what are those future factors that you
reference?
A. Well, if I took over the General Motors plan in 2005, there would be
historical turnover, but I would also anticipate high turnover coming in
the future.
Q. Well, do you --
A. You incorporate both into your -- that's part of the art of it.
A. Right. And the future is never known with 100 percent certainty, but
that's reflected as well.
Q. So for GM in your example, it's really not the future. You already know
what's happened.
Q. So you already knew what happened then. It's not really the future.
I'm just saying I could have anticipated that the auto industries were in
for a very tough time going forward, and so I would be inclined to
consider higher turnover rates.
Q. But you're really still respectfully not talking about the future.
You're just factoring in what has actually already occurred and what --
A. When I go in at the end of this year and talk to my clients about what
assumptions we're going to set at the end of the year for salary
increases, for turnover and so forth, and I ask them “What do you see
happening in your industry? Do you see generous pay raises in the future
or not generous pay raises? Do you see increasing turnover or decreasing
turnover? Do we hire a lot of people?”
MR. GOTTESDIENER: Can we get the end of the answer. Do we have it?
(Recess taken.)
BY MR. GOTTESDIENER:
Q. Assume you had no data on similar plans in this plan we're talking
about. It's not the GM plan.
So then I would be left with the fact -- the other factors we talked about
looking backwards at this Plan's experience and then looking forward based
on what is expected for this Plan.
A. Again, that's one of the components, but not the only component.
You just don't rely on past experience. And for that matter, you would
probably would give greater weight to recent past experience than long-
term past experience.
But you would also think about the future. And I would try to talk to the
employer and learn more about the future for that plan.
Q. And that learning about the future would be based on other known past
information?
A. Not -- no, not necessarily. A very relevant question is what are your
salary budgets like for the next few years, because we have to make
assumptions about salary increase going forward. And that's a forward-
looking assumption, not a past-looking assumption.
Q. You're just talking about that the payouts are going to be in the
future, but it's known that that's what's going to happen, correct?
A. Within, yeah, of course within certainty. The never hits out exactly.
But they know what they're targeting their budgeted payroll increases to
be.
Q. And this taking into account known information to date, more weight, in
general, is given to recent events than long past events in general?
A. In general. You would think about both, but unless there was some
reason to discount recent events, recent events are closer to the current
and long past events.
Q. You meant they're given more weight. You just said something circular
at the end of your answer.
Q. Thank you. Now, assuming you selected an assumption, and 10 years later
you wanted to measure how well your assumption met expectations, what
would you do?
A. You would look at the actual experience for those 10 years and compare
to the -- look at the actual experience and compare it to the assumption.
A. Yes.
Q. Now, assume you were selecting the interest rate assumption; how would
the process differ?
Q. Yes.
THE WITNESS: I'm sorry. The door closed again. That's fine. I'm sorry.
Let's just wait.
Q. How would the process differ, if it were, in setting the interest rate
assumption?
Q. Right.
A. Right.
Q. Right.
If you were setting -- specifically you asked about the interest return --
the rate of return assumption on the trust assets.
And as a result, the real returns above the underlying -- the real returns
above inflation may remain more or less constant, but the inflation factor
is way down.
And so the nominal, the total return assumptions have been coming down.
Q. So I understand --
A. Right.
Q. And you assume in this plan -- let's assume that you selected the
assumption. Ten years later you want to know how well your assumption did.
A. Right.
A. I would look at the past rates that were earned as opposed to the
assumed rates.
Q. So just like with the demographic assumption, you'd compare the actual
experience with the expected experience?
A. Yes.
And then on 1/1/2005 how would you go about determining how well your
assumption predicted the actual outcome?
Q. Right.
A. Right.
Q. So how are you going to go about determining on 1/1/2005 how well your
assumption predicted the actual outcome?
Q. Right.
A. You would know how much money is in the account in 2005, and you would
compare it to what you projected.
Q. Let's take two investors. One is this guy Joe we talked about earlier,
and the other is the ABC plan.
Joe's investing his $100,000, and the Plan is investing its $250 million.
And it spends $1 million a year in getting investment advice.
In general, you would expect the Plan to get a higher rate of return than
our friend Joe?
It's not, of course, always the case. Joe might be extraordinary, but you
would expect the Plan would do better.
Q. You would expect the Plan would be better able to diversify than Joe,
right?
A. Yes.
Q. And you would expect that tinkering with the provision frontier, it
would earn a significantly higher rate in general than Joe?
Q. And you're aware of studies, such as one that was done not too long
ago, where somebody took schedule Bs, 10 percent of them, and looked at
plans and said, “You know, it turns out plans that have over $100 million
in assets received a 2 percent higher rate of return than plans with less
than $5 million in assets”?
A. I don't know if I'm aware of that specific study, but I'm certainly
aware of studies that have shown that plans have higher returns than
individuals. That I know I've seen research on.
If you measured on March 9th versus you measured today, you'd get a
different answer.
Q. Well, let's say you measured on March 9th of this year as opposed to
today. Would it be that different of an answer? Would it be true on March
9th?
A. I'm guessing that if you measured on March 9th, it might be less than
80.4. I don't have the statistics. It depends on how many years you're
looking at too.
A. Twenty years?
Q. Yeah. Does it matter if we say November 12th versus March 9th if we're
looking over 20 years?
A. Sure it does.
But I'm saying can you agree with that statement that 50 percent stock, 50
percent bonds, looking back over the last 20 years the cumulative earnings
of that portfolio would be 8.4 percent?
Q. What has changed between March 9th and today that would cause you to
agree that on March 9th it would have earned 8.4, but not today?
A. So the equity markets, depending on what measure you take, just for
simplicity let's just say they've gone up 50 percent since the bottom of
the market drop on March 9th. So you've got a 50 percent additional return
in a short period.
Now, just playing roughly with the numbers, you invested half in stocks
and half in bonds. So your portfolio experienced at 25 percent additional
return and spread over 20 years, you know, you might have a 1 percent
difference just on the basis of timing.
Q. So you agree with 8.4 as of today, but it could be as low as 7.4 back
in March?
Q. Well --
A. It doesn't sound unreasonable to me, but I didn't calculate it. I'm not
asserting that that's --
BY MR. GOTTESDIENER:
Q. I want to show you what's marked as Exhibit 26 and ask you if this is
your expert report in the Avnet case?
A. Okay.
A. Okay.
Q. And if you turn to page 16, don't you say literally what I asked you,
that it would be 8.4 percent, the portfolio of stocks and bonds 50/50 over
the last 20 years would have cumulatively earned 8.4 percent?
A. Yes.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. Okay. If you can't answer that question, you then are noting that it's
May 9th?
A. May 29th.
Q. May 29th?
A. Right.
Q. And do you want to now tell me what difference between March 9th and
May 29th would make in 8.4 percent?
I'm just noting that the timing wasn't March, it was May. And, of course,
the markets were covered.
I don't know what calculation I made so what -- and as of what time. I'll
look at it. What page are we talking about?
Q. Sixteen.
Q. I'm sorry. This is what you said. That's what the question is.
Q. And on May 29th you were 6 months from 12/31/2008, and yet you don't
caveat at all in your assertions to the Court here that the 8.4, you know,
a lot of things have changed since 12/31/2008, do you? Yes or no?
Do you caveat, bring to the Court's attention, that things could change,
and that 8.4 needs to be taken with a big grain of salt because it's now
May of 2009?
BY MR. GOTTESDIENER:
Q. Yes or no?
A. No. I make clear what data I'm using, but I don't indicate that it was
-- that it's now May.
Q. Thank you.
A. For --
A. Uh-huh.
Q. And so you do agree that 50 percent stocks and bonds over the last 20
years taking the data as of that time cumulatively would have earned 8.4
percent?
Q. Okay. What you just added right there, that's not stated in the body of
your report. You just made the declaration in the body of your report. You
reference the attachment.
A. Right.
Q. But in the body of your report to the Court, you made the assertion
that I read, correct?
BY MR. GOTTESDIENER:
A. I referenced --
BY MR. GOTTESDIENER:
Q. Yes or no?
Q. Did I say -- did I ask you do you agree that it's misleading? I didn't
ask you that.
I just asked you did I accurately read what you wrote in the report,
including that you referenced the attached exhibit.
BY MR. GOTTESDIENER:
Q. Yes or no?
A. Yes.
BY MR. GOTTESDIENER:
Q. Thank you. Now, you have told us that since the market's recover -- and
they were down, down, down as of 12/31/2008, right?
Q. Oh, they were very down at that point. At the end of the year they were
down -- the S&P was down 38 percent, no? Roughly.
Q. Okay. Well, based on what you've told us about how markets have
recovered up until right now if you want to caveat, you'd have to caveat
higher than 8.4 percent as of right now looking back 20 years?
A. Around 7 or more.
Q. Yes. He's investing today. He's investing this year since 12/31/2008.
A. So might --
A. I would expect that going forward he might earn less than 7 percent,
more like 6 percent perhaps.
Q. Why don't you open that report again of yours on page 16.
A. Uh-huh.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
On Triple B bonds how does that differ from long term, high quality
corporate bonds? Does it differ or is it the same thing?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. In your report.
A. Uh-huh. Uh-huh.
Q. And you start off at the top of 16. “By that measure a 7 percent rate
of return assumption is reasonable, if not conservative. Whether looking
short term or long term, one place to look at returns is in the market of
investment grade corporate bonds.” Right?
A. Yes.
Q. When I said to you long term, high quality corporate bonds, there is no
difference between investment grade corporate bonds and what was in my
question, right?
A. Investment grade corporate bonds. You said high quality. And so high
quality to me means Double A.
Q. And what material difference do you disclose here other than it's going
to be effectively a wash?
“Over the past 20-year period, the yield on the three most common
investment quality grades of corporate bonds has exceeded 7 percent.”
Q. And --
A. Right.
Q. And even in 2008 when some yields were nearing periodic lows, Double As
yielded on average more than a 6, and Triple Bs yielded more than 7,
right?
Q. Sir, your assertion at the end here is “Without any risk,” you talk
about all of these kinds of bonds, “participants can still expect long
term returns that are around or exceed 7 percent.”
BY MR. GOTTESDIENER:
Q. Right?
BY MR. GOTTESDIENER:
Q. Is it true?
A. You --
A. Okay.
BY MR. GOTTESDIENER:
A. Or 8.4.
Q. Or 10 percent?
Q. I'm sorry. I'm not arguing. I'm asking you a question. You said --
Q. Thank you. Your Joe is getting 7 percent or more. Our guy out there,
he's buying the bonds, however you want to quibble with what I said and
what you put in there, your bottom line is that the average Joe can get 7
percent or better, right?
BY MR. GOTTESDIENER:
Q. And you don't have any material different statement now? You just told
us that?
BY MR. GOTTESDIENER:
Q. On this point?
MR. CASCIARI: Objection.
BY MR. GOTTESDIENER:
Q. This year. My question to you is are you now saying that had the
defense in this case said “Hold up. Don't submit the report. We've got
some stay going on.” And the passage of time went, and 4, 5, 6 months you
would change in a material way that paragraph?
A. I don't know. Interest rates have fallen considerably in the last few
months.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. Yes.
A. I would be concerned about the drop in fixed income returns, which are
at very low levels.
A. That --
Q. You would say all that, but then you would say “I'm concerned about the
drop, and I would factor that in even though I'm talking about a 20-year
period”?
BY MR. GOTTESDIENER:
Q. But you didn't say anything about the change in the markets as of May
from December 31, which were considerably higher from December 31 to May?
And, as I said, the drop in fixed income rates has been recent.
BY MR. GOTTESDIENER:
Q. So you're saying whoa, it was -- it's been no more recent than when you
submitted that report vis-a-vis the end of the year of 2008 with respect
to equities.
BY MR. GOTTESDIENER:
Q. There's not much difference between the end of 2008 and when you
submitted that report, you didn't caveat anything about the change in the
markets?
You were looking at a 20-year period, and you didn't caveat in any way
despite the change in the markets going considerably higher as of May,
right?
A. Yeah.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. You would not caveat, did not, excuse me, but you are claiming, and
this is the question, you are claiming that the experience of
approximately the same period of time you would caveat, even though you
were also looking at a 20-year period?
MR. CASCIARI: Objection.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
And the answer is no, you don't know that you would make a material
change.
I said to you you are saying you would make a material change, and we got
off on this whole tangent because you didn't just say “that's right, I
don't know if I would make a material change.”
Isn't it correct that right now you don't know that you would make a
material change to that paragraph --
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Other than the little data points changing, the literal numbers?
BY MR. GOTTESDIENER:
Q. Thank you. So now in this plan, the Alliant plan now, we're talking
about the actuary's actual assumptions for future returns.
8.5 percent consistently was used during the relevant period, right?
Q. And in the Alliant plan the interest crediting rate is the greater of 4
percent or 75 percent of the Plan's rate of return, right?
A. Yes.
Q. Do you believe that over an extended period of time, the Plan would
have a cumulative higher interest crediting rate than if the Plan rate --
if the interest crediting rate were simply 75 percent without the 4
percent floor, including if it could have gone negative?
BY MR. GOTTESDIENER:
A. Yes.
Q. Okay. So if the Plan averaged an 8.4 percent rate of return, then the
Plan's interest crediting rate would actually exceed 6.3 because of the
effect of the floor?
A. It likely would.
Q. No. It would have to. You just said that it had value.
Q. And you would expect it maybe not to 100 degree certainty, but
something approaching such a high degree of certainty that you would agree
with my question as phrased?
Q. So you do agree that if the Plan averaged 8.4, that the Plan's interest
crediting rate would actually exceed 6.3 because of the effect of the
floor?
A. When we're talking about the 8-year period, I'm not sure I would give
you “very.”
Q. Well, you know that the Plan's enrolled actuary consistently assumed
that the interest crediting rate would be 7 percent per year?
A. Yes.
MR. GOTTESDIENER: Now we have to break here I think. Let me just double
check.
BY MR. GOTTESDIENER:
Q. So where we broke was you acknowledged that the Plan's actuary used a 7
percent interest credit rating assumption throughout all of the relevant
years.
And you would agree that that is and was a reasonable assumption?
BY MR. GOTTESDIENER:
A. Thank you.
BY MR. GOTTESDIENER:
A. Yes.
A. Well, they selected the rate that's in the Plan document as a proxy.
Q. Okay. I'm asking though what does “proxy” mean, and you kind of defined
it by its own word.
Q. In this context what purpose are you saying that Alliant selected the
proxy for?
A. They selected the 30-year treasury yield to be the proxy for the Plan's
crediting rate for purposes of projecting the cash balance account to
normal retirement age.
A. Yes.
Q. What you said was in the last answer you just gave you were intended --
intending to mean that your prior answer was that Alliant selected the 30-
year treasury as a proxy for expected future interest credits because
Alliant believed at the time it made the selection that the 30-year
treasury was a reasonable proxy for that purpose?
And if you didn't use those exact words, my question was wasn't that your
intent when you used the word reasonable that it was selected at the time
it was selected as reasonable, and that was what Alliant was attempting to
achieve?
You're picking up the Plan document, Exhibit 4. Could you just without
doing that -- I'll give you time to look at it. I'm just trying to
understand.
Q. Okay. So you believe Alliant stated that it was reasonable, that it was
selected as a reasonable proxy?
Do you have any other understanding as to why Alliant selected that proxy
at the time it made that selection other than what it stated or they
stated in the Plan document?
A. No. I have no other specific knowledge of why they made that selection,
other than what I can presume.
Q. What general knowledge do you have about why they made that selection?
A. Well, it says in the Plan and -- that would comport with the way they
administered the Plan.
Q. You said that you also had an understanding based on presumption. You
said other than what you presume.
A. Yes.
A. Well, also with the benefit of what I believe is in the Plan document,
but I presume that it was selected because it was felt to be a reasonable
proxy for what was credited, what was to be credited.
A. Because it was selected at the rate that they used to project forward.
Q. No. I'm sorry. You're saying that you presume that it was felt to be
reasonable by the sponsor?
A. Yes.
Q. Yes.
A. That it would be logical for that to be the case.
A. They would need to project the cash balance at some rate, and the Plan
defines what that rate would be in practice as it occurs. So they would
have to make an estimate of what that was going to be.
BY MR. GOTTESDIENER:
Q. But why would the fact that functionally they had to make an estimate
or perceived the need to make an estimate?
Why are you presuming that the Plan sponsor made a reasonable assumption?
A. Well, because --
A. That appears -- that's more logical than assuming that they made an
unreasonable assumption.
BY MR. GOTTESDIENER:
Q. Why?
A. Because they -- well, because I expect that they knew what they were
projecting, and they would pick something that reflects what they're
projecting.
BY MR. GOTTESDIENER:
Q. I'm sorry. Again, I don't understand. When you say “They would pick
something that reflects what they're projecting,” that's circular because
they're just picking something and then doing a projection.
BY MR. GOTTESDIENER:
Q. You have nothing to add? You have no explanation of the logic? If you
do, I'd like to understand it.
BY MR. GOTTESDIENER:
Q. Okay. What is it? If you've provided it three times, then you're well
oiled to simply summarize it.
A. The logic is that the purpose of the exercise was to select a rate that
they would use to project the cash balance to normal retirement age.
BY MR. GOTTESDIENER:
Q. And the sole basis upon which you make the statement that they selected
this because they felt it to be reasonable is 1.2(a) in the Plan document?
BY MR. GOTTESDIENER:
A. No. I'm saying it's in the Plan, and I am making the presumption that
the Plan sponsor select -- you know, would select a reasonable rate as
opposed to an unreasonable rate.
BY MR. GOTTESDIENER:
Q. And so, again, if you just open to 1.2(a), if you look there, you'll
see that that's where there is the last sentence where it says “The Plan
shall apply an interest rate of 4 percent to any partial year interest
credit and shall deem it reasonable to credit future interest on a
participant's cash balance account at the interest rate described in
1.2(b)(1) below.”
A. Yes.
A. Yes.
Q. And that's the provision that you're relying on plus your presumption,
but that's the provision you're relying on when you make the assertion
that Alliant in your belief selected the 30-year at the time it was
selected based on its belief that that was a reasonable assumption?
A. Yes.
Q. And then you have, as I just mentioned and you've mentioned, you have
the Plan provision, 1.2(a), and then you add to it the Altman presumption
that the Plan sponsor is acting in good faith?
A. Yes.
Q. And you are not so -- you are not so Pollyanna-ish as to believe that
Plan sponsors when they use assumptions are always acting in good faith,
are you?
A. Generally I believe Plan sponsors act in good faith. Not all Plan
sponsors act in good faith all of the time certainly, but my general
presumption is Plan sponsors act in good faith.
BY MR. GOTTESDIENER:
A. Right. Right.
A. It's possible.
I'm saying when you talk in your document, your report, at 9, you say that
it's selected this rate as a proxy, and you cite documents on this page.
A. That's correct.
A. I did.
Q. And did you find anything in the Plan document that might cause you to
question whether that presumption, that the 30-year was selected because
Alliant believed that it was reasonable, a reasonable proxy for the
expected future interest credits, anything you locate anywhere in the
document that causes you to think or caused you to think that Alliant
maybe had some ulterior motive or didn't think it was reasonable or
anything that caused you to question whether you should give them the
benefit of the doubt like that?
A. Well, there are other rates in the Plan document. They use an 8 percent
rate for actuarial equivalent. And that doesn't -- there may be other
rates as well, but nothing I read lead me to question that presumption.
Q. Nothing you saw anywhere in the document, even indirectly, caused you
to question whether they may have had other or another agenda in terms of
using that rate as a proxy for expected future interest credits?
A. With the caveat that obviously I read certain parts of the Plan much
more closely than others, but as I sit here now and recall everything I've
read, there's nothing else that changes my presumption.
Q. Well, okay. My question was you saw nothing? You noticed nothing? You
located nothing?
You read the entire document that caused you to think that even some other
agenda was driving the use of that other than just purely “We think this
is reasonable.” You found nothing like that?
A. Correct.
Q. Well, you did read the preamble, the same page on which 1.2(a) appears,
didn't you?
Q. Yes, sir.
A. Yes.
A. Yes. Yes.
Q. And that to you doesn't raise any possible other agenda that the Plan
may have had in selecting that interest rate as a proxy for expected
future interest credits?
A. That statement is not contradictory with the statement in 1.2 and did
not lead me to question the -- my presumption.
A. No. Now, let me reiterate. This was -- my opinion is not -- I've given
an opinion in my report as to Alliant's intent.
BY MR. GOTTESDIENER:
Q. And what did you do to determine whether or not Alliant ever considered
defining the interest credit differently?
BY MR. GOTTESDIENER:
Q. So you're presuming that if they had actually determined that it wasn't
reasonable, that they would not have used the interest crediting rate they
did?
A. Well, their intent was to pay the cash balance amount as the lump sum.
I believe that's what it states here. Yes. It's a very good paraphrase.
BY MR. GOTTESDIENER:
A. No.
Q. I know what the Plan says. Excuse me. I asked a very specific question,
which is you are saying -- this is a question -- are you not, that you
believe that had Alliant determined that it was not reasonable at the
point in time they put this in the Plan prior to it being signed,
finalized, put into operation, that it would not have used that interest
crediting rate?
A. No, they might not have. They might have changed it.
BY MR. GOTTESDIENER:
Q. They might not have. They might not have used the same interest
crediting rate, and they might have changed it, but you're saying you're
not sure what they would have done?
A. Well, I'm certainly not sure what they would have done. If they did not
believe that the 30-year treasury was a reasonable rate, they could have
changed the Plan's crediting rate or they could have not indicated that
that was the intent of the Plan. They could have paid more.
They could have done a lot of things. They could have made many changes if
they didn't believe that that was a reasonable assumption, a reasonable
price and had to change it.
Q. But you have no evidence to support your surmise that they could have
done any of those things or would have done any of those things had they
been of the belief that the 30-year was not a reasonable proxy for these
future interest credits?
BY MR. GOTTESDIENER:
Q. The intent is stated very clearly, you would agree with that, to pay
benefits in a single sum equal to a participant's cash balance account,
right?
A. Yes.
Q. And you know from your knowledge that 96-8 came out prior to this Plan
coming out?
A. Yes.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. And they wanted to be sure that they did the right thing?
They're told --
BY MR. GOTTESDIENER:
Q. -- you can use a whole range of rates that can achieve this goal.
A. They absolutely could have selected a rate from the list of allowable
safe harbors, and that would have assured them that they could comply with
this goal. They certainly could have done that. Obviously they didn't want
to.
Q. Well --
Q. It's your view that it's more generous to participants to use -- excuse
me.
Q. I mean, so they only had two options, change the interest crediting
rate or pay whipsaw?
A. Well, fortunately, they believed that this rate was a reasonable proxy
for what they would credit, and so, again, I'm presuming, but they must
have thought that this didn't require whipsaw.
You don't have any evidence of what they believed other than the Plan
document and your surmise, correct?
A. Okay. I'm presuming that they believed that this arrangement all
worked.
Q. But you know that Plan sponsors at this point in time who had an intent
to pay just the account balance as the lump sum had available to them any
range of rates that had been identified by the IRS as presumptively no
greater than the 30-year treasury, right?
You knew -- you know that that is the case when this selection of an
assumption went in, you know that this Plan sponsor had available to it an
entire range of rates that could have accomplished that intent? Yes or no?
A. Yes.
BY MR. GOTTESDIENER:
Q. You have no evidence whatsoever that the Plan sponsor investigated the
use of any of those rates as the interest crediting rate for this Plan, do
you?
A. No.
Q. You didn't make inquiry with counsel or anyone at Alliant to determine
what they did to investigate whether there was an absolutely accepted
reasonable assumption called Section 4 of 96-8 rates, whether they looked
at those and considered them before using this other rate, did you?
A. No.
Q. This Plan says it doesn't intend to pay whipsaw more or less, right?
A. Yes.
Q. I want you to assume a Plan that says the intent of this Plan is not to
pay whipsaw. It's to pay the cash balance account under all circumstances
to everyone taking a distribution as a lump sum prior to normal retirement
age. Do you have that in mind?
A. Yes.
Under what circumstance, if any, can you identify for me that you believe
there could be such a plan?
Q. I'm sorry. I missed that part. What did you say? If it were clear what?
Q. Yes.
A. Then if the Plan defined the crediting rate as 8 percent, and the
417(e) rate fell below that, then I think there would be great evidence to
suggest that they would need to pay a whipsaw, and they would have to
communicate that to participants.
Describe that plan and that circumstance. They don't want to pay whipsaw -
-
And you're going to make the decision which side to side with. Which cash
balance plan forced to pay whipsaw, describe it.
Are you going to side with the plaintiffs and testify all other things
being equal? It's just when you think it's required, it's not a windfall
versus it's a windfall when the government and the courts say “Plan, you
have to pay it.” Tell me what plan that is.
A. Well --
BY MR. GOTTESDIENER:
The only plan that you think is not a windfall is if the plan document, as
we looked at the plan for John, the Berger plan where it's actually
written in that we're going to do all that, and they go into it with eyes
open, basically there is no such plan where they state an intent to pay
the account balance only and not pay whipsaw.
The only plan you can identify where you don't think it's a windfall is
the plan that actually says “We pay windfalls. We want to pay that
windfall.”
BY MR. GOTTESDIENER:
Q. You're describing.
BY MR. GOTTESDIENER:
Q. Why don't you do that then? What's a windfall? You know what whipsaw
and windfall -- you know what windfall means in the context of the whipsaw
discussion, don't you?
A. Unexpected.
Q. -- unexpected, correct?
A. Right.
I wasn't saying it was one or the other. I was saying your standard for
windfall is both that the Plan sponsor has to be absolutely blind sided
and the participant just has no right justification, expectation
whatsoever to the payment. Is that fair?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. I don't want you. I don't believe it. So I want to know what you
believe.
A. I could define it as --
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
You told me unexpected and unjustified. Am I hearing you right that that's
the way you define it?
BY MR. GOTTESDIENER:
A. I see that.
BY MR. GOTTESDIENER:
Q. I don't want could. I want how do you define windfall in the whipsaw
context? How do you define it?
You can include how have you in the past actually defined it, how do you
define it right now.
Exclude from your answer any conditional. You do now define it such-and-
such. You have in the past defined it such-and-such. Please give me your
answer.
BY MR. GOTTESDIENER:
A. Yes. Uh-huh.
A. I would say because now I'm struggling with another Ian Altman
definition is unexpected and unjustified. And I think that's an easier one
to work with.
Q. Okay. Let me see if I can restate this, because I'm really not trying
to trick you. I'm really just trying to understand.
BY MR. GOTTESDIENER:
Q. I'm really not trying to trick you. I'm really just trying to
understand.
BY MR. GOTTESDIENER:
Q. Are you saying that it's a continuum insofar as there are situations
that you can imagine, and not wholly speculative, but there are situations
that you can imagine, you may have seen or have heard described where it
would classify as a windfall solely based on a high level of
unexpectedness on the sponsor's part.
So if the sponsor has a very good heart and did an adequate in your view
investigation, knew about the issue and still they got blind sided, that
could be a situation without reaching unjustified where you would say
windfall?
A. Possibly, yes.
Q. However, it's easier for you to say it's windfall when you add in your
belief under the facts of that whipsaw case that the participants had no
justification for expecting, economically or otherwise, anything more than
the notional account?
A. Yes.
I put it to you there is no such plan. If I'm wrong, describe that plan.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
A. I can.
BY MR. GOTTESDIENER:
Q. Okay. Do it.
BY MR. GOTTESDIENER:
Q. Meaning that it's not a windfall. I'm sorry. It's not a windfall in a
Plan you said that has an 8 percent --
A. Right, or 10 percent.
Q. Okay. And it's consistently higher than 417(e), and it's a fixed rate?
A. Which is higher than 417(e), but it's a more clear example with 10.
Q. And we have -- and so one criteria is for you to find that whipsaw is
not a windfall is that the interest crediting rate is fixed?
Q. Fixed at a high rate well above 417(e) at what time, the time that the
Plan is written and you look to see what the 417(e) rate was at that time?
Q. Uh-huh.
A. Yes.
Q. So you would say at the time it's written it's the 417(e) rate is, in
your hypothetical, what?
A. Six percent.
A. Ten percent.
Q. Ten percent. And then -- but it also says “We don't want to pay
whipsaw”?
A. Right.
Q. And it's fixed?
A. Right.
Is there any circumstance under which you would say whipsaw is not a
windfall if it's a variable rate?
A. I don't think so. It would depend on what the variable rate is, of
course, but it couldn't be a market return with a minimum of 10 percent.
A. Perhaps. Let's include the example. We could take the basic example to
its conclusion.
Q. You're just saying perhaps on the variable. Fixed. Variable. Can you
make that distinction?
Q. Okay. Well, can you tell me yes or no is your whipsaw's okay group of
plans confined to plans that have fixed interest crediting rates that are
at the time they're put into the Plan at some unspecified margin above the
417(e) rate or does it also include possibly variable rate plans?
A. A floor.
A. It could be more.
A. No, no.
Q. Yeah, but if the floor is 10, what in your hypothetical is the variable
rate?
A. Right.
BY MR. GOTTESDIENER:
A. I am an expert.
Q. Okay. So let's just agree that I just went through this whole thing,
and you just said yeah, that example is really no different than the 10
percent fixed, correct?
Q. Yes. Now let's try another example. How about take the 417(e) rate and
add 170 basis points to it. That is going to be the crediting rate.
A. All right.
A. I think I would agree if you define the interest crediting rate as 417
plus 170 basis points.
Q. Then you're going to side with the plaintiffs rather than the
defendants?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. Well --
MR. GOTTESDIENER: You've got a copy. Kramer got a copy. I am not going to
12 depositions in this case schlepping copies that I've already handed
out.
MR. CASCIARI: So I don't need to give you copies then tomorrow which
you've already marked?
MR. GOTTESDIENER: If you are marking exhibits, you have to give me a copy.
I don't know what --
MR. GOTTESDIENER: Let's have this conversation some other time. You're
threatening to stop the deposition at 5:00, at which time we're going to
get on the phone with the Magistrate.
BY MR. GOTTESDIENER:
Q. 3(b)(1.)
MR. CASCIARI: Why don't you get on the phone before then?
MR. GOTTESDIENER: I'm going to, if, in fact, you confirm that even though
I've offered to help pay for him to stay to do this, you're refusing to
continue it.
Q. 3(b)(1.)
BY MR. GOTTESDIENER:
If you go to the copy you have that should be on page 5. It's the middle
of the first full paragraph.
A. I have it here.
Now, by proxy you mean a legitimate proxy would be a rate that represents
the value of the future interest credits?
A. Yes.
A. That would have been one of the things I did, yes, one of the things I
would have looked at.
I would have looked back at the rate of return backwards, and then I would
have looked forward and given thought to what expected returns going
forward would be.
BY MR. GOTTESDIENER:
Q. But remember we went through this? That would all be based on what was
known at the time?
A. Yes, but that doesn't mean I would just accept the last 10 years or 20
years of return.
Would you say that the line representing the Plan's interest crediting
rate has any correlation to the line representing the 30-year treasury
rate?
A. Yes. It goes right through the middle. There are points above, and
there are points below.
BY MR. GOTTESDIENER:
A. The return on the annual interest crediting is higher in some years and
lower in others.
A. As a number?
Q. Yes.
Q. Okay. But assume we're not talking about negative correlation. Just no
correlation.
A. So this is --
A. I'm sorry?
Q. One would be perfect correlation.
A. Yes.
A. Right.
Q. Okay. This chart, this graph, you know without having to get fancy is
very close to zero correlation?
Q. In your report on page 9 you say “Use of the 30-year treasury yield has
produced results close to the actual credited rates under the Plan.”
A. Over the period of time that we were looking at, yes, '98 to 2006.
Q. Well, earlier when I first started asking you about what you would have
done had you been at the creation, you said you wouldn't necessarily limit
yourself to going back 10 or 20 years, right?
A. I would look at that, and I'd think about what's coming ahead, yes.
Q. I'm sorry. My question is you said, and you said it truthfully and
accurately, that had you been present at the creation that you agree that
you would have looked at what would the Plan's interest crediting rate
have returned in the past over 10 to 20 but maybe longer period of time
and compared it to the 417(e) rate, the 30-year treasury rate rather?
Q. Right. But you made a point of saying you may have gone back even
further than 10 to 20 years to make sure that your -- if you were going to
give an opinion as to whether or not this was a reasonable assumption
whether or not it really was.
A. I might have said that. I might have gone back more than 20 years,
sure.
I would have certainly put more weight on the most closely recent years,
but I might have gone back more than 20 years.
Q. And I just asked you about page 9, the use of the 30-year treasury
yield has produced results close to the actual credited rates under the
Plan, and you stopped me, and you said, well -- look to page 9 of your
report.
A. Page 9 of my report.
Q. And you inserted over the period of time, you inserted in your answer
when I read that, you said well, you meant there over the period of time
in question.
A. Right.
Q. And, I mean, was there some reason why you inserted that caveat in your
testimony? I don't see it here on the page.
A. Well, just to be clear, I mean, because we're talking about the period
from '98 to 2006.
BY MR. GOTTESDIENER:
You just say the use of the 30-year has produced results close to the
actual credited rates under the Plan.
And I read that, and you said, you know, looking at those years, right?
A. Right. I think that's clear from the report. If not, it was certainly
what I intended in the report.
Q. And in terms of going back in time, had you been present at the
creation, you would have, as you said, you would have looked back
certainly at least how many years would you have taken?
Q. But whatever you did, you would have in terms of the length of time you
looked back, you would have given more weight as we talked about the
demographic and the expected rate of return, you would have given more
weight to more recent experience?
A. Yes.
Q. So, for example, if you're there assuming the Plan is adopted December
31, 1997, then assuming it's effective January 1 or August 1, 1998, you
would have given more weight to 1997, '96, '95, '94 than earlier years?
A. Or the last 10 as opposed to the last 40, but something like that.
To be clear in your report, all of the discussion that you have as to the
result, you're not judging it from the point of view of December 1997,
which I'm using as a proxy, as the point at which the projection rate is
adopted?
A. Right. Right.
A. Right. I'm evaluating how the proxy performed over the 8 years in
question.
A. Right.
Q. And if you learned that there was no evidence whatsoever that the Plan
sponsor or actuaries drafting a Plan documents or designing the Plan did
any of the kind of experience study looking back as what would have
happened had this crediting rate been in effect as compared to the 30-year
treasury, might that -- I understand you didn't do that kind of
investigation, but would you be open to factoring that in and maybe
considering rethinking the presumption that the projection rate here was
selected in good faith?
BY MR. GOTTESDIENER:
If you learned that nothing like the analysis that you said you would have
done had you picked up a Plan and you had to do the employee turnover or
you had to do the interest rate assumption, the expected rate of return,
that none of that had been done, would you be open to reassessing the
presumption that you've given the defendant in this case that they acted
in good faith?
BY MR. GOTTESDIENER:
Q. That factor would be even stronger if what you learned is not only did
they not do it, they did it. And they were aware that there was almost no
relationship between those two lines, that it approached zero, as in that
chart.
Then you would be even more inclined to perhaps reassess the presumption
that they acted in good faith?
BY MR. GOTTESDIENER:
Q. You would then give less consideration if you got affirmative evidence
that they stared that zero correlation in the face, you would actually
discount that and not be concerned by it?
A. I wouldn't weight that specific factor. It's not the correlation that
I'm citing.
I'm not talking about your report, because you already just very clearly
established that the only thing you're doing, you're not putting yourself
at the threshold.
A. Right.
Q. You're putting yourself on the other side and judging how did it do?
A. Right.
Q. Correct? So I'm saying if you had evidence that at the threshold before
the ink was dry when they still had time to change, not only did they not
do an investigation, but what investigation they conducted told them that
effectively historically all the known data said total mismatch except for
in rare statistical cases?
BY MR. GOTTESDIENER:
It can vary year by year. It does vary year by year. But in the long term
it produced relatively close results.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. -- you the focus on what you're very clear on, that I'm not asking you
to assess after-the-fact evidence. You inserted that as about 40 percent
of your response.
And the first part of it is you did not address the question. You rather
said “It doesn't disqualify the 30 year.” That wasn't my question at all.
It was a very narrow question.
It was simply would you be even more open -- you told me if they did no
investigation, that might make you look with a jaundiced eye at that
presumption you usually give, correct?
A. Yes. Yes.
Q. I'm just saying wouldn't you look with two jaundiced eyes if not only
did they not do an investigation to satisfy themselves of the
reasonableness, but that they actually looked at evidence that may not be
dispositive, conclusive, absolutely 100 percent you can't use it, but it
tends to show that there's a very low correlation?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
MR. GOTTESDIENER: Do you know so little about the process that you don't
understand that you can ask him questions?
BY MR. GOTTESDIENER:
A. Yes.
Q. You say that it's produced results that are close to the actually
credited rates under the Plan.
A. Yes.
A. Over the period of time, and even year by year, the rate that was
credited and the rate used for projection were not vastly different,
certainly not over -- averaged over the period of time. And they were not
vastly different with the exception of a single year.
Q. And that's what you mean when you use the word close in your report?
A. What I mean is that the average over the period the difference is
relatively small, and the difference in each year is perhaps a bit larger,
but still relatively small except for one year.
Q. But am I to understand that your synonym for close as you use it here
should be interpreted how again?
A. Relatively similar over the long term, and fairly similar in all
individual years but one.
Q. Ah.
A. Yes. That's what I was -- meant when I said the long term, yes.
BY MR. GOTTESDIENER:
Q. Could you just tell me whether or not you're aware of any support for
the assertion -- I'm not saying you're making it. I'm just saying there's
an assertion in the world.
Do you know of any literature, support for the following assertion that
you can make a statistically significant prediction and come up with a
future expected return on any kind of portfolio using eight data points?
BY MR. GOTTESDIENER:
Q. You could?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Your testimony is any single -- any statistical text that is used in any
grad program in the country I will find support, direct support for as
little as eight data points for projecting investment returns on any kind
of portfolio? That's your testimony?
A. Eight data points are useful. As few as eight are useful in projecting
the future.
Q. Useful?
A. Obviously --
Q. But you can't name a statistical text, just any one will do?
MR. GOTTESDIENER: You know, it's uncanny. It's rule one. You don't try to
take a break in the middle of a pending question.
BY MR. GOTTESDIENER:
Q. Can you answer the question?
A. My analysis says that the -- over the 8-year period the rates differed
by less than 1 and a half percent per year. I defined that as relatively
similar.
BY MR. GOTTESDIENER:
A. This less than 1 and a half percent a year. I categorized that for you
as relatively similar.
(Recess taken.)
BY MR. GOTTESDIENER:
Q. Page 9 of your report you say “In the legal decision Ray Berger v.
Xerox Judge Posner references the use of an unbiased estimator for
projecting cash balance accounts at payout,” right?
A. Yes.
Q. And you told us that you read the entire decision in Berger, right?
A. Yes.
Q. And the sentence you refer to in which the words unbiased estimator are
used can be found in the opinion on page 760, if you would turn to Exhibit
29 and turn to the fourth page, and look at the final paragraph beginning
“Since,” I'll direct your attention to the sentence.
Let me actually give you 29 remarked. Do you see where it says “Since the
fourth numerical page.”
A. This is also.
Q. Okay. That's fine. “Since future credits are not fixed,” do you see
this?
A. Yes.
Q. If you look to the middle of that paragraph where it starts “It is
estimation rather than determination that is required because the T-bill
rate fluctuates, one method of estimation would be just to use the current
1-year T-bill rate on the theory that it is an unbiased estimator of
future such rates.”
A. Yes.
Q. Are you aware of any other place in the Berger decision where Judge
Posner uses the word unbiased estimated?
A. I'm not aware at this time. I'm not certain one way or the other.
Q. Accept my representation?
Q. I represent to you that the only time the word unbiased is in the
sentence which I directed your attention to.
A. Okay.
Q. Which you said was the sentence you were referring to.
A. Fine. I'll accept your representation that was the sentence I was
referring to.
Q. And your interest credit rate in the Berger case, in the Xerox plan
rather, was the 1-year T-bill rate plus 1 percent?
A. Yes.
Q. And so what Judge Posner is saying is that the current year's interest
crediting rate could be used as an unbiased estimator?
A. I think what he's saying that the 1-year T-bill rate could be used
because it is an unbiased estimator, but would qualify it to be used for
this purpose.
MR. GOTTESDIENER: You know, Mark, why don't you go to law school? You're
not the witness.
MR. GOTTESDIENER: No, you can't finish, that's the whole point. You were
admonished not to make speaking objections.
BY MR. GOTTESDIENER:
So he's saying that you're -- you're aware of the Random Walk Theory,
right?
A. Yes.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. Wait a minute. When I use the foundation of your report that it's an
unbiased estimator, and you don't know what Judge Posner is referring to?
A. I don't know that he's referencing the Random Walk concept as I've
studied it.
BY MR. GOTTESDIENER:
Q. Okay. Well, then you tell me what does he mean right there when he's
saying that the current year rate could be an unbiased estimator on the
theory that it's an unbiased estimator?
Q. Okay. Go ahead.
A. He's saying that “One method of estimation is to use the current 1-year
T-bill rate.” And the reason you would use that is the theory that it is
an unbiased estimator of future such rates.
Q. You diluted it of any reason. You just said it's an unbiased estimator
because it's an unbiased estimator.
He's saying the theory -- you even left out the word theory when you were
reading his sentence.
On the theory that the current year rate is as good as any other rate is
the concept he's trying to get across, right?
A. Right.
A. -- as any other.
MR. CASCIARI: Wait, wait, wait. I object. May the record reflect that
you're again leaning towards the witness.
MR. GOTTESDIENER: Stop lying. Put the camera on me. Put the camera on me.
BY MR. GOTTESDIENER:
Q. Did I -- sir --
BY MR. GOTTESDIENER:
Q. Sir, the question put to you is don't you just agree that you don't
have any other way other than Random Walk to describe what Posner is
saying?
And if you do, for the third time, please, give me the label, the theory,
the doctrine. If he's not describing a Random Walk Theory, please explain
what it is.
A. I will accept -- I'm not sure what the entire implication of that label
is.
I will accept the statement that the Judge says the current rate is useful
because it's as good as any other or it's perhaps better than any other
estimate of the future.
Q. And you agree that the only way that you know of to describe that
theory is the Burt Malkiel Random Walk Theory, right?
BY MR. GOTTESDIENER:
Q. Just sitting here now you have no other way of describing that theory
as Random Walk, correct?
Q. Would you agree with me that what you just said as the free market
theory is indistinguishable from what a lot of other people call,
including yourself on occasion, Random Walk?
BY MR. GOTTESDIENER:
A. Yes.
Q. But it's the exclusive test that you talk about in your report?
A. Well, I go on to then look at the actual returns year by year and over
the 8-year period.
Q. That's just doing what I just said. That's no different than taking the
estimator and comparing it to the actual and counting them up and seeing
if there's four on one side and four on the other. And then you say it's
unbiased, right?
A. No. That's part of it. I also look at the magnitude of the differences
on both sides.
Q. Well, if you look at the bottom of page 10 and the top of page 11, what
you do after you have your chart, and we'll throw out for this purpose
2006.
A. All right.
Q. We'll come back to that. But you do your chart, and you say “For the 8
full years shown, the 30-year treasury rate exceeded the Plan's crediting
rate for 4 years and lagged the Plan's crediting rate in 4 years.” And
then we deal with 2006.
And you conclude at the top “So the 30-year rate perfectly meets the
measure of being an unbiased indicator of the Plan's crediting rate.”
A. Yes.
A. Yes.
Q. And then you repeat that at the top of 11, “So,” you use the word so,
“in conclusion at the end of a paragraph,” and you say “I've just
demonstrated.”
You have a chart on the prior page. You explain what you do in 2006.
You've got four on one side, four on another perfectly meets the measure
of being an unbiased indicator of the Plan's crediting rate. That is your
entire definition of an unbiased estimator, correct?
You may have other considerations later, but can't you just answer that
correct? Not --
Q. No. There's nowhere in your report where you tie the word unbiased to
anything else you're saying, correct?
A. The intent of the analysis of the differences was not, as I'm stating
now, it would be a relevant factor.
Q. It would be what?
Q. If the Judge is reading your report and saying “I like this Altman guy.
I can just stop right here at the top of page 11,” you don't give any
warning anyplace up until you get to the end of that sentence. And we'll
find out what you say later.
But you could just put your report down at the top of page 11 you agree
that the reasonable reader could say that is your exclusive measure of
what an unbiased estimator is?
A. Yes.
BY MR. GOTTESDIENER:
Q. Now, you then -- look at the chart on page 10. Again, we'll ignore
2006. You have it in front of you.
There is shows the four years where it's higher, four years where it's
lower, and you reach your conclusion. And up until that point there's no
other constraint on being unbiased?
A. Coincidentally from the way the figure has turned out, that's correct.
A. You pick 170 basis points because it comes very close to placing the
30-year, the 30-year -- the measure you're looking at to the credited
rate, but doesn't exactly exceed it.
Q. Well, we could use a lot of other numbers other than 170, and your
answer would be the same, it would be unbiased?
Q. Right, but you could use a lot of numbers less than 170.
A. Yes.
A. Yes.
A. And if that were only -- the only criteria I was applying -- well, let
me back up.
MR. CASCIARI: Objection. Let him answer the question. He wasn't finished
with answering his question.
BY MR. GOTTESDIENER:
Q. Okay. So we agreed the Judge could put your report down at page 11 and
be satisfied that what you were saying to her is that a flat rate of 7,
treasury rate, plus up to 170 basis points, a flat rate of 4.1, anything
between 4.1 and 7, it's okay in your book, it's an unbiased estimator,
correct?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
A. You asked between 9 and the two sentences at the beginning of 11?
Q. Yes. You start by saying it's unbiased, and you conclude by saying it's
unbiased. In the middle of your analysis you say “It is unbiased.”
A. Right.
Q. I'm just asking is there anyplace that you caveat that that is not the
exclusive criteria?
MR. CASCIARI: I move to strike your motion to strike. I get to say that.
BY MR. GOTTESDIENER:
It's absolutely unbridled that the only criteria is, only criterion is
that you've got basically four on one side and four on the other, correct?
A. So the section --
BY MR. GOTTESDIENER:
Q. Now, so let's go back to your agreement that any rate between 4.1 and 7
would meet your definition of an unbiased estimator, okay?
A. Yes.
Q. So that would mean then that the value of the upside, the 75 percent of
the Plan's trust, is worth maybe as little as .1 percent, right?
BY MR. GOTTESDIENER:
Q. Why don't you get out a pen and let's do some numbers.
A. Yes.
A. Right.
MR. CASCIARI: May the record reflect -- may the record reflect that Mr.
Gottesdiener is making facial expressions towards the witness.
MR. CASCIARI: Keep it on him. It's my nickel. Put the video on him.
MR. GOTTESDIENER: No. It's not appropriate. We're not doing that.
MR. CASCIARI: We are doing that. We are doing that. I'm saying we're doing
it.
MR. GOTTESDIENER: You know, Mark, I've had it with you. Okay? Stop
interrupting.
BY MR. GOTTESDIENER:
MR. GOTTESDIENER: Have you, have you ever put a video on a questioner
other than -- no?
MR. GOTTESDIENER: Fine. Turn it off. We're done. You're either going to
turn it off or you're going to put it on the witness.
And the other problem is I can't say “May the record reflect” because you
won't let me.
MR. GOTTESDIENER: Then shut up. Then shut up and let me take my deposition
that you're unfairly trying to stop at 5:00.
MR. CASCIARI: I --
MR. GOTTESDIENER: You gave no notice of that. You are interfering with my
deposition. You have no regard for the truth, the federal rules of civil
procedure, and I am going to proceed.
MR. CASCIARI: I have an obligation --
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
MR. CASCIARI: I don't know. I don't know that it would produce a different
result.
BY MR. GOTTESDIENER:
A. For unbiased?
Q. For unbiased.
Q. It's a paper dictionary you have -- when you say “paper,” you mean a
hard copy?
A. A book.
A. I don't recall.
A. It is in -- it is not in my office.
Q. So you looked in that book. And did you start with unbiased or biased?
A. Well, bringing me back to the word biased. So then I looked at the word
biased.
Q. Okay.
A. Then after that I looked at the paper to see if I was going to get the
same thing, and I don't recall which I looked at first.
A. Yes.
A. Yes.
Q. You say that the dictionary defines biased as “tending to yield one
outcome more frequently than another in a statistical experiment.”
Q. Well, I'm going to show you Exhibit 30, and if you take a minute and
look at 30, tell me if you agree that at the bottom it says the URL is
www.Merriam-Webster.com/dictionary/unbiased. Do you see that?
A. I see that.
Q. And then if you look at the definition, it says “unbiased.” And the
first definition is “free from bias, especially free from all prejudice
and favoritism, eminently fair and unbiased opinion is the example.”
A. Yes.
Q. The second entry says “Having an expected value equal to the population
parameter being estimated.” They give an example, “an unbiased estimate of
the population mean.” Do you see that?
A. Yes.
Q. Now, as of the two definitions, it would be the second one that would
be more appropriate in this context, correct?
A. I don't agree.
Q. Okay. Free from bias where it says “all prejudice and favoritism,” you
don't agree that that is tending to refer to social bias as opposed to
numerical?
A. That may be the case, but it doesn't conclude one way or the other.
BY MR. GOTTESDIENER:
Q. In your report?
A. Yes.
I'm asking you sitting here right now are you saying, because I'm hearing,
that you have no preference between what I asserted was a social
definition of bias and the second one that I read, which is a purely
numerical definition of bias?
I just want to make sure that I understand that you're saying you don't
have any preference for purposes of the discussion here, which one we
would use, or do you have a preference?
A. It's not clear to me as I sit here which I would have a preference for.
Q. Okay. Let's ask it a different way. You may not have a preference, but
there's one that's more appropriate without question to the discussion
we're having today as between those two definitions, and it's the second
one, correct?
A. The second one deals with statistical matters, but it's not clear to me
that this is what the Judge in Berger intended or that this is actually
appropriate.
Q. The question as asked was would you not agree that as between the two
definitions for the purposes of the discussion we're having now that the
second definition is more appropriate than the first?
Q. Now, I would like to focus on the second definition. You don't prefer
it, and you don't agree that it's more appropriate, but if you would
indulge me, I'd appreciate it.
I'm going to hand you another definition. And this definition is going to
be of “mean.”
Q. Okay. Take a look at 31. And 31 is from the same dictionary you pointed
us to, and it says that it is “something intervening or intermediate, a
middle point between extremes, a value that lies within a range of values
and is computed according to a prescribed law as arithmetic means.
Expected value either of the middle two terms of a proportion.” And it
continues, but that's essentially your understanding of “mean”?
It also says “arithmetic mean” and “expected value,” but yet the first
definition is broader than that specific statistical definition.
Q. For a given group of numbers, what is the mean? I'm not asking you to
read. I'm asking you to just tell me --
A. Correct.
Q. Okay.
Q. I don't know, that's not exactly the -- I don't know why you're saying
that. I'm not asking about --
A. You're not asking me about the definition of mean or you are asking me
about the definition of mean?
A. Right.
A. Okay. Please.
Q. And that is would you please put down those two exhibits? Thank you.
In this context that we're talking about, would you agree that the mean
and the average are synonymous?
A. I will assume that if you ask me to, but the definition of mean you
just handed me does not say -- requires the phrase arithmetic mean to
imply what you've just stated.
Because you said you found a definition of unbiased in the dictionary, and
it just referred you to the definition of biased.
BY MR. GOTTESDIENER:
A. I searched --
Q. In a dictionary?
A. No.
Q. Sir, you found the definition, you just didn't like it.
You found that second definition that you don't prefer, and that you say
is not more appropriate here despite the statistical context we're in, and
you just didn't like it, so you went to biased.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. You were unable to find the definition of unbiased that I've put in
front of you in Exhibit 30?
Q. You were unable to find either that definition or any definition on the
Internet looking for one that did anything other than say not biased, in
effect, “go see biased.” That was --
Q. And do you feel you have reasonable Internet search capability skills?
A. Reasonable, yes.
A. I described my process.
Q. There were other people who helped you with your report, correct?
A. Yes.
A. Yes.
Q. And they and you together were unable to find an actual definition of
biased that was anything other than not biased?
Q. But other than that caveat, you were unable to find an independent
definition of unbiased?
Q. Okay. And --
THE VIDEOGRAPHER: Excuse me, Eli. Can I go ahead and change tapes?
BY MR. GOTTESDIENER:
Q. And just so we're real clear, on page 9 you are citing to Merriam-
Webster.com?
MR. CASCIARI: Let him answer. Come on, let him answer.
BY MR. GOTTESDIENER:
Q. Could I just stop you and ask you a question about that?
A. Please.
Q. You've said repeatedly you've put something into Google. You opened a
dictionary --
A. No, later.
Q. What do you mean later? You got returns on Google, and they were
sorted, and you -- what you clicked on to see something that said
“unbiased,” what it defined, gave a definition of, was a dictionary.
A. Well, it actually gives you a list of definitions, and then you can
click on it to go further.
Q. And when you clicked on it, you were sent into some dictionary,
Roget's, Merriam-Webster, somebody who puts out dictionaries, right?
A. Right, uh-huh.
Q. And you're saying that you then were unable to find a definition other
than “Go see bias”?
A. Right.
Q. And then you went -- how did you get to the Merriam-Webster if you
weren't already there --
You're not saying you know for a fact you weren't already inside Merriam-
Webster, but you're saying you think you then got to Merriam-Webster; is
that fair?
A. Yes.
Q. Okay.
A. What I did was I went back to Google and say okay, let's try a
definition of bias.
Q. Okay. Once you got into Merriam-Webster, you were inside of it, and you
found “bias”?
A. Bias. Correct.
A. Right.
Q. Why not?
A. Yes.
Q. And yet you didn't think the source that you trusted, that it was worth
your time to bother to see if in a couple of seconds you could find maybe
inside this source that you trusted a definition of unbiased?
Q. But I'm asking you your thought process, sir, is that you find the
definition of “bias,” you determine that that's going to be good enough,
and you don't think that it's worth it to see whether the source that
you're about to trust and write about two pages of your report around
could be queried to find out if this source had a definition of unbiased?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
A. Uh-huh.
A. Yes.
Q. And Tim Mahannah, who is another enrolled actuary, he's billed 55.1
hours as of the end of October, correct?
A. Yes. Correct.
Q. And you have your assistant, and she's billed some hours too?
A. Yes.
Q. How much time would it have taken you to type in “unbiased” once you
were inside the Merriam-Webster dictionary to find the definition that
I've put in front of you?
Q. Now, if you get onto the definition in front of you of 30 that's of the
actual phrase that you are saying you've adopted unbiased estimator, when
you go to the definition of unbiased, and you go to the second definition,
you see “having an expected value,” right?
A. Right.
You would agree that your definition and this definition are functionally
equivalent?
A. Yes.
A. Okay. I think I'll accept that. When you said “average” before, you
just said average, that to me implies looking backwards at events. Now
you're saying --
Q. Well, I didn't say anything different when you're saying “now I'm
saying.”
A. What you're saying now is you want to take the average of what is going
to happen in the future. I'm sorry, say it --
Q. I'm not asking if it's different. I had no difference. I'm just asking
expected value in the sense of average in this context means the expected
value of what's going to happen on average in the future?
The average of the future interest crediting rates, that's the expected
value?
BY MR. GOTTESDIENER:
Q. Do you believe going back to Judge Posner, who started all of this with
the use of “unbiased estimator,” do you believe that when he said
“unbiased,” he meant simply half the time higher and half the time lower?
A. That could very well have been what Judge -- the judge in that case
meant. I don't see any -- well, I don't know if the Judge meant it had to
be exactly the expected value of an event either.
BY MR. GOTTESDIENER:
A. So --
Q. I'm sorry.
BY MR. GOTTESDIENER:
Q. Can you just answer yes or no? Could he have meant on average?
BY MR. GOTTESDIENER:
A. He could have meant that, but I don't believe it's actually correct.
BY MR. GOTTESDIENER:
Q. Okay. I want to make sure I -- when I said “okay,” I want to make sure.
You said you don't think that's correct. You mean you don't think that's
what he meant or you don't think that's the way “unbiased estimator”
should be defined?
A. I don't think that's the way -- specific to taking the current rate and
using it to predict forward --
Q. I don't know what you just said, but my question has nothing to do with
that.
BY MR. GOTTESDIENER:
I'm asking you are you disagreeing you think he meant something other than
the average of what's going to happen in the future?
BY MR. GOTTESDIENER:
A. Meant something else than the average of what's going to happen in the
future.
BY MR. GOTTESDIENER:
Now you're changing and saying he may well have been referring to
something else.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
A. I think he may have been speaking more broadly than that. Now we're --
I mean, you're asking me to speculate about what precisely he meant.
BY MR. GOTTESDIENER:
MR. CASCIARI: Let him answer. Please let him answer the question, Eli.
BY MR. GOTTESDIENER:
A. Right.
Q. We've been talking about Posner on and off for a good 20 minutes or so
just on Posner.
And you've never once when I've asked you “what is he meaning, what is he
meaning,” up until now you've never said that I was asking you to
speculate as to what he meant when you center your analysis around a
sentence in his opinion.
BY MR. GOTTESDIENER:
Q. Correct?
BY MR. GOTTESDIENER:
Q. You've never previously said when I was asking questions that I was
asking you to speculate as to what he meant?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. Before.
BY MR. GOTTESDIENER:
Q. Do you think he meant half the time higher, half the time lower?
MR. CASCIARI: Object. That could certainly have been what he meant or part
of what he meant, yes.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
A. For him?
BY MR. GOTTESDIENER:
Q. For you. Your view of what's acceptable is that if the range was 4.1 to
7, if he decided that that is an unbiased estimator, you would have no
problem with that?
A. Well, he is the one -- he's the judge, but I'm not saying that I
stopped my analysis at identifying an unbiased estimator.
Q. Where does Posner add any other criteria to what he's talking about,
whatever that may be, of an unbiased estimator?
A. Well, again --
BY MR. GOTTESDIENER:
MR. CASCIARI: For the sake of the court reporter, will you please. Let him
answer.
MR. CASCIARI: You know, Eli, really I want to say -- I want to say --
BY MR. GOTTESDIENER:
MR. CASCIARI: I want to say for the record I am not -- I cannot get a word
out --
You have had no regard for the rules of civil procedure. Every time I get
close to getting questions answered, you interfere, you object. You have
no basis for what you're doing.
So you are absolutely on record. File another motion. And you were
admonished to file motions, not interfere with the deposition.
BY MR. GOTTESDIENER:
Q. When looking at the chart on page 10, is the 417(e) rate on average the
same as the Plan interest crediting rate?
A. For this 8-year and 7-month period you're asking? For the period we're
looking at here in this chart?
Q. Yes.
A. No. The average of the 30-year treasury rate is not the same as the
average of the credit rate.
A. If you -- I suggest that one might throw out the year 2003 as an
outlier.
Q. You do it. You don't just suggest that one might. You, Mr. Altman, do
it?
A. Right. I present the analysis with and without the year 2003. I don't
only present the results without 2003, but I consider the -- what happens
if you throw out 2003.
A. As part of my analysis.
Q. Now, to your knowledge -- we'll come back to 2003. I want to talk about
2006.
To your knowledge was the Plan interest crediting rate changed in 2006?
A. Not to my knowledge.
Q. To your knowledge did any event occur in 2006 which would impact how
notional accounts were determined in 2006?
Q. I'm sorry, how does that impact how notional account credits were
physically determined?
A. Well, the only people for whom -- well, the period in question stops in
August of 2006. So it's only people who terminated in the first 7 and a
half months of 2006 that were considered here, and those people were
credited with 4 percent.
A. Yes, the Pension Protection Act changed the way that it was -- the way
that they are considered in my analysis.
Q. I'm not asking about your analysis. If I am a participant, and I am in
the Plan in 2006, and I'm in the Plan in 2007, what change occurred in
2006 to change what hit my account balance?
A. Nothing changed.
Q. Okay.
Q. If you wanted to --
A. And then I want to compare that to what the actual notional account is?
Q. That's right.
Q. Okay.
A. And let's just call that -- well, it doesn't matter, but it would be --
Q. It doesn't matter?
A. Then I would take the $10,000 and multiply it by each of the actual
crediting rates shown here. And this guy is -- you want to know the actual
rate in 2007?
Q. Yes. What would be the actual amount that he would have in 2007? I'm
just asking methodologically, and you're doing that.
Q. Not 4 percent?
A. Right. But that person -- well, I'll leave the answer there.
Q. Well, putting that aside, you would use the actual interest credit for
that person and not 4 percent?
At what point did this participant earn the right to the actual interest
credit for the 2006 Plan year at the full crediting rate of 9.6 percent?
It's 1/1/2006. PPA hasn't been enacted. At what point does our participant
earn the right to the actual interest credit for 2006 at the full rate?
But he could take his money out on July 1st, and his interest credit would
be 4 percent for the 6 months of 2006.
Q. And he would not have any right to anything above that 4 percent
minimum?
A. Under the Plan, correct, if he takes his money out in the middle of the
year, he gets 4 percent for the fractional portion of the year.
Q. Take a look at 96-8, Section 3(a) where it says “Thus, in the case of a
front-loaded interest credit plan” --
Q. 3(a.)
BY MR. GOTTESDIENER:
Q. 3(a)?
BY MR. GOTTESDIENER:
Q. That's right.
A. Okay.
Q. And it says “Cash balance plans can be characterized based on when the
benefit is attributable until interest credits accrue.”
You're saying that the right to the interest credit above the minimum
doesn't accrue until the last day of the Plan year in which the interest
credit is applied?
A. Right.
Q. So if the participant is paid before the end of the Plan year, they
lose the value of that year's interest credit?
A. Above 4 percent.
Q. So you're saying that future interest credits in this cash balance plan
are not completely front-loaded?
BY MR. GOTTESDIENER:
Q. The first thing you said was that it accrues when it is credited to the
account in your answer just then.
A. Right.
A. Right, because the interest credit -- that person accrues the right to
whatever interest crediting rate is payable under the Plan until they
terminate, until they take their money out.
A. Right.
A. Right.
BY MR. GOTTESDIENER:
Q. Or is it?
Q. 2006.
Q. Yes. He's not accrued anything other than his fractional right to a 4
percent interest under the Plan. I mean, you said that. That's under this
Plan.
Q. And so when the excess, the 5.6 percent is accrued, it's only accrued
on December 31st. It's only accrued on the last day of the year, that's
what you say in your report?
Q. Violates what?
A. 96-8.
A. No. The part you had me looking at was describing front-loading plans.
A. I withdraw my concern.
Q. And you believe that it's possible to have such a partially front-
loaded and partially back-loaded interest credit and not necessarily
violate the back-loading rules?
BY MR. GOTTESDIENER:
Q. But 96-8 does say pretty much because of the way these plans are
structured if you have a back-loaded interest credit, you're probably
going to be back-loaded?
BY MR. GOTTESDIENER:
Q. And you haven't done any calculations to determine whether this plan
fails the back-loading rules if, as we've discussed, the 4 percent minimum
is front-loaded, but anything in excess is back-loaded?
BY MR. GOTTESDIENER:
Q. Now, on page 11 you say in your report, you say that “Since there is no
rule or law that says that the rate used to project a credited rate has to
be a specific measure, such as the arithmetic average or the statistically
expected return” --
Q. Okay.
Q. Page 11 --
A. Yes.
A. Uh-huh.
Q. This is after you conclude again that it's unbiased if you have four on
one side, four on the other.
A. Uh-huh.
Q. You then say “Further, when looking at the actual returns,” that's when
you say they're relatively close, right?
A. Right, uh-huh.
Q. And then you say “Since there is no rule or law that says that the rate
used to project a credited rate has to be a specific measure, such as the
arithmetic average or the statistically expected return, using a measure
that is evenly higher and lower than the actual rate over time and
relatively close in each year except one supports using the 30-year
treasury rate”?
A. Yes.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. You did consider 96-8 in your report for purposes of your report as
controlling?
BY MR. GOTTESDIENER:
Q. Okay. So the question remains. When you said “no rule or law,” I'm just
very simply asking were you including 96-8 or excluding it?
Q. Okay. I'll ask the question again. Is 96-8 a rule or law within the
intended statement of your sentence?
You say there is no rule or law. Does that include or does it exclude 96-
8?
A. I don't know if there's anything -- I did not review it, and I don't
know if it says anything on this point.
Q. Okay. So the way that sentence should read is “Since there is no rule
or law (not taking into account 96-8 one way or another) that says” and so
forth and so on? Is that fair?
Q. Okay. If you turn to in 96-8 page 5, the middle of the first full
paragraph where it says “Further, in determining the amount of an
employee's accrued benefit, a forfeiture within the meaning of the cited
regulation will result if the value of future interest credits is
projected using a rate that understates the value of those credits.”
A. Yes.
Q. Wouldn't this rule require more than simply that the rate is an
unbiased estimator using your definition of unbiased estimator?
The fact that the average was relatively close and excluding when the year
was actually greater than the actual credited interest, you know, and I
think that, in essence, captures the whole case.
Q. My question was very pointed, and it was that would your definition,
wouldn't this rule require more than just your definition? Yes or no?
BY MR. GOTTESDIENER:
Wouldn't this rule that in determining the amount of the accrued benefit
you're going to have a forfeiture if the value of future interest credits
is projected using a rate that understates the value, would that rule
require more than simply your test of unbiased estimator?
BY MR. GOTTESDIENER:
Q. Or would it be satisfied?
A. As I interpret it?
Q. Yes.
MR. CASCIARI: Let me say this objection. Let me say this objection. We
need to state the objection.
MR. GOTTESDIENER: (Raising his hand.) Which you've never -- which you've
never read.
MR. CASCIARI: What do you mean? I have read it. You don't let this witness
answer questions or any witness.
BY MR. GOTTESDIENER:
Q. The pending question, the pending question that I've asked now three to
four times is your definition, would it set -- I'll ask the same question
a different way.
BY MR. GOTTESDIENER:
Q. Should?
A. Yes.
I'm asking is it required to look at more or could you just get by with
your definition?
BY MR. GOTTESDIENER:
Q. No, I understand there are all kind of things out there in the world
that could happen.
In your view is it required to take into account more or is it sufficient
to meet your definition?
BY MR. GOTTESDIENER:
Q. And you don't say that your definition of unbiased estimator requires
more, right?
A. Well --
A. I define unbiased estimator, and then I show how the Plan meets that
definition, but that's not the only definition or only test I apply in
developing my opinion that the 30-year treasury was a reasonable
estimator.
A. Well, that may or may not be the same as understating the expected
returns.
Q. But what if that's what was the case? What if that -- what if that's
the case?
A. Well --
BY MR. GOTTESDIENER:
A. Projection rate.
A. Yes.
Q. Now, assuming you had a perfect crystal ball, and you knew what all
future interest credits under the Plan were going to be, how would you
determine what the value of those credits were?
BY MR. GOTTESDIENER:
Q. Okay. Well, how about my question, which is you've got the perfect
crystal ball. Here it is. You know exactly what's going to happen. I want
to know how would you go about determining the value of those credits?
A. Well, then I would look at all of the future interest credits, and then
using the characteristics of those credits, I would use that to determine
the -- an appropriate projection rate.
Q. You'd take $1, and you'd move it forward in time increasing it with the
actual credits that you knew would happen to a future point in time,
right?
A. Right.
A. Right, if we knew what the future earnings crediting rate would be,
then we could set a rate for projecting the compounds that would produce
the same result.
A. Yes.
A. I don't agree with that. Implicit in that is you're saying you look
back, because you don't know the rates going forward.
Q. You do under my hypothetical.
A. All right. In your hypothetical if we know what the rates were going to
be for the 8-year period --
Q. Yeah.
Q. I had a question. I'm not importing any facts other than what's in my
question.
If you had a 50-year-old, and you had a crystal ball, how many years would
you need to do the analysis that you just said you could do?
And do you see where it says “For purposes of projecting cash balance
accounts to normal retirement age”?
A. Yes.
Q. “Alliant selected as a proxy for the interest credit amount the annual
interest rate on 30-year treasury securities as specified by the Internal
Revenue Service and in accordance with the rules of Code Section 417(e).”
A. I see that.
Q. This word proxy, we talked about that in another context. What does
“proxy” here represent?
A. Yes.
A. It's representing the rate of return that the Plan will credit.
Q. In the future?
A. In the future.
A. Yes.
Q. Okay. But it's an estimate, and the number or the rate, rather, of the
30-year represents something about future numbers, correct?
Q. So it's an average?
BY MR. GOTTESDIENER:
A. And I'm not aware of anybody that says what average -- anywhere where
it says what average it has to be.
Q. I'm trying to ask you -- there's really only two possibilities, that
it's an average, it's representing an average of future returns or it's
representing a constant.
It's trying to say “This is what the number is going to be in the future
year after year after year”?
Q. We do?
A. Well, it will vary with -- not absolutely, but with a great deal of
certainty.
You know that this Plan -- in 1998 you knew that this Plan was not going
to credit the same rate of return every year from '98 through 2006.
A. What am I doing?
Q. Yeah, when you're endorsing this rate, what is it that you are saying
it is?
It's not representing what's going to happen the next year and the next
year all the way out to retirement age?
A. Well, let's see. I'm projecting using the 30-year treasury rate.
They're projecting and I'm endorsing their use of the 30-year treasury
rate that relate to account balances.
Q. Right.
Q. The value varies year by year, but you're projecting only for the rate
the year the participant takes their account balance out?
A. Right. So in any given year you pick the rate for that year because you
have to make a calculation. You have to make the calculation, you want to
pay the person out.
Q. Right. And I'm asking is the theory behind using that year's 417(e) 30-
year treasury rate that the next year and all whatever years, maybe it's 1
year to retirement or 20 years to retirement, that that's it? That that
yield from that year with the lookback period, that's what it's going to
be because it's an unbiased estimator. It's going to be that -- on a
Random Walk Theory, it's going to be that same rate the next year and all
the way to retirement or does that use of that rate from that year
represent an average of all of those future years?
A. Just hold on. It's reflective for all of those future years.
I'm not saying it's going to be that single rate forever. We know there
will be variability for the future.
Some other kind of average that I'm not familiar with or some other
mathematical concept that has a word other than average?
Q. We're not taking the mode. This is not -- mode would be appropriate for
discrete events?
A. Right.
A. Okay.
Q. Okay. So what can you give me -- when you say “function,” is there some
other concept other than average that you can tell me that distinguishes
what you're trying to capture other than the same rate the next year to
retirement or some kind of mean median average of the collection of those
future returns? Because I don't understand.
A. Right. So we agree that that rate that we're using to project, the 30-
year rate for the year the person terminates, that that is reflecting
what's expected for all future years.
Q. As a bunch?
A. Yes.
Q. Not one by one seriatim each year. You're not trying to peg what's
going to happen each year?
A. Yeah. Right.
Q. That's right.
A. So you have these future years you're trying to reflect. You're picking
your rate in 1998, 6.33 whatever, and you're saying that that rate is
going to reflect all of the rest of the years we're going to get. Okay?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
MR. CASCIARI: I object to you not letting the witness finish the question.
You'd take the 8 points, and then you'd figure out what rate the eighth
power would -- divided by 8 would produce that number. I think that's
geometric average. That's not what I'm talking about.
BY MR. GOTTESDIENER:
Q. Maybe we can short circuit this. You do agree that it's an average of
some kind?
A. It's not an average. Average -- well, I mean, it's not an arithmetic
average, and it's not a geometric average.
BY MR. GOTTESDIENER:
A. Yes. Yes.
MR. GOTTESDIENER: Okay. I'm going to mark this blank piece of paper as 35.
BY MR. GOTTESDIENER:
Q. And give you a pen and ask you could you please write out the formula
that I could use to plug in those 8 years that we have?
MR. CASCIARI: You want him to write out the answer to your question?
Q. I actually thought that for the past 12 minutes I've been asking you to
describe it.
However, if I was wrong, I would like to just keep moving and get you to
write out this formula because it is what you're saying you're doing and
why the Court should say that it's okay. So I'd like to see it. Because I
don't see it in your report.
And you're saying it's not a current year's rate in each in the future,
that it's some kind of estimator of a group.
And I don't know what that formula is, so could you please write it so
there's no ambiguity?
Q. Please do.
BY MR. GOTTESDIENER:
Q. Marking what is Exhibit 36, could you please give me your formula.
There could be other measures that also satisfy those criteria, but I
think those are valid criteria. Those are the criteria that I applied to
determine that the 30-year treasury rate was reasonable for this purpose.
Q. I'm not asking about a justification or the criteria. I'm just trying
to understand mathematically what the rate that is used as the projection
rate represents.
A. No.
A. It could be --
A. It could be anything.
BY MR. GOTTESDIENER:
Q. It could be anything?
Q. But is it?
BY MR. GOTTESDIENER:
A. It could be --
BY MR. GOTTESDIENER:
A. All right.
If it's not a constant and it's not an average, it's got to be some other
mathematical thing that you're not identifying.
A. (Nodding head.)
A. Yes.
Q. Okay. So can you give me some mathematical term if you won't give me a
formula?
MR. CASCIARI: Objection to the form and harassing nature of this line of
questioning. He has already answered this question. He really has. You're
just not getting the answer that you want; that's all this is about.
BY MR. GOTTESDIENER:
Q. Go ahead.
Q. I wasn't asking that question. My last question was can you give me a
term in mathematics where I could go look up what it is that your 30-year
treasury rate, that number for that year, represents about what it's going
to happen in the future?
Q. Okay. But I just want to -- I'd like to keep talking about this, but I
think I got it's like an average. Will you accept that?
BY MR. GOTTESDIENER:
A. No, it has --
Q. Okay.
BY MR. GOTTESDIENER:
Q. But we got that it's like an average, but it's not, it's not like a
constant.
MR. CASCIARI: You cut him off. You wouldn't let him answer the question.
I want the record to note that you wouldn't let him answer the question
completely. You cut him off.
BY MR. GOTTESDIENER:
Q. Okay. Does it have any other characteristics of something you can put a
one-word label on in mathematics?
Q. Any other label words that you could put on it that would be recognized
in mathematics?
A. I don't understand.
Q. You don't understand? Didn't you have the right, the ability, the duty
to say what was the appropriate thing to do here?
Q. So --
BY MR. GOTTESDIENER:
Q. And you, however, know that what the Plan was doing was reasonable
because you performed a test, but when you did --
A. A series of tests.
Q. Yes. But when you're performing those tests, you were not following --
you were not aware as to whether or not it was doing a constant or if it
was using an average to predict the future?
Q. I'm sorry. I'm talking again about you said it was not trying to peg a
constant.
A. Right.
Q. What's going to happen each year. All right? That's not what the Plan
is doing.
A. It's not trying to get every year right.
Q. Right. So then I'm just saying why would you then again use or say that
the appropriate thing to do is use something that is so specific to that
point in time that it is not going to reflect averaging?
It's going to reflect, in effect, the random occurrence of that year, like
the year that you dump 2003.
Why don't you do an average or why don't you say that the Plan needed to
do an average?
A. That would have been another approach. I don't know whether it would
have been preferable or less preferable -- more or less preferable.
BY MR. GOTTESDIENER:
Q. It's fair to say that before I asked you this line of questions that
you hadn't considered whether or not the proxy that the Plan used
represented a constant or an average?
A. Well, it's obvious that the proxy of the Plan used is not a constant.
A. It's attempting to predict, right, the Plan's crediting rate over time.
Q. Right. And I'm asking you what justification could there be for using
apples and oranges, using a specific year's rate that has all of the
characteristics and the oddities that you talked about, the 2009, about
all of these different things that can happen that would make it
anomalous, to use that specific rate to try to predict a whole basket of
things that will be smoothed out over time?
MR. CASCIARI: Object to the form.
BY MR. GOTTESDIENER:
But you -- I don't think you want to look backwards. You might have
defined it as something that took the average of treasury rates from the
inception of the plan.
A. I didn't, and I don't know if that would have produced better or worse
numbers. But, again --
Isn't it fair that you really didn't think about this before I asked you
all of these questions?
A. I thought about the concept of using 1-year rates versus average rates,
that came up in different reports and different depositions.
BY MR. GOTTESDIENER:
A. Yes, I think I thought about that. That issue came up I think in some
other -- in either someone else's report, Mr. Deutsch's report, I don't
recall.
That issue either came up somewhere else. Maybe it did come up in one of
your expert's reports.
BY MR. GOTTESDIENER:
A. I think somewhere I read that, but I know that I have given that
concept at least some modicum of thought, at least I believe I have.
(Recess taken.)
BY MR. GOTTESDIENER:
Q. Would your opinion on the use of a 30-year treasury rate change if the
4 percent minimum were changed to a 2 percent minimum?
Q. How?
A. I would look at what impact that would -- well, I would think about the
impact it would have had from the beginning of the period, then I would
look at the impact it had during the period.
It would lower the rate credited in several years, and so lower the
average that was credited. And I think it would not affect the unbiased
estimator determination.
It would not -- I'd have to run the numbers. The 30-year treasury yield
may or may not be a reasonably -- the average may or may not be reasonably
close on that basis.
Q. How about if the minimum were 4 and three-quarters, would you still say
that the 30-year treasury is okay to use as a projection rate?
Q. It would be fine.
A. I'm sorry, I wrote them down. The criteria that we're talking about,
the four criteria.
Q. I can't plug numbers into -- can I plug numbers into Exhibit 35 and get
a right or a wrong answer or would I just have to use subjective feel for
whether things were close enough?
A. You would get data by applying these criteria and doing the calculation
as I've done them, and then that would enable you to perform a subjective
judgment.
A. It's possible that could be the outcome, because the average would be
further off from what was -- the actual credit, the average would be
higher than the 30-year treasury, although it would be a small amount.
Q. So what I take from the last exchange is that it's a happy coincidence
that the 30-year treasury and the numbers that were produced for this 4
percent floor in your view are close?
Q. And it's just in one year, one year after the Plan methodology was put
in place information that wasn't known that the interest crediting rate
and the 30-year treasury were reasonably close? One year?
Q. Please do.
A. Oh, my report? We're talking about -- I'm sorry, I thought you meant
the -- we're not talking about the graph you showed me earlier with the
years of data?
Q. We're talking about both of those things. Lock at that and look at your
page 10. Look at Mr. Deutsch's page 10 and see is there any other point
where those lines seem to touch.
A. Okay. I don't have Mr. Deutsch's page 10 with me if you want me to look
at it. Maybe I do over here. Here.
Q. Let's start with Mr. Deutsch's chart. And just tell me if I'm wrong
that the only place on that chart where they are reasonably close is 1998.
I think if you averaged this, you would get -- if you averaged the two,
you would get a result that's not apparent from the volatility of the
actual returns.
Q. Not unless you threw out years that you didn't like, like 2006 and
2003.
A. So in 1999 --
You wouldn't get what you just said unless you changed the data, correct?
Q. You're the one that started moving off that question. I just -- you
made a statement, and I want you to tell me.
A. Fine.
Q. If you could --
Q. Other than that a span of two to three decades, you can't identify the
years?
A. I'm just looking at pre- -- we're take about the 13 years before the
Plan is what you asked me to look at.
A. Yes, 13 years.
Q. Really the only time -- really the only time they come close to
touching is 1998, which is after it went into operation?
A. Right.
Q. -- there's really -- it's only in the year after the Plan went into
operation that they're very close?
A. Well --
Q. The other years you just can't say they're very close, can you?
A. In 2002 they're 1.32 percent off. In 2005 they're .86 percent off.
The average, the arithmetic average of the crediting rate versus the 30-
year treasury was within 1 and a half percent per year. And the arithmetic
average excluding that one extreme year, there are virtually identical.
BY MR. GOTTESDIENER:
Q. Take a look at the next page, page 11. Do you see where you say on your
report there are further reasons to use the 30-year rate as a reasonable
rate? And I'm some what paraphrasing.
“At the time Alliant converted to the cash balance plan, the investment
goal of its trust assets were to protect the integrity of the Plan and
assist the corporation meet its obligations.
“The investment policy statement went on to indicate that the plan should
attempt to produce results that achieve the actuarial rate of return.”
And then you pick up and say “At the time of the creation, the actuarial
assumed rate of return was 8.5 percent.”
A. Yes.
Q. “And with the investment goal set for the Plan to earn 8.5 annually,
the expected interest crediting rate equalled 75 percent of 8.5 or 6.375
percent.”
A. Right.
Q. And then you say “The 30-year treasury yield utilized for projecting
cash balance accounts in 1998 was 6.33, very close to the expected actual
rate of earnings credit at the inception of the cash balance design.”
A. Yes.
Q. And I just want to first establish it really was only that year that
the two are very close?
Q. So under the logic of that paragraph in your report, shouldn't the Plan
have assumed that the interest crediting rate would be 6.375 percent?
Q. No. It was after they put the Plan into effect that that one year
occurred, correct?
When you say “at the time” -- I just want you and I and the record to be
clear, they didn't know that at the time. That was after. The 1998 return
was after the Plan went into effect?
A. Right.
Q. And so you say here that at the time that was the assumed rate, that
was the goal, and the expected interest crediting rate equalled 75 percent
of, and putting aside any effect of the floor, I'm asking why under your
argument here shouldn't the Plan have assumed that the interest crediting
rate would be 6.375 percent?
Again, assuming -- putting aside the floor 75 percent of the goal and the
reasonable assumed rate of return, you said it was reasonable, why not use
6.375 or shouldn't it have been at least that?
You're saying this is a further reason. And you dig into this is the goal
of the Plan, this is the assumed rate of return. And then you focus, like
a laser beam, on the 1-year result.
And so I'm saying, you know, why is that not sauce for the goose?
Why wouldn't you say “Hey, these things really match.” But then after that
why wouldn't and shouldn't the Plan have assumed the interest crediting
rate to have at least been 6.375 percent?
A. Well, at the time they put this in, they picked a variable rate, I
don't know why, but they picked a variable rate that was very, very close
to what was the expected rate.
Q. I'm sorry, when you say it's var- -- sir, they didn't know the year's
return. They didn't know the return, they didn't know the 417(e) rate,
what it was going to be when they did this.
A. For 1998?
A. They didn't know what the Plan return actually was for 1998.
Q. They didn't know what the 417(e) rate was going to be in 1998, the
lookback, when they put the operation into the Plan in 1997 when they
drafted the document?
Q. You can look, but could you assume for purposes of this question what I
thought was well established, that they didn't have a crystal ball as to
whether the rate of return or the 417(e) rate, where that was going to be
either?
A. So you're not understanding. The 417(e) rate that they applied for
projections for anyone terminating in 1998 is the rate from October of
1997. It's the lookback period.
They didn't know, as you said, what the Plan was going to earn. Let's keep
it simple.
I mean, they didn't know what the Plan was going to earn, if it was going
to earn 20 percent that year, right?
A. They didn't know what the actual return on the Plan was going to be for
that year.
Q. Of course. But you're patting them on the back here and saying this is
a further reason.
A. Right.
Q. And I'm just saying why under your logic 75 percent of the expected
rate of return, you know, why shouldn't the Plan have assumed 6.375?
Q. They didn't know it was close at the time they put it into effect. They
needed to know both numbers.
Q. They knew? They had a crystal ball for that year? They didn't know the
return?
A. The two numbers that I'm comparing -- of course they didn't know the
return.
Q. Yes?
A. They knew what the 30-year treasury rate for October was because this
was signed in November.
And even if they didn't, they knew because it was getting close to
November or October, they knew what it was going to be about.
So by the time this was signed, they knew what the 417(e) rate that was
going to be used for the 1998 Plan was year was. That's one thing they
knew.
Q. Of course, you don't know any of this factually. You're not the one who
drafted this provision?
A. Right. They certainly could have known. The facts were available to
know.
Q. Yes.
A. And they also knew what the expected credited return was going to be.
A. Right, because the investment policy references the actuary you said 8
and a half and three-quarters of that is --
Q. You're asking my own question for me. So why -- and this is the point.
Putting aside the value of the floor, which you said has real value, why
wouldn't they -- if that doesn't change, if the investment policy doesn't
change, the investment goals don't change, the actuarial assumption
doesn't change, you're not answering, if I'm hearing you, why they
shouldn't always be assuming a projection rate at least of 6.375?
A. Right.
Q. They picked a rate that they didn't know whether there was going to be
any relation in the future, they didn't know even for one year that it was
going to be close, that was all post hoc?
A. Right. At the time when they made the election, they certainly had
available all of the information to conclude that they were picking a rate
that was very, very close to the expected crediting rate.
A. Yes.
Q. So, again, why not use 6.375, which is much more accurate and a
variable 417(e) rate that could flip-flop all over the place?
A. It -- the rate is variable. It could be higher or lower, you know, I --
BY MR. GOTTESDIENER:
Q. On your logic how is it you can justify not applying your logic and
coming up with at least 6.357?
A. Because more would have been -- well, we're assuming 8 and a half. So
we're assuming 6.375 would be credited. So the floor doesn't affect the --
Q. Okay.
A. They could have picked 6.375. That might have also been a reasonable
rate to pick.
Q. But why --
Q. I know they didn't, but under your logic, they should have.
Q. Well, sir, under your logic I put it to you that they should have at
least picked that rate or why not pick the 417(e) rate in combination with
a minimum of 6.375?
Under your logic they should have done that, shouldn't they, if they
wanted variability?
A. I don't say that they should have done that. That could have been
another reasonable rate.
BY MR. GOTTESDIENER:
A. No, no --
Q. Under your logic of that paragraph how is it can you explain that they
shouldn't have at least used 6.375?
BY MR. GOTTESDIENER:
MR. CASCIARI: Hold it. I want to cite to the Federal Rules of Civil
Procedure. And let me quote.
BY MR. GOTTESDIENER:
Q. On page 15 --
BY MR. GOTTESDIENER:
Q. On page 15 --
BY MR. GOTTESDIENER:
Q. On page 15 you state “The current expected return for Plans like
Alliant is generally in the range of 7 to 8.”
A. The projections that I've seen this year, 2009, are reflecting lower
long term expected returns.
A. Yes.
Q. So the plan crediting rate would be 75 percent of 7 and a half or
5.625?
A. Right.
A. Right.
A. To 4 and a half.
Q. And you said that it was reasonable for the Plan's actuaries to use 7
as the interest crediting rate expected return for participants?
A. Okay.
Q. So that means there's at least .625 value that you find reasonable
assigned by the actuary.
A. Okay.
A. Sure.
Q. So that --
A. Right.
MR. GOTTESDIENER: Why are you saying you have to take instruction from
him?
You are either going to point it there or we're turning it off. What are
we doing?
MR. GOTTESDIENER: The record is going to reflect that Judge Crocker gave
you very specific instructions.
MR. CASCIARI: May the record reflect that you came -- you went to the
videographer, and you physically moved the camera.
BY MR. GOTTESDIENER:
Q. Now, if you were to add over 50 basis points to 5.625, you are still
saying that that's an acceptable difference? Similar? It's still similar
to you?
Q. Today.
A. Well, the 30-year treasury rates have to be quite low now, but that's
not within the period that we're discussing.
Q. The law doesn't change what occurs in the markets, does it?
A. That's correct.
Q. Okay. And the law doesn't change that you get more statistically
significant results by taking in more experience, correct?
A. But my opinion is --
Now, you on page 20 say “When the overstatement and understatement are
combined, the total represents a cumulative understatement of 11.99
percent over 8 years or less than 1.5 percent per year.”
A. Right.
A. Yes.
Q. So ignoring the effect of compound interest, the difference would be 25
years times 1.5 percent per year or 37 and a half percent?
Q. Yes.
A. Yes.
A. Yes, because of the long term nature of the projection. You can't be
exact.
Q. So for Joe that's -- you could tell him that that's a relatively
similar result, 100,000 versus 142,000?
He should accept that as good enough for purposes of paying him his
pension?
A. Rates could have gone up, and Joe would have been paid exactly what he
was entitled to.
But because rates went down and because there was this one year where 17
percent was credited, the figures worked out to be substantially
different.
Q. On page 20 you say that “If 2003 is ignored, the Plan actually has
cumulative overstatement of a small amount highlighting how strongly
plaintiff's claim relies on a single year's return.”
A. No. I'm reflecting the rate that was credited to anyone who terminated
within 2006.
Q. Because that's a partially back-loaded interest credit?
A. Because that's the way the Plan treats people who terminate before
August 17, 2006 and take their money out.
Q. And so you changed 2006 actual crediting rate, and then you eliminate
2003.
Q. And you still can't cite us anything about using eight data points and
eliminating one or two of them as a statistically acceptable basis for
projecting returns in any kind of portfolio, can you?
A. No. As we discussed before, it's not perfect. You would rather have
more years, but if you have 8 years, you can utilize them knowing that
your results are not, you know, not based on a large sample size.
Q. But why would you, especially such few data points, why would you just
dump 2003 as opposed to fix it in some way and then use a fixed version of
it?
Q. Yes.
A. Right.
Q. You didn't give any weight whatsoever to the fact that the interest
crediting rate can be pretty high. You just eliminated it.
Q. But you didn't do any of the calculations with, without and with a
version that you found acceptable?
And the next thing is you didn't -- you took in terms of testing the
validity of the result.
You used the fact in 2006 that the law changed to cut off at the knees a
9.6 percent return?
Q. But that's not relevant. We went through all of this, and you said that
if you had to -- if you were going to predict what happened, there's no
way --
A. For someone who stayed, yes, but they're not in consideration here.
A. Right.
A. I'm saying that the rate that was applied to the participants in the
class was reasonable.
Q. Well --
Q. The participants in the class are still like the participants who are
currently not in the class. There may be more participants soon in the
class. They're all acting under economic facts. And those facts continue
through the passage of PPA, through 2007, through 2008 and 2009. It's more
data that you should be embracing, not rejecting.
If you wanted me to include it, I remind you that there's some tough years
in there since 2006.
Q. Well, if you don't dump out 2003, you just dump out the good and you
keep the bad.
BY MR. GOTTESDIENER:
Q. Now, consider a participant who had $100,000 account on 1/1/98 and no
pay credits after 1/1/98, and assume he would be hitting normal retirement
age on 1/1/2006.
Q. Yes.
A. No pay credits?
Q. No pay credits after, and he's going to hit normal retirement age
1/1/2006.
A. Okay.
Q. So you'll agree the actual value of the future credits on 1/1/98 are
the result of the actual interest credits that occurred in '98 through
2006?
Q. And but that's even though that actual value wasn't known on 1/1/98?
Q. Ten.
A. Okay.
A. Yes.
Q. Okay. So if the participant did not take a lump sum until normal
retirement, he would have an account balance, if you could get it own, of
171,371.
A. Okay.
Q. On 1/1/2006.
A. Right.
Q. Do you agree that if the value were exactly correctly reflected, that
the correct 417(e) minimum lump sum on 1/1/98 would be 171,371 divided by
1.0633 to the eighth power?
Now, if the correct minimum lump sum on 1/1/98 was 104,879, but the
participant was paid only 100,000, wasn't the participant underpaid?
A. Well, it's not correct. The participant was paid 100,00 under the terms
of the Plan assuming putting together what would happen if he had been
terminated and been paid on that date.
If he would have been paid 100,000, was he underpaid? He was paid under
the rules of the Plan.
Of course if he stuck around, he would have earned slightly more than the
30-year treasury rate.
BY MR. GOTTESDIENER:
A. Yes.
Q. Wouldn't that be evidence that projecting the value with the 417(e)
rate barely consistently understates the value of future interest credits?
A. Perhaps not by a significant margin. The first example you gave me was
less than 5 percent.
The first example you gave me I would categorize as not material. It was
less than 5 percent off over an 8-year-period, 5 percent off in total over
an 8 year period, so half a percent a year.
Q. Now, on -- well, the more the years of projection you agree the larger
the margin?
A. Well, you come up with bigger numbers if you project the differences
over longer periods, yes.
Q. And yet on page 21 you say “There is simply no arithmetic evidence that
the Plan materially understated participant's balances in operating the
cash balance plan.”
MR. CASCIARI: What are you going to do? Are you going to forcibly restrain
us?
MR. GOTTESDIENER: No. I would not do that. I'm not as uncouth as you are.
BY MR. GOTTESDIENER:
Q. I'm showing you No. 5. No. 5, sir, is Alliant 5482 and 83. You list
this on your report.
You see this is a letter from the IRS to the Plan representative?
A. Yes.
Q. And do you see on the second page the IRS is saying how the Plan --
BY MR. GOTTESDIENER:
Q. “Have the Plan use the same rate apply for both interest crediting and
for projection to NRD,” normal retirement date.
A. Yes.
BY MR. GOTTESDIENER:
Q. Let me show you 37. This is revenue ruling 2008-7; you're familiar with
that, aren't you?
A. I am.
Q. Why don't you turn to the very last page, the last paragraph before the
drafting information, second-to-last page.
And you see where it says after the first sentence about “the relief
doesn't extend discussed above to other 4-11 issues”?
A. Yes.
What does that mean to you, sir, in the context of a plan like the Alliant
plan?
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
MR. CASCIARI: I told you -- I told you at the beginning of this deposition
that we're leaving at 5:00. It's now 5:15 by my clock.
MR. GOTTESDIENER: I told you at the beginning of the deposition that your
behavior is inappropriate. You had no agreement to stop the deposition at
5:00 p.m.
You have absolutely violated every rule, every courtesy. You have
absolutely on obstructed justice.
MR. CASCIARI: I will also for the record that you were abusive. You've
abused this witness. You physically almost hit me yesterday. You threw
your papers to me today.
MR. GOTTESDIENER: You're a liar. You're a liar. Now I've almost hit you?
You are a liar. Go away.
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
BY MR. GOTTESDIENER:
Q. What is a relevant factor? Will you please answer that so we don't have
this issue?
What does it mean -- when this revenue ruling refers to a relevant factor
under the back-rating rules, what does it mean by a relevant factor?
Q. At this point?
Q. When you're not being ordered out of the room by defense counsel?
A. And just for the record I believe I've testified for 7 hours.
v.
Jurisdiction: W.D.Wis.
Representing: Plaintiff
Appearances.
Ronald J Kramer
Suite 2400
Frank J Wiener.
Seyfarth Shaw, LLP
Suite 2400
Chicago, Illinois
RECORDER: Okay, good morning, we're on the record, Friday, November 13th,
2009. The time now is 10:32 a.m. We're located at the law offices of
Seyfarth Shaw, 131 South Dearborn Street, Suite 2400, Chicago, Illinois
for a deposition in the matter of Lawrence Ruppert versus Alliant Energy
Cash Balance Pension Plan. Case Number is 2008 C 127 before the Western
District of Wisconsin. Our witness today is Mr. Clark Leroy Maxam. Mr.
Maxam, my name is Mike Lieschke, I'm a notary public and an employee of
Textnet Court Reporters. At this time, would you please raise your right
hand for the oath.
(Witness sworn)
RECORDER: Okay. Attorneys, please state your appearances audibly for the
record.
MR. CASCIARI: Mark Casciari on behalf of the defendants. And it's not
more than an hour. It's an hour, two minutes more than an hour, and we'll
take a short lunch break and we'll be just fine. And with me is Vince --
Vincent Warther. Okay? Ready?
RECORDER: Yeah.
EXAMINATION
BY MR. CASCIARI:
A. Clark Maxam.
Q. Maxam, you've been -- Mr. Maxam, have you been deposed before?
A. Yes, I have.
A. Twice.
Q. What cases?
A. A case involving S.C. Johnson and a case involving a Viatical
settlement case.
A. Viatical.
A. V-i-a-t-i-c-a-l.
A. Yes.
Q. Oh, sell securities related to the life insurance product that you
owned.
A. Sure.
A. Sure.
Q. Okay. If you want a break, ask for a break. All right?
A. Sure.
Q. What is finance?
MR. CASCIARI: Would you show the witness what is marked as -- marked as
Exhibit 38.
Q. What is 38?
Q. Okay. Now, if you turn to page 1 of your bio -- would you do that for
me, please? You have a description of your current position, correct?
A. Yes.
A. Mm-hmm.
A. Yes.
Q. And it says here that you train in an endowed program -- you work in
“an endowed program in trading and investment management that trains and
funds student traders and portfolio managers in equity, fixed income, a
neurological deficit commodities derivatives markets. And you “jointly
oversee and supervise the trading curriculum and risk management for a
growing trading operation and investment management portfolio,” end
quote. Now what -- what I take from that is that -- that you spend a lot
of time teaching students about trading insecurities. Is that right?
A. Yes.
Q. Okay. What do -- what do you mean by trading? What does that mean?
Q. Describe that.
Q. Well, tell me what traders do. What you teach students about.
A. We have our own assets in the program and we allow students to take
accounts out of those assets and trade with them.
A. Yes.
A. That's correct.
A. Yes.
A. That's correct.
Q. That's right? And do you grade them on whether they make the most
money?
A. No.
Q. And you teach them how to go about doing that to maximum their chance
of making money. Is that right?
Q. Such as?
Q. Because there's all sorts of economic data that one could research
that could be helpful in trading. Is that right?
A. Yes.
Q. And that's where your expertise comes in. You -- you teach them how to
marshal this data in a meaningful way so that when they do trades they
maximum their chance for success?
Q. Such as?
Q. Okay. All right. Now, you have been at the University of Colorado. Is
that right?
A. Yes.
Q. Were you doing something different there when you teaching at the
University of Colorado?
A. Currently no.
A. Yes.
A. That's correct.
Q. Teaching finance?
A. Yes.
Q. Not trading?
A. No.
A. No.
A. Yes.
A. Yes.
A. Yes.
A. Yes.
Q. Teaching -- no, it looks like you were an associate instructor or
research assistant. Is that right?
A. Yes.
A. No.
Q. Incorrect, right?
A. Yes.
A. XX/XX/
A. No.
A. Yes.
Q. Anything else?
A. Yes.
Q. How long did you provide such advice? To plans, to benefit plans.
A. In that regard?
Q. Being how many benefit plan clients did you have during that five-year
period?
A. Yes.
Q. When you were providing advice, investment advice and asset allocation
advice, were you the only one on the account?
A. No.
Q. How many senior people were there for those two or three accounts?
A. Two to three.
A. I reported to someone.
A. No.
Q. Number three?
A. Yes.
Q. All right. So, for -- for five years, you provided asset allocation
and investment advice to two or three benefit plans as the third in line
from the top on the advice team, correct?
A. Yes.
A. No.
Q. But who was respon -- but the -- was a senior person responsible for
reviewing a -- the fee statements or were you?
A. No.
A. Generally.
Q. When did -- when were you working on your teams where you were
advising those two to three pension plans -- or benefit plans?
A. When?
Q. When.
A. 1996 to 2001.
A. No.
Q. Incorrect?
A. Yes.
Q. Do you know anything else about the Pension -- Pension Protection Act?
Q. Do --do you know whether it affects how plans define asset mix? For
investment purposes.
A. No, I have no idea.
A. No, I can't.
Q. Okay. You know that this case is about an interest crediting rate,
correct?
Q. Do you?
A. Yes.
A. Just the experience I've developed in working on this case and another
case.
A. Yes.
A. No.
A. No.
A. To me? The --
Q. Yeah.
A. The selection of investments, portfolio formation, evaluation, risk
performance.
A. Yes.
A. No.
A. I --
MR. GOTTESDIENER: You can -- you can describe them. Don't name them.
A. Six.
A. Yes.
A. Yes.
Q. And also you advise them on what types of investments to purchase and
sell. Is that right?
Q. Do you provide any other services beyond what I have said? Or does
that cover it?
Q. Yes.
MR. GOTTESDIENER: Objection. Services to?
Q. Yes.
A. No.
Q. Do you provide -- have you provided for your -- these six clients
services other than investment management services?
A. No.
Q. So, if I was a client of yours, you might say, Mark, I think you ought
to be 60/40 stocks/bonds and for your stocks you ought to have a certain
percentage large cap, certain percentage small cap? Is -- is that
something you might say to me? Something along those lines?
A. In generally. Potentially.
Q. And you -- and you might suggest that that asset allocation change
over time due to a variety of factors? Is that right?
A. Rarely. Yes.
A. Yes.
Q. Have you had any experience with cash balance pension plans before the
S.C. Johnson and in the Alliant cases?
A. No.
Q. Did you know what such a plan was before this case?
A. No.
Q. When did you begin your relationship with him? When did it commence?
A. He --
Q. -- was that?
A. He contacted me.
Q. In a previous case?
A. Yes.
Q. Was that the first time that you started working with Mr. Gott --
Gottesdiener on any case?
A. I wasn't --
Q. Huh?
A. You know, I wasn't working with him at that point. He just called me
for some information.
Q. Okay. Was that the first time that you spoke to him ever in your life?
2002, 2003.
A. Yes.
Q. How did be happen to call you at this point in time, if you know?
A. No.
Q. Consulting expert?
A. No.
A. No.
A. I have no idea.
Q. How many hours have you spent on this particular case? Do you know?
A. No.
Q. Just yourself?
A. Yes.
Q. Okay. You note in -- if you look at your first footnote in your report
on page 1, that you state that you will supplement the report with a
declaration. And you've done that correct?
A. Yes.
Q. If the -- if you come up with some new date, might you supplement your
report?
A. Possibly.
Q. All right, let's turn to page 1. Under SCOPE OF THE REPORT, you say in
the first paragraph that your report is limited to a relevant time, which
is -- is what you define as January 1, 1998 until August 17, 2006. Do you
see that?
A. Yes.
A. I was informed by Mr. Gottesdiener that that was the relevant time.
A. Yes.
A. I believe January 1st was when the Cash Balance Plan was formed and
August 17th was when the rules regarding projection of future cash
balance plan values was changed.
Q. You say in the second paragraph that “Interest Credits are determined
each year under the Plan as the greater of 4 percent or 75 percent of the
Plan's return on assets.” Do you see that?
A. Yes.
Q. “Plan Trust's return on assets.” That's for the prior year, isn't it?
That return on assets that you refer to.
Q. How -- you -- you -- you talk about 75 percent of the Plan Trust's
return on assets. How was that determined?
A. The return on the Plan assets over the course of the year.
Q. What year?
Q. Okay. When -- when you run the math and you get -- you have to compute
75 percent of the Plan Trust's return on assets, what year do you look
for to obtain the return on assets?
Q. What are you -- okay. So how would I determine if I wanted to find the
interest credit rate from 2000, who would I determine the return on
assets with which to multiply 75 percent by?
A. You would see the Plan Trust's return over the year 2000 and multiple
by .75.
Q. Okay. You note on the bottom of page I that you have reviewed
documents including “presentations made by the Plan's actuaries as part
of the Plan design and asset allocation decision-making processes”. Do
you see that?
A. Yes.
Q. Okay. And Towers Perrin, I take it, is -- have -- have -- has been the
Plan's advisor and consultant and actuary? Is that right?
A. That's my understanding.
Q. Okay. Now, on page 2 you state that you're assuming that IRS Notice
96-8 is authoritative. Do you see that?
A. Yes.
A. I have.
Q. By the way, do you know who wrote it? What individual wrote it?
A. No, I --
A. -- don't.
A. Yes.
Q. But you don't know whether that's in fact the case, do you?
MR. GOTTESDIENER: Asked and answered and silly. This statement is taken
directly out of Berger v. Xerox, which controls this case. I guess you
didn't know that. It's a quote from Judge Posner.
Q. What are the statutes and regulations that you refer to here when you
say 96-8 is an authoritative interpretation?
Q. Well, I'm asking you -- let's take it one step at a time -- what's the
statute that 96-8 is an authoritative interpretation of?
A. I don't know.
A. I don't know.
Q. Is 96-8 a regulation?
A. No.
A. No.
Q. So, the opinion that you offer is your opinion regardless of whether
or not 96-8 is an authoritative interpretation of statutes and
regulations. Correct?
Q. Well, then why did you say that you are making an assumption that it
is authoritative of it's not meaningful that it's authoritative?
A. For --
A. Mm-hmm.
Q. Yes.
A. Yes.
Q. Does it mean that the estimate must be precisely the true answer? Or
is there some room there that it can deviate from and still be an
estimate that's unbiased?
Q. So, there's some room that the estimate can -- a range, if you will,
the estimate can fall into and still be an unbiased estimate, correct?
A. Yes.
Q. Does the motive of the individual who selects the unbiased estimate
have any effect on whether the estimate is in fact unbiased?
A. The motive?
A. Explain.
A. Yes.
A. I don't know.
Q. Is -- is there a source that would -- that you would use to find out
what that -- whose those words mean?
A. A statistics textbook.
Q. Any one in particular?
Q. Called?
A. Econometrics, I believe.
Q. Any others?
A. I believe so.
Q. Do you know what the definition says? Or do you have to look at the
book yourself?
Q. Now, in -- in the sentence where you talk about unbiased estimate, you
start by saying “Under 96-8”, then you go on to say “unbiased estimate”.
Do you see that? Do you see how that sentence is structured?
A. Yeah. Yes.
Q. So, are you saying here in your report that the notion of unbiased
estimate comes from 96-8 since you use that prefatory phrase “Under 96-
8”?
A. That's my understanding.
Q. But I asked you earlier whether or not that's the case and you said
you weren't sure. Right?
Q. Okay. So, let me ask you now. Does 96-8 address unbiased estimates?
A. I don't recall.
Q. So, you're not sure if this sentence is correct where you say under
96-8 an unbiased estimate is necessary. Correct?
A. I don't recall.
Q. You -- you go on to say in that paragraph, quote, “The benefit paid
may not be less than the discounted present value, paren, using the
statutorily-prescribed interest rate and mortality table, close paren, of
this accrued benefit, comma, even if the value is larger than the balance
of the participant's notational account,” end quote. Do you see that?
A. Yes.
Q. What choices?
A. Which rate?
A. I don't know.
A. Yes.
Q. But mortality has to be taken into account to come up with the present
value. Is that right?
A. My understanding is that has something to do with the value of the
annuity at the end -- at the future balance date.
A. Yes.
Q. Do you know whether or not that the balance of that interest credit
takes into account mortality factors?
A. No.
A. I have no opinion.
A. Yes.
A. Correct.
Q. How do you know that an illegal forfeiture would occur under those
circumstances?
Q. You go on to say in that sentence that “the participant will not have
received the actuarial equivalent of his normal retirement benefit”. Do
you see that?
A. Yes.
Q. Now, you could've used the word “equivalent”, right? Just the word
“equivalent” in that sentence.
A. I suppose.
Q. But you used the word “actuarial equivalent”, right?
A. Yes.
A. I don't know.
Q. What did you mean to say when you used the words “actuarial
equivalent”?
A. I was attempt -- I was including the -- the notion that there was this
mortality table and future annuity value involved in the calculation.
A. No.
A. Yes.
Q. You understand that that is one of the questions in the lit -- in the
litigation for Mr. Gottesdiener, correct?
A. Yes.
Q. You don't know that on your own, do you? You -- you have analyzed the
-- the papers filed in this case to determine if that is in fact an issue
in the case, have you?
A. No.
Q. In the next paragraph you talk about “75 percent of the Trust Fund
earnings equity-based variable rate”. Do you see that at the end of that
paragraph? Seventy-five percent?
A. Yes.
A. Yes.
Q. What part?
A. Roughly 65 percent.
Q. Well, why do you use equity-based when part of the assets also were in
bonds?
A. Yes.
A. It means it changes.
Q. Well, would you rewrite this, if you could, to say that it's equity
and other asset based?
A. Trust Fund returns are returns on the investments that they make.
A. Yes.
A. Yes.
A. No.
A. Yes.
A. Yes.
A. Correct.
Q. And then you apply an interest crediting rate derived through the use
of a considerably more conservative 80 percent confidence level, which
yielded, in your opinion, a future crediting rate of 8.45 percent,
correct?
A. Yes.
Q. Explain that.
A. Yes.
A. And if you look through those projected returns and move down through
them to the point where you've covered 80 percent of them, you find the
8.45 percent number.
A. Correct.
A. Yes.
Q. Why 80 percent? Why not 70 percent, why not 90 percent, why not 95
percent?
Q. Does it come from any source? Any book or such that says you should
use the 80 percent level?
Q. To come up with that 80 percent level, did -- did you or do you apply
a formula?
A. Formula?
Q. Yes.
Q. What is it?
A. You take all the returns, you rank them, you -- from high to low, you
move down though the ranking until you reach the 80 percent point.
A. I don't understand.
A. Yes.
A. I don't know.
Q. Higher or lower?
A. Would be lower.
A. In a statistics textbook.
Q. Green?
A. Yes.
Q. Is -- is it reasonable?
A. Yes.
Q. Are other percentage levels besides 80 percent taken off the median
reasonable?
A. I think they're -- you know, you could certainly choose 80, 70, 60,
50.
A. Possibly.
Q. Or something higher, correct?
A. You could.
A. Potentially.
Q. What is it about this case that tells you it's not within the range to
go to 81 percent?
A. I don't know.
Q. Perhaps?
A. Potentially.
Q. If the judge asks you, well, what should the interest crediting rate
be for these plaintiffs in this particular case, what is your opinion,
and she asks for one percentage? What is your opinion?
A. 8.45 percent.
Q. Well, it's the paragraph that says, “The results of the stotastic --
stochastic -- sorry -- simulation modeling I performed” and then I'm
going to sort of paraphrase this -- are supported by similar stochastic
simulation modeling performed by Towers Perrin. You -- are you with me?
A. I don't know why you would paraphrase when you can just read it but --
A. I think it's important to understand the way the Plan and its
actuaries were thinking at the time and the methods that they were using
at the time.
A. Similar. Yes.
Q. And there are several estimates that the Plan could determine that
would be reasonable because of the course the future is unknown, right?
A. Correct.
Q. For example, the -- the stock market crash of 2008 was unknown, right?
A. Yes.
A. Yes.
Q. I imagine that for your clients, and correct me if I'm wrong, you
would bias a certain return to your clients that you mentioned carlier in
2007 that were highly excessive when compared to what actually happened
in 2008 versus what you thought would happen. Is that right?
Q. Okay. Was your advice -- are you able to say whether or not your long-
term advice was too optimistic now looking back on the 2008 stock crash?
A. I don't think it was too optimistic because you cannot look at a long-
term return in comparison to one year's realization.
Q. After the stock crash of 2008, did you advise your clients to expect
more modest returns?
A. No.
Q. Okay, let's turn to -- well, let me -- let me ask you one other
question before I get off this subject. You -- you did make reference to
the fact that Towers Perrin's stoe -- stochastic ana -- analysis is
similar to and supporting of yours, correct?
A. Yes.
Q. Why then didn't you just use the Towers Perrin analysis?
A. I -- yes.
A. Yes.
Q. Section B. Yes?
A. Yes.
Q. Section B, right. Just want to make sure we're on the same page. You
say then in the first paragraph, “After investigating alternatives, I
elected to use the Society of Actuaries/Casualty Actuarial Science (sic)
report, quote, Modeling of Economic Series Coordinated with Interest Rate
Scenarios, 2004, paren, the SOA Report, close paren, as the basis for my
analysis,” and quote. Do you see that?
A. Yes.
Q. So, you thought you would -- you'd just build your own stochastic
model. Is that right? That's what you meant by investigate?
A. Yes.
Q. Did you actually build your own model and compare it to the SOA model?
A. I did.
Q. Did you read any other models beside the SOA model? Or it -- was it
just the -- it's the first one you read and you thought it was good?
A. I have read and used stochastic modeling in the past, and based on my
experience with that, I thought it was a good model.
Q. But did you look at any other models beside the SOA model?
Q. Did you --
A. --in terms of --
A. -- of this plan.
Q. What books?
A. I can't recall any titles but books that discuss stochastic modeling.
A. Wayne Winston.
Q. Any others?
Q. When you say the SOA report was well documented, I take it that it was
-- it was supported by literature and such. Is that what you mean by well
documented?
A. Yes.
Q. Did you -- did you check the underlying literature to make sure that
the stated documentation was in fact correctly cited?
A. For convenience.
Q. Was it a -- was the -- the model that you used adopted by the Social
of Actuaries?
Q. Was it --
A. -- proposal.
A. I don't know.
A. I don't know.
A. Potentially.
A. No.
Q. So, what we have in this case with your opinion is really not a model
that was -- has been completed endorsed by the Society of Actuaries,
correct?
A. I don't know.
Q. Well, it's different in some respects from the SOA model, right? The
one that you used. Because you made modifications to it.
A. Yes.
A. I did.
A. No.
A. I used it as support for the notion that the interest crediting rate
was an option and that it was a valuable option and that when you looked
at the equity portion and isolation you could clearly see the value of
that option.
Q. You agree with me, don't you, that the annual interest crediting rate
in the Alliant Plan is really a series of one-year options that offer the
participant the better of a floor of 4 percent or 75 percent of the Plan
asset return, don't you?
A. Yes.
Q. If you look on page 12 of your report, you -- you actually say the
annual -- in the first paragraph of that page -- quote, “the annual
interest crediting rate is really a series of one-year options that offer
participants the better of 4 percent or 75 percent”. Do you see that?
Q. It's the second sentence of the first paragraph. Just -- just affirms
what you've already testified to. I'm just directing your attention to
that.
A. Yes.
Q. Okay. And Towers recognized that the 4 percent floor was a call
option, right?
A. Yes.
A. Yes.
Q. Let me -- let me just ask you some questions -- for the subject I'm
talking about now. Goldman Sa -- you know who Goldman Sachs is, don't
you?
A. Yes.
Q. So, the value of those equities then would turn in part on the value
of the bonds held by the firm. Right?
A. To some degree.
Q. Does it matter to you that the Alliant Plan option -- that is, the
interest crediting rate -- is not valued on the open market?
A. Yes.
Q. In what sense?
Q. You said it's significant and I'm just asking you why.
A. If you had something that you could actually sell, it would be more
difficult to sell, yes.
Q. If it's more difficult to sell and you hold the option, then it's true
that you have to lower the price on the option vis-à-vis what you would
sell it for on an open market. Correct?
A. Correct, but the opposite is true, it's almost more difficult to buy
and you would have to raise the price to buy it.
Q. No, but if I hold -- if -- if I'm just looking at it from the -- the -
- the holder's point, the seller's point, if I have this option, it is
easier for me to sell an option on an open market than it is in a private
market for the value of the option.
Q. I think you answered the question. The -- the point is from a -- from
a seller's standpoint you'd have to lower the price vis-à-vis the value
in order to sell if it you're not trading on an open market.
Q. Have you ever -- oh, strike that. You -- you decided to use a Society
of Actuaries stochastic model as your base, right?
A. Yes.
A. I believe it was earlier than that. I think there was some published
articles about in 2004, 2003.
Q. But the point is that it didn't exist at the beginning of the -- what
you call the relevant period, 1998 to 2006, correct?
A. All the techniques that had existed, but the collection of those
techniques was published after that period.
Q. Okay. So, the Alliant Plan could not have picked up the SOA model that
you used in 1998. Correct?
A. Correct.
Q. Have you ever used the stochastic model the -- that you used in this
particular case for any employee pension plan?
A. No.
Q. Have you ever used it to valuate interest crediting rate? Besides this
case and the S.C. Johnson case?
A. No.
Q. Are you aware of any pension plan that has used any -- the model that
you used, the stochastic model that you use in this case and the S.C.
Johnson case --
Q. Yeah.
Q. Now, the model that you use uses data through 2006. Is that correct?
Q. Right.
Q. Yes.
Q. If you turn to page 5 of your report, under heading B, do you see the
reference to -- in the middle -- “current economic data such as inflation
and interest rates as of each year-end, 1997 through 2005” --
Q. Yeah. So, you're using data that did not exist back in 1998, correct?
A. That's not correct. What I'm referring there is that I did look at
successive years 1997 through 2005 but as of each year I used only data
available to me prior to that year.
Q. Well, then you used data in -- in the 2005 context data that was
available in 2004. Is that right?
A. That's correct.
Q. Okay. But that data did not exist back in 1998, correct?
A. For my 1998 model I used data only prior to 1998, and subsequent years
followed the same rule.
Q. So, for your mo -- for your 2005 model, then you used parameters based
on '04 data.
A. That's correct.
Q. Okay. And for your 2005 model, the data that you've used was not
available to the Plan back in 1998, correct?
A. Right.
Q. Okay. Does the Society of Actuary model use parameters based on '05
data?
A. I don't recall. It was published in 2004. So, I don't see how -- see
that it would.
A. I don't recall.
Q. You don't use -- oh, strike that. So -- so, you used in your model
certain parameters that post-date 1998, correct?
Q. But there were parameters in the models that you used in arriving at
your opinion that -- that used data that post-date 1998?
A. And I'd have to review the Society of Actuaries model. I believe they
used very long-term data and I don't remember exactly when they added
that data to support their model parameterizations.
Q. Okay. Turn to page 5 of your report. You say here that, quote, “I used
the base assumptions from the SOA report together with current economic
data such as inflation and interest rates as of each year-end, paren,
1997 to 2005, close paren, in order to best capture the economic
environment facing an analyst attempting to project future crediting
rates at that time,” end quote. Do you see that?
A. Yes.
Q. But the time period that's relevant in this case begins in 1998,
right?
A. Yes.
Q. So, doesn't this sentence certainly suggest that the data that you're
using post-dates 1998?
Q. You say that on page 7 that you -- you just the base assumptions of
the Society of Actuaries. Is that right?
A. That's correct.
RECORDER: Mm-hmm.
Q. I hand you what's marked as Exhibit 39. Can you take a look at this?
Can you tell me what this is?
Q. Can you tell me which of these parameters are not Society of Actuary
parameters?
Q. So, why did you change the SOA parameters the way you did?
A. Which ones?
Q. Well, okay, let me -- let me just go through this again. Which of the
parameters of the SOA did you not use?
A. The yield curve and level of inflation. And large and -- and small
stock volatility.
A. Yes.
A. Yes.
Q. Okay. The safety yield curve. Why did you make that change?
A. Because the model calls for the input of current market conditions at
the time.
A. Same thing.
A. I evaluated those measures that they had in that model and I didn't --
I viewed those parameters as not being realistic for the markets at the
time.
Q. Why?
A. You -- you will get a higher -- you could potentially get a higher
option value, yes.
A. Yes.
Q. Okay. So, you -- you took out the Society of Actuaries' large and
small cap parameter and put in -- stock parameter -- and put in large and
small cap stocks with higher volatility. Right?
Q. 73.
A. Which number?
Q. In other words, did you run your models with the SOA large and small
cap stock volatility data to see what number you would come up with other
than 10.73?
Q. Well, why did you -- so, we don't know exactly how much lower,
correct?
A. Correct.
Q. Okay. And -- and why did you reject the SOA large and small cap
volatility numbers?
Q. You said you looked at your own historical analysis to make that
comparison.
A. Yes.
WITNESS: Ibbotson.
MR. CASCIARI: Can you spell it?
WITNESS: I-b-b-o-t-s-o-n.
A. Yes.
A. Two --
Q. The historical analysis that you used was available to the SOA
researchers when they developed the model and parameters. Right? The
Ibbotson data.
A. As far as I know.
Q. Okay. You said you input yield curve data and level of inflation data.
Do you remember that? You said that?
A. Yes.
Q. Are there several sources at the Federal Reserve that you chose from
to get yield curve and level of inflation parameters?
Q. Yes, that would give you yield curve or level of inflation parameters?
A. No.
Q. So, there are other sources out that might give you different
parameters?
Q. If there are other sources out there, that could affect the 10.73
number, right? Because the -- because the parameters you select are going
to have an impact on that --
A. I view the Fed data as authoritative data. I don't see any problem
with that.
Q. Did the SOA, Society of Actuaries, recommend using the Fed FRED data?
A. I don't recall.
A. I don't recall.
Q. But what comes out of your model is affected by the parameters that
you chose. Correct?
A. Yes.
A. Yes.
Q. So, with different parameters you get a different number as the end,
right?
A. Yes.
MR. CASCIARI: Can you mark this? Can you hand it to the witness?
RECORDER: 40.
RECORDER: Yes.
A. No. I don't.
Q. Are these SOA assumptions for the SOA model that you chose?
A. I'm not seeing that these match any of the assumptions in the other
document you provided.
Q. So, in Exhibit -- what -- what are -- what -- what are the assumptions
stated in Exhibit 40?
Q. Describe how your model works, the one that you used to come up with
your opinion in this case. We know that the base of it is the -- is the
SOA stochastic model that was published in 2004. We know that. We know
that you made certain changes. But describe for me how it works.
Q. The -- the model contains data, right? Or the model uses data. Is that
a better way of saying it?
A. Yes.
A. Yes.
A. Raw data?
A. I don't understand.
Q. Describe for me how the equations work with the assumptions and the
parameters.
Q. So, it places rules around the path, and then how does it come up with
a number at the end?
Q. Data.
Q. Every time you run this path, you're going to get a different number
at the end, right?
A. Yes.
A. I suppose so.
Q. I'm sorry. Median. But every time I run the path, I end up with a
different number at the end. Correct?
A. Correct.
Q. And then take that distribution of numbers and you get a median,
correct?
A. Mm-hmm.
Q. Yes.
A. Yes.
Q. 200?
A. Probably not.
A. Possibly.
Q. You can't say how far down in terms of something less than 5,000 runs
would be still within the range of reason, can you?
MR. CASCIARI: May the record reflect that Mr. Goss -- Gossendiener's
laugh -- laughed at that. You want to comment on it?
MR. CASCIARI: I'd like to know where you -- why you're laughing.
Q. Mr. Maxam, the -- the -- the -- the model that you created with the
base of the SOA stochastic model can be referred to as a system of
equations, right?
Q. Did you turn over to us with your report enough computer codes and
data so that we could run your model?
A. I believe that I turned over everything that you would need to run the
model, yes.
MR. GOTTESDIENER: Did you -- is there something missing that you've asked
us for that we didn't give you?
Q. No, I'm just asking you, are you sure about that?
Q. Now, what we -- before the break, we talked about how you changed the
model by including international stocks and then estimated the parameters
for that assumption. Correct?
Q. Anything else?
Q. Anything else?
A. No.
A. I added -- yes.
Q. Equation. Or assumption.
A. Yes.
Q. And then did you -- did you add -- to run the model then you had to
add parameters inside those equations?
A. Yes.
Q. The -- the ones that were different from the parameters in the SOA
model itself?
A. They're all the same except for the volatility assumption, which I
updated to current market.
Q. Okay. Same for -- strike that. And for the corporate bonds, what
parameters did you add?
A. I added a parameter to add a risk premium to the long interest rate
process to account for corporate bonds.
Q. And where did you get your -- the parameter that you -- the data that
you used to create your updated volatility parameter? You talked about
volatility and you updated that. Is that right?
Q. When --
A. -- talking about?
Q. Okay.
A. -- I --
Q. And -- and did that parameter -- did that -- was that updated
information, I think you said?
A. Risk?
A. Oh, the pro -- program at risk. It's not required but it's a nice --
it's a useful tool.
Q. In what sense?
Q. What about correlations? Did you add any correlations to the model?
A. I added correlations for the international stock process and the
corporate bond.
RECORDER: 41.
A. Yes, I do.
Q. What is it?
Q. So, this is the base model that you used with some changes?
A. That's correct.
Q. Now, two-thirds of the way down this page, it talks about how the
model uses the longest time series available for large stocks, 1871 to
2002. Do you see that?
A. Yes.
Q. Does that refresh your recollection as to whether the data used in the
SOA model was available in 1998?
A. Yes.
Q. Okay. So, the data that was used to create the SOA model was not
available in 1998, correct?
A. Well --
A. Four of, you know, 130-some data points were not available.
Q. And -- and those are the data points that are most recent in -- in the
scheme of things, correct?
A. Yes.
Q. And recent data points are more valid than data points from 1871?
Q. So, the -- the stock volatility that was in effect in -- that happened
in the late 1800s is as meaningful as the volatility that took place 2002
--
A. Yes.
A. Yes.
A. No.
Q. If the volatility was greater in the 1800s as compared to more
recently, including that data would have the effect of ultimately
increasing the interest credit assumption that you now suggest to the
court, correct?
A. Increased volatility would increase the option value and the crediting
rate, yes.
Q. Right. So, including -- including numbers from the 1800s that were
highly volatile would have the effect of increasing the option value?
A. I don't know that the numbers from the 1800 are highly volatile.
A. There were certainly periods after World War II that were every bit as
volatile as that period.
Q. What periods?
A. There were some periods in the '70s -- I couldn't tell you exactly,
but volatility was very high. Most recent period was the highest
volatility we've ever seen.
Q. How -- but your data stopped before 2007, 2008, 2009, correct? Your
data --
A. The data stopped but the projection rate goes well past those dates.
Q. Right. But the volatility that was used in 2007, 8, and 9 doesn't
affect the 10.73 percent number. Or am I wrong about that?
A. Well, to the extent that I'm modeling potential volatility in the
marketplace, I would want to think that I had captured as much of the
possibility of volatility in the marketplace happening and I would
certainly that what happened in those periods were captured in my data so
that I had a representative picture of how the markets were going to
behave in the future.
Q. Yeah.
A. It shouldn't have?
Q. Right.
Q. All right. Don't many economists believe that economic volatility has
been lower since The Depression because of Depression Era regulations?
A. I've seen that argument, but I also know many economists are
completely perplexed by the volatility of the most recent period here and
it's been among the most heavily regulated periods of time.
A. Correct.
Q. Can you cite me to the changes that you made in this Exhibit to
customize your model for purposes of this case?
Q. But let's -- let's -- I wanted to say that the -- the term change
includes both taking away from the model and putting something else in
and just adding something to the model.
MR. GOTTESDIENER: Objection.
Q. So let's -- let me ask you this. What -- what parts of this Exhibit C
did you alter?
Q. Can -- can you -- can you -- can you refer me to the pages in here?
Q. Right.
Q. But you also changed, I believe, the -- what did -- did -- what did
you change in the model? That is, what -- what did you --
A. As I --
Q. Right.
A. -- parameters.
Q. Right. Can you show me where the volatility parameters are discussed
in this Exhibit?
Q. What -- okay, where are the parameters that you changed? Can you -- I
know there are no page numbers, but -- do you want to start at Section 5
and then take me page by page after that so I can find those parameters?
Is that fair?
A. Sure.
A. Time Period, the last column. It says Time Period 1913, 2001.
Q. Right.
A. -- parameters were.
A. Okay. Next page I don't see anything. The next page I don't see
anything. The next page, nothing. Next page, nothing. Next page, where it
says Excess Monthly Returns.
Q. Right.
A. Yes.
A. Yes.
A. Correct.
A. Correct.
Q. Anything else?
A. No.
Q. Are those the only things that you changed -- the parameters that you
changed, rather, in this Exhibit C?
A. Yes.
Q. What did you change the parameters to? What number -- what numbers?
MR. CASCIARI: Well, let me see -- I'm sorry -- make sure I got the right
one. You know, I think you're -- you're okay --
RECORDER: Sure?
Q. What -- what effect does this have on the model that you created based
on the Society of Actuaries stochastic model?
A. This is really a guide to using the software that they provide the
template for.
Q. Yes.
A. I don't recall using it in great detail, but I'm sure I read it.
Q. Was there -- is there anything in this guide that you did not use in
applying your model for this case?
Q. Can you think of anything that you rejected about the guide?
A. No.
A. Yes.
Q. Did you disagree with anything that you read in these presentations?
Q. Did you -- were they -- were they helpful to you in running your
model?
A. Yield curve.
Q. Okay. Can you point me to the inputs that altered in Exhibit 44?
Q. Right.
A. I used the yields that applied for the current market conditions at
the time.
Q. Did -- what effect did your altering of these inputs have on the final
credited interest value which you ultimately came up with?
A. They had the effect of making the credit rate reflect current market
conditions at the time.
Q. As compared to the inputs in this Exhibit 44, did they have the effect
of increasing or lowering the value that you ultimately computed?
A. Again, the current market conditions are required input to the model.
So, the current market conditions determine the output of the model. And
I don't know from what point these current market conditions are entered
in here. They were variables that needed to be changed to properly
reflect the position of the analyst at the time.
Q. But did -- do you know whether -- whether or not if we use the inputs
that are on page 1 on Exhibit 44, would we come up --
A. So, if you used inflation rates that were not from that time and
interest rates that were not from that time, it would affect the output.
Q. In which way?
Q. Yeah.
Q. So, what -- can you tell me what -- if we use these inputs that are on
Exhibit 44, what your -- the value of the interest rate that you camp up
with would be?
A. If I use these?
Q. Yes.
A. The value of the -- so, if I use the wrong data for that period of
time, I would pro -- most likely it appears that I would get a lower
crediting rate because the level of inflation, level -- level of three-
month T-bill rate is -- and short-term rates are lower.
Q. When you say current, how current were -- were your inputs?
A. How current?
Q. Yes.
A. For purposes of projecting 1998, I used the year end 1997 values.
MR. GOTTESDIENER: Several times previously answered. We've been over this
I think probably three or four times.
Q. Okay. Go ahead.
MR. GOTTESDIENER: But if you want to keep doing it -- I guess you want to
keep doing it.
A. Short -- or sorry -- the small cap volatility and the large cap
volatility.
A. Those are under EQUITY MODEL - REGIME SHIFTING (sic), Large Stocks,
the volatility of equity return in state zero, and under small stocks the
same variable.
A. Yes.
A. The .039.
A..052.
Q. All right. And what we do know from your other testimony is that if we
ran these inputs in your model instead of the ones that you did choose,
the value of the credited interest rate would be lower. Correct?
Q. Okay.
A. Yes.
Q. What is it?
A. It is the Ibbotson long-term data.
Q. Yeah, and -- and what role did this play in your modeling?
A. That's correct.
Q. And lastly --
Q. Of your model?
A. Yes.
Q. Okay. So, if someone were to take the Society of Actuaries model and
alter it as you did, the -- the result of computing the value of the
interest rate, the credited interest rate, would be different, right? If
you change the assumptions.
A. Yes.
Q. Now, your model was not based on actual Alliant Plan returns and
investments, was it?
A. Actual plan returns and investments. It was based on the stated target
asset allocations.
Q. But it -- let's break that down. But it wasn't based on the actual
returns on the investments that the plan made, was it?
A. No.
Q. And we know that -- that the actual returns are different from what
your model produced. Correct?
Q. In what sense?
A. The actual plan return, geometric plan return, over history of the
plan is within range of what my model produces.
Q. But different?
A. Sure, different.
Q. So, your model wasn't a perfect predictor of what the plan actually
earned? Correct? Amy I correct?
Q. Let -- let me back up for one second. You changed certain assumptions
in the Society of Actuaries model, right?
A. Yes.
Q. But the -- the -- the necessary assumptions that you did or that you -
- the necessary changes you made to the assumptions could be
characterized as the ones involving current inflation and such, I take
it, and they were different qualitatively than the -- the change that you
made on long-term stocks, small cap stocks?
A. I don't understand.
Q. Okay. Were some changes that you made more necessary than others?
Q. How do you know that your assumed asset mix accurately reflects the --
the plan trust's actual asset mix?
Q. Did you conduct any investigation to see if that -- that asset mix
continued throughout the relevant period that you have --
A. At the time I wrote the report, I had another report from a subsequent
year, I believe in 2000 or 2001 that showed the asset allocation at the
time for the plan was 70 percent equities, and it was an actual asset
allocation. And after I wrote the report, I -- I was able to see
subsequent analysis provided by a -- a new actuary or a new consultant of
the plan that showed the investment policy statement of 2007 was indi --
they indicated in that that the asset allocation was targeted at 70
percent equities. So, prior to writing the report, I looked at it and 65
percent seemed reasonable and conservative and I -- I guess I was able to
verify that afterwards.
Q. But the -- the 70 percent equities mix was after the relevant period.
Is that right?
Q. Are you aware that -- that many analysts are recommending to pension
plans to get more conservative in their equity and fixed asset ratios to
increase their fixed asset percentages and lower equities?
A. That's possible.
Q. Given the recent market turmoil and the state of the economy, that
would be a -- and perhaps changes in the Pension Protection Act, that
might be a prudent thing to do?
Q. But just --
A. -- but --
Q. If this plan becomes more risk averse and lowers the ratio of equities
to fixed assets from 65 to 35 percent, that would reduce volatility,
correct?
Q. Right. But -- and you just finished testifying, I think that it's
relevant to look at the asset mix in 2007, 2008, and going forward
because the interest crediting process goes forward. Is that right?
Q. Well, I thought you said that if -- that -- that the 70/30 mix was
relevant to you in 2007.
Q. Okay. Suppose I tell you that for 2010 the asset allocation is 50/50.
Suppose I tell you that. What effect does that have on your opinion?
Q. How would that affect your opinion about the interest credit rating?
Q. Well, in my --
A. -- my answer.
Q. -- the --
MR. GOTTESDIENER: You interrupted his answer, and I'm not clear that your
little video camera has picked up what he said. So, we'll just supplement
with a declaration later. Go ahead. You can ask your question.
RECORDER: That's not the only recording device here, Mr. Gottesdiener.
MR. GOTTESDIENER: I'm glad to hear that you're giving testimony, Sir --
MR. CASCIARI: Okay, hold it. We're taking a break. Let's go off the
record --
RECORDER: An attorney.
RECORDER: Good.
RECORDER: Yes.
MR. GOTTESDIENER: I don't -- I don't play the games that you do. But I --
you need to tell me precisely with some reasonable degree of accuracy
really how much time you have --
MR. CASCIARI: I'm not going to argue with you. I want to know when --
RECORDER: No --
RECORDER: Okay.
RECORDER: I will not put it there. I will shoot it where I want. You can
move to quash --
RECORDER: -- my video.
MR. GOTTESDIENER: -- going to shoot me? Are you going to shoot me? You
came in seven minutes ago --
RECORDER: -- to quash.
RECORDER: -- an emergency --
RECORDER: -- to -- to -- to --
RECORDER: All right. I will shoot the camera where I want. If you want to
quash my video, you can move --
MR. GOTTESDIENER: Where did you get -- where did you -- yeah, and you're
an attorney, right?
RECORDER: Correct.
MR. GOTTESDIENER: And where did you get trained? Where's your
certification from as a -- as a -- you're not a court-certified -- you're
not court-certified as a stenographer --
RECORDER: Correct.
RECORDER: Correct.
RECORDER: I will do that -- you can pre -- you can present that in
writing. I'll answer all of those.
RECORDER: -- Sir.
MR. GOTTESDIENER: Okay. This is all -- this is all very consistent with
the conduct that we saw the other day --
MR. GOTTESDIENER: -- it's like the things that you file in court. Little
games. We -- we need to keep going. If you want to finish this --
Q. Can we talk about Towers Perrin now? Mr. Maxam, Towers is a well-
respected actuarial firm. Isn't that right?
A. That's my understanding.
A. I believe so.
RECORDER: -- yesterday.
RECORDER: Thanks.
Q. Now, you said previously in this deposition that the Towers model,
stochastic model --
Q. Is substantially similar to your own model that you used in this case.
Do you remember that?
Q. You also said in your report that Towers followed generally acceptable
financial modeling principles. Isn't that right?
A. Yes.
Q. -- at the bottom? And then you list a number of bullet points, what
those generally accepted financial principles are. Do you see that?
A. Yes.
A. Yes.
Q. Towers' stochastic model, which was performed in 2001, used data that
existed up to January 1, 2001. Isn't that right?
MR. CASCIARI: Why don't you mark this as the next Exhibit number.
RECORDER: 47.
A. Yes.
Q. What is it?
Q. Turn to page 6865. It's the Bate number in the lower right-hand -- or
the lower left-hand corner of the document. 6865.
A. Okay.
A. Yes.
Q. And you can see that -- that this chart is entitled Stochastic
Forecasts, correct?
A. Yes.
A. Yes.
Q. Now, isn't it true that the correlations that Towers used between
asset classes or among asset classes is substantially similar to those
that -- that you employed?
A. That's correct.
A. Correct.
Q. Turn to your report page 19. Exhibit 38. I'm sorry, page 18. Tell me
how the correlations that you used differed -- or differ from the
correlations used by Towers.
Q. Well, turn -- turn to your report at page 8 for now. And take a look -
-
A. Yes.
A. It refers to the fact that -- I was referencing the fact that Towers
used higher correlations than I did. And that I was verifying that higher
correlations resulted in a higher interest crediting rate.
Q. So, if you made your -- strike that. If -- if Towers used the same
correlations that you did, then their expected credited -- crediting rate
would have been less, correct?
Q. Okay. So, had Towers used the correlations that you did more directly,
their risk would've been less and their expected interest rate return
would have been less. Correct?
A. And without knowing the model and assuming correlation was the only
factor that influenced that, it could be less.
A. That's correct.
Q. As a general rule.
A. Yes.
A. Yes.
Q. Are there any other assumptions that would have an impact on results
as -- comparing, rather, the Towers model and yours, beside the asset
allocation strategy and the correlation -- correlations?
A. Yes.
A. Yeah.
A. Difference?
A. I'm not entirely sure. I don't have the -- the full towers inputs at
my disposal.
Q. Okay. But in your opinion what Towers did was reasonable because it
was substantially similar to your model?
A. Again, I don't know their model. It's possible, but I couldn't say for
sure.
Q. Well, in terms of trends, in terms of trends, had they used a more
conservative asset allocation assumption as did you in your model, and
had they used correlations likely yours in terms of trends, it would have
trended down -- it would have the effect of reducing the estimate as --
A. I don't understand --
Q. -- as opposed --
Q. Okay.
A. I'm sorry.
Q. Right.
A. -- the same.
Q. Do you have any reason to believe that Towers Perrin was operating in
anything but good faith when they came up with their stochastic model?
A. There's some documents that I've reviewed and I cannot say and the
time sequencing to me is unclear, but there's some documents that I've
reviewed that indicated that somebody either in the Alliant Plan or in
towers recognized that they had perhaps not priced this interest
crediting rate appropriately. So, I don't -- can't answer that fully, but
all I can say is that, you know, there's something in some document that
I saw that indicates there might be an incentive --
Q. Go ahead.
A. An -- an incentive for them to kind of not make the value of the
interest rate crediting rate as apparently larger to the plan versus its
plan return.
Q. Did the model -- was the model re -- the reason for the mispricing?
A. The model?
A. I couldn't say.
Q. But still you found that the Towers stochastic model was reasonable --
Q. Was the document that you can't recall the identity of cited in your
report?
Q. The document that you can't recall the identity of cites in your?
A. No. And I don't know that it was one specific document. I think it was
maybe a collection of things and, you know, that I read through.
Q. Okay, take a look at page 9 of your report. Now, the -- these are the
Towers projected interest crediting rates and the chart up on page 9. Do
you see that?
A. Yes.
Q. And the projected rates vary from 8.25 to 8 point -- I guess to 10.4.
Do you see that?
A. Well, if you look at the top of page 9, you say here in this -- in the
first full sentence, “Towers' 2015 projected annual interest crediting
rate, estimated as of March 2001, of the plan asset allocation is 8.25,
where my 80 percent confident projected rate estimated as of December 31,
1997 is 8.45”. Do you see that?
A. Yes.
Q. So, what I take you to be doing is to comparing your 8.45 to the 8.25,
right?
A. Yes. The only comparison I could make for 2001, number to my number.
Q. Right. Okay. So, go back to Exhibit 47, which is the Towers Stochastic
Analysis dated March 29, 2001. And show me the 8.25 number to which you
are comparing your 8.45. And if it's on a different page, go ahead and
show me that.
Q. Page 19?
A. Yes.
Q. And that's the number that you chose in your report to compare your
8.45 to, correct?
A. Yes.
Q. Is that a mean or a median? And by that I mean the 8.23 number.
A. I'm not sure where the 8.23 number was pulled from. I'm trying to see
that. All I'm looking at is chart here with the number 8.23 written on
it.
A. Okay. Yes.
A. Correct.
Q. Mean or median?
Q. Median.
A. Yeah.
A. Yes.
A. Correct.
Q. Okay, so the median is less. The Towers median is less than 8.23.
Q. Turn to page 4.
A. I'm on page 4.
Q. Okay. Well, you -- you see where median is identified as the middle of
the bars. It's right -- it's a -- it's a line below the -- the darkest
square or rectangle.
A. Yes.
Q. Okay. So, going back to page 19, 8.23 is the arithmetic mean or
average, right?
A. Yes.
Q. And the -- the median is the value at the line that is the bottom of
the dark -- darkest rec -- rectangle or square on that bar chart -- on
that bar. Right?
A. Okay.
Q. So, what we know is that the Towers median estimate is less than 8.23.
Q. Well, you know it's less than 8.23. Because that line is below the
8.23.
A. I -- I don't see a scale that I can read 8.23 off of the line.
MR. CASCIARI: Oh; you know what? Let's mark -- this one --
RECORDER: Oh, hang on a second. I know. You -- you want -- you going be -
- you want to make this 49 and I'll take this --
MR. CASCIARI: -- you have -- no, you have 48. If you want to check it
against the one marked, go ahead. Take a moment.
MR. CASCIARI: It's 48. That's 48. The one that I had marked, Eli, had
some -- my notes on it. You want to check, take some time to check it?
MR. GOTTESDIENER: No, I don't want to take any time. I just want to know
--
MR. GOTTESDIENER: -- you handed me something and you said -- have you
marked it 49?
Q. All right. Turn to page 27 of Exhibit 48, which is the Towers March 1,
2001 forecast. And on page 27, it's titled Stochastic Forecasts. You see
that?
A. Yes.
A. Yes.
Q. Okay. Now, the eightieth -- I'm sorry -- the -- the 8.23 is replicated
on this bar chart as well. It's the same number, the 8.23, that we've
seen on Exhibit 47, right
Q. And the line that is below -- or at the bottom of the blackest box on
the chart on the right is the fiftieth percentile, which is the median,
right?
A. Correct.
Q. Okay. So, what we know now is that the median the Towers stochastic
model forecast -- forecasted for the interest rate is less than 8.23.
Q. Can you tell us how much less? Take a moment and read the graph
A. -- percent confidence --
Q. Right.
A. -- interval.
Q. Right?
MR. GOTTESDIENER: And you've asked this 50 times. It's the 80 percent
confidence level. It's not a median, a mean. You don't understand what
you're talking about.
Q. Right. And then you take the 80 percent confidence level and we get --
Q. We get 8.45.
Q. Do we?
Q. Okay. And the 8.45 then would compare to what? In the Towers bar
chart.
Q. Go ahead. You --
A. They're --
Q. -- can answer.
Q. Okay. Can you show me on the bar chart on page 27 where that -- where
the line would be with -- applying such an 80 percent confidence level?
On that bar that has 8.23 on the top.
Q. Do you have any explanation why the Towers stochastic model produced
such lower numbers are compared to yours?
A. I don't know their model. As I said, the only thing I can presume is
that they put in different inputs that resulted in their lower numbers.
Their expected number was 8.23 percent.
Q. Let's talk a little bit about Ibbotson again. You used the Ibbotson
historical comparison analysis as part of your report on pages 9 and 10.
Right?
A. Yes.
Q. And you thought that this analysis was an appropriate method to
estimate -- strike that. If you thought that the Ibbotson analysis in and
of itself was an appropriate method to estimate crediting rates, you
would not have used -- created and used your stochastic model, would you?
A. In general, no.
Q. You disagree?
A. Yes.
Q. So, then, past stock performance does not necessarily predict the
future stock performance, right?
A. No, you asked me whether a specific boom year would predict future
years and if I were to advocate that. Which I would not.
A. It is true?
Q. Is it true?
A. I would imagine that a lot of people have changed their asset mix.
A. Yes.
Q. On the theory that the past may not always predict the future. Right?
A. -- they're doing that on the -- they're basing that on the fact that
the past does predict the future and they don't -- they're worried about
it.
Q. Now, the Ibbotson analysis you did is not based on actual plan
investments, correct?
A. Correct.
A. That's correct.
A. Fixed assets?
Q. Bonds.
Q. Yeah.
A. The assumptions? Ibbotson has a return series for fixed income assets.
WITNESS: Series.
Q. And the Ibbotson model's results are considerably higher than your 80
percent number. Isn't that right?
A. They're higher than my 80 percent number and relatively consistent
with my median number.
Q. And they're higher than plan returns in eight of nine years. Isn't
that right?
A. Yes.
Q. Okay. And the Annual Average of the Plan Interest Crediting Rate
actual 1998 to 2006 is 7.32. Do you see that number?
A. Yes.
Q. So, it is true that the Ibbotson analysis that you performed produced
a much higher expected return than were produced by the actual plan
returns, correct?
Q. Why not?
Q. Well, can I compare the long-term average to nine years? The average
over nine years? The 7.32 to the 10.51?
Q. Well, let me ask you this. Do -- given what the plan actually
returned, how does it compare to the Ibbotson analysis you performed?
A. Mm-hmm.
Q. Yes?
A. Yes.
Q. Why did you me average when arriving at your Ibbotson crediting rate
number instead of a median?
A. Because --
Q. -- why --
A. Yes.
Q. Why didn't you take that 10.76 -- I'm sorry -- 10.54 number down to an
80 percent confidence level, like you did with your stochastic model?
Q. Now, even though the -- the numbers on your chart on page 10 are based
on an analysis going back to 1926, they are predictions for each
particular year, correct?
A. No.
A. No.
A. No.
Q. What is --
A. It's --
Q. -- the relationship?
A. The relationship is this is how a crediting rate would have looked had
we been able to run it since 1926 given these asset allocations. So, it's
a very long-term picture of what the crediting rate looked like through
that period of time.
A. That's correct.
Q. How can you explain, then, that the actual crediting rate for a
particular year is so much less?
A. I -- I can't tell you what the actual crediting rate was for Ibbotson
for those years without looking at the data.
A. That's correct.
Q. And what we do know is that the actual crediting rate for 1998 was
8.01. We know that much.
Q. And we -- but we also know that the actual crediting rate for 1991 was
8.01 percent. We know that.
A. For 1998 it was 8.01. For the plan according to what you've given me
here.
MR. GOTTESDIENER: That's wrong. You represented that it was right, and
it's wrong. Your chart is wrong.
Q. On pages 10 and 11 of your report, you talk about the IEC plan actual
compound interest crediting rate from '87 to the year indicated. Do you
see that?
A. Yes.
Q. Why did you come up with this number based only on ten years?
Q. Do you know whether or not those ten years were above average stock
returns in the market?
A. In this case?
Q. Yes.
Q. Okay. But I asked you whether or not the stock market returns during
those years were above average when we look at those returns compared to
the Ibbotson period of 1926 forward.
Q. Can you perform a -- a similar analysis that you did for the IES plan
corning up with an average of 8.95 percent for the actual plan returns
1998 through 2006?
A. Similar to what?
A. Yes.
Q. Okay. Tell me what the actual annual compound interest crediting rate
from 1988 to 2006 was for the actual plan at issue. Can you tell me that?
Q. Right.
A. And you mean -- by the actual plan at issue you mean the combined
plan?
Q. Well, let me rephrase the question. What if I just took the period of
1998 to 2006 and wanted to get an -- plan actual annual compound interest
crediting rate from 1998 to 2006, could you do that analysis?
A. If --
A. I cannot tell you for sure. I don't know how you computed that number.
Q. How would you compute the number if we wanted to compute a number like
the one you have for the IES plan only for the years '98 through 2006?
Q. Yes. Right.
A. So, you would look at the performance of the plan over that period of
time.
Q. Do you agree that the stock and bond market increase in the '80s and
'90s was one of the most usual -- unusual in the history of capital
markets? Do you?
A. I can't agree with that. I -- I'd have to know much more about
everything you're talking about.
A. Yes.
Q. What is it?
A. Yes.
Q. What does that tell you about the period in the '80s and the '90s?
A. It says they were among the highest of the decades that they measured.
I presume they're measuring docades as arbitrary 20 -- 1920 to 1930, 1930
to 1940.
Q. Right. When you run your IES plan actual annual compound interest
crediting rate from '87 to the year indicated on page 11 of your report,
if you had more complete Ibbotson data or -- or Ibbotson-like data,
rather, going back to 1926, those interest crediting percentages would be
less, wouldn't they?
Q. Well, what is the effect of the fact that the '80s and '90s were among
the highest in returns? What effect does that have in your analysis?
A. I guess -- I guess as you kind of pointed out to me, the '87 to '97
IEC plan return is 9.65. The Ibbotson '26 to '97 return using the same
asset allocation is 10.65. So, it appears from this -- this information
that including the previous period would raise the number. And the reason
for that is because of the compounding effect that the crediting rate
affords the participant, in that they never take a loss, that they always
get the 4 percent minimum, and therefore over long periods of time that
compounding rate builds. And that is reflecting. I think, the value of
that compounding rate in the crediting rate through time.
Q. Now, you talk about the IEC plan. Is that right? On page --
A. I -- I --
Q. -- II.
A. My recollection is that they are the WP&L plan, the IES plan, and the
IPC plan.
Q. Is there some reason why you did not provide compound in -- compound
interest crediting rate for the IPC plan?
A. There were two reasons. Number one was they had a substantially lower
-- a substantially different asset allocation than IEC, WP&L, and the
combined plan going forward. Second reason was it was a very small plan
relative to the other two.
Q. Did you know what the asset allocations were in the three plans?
A. I could only infer what the asset allocations were from the
performance of the plans.
WITNESS: Correct.
Q. So, you didn't do an analysis on the one with the lowest returns,
correct?
A. I did do an analysis on the ones with the lowest returns. But I looked
at the investment policy statement, the combined plan, and the returns
indicated by IEC -- IES and WP&L, and given that those two plans comprise
I think 87 percent of the total assets of the combined plan, I deemed
that -- or I decided that the asset allocation that matched the combined
plan better fit those two plans and those two plans were the driving 87
percent of the combined plan going forward.
Q. Your analysis, though, does show that the actual compound interest
crediting rate for the two plans you did choose, the IES and the WP&L,
was less than your Ibbotson results. Right?
A. Yeah. And I'm not really comparing -- you know, we're not really fully
comparing apples to apples here, but it's -- we got an '87 to '97 period
versus longer term period. As I indicated, the compounding effect of that
4 percent minimum is -- is a large effect, and so number to number, the
number on the plan returns is lower. From 1997 IES in 9.65, WP&L in 9.52.
That is their historical return versus 10.65 for the Ibbotson -- returns.
Q. Does that suggest to you that the -- that comparing the stotastic --
stochastic estimate that you came up with, 10.73, to the actual plan
returns for the period of '98 to 2006, your stotastic -- your stochastic
returns would be higher?
A. Which analysis?
Q. What page?
A. 9.65 I believe is the highest of the plan return. And 8.23 is the
lowest of those plan returns up above. So, for IEC 1997 was 9.65. That
was the highest of all the numbers in both plans for 2002 under WP&L,
8.23 was the lowest number.
Q. Yeah, but I think my question was, did you perform that kind of
comparative analysis between the Ibbotson numbers and the actual plan
interest crediting rate between 1998 and 2006 for the combined plan?
Q. But the analysis could be done if you're standing now at this point in
time?
A. Sure.
A. Yes.
Q. And the IPC plan was the lowest performing of the three predecessor
plans, wasn't it?
A. Yes, it was the lowest performing. And again, it only comprised about
13 percent of the total assets of the combined plan.
Q. Wasn't the IES plan the lowest -- had the lowest return to risk ratio
and the greatest standard deviation?
A. I don't know.
Q. Did you do any sort of investigation as to whether the IES plan was an
outlier as compared to the other two?
Q. Mm-hmm. Now, let's talk a little bit about the -- the plan sponsor
intent. Do you know who the plan sponsor is in this case? You know what
that means?
A. That the plan sponsor is Alliant Energy, the company, the corporation.
Q. Do you know what their intent was when they drafted the plan to
provide an interest crediting rate of 4 percent of 75 percent of plan
returns?
A. That was --
A. -- my understanding.
Q. Yeah. Okay. Did you do any investigation of the intent of the plan
sponsor beyond just reading the plan document?
MR. GOTTESDIENER: Objection.
Q. Beyond that?
Q. Do you know why Alliant did not simply fix an interest crediting rate
but instead went to a 4 percent -- 75 percent plan return scheme?
A. I have no idea.
A. I have no idea.
Q. You indicated in your report that Alliant had the intent of creating a
combined plan no less valuable than the predecessor plans? Do you recall
that?
Q. Can you turn to page 3? This is 11-Year Pension Fund Returns of the
three predecessor plans. Do you see that?
A. Yes, I do.
Q. And I asked you whether the IES plan was an outlier, and you said -- I
-- I can't remember what you said, but -- does this help refresh your
recollection about that?
Q. Isn't it true that the IEC -- IES plan, rather -- had the lowest
return to risk ratio --
A. Based on --
Q. Yeah.
A. Yes.
Q. So, back to your chart on page 11 of your report, you chose the IES
plan and WP&L plan but not the IPC plan. Given the greater similarity
between the WP&L and the IPC plan, wouldn't it have been a better
representation to have chosen those two plans instead of the two you
chose?
A. The only data I had available to me was returns data, and -- and I
looked the comparability of the returns data and -- and I'm -- over a
long -- I mean, again, I'm looking at the period of time from '87 to the
year indicated on my report, so I'm trying to capture a longer period of
time there, and when I did so, the IES plan and the WP&L plan were much
closer in alignment and they were much larger than the IPC plan.
Q. Does this new data affect your judgment about discarding the IPC plan
as opposed to the IES plan? From your analysis on page 11?
A. And I don't think so because the IPC plan is so small relative to the
combined plan --
A. Because it was --
MR. GOTTESDIENER: No, he was cut off. You were saying it was too small
relative to --
A. It's so small relative to the -- what the combined plan was, and based
on the investment policy statement of the combined plan, that policy
appeared to match better with the IE -- IES and WP&L returns.
Q. But does this now data cause you to reconsider that analysis?
Q. I use the word reconsider in the sense that it's something that you
would have to think about as opposed to something that might change your
-- might necessarily change your opinion.
A. Well, one -- I mean, one think I notice here is that these are showing
average returns, and I would want to see compound returns for better --
Q. So, the new data might cause you to prepare -- prepare an analysis of
compound returns? Before deciding whether to include the IES plan and
WP&L plan as opposed to WP&L and IPC. Correct?
Q. Okay. And then we can't tell what the results of that analysis would
be because you haven't done it, right?
A. Correct.
RECORDER: 52.
A. Yes.
A. Yes.
A. I did.
A. I agree that the expected future stock returns and volatility are
inputs to the model and that has influence on the results.
Q. Would you agree with the statement that your results are driven
primarily by assumptions with respect to expected future stock returns
and volatility of those returns?
A. I disagree.
Q. Well, you would agree that the -- your assumptions with regard to
expected future stock returns and volatility of those returns are a
driver to -- to your results.
A. I --
Q. Is that --
A. My report?
Q. Yeah. You with me? Note -- note 10, the last sentence in note 10, you
-- you are making a statement about the Towers stochastic model, and you
say, quote, “Stowers also -- Towers also notes that the value of the
minimum crediting rate is very sensitive to anticipated portfolio
return.” Do you see that?
A. Yes.
A. It's a statement that says the value of the minimum crediting rate is
sensitive to anticipated portfolio returns.
A. Yes.
A. And the value of the crediting rate is very sensitive -- I mean, the -
- the crediting rate takes on more value, right.
A. Yes.
A. Yes.
A. Yes.
A. It's a little more than that. It's to show that at the time -- in the
time frame in question, that the experts involved in the Alliant case
were utilizing the stochastic modeling and did not reference any other
type of modeling for estimating future plan returns and crediting rates.
A. No.
A. Not necessarily true, but I would say that historical average stack
return assumptions are part of the input process to my model.
A. They're used as one of the parameters into the processes that drive
the model.
Q. When you advise your clients, you'd look at historical stock returns.
Right?
A. Sure.
Q. As a --
A. Yes.
A. As a guideline.
Q. Guideline. Mr. -- strike that. Mr. Warther goes on to say, quote, “But
the question of how large average stock returns will be in the future is
the subject of a large and contentious debate in the academic literature,
and researchers have put forward a wide range of estimates of future
expected stock returns,” end quote. Do you agree with that statement?
A. Yes.
A. Yes.
Q. Page 24 and 25. The bottom of 24 going onto 25. Quote, “Most of the
market's highest returns occurred during the Great Depression, from 1929
to 1939. This is a simple way to show that there were high levels of
stock market volatility,” end quote. Do you see that?
A. Yes.
Q. Well, do you agree with the statement that the Great Depression was a
era of high levels of stock market volatility?
A. Yes.
Q. If you turn to page 9 of the Warther report, footnote 22. Do you agree
with Mr. Warther's statement, quote, “Dr. Maxam bases his estimates on
stock returns beginning before the U.S. depression of the thirties. The
academic literature has documented that stock volatility was abnormally
high during the U.S. depression,” end quote.
Q. Yes.
Q. How would your analysis and your opinion change if you excluded the
Great Depression stock returns from your -- your opinion?
Q. I know --
A. -- Depression, but --
A. Potentially.
A. I disagree.
Q. It is true, though, that the regulation affecting the market was much
less during the Great Depression than after World War II, isn't it?
A. It was different.
RECORDER: 54.
Q. Or book chapter. The author is Cochrane. Do you know who Cochrane is?
John Cochrane?
Q. If you turn to page 460 of this article, in the middle of that page,
Cochrane states, quote, “First of all, the standard deviation of stock
returns is so -- is so high that standard errors are surprisingly large.”
“Using the standard formula of” -- and then there's a formula -- “the
standard error of average stock returns in 50 years of data is about” --
more numbers. “This fact means that the two standard deviation (sic)
error confidence interval for the expected return extends from about 3
percent to about 13 percent,” end quote. Do you agree with that
statement?
A. Yes.
Q. About what the equity risk premium will be in the future. Correct?
A. Yes.
Q. What is the risk premium that you used in your -- or your came up with
in your model?
Q. It was what?
A. Where's that?
Q. Well, I'm just asking you if that's what you recall. That he --
Q. Well, do you -- do you remember that that's what he was saying? Does
that sound right you, over 9 percent?
Q. How does it play into your estimate of the interest credit rate?
Higher risk premium, the higher the estimate?
A. By definition, yes.
A. Yes.
A. Again, I can't agree with that because, you know, the good luck part
of it. I -- I just don't know how one can ascribe the returns earned a
portfolio to good luck.
Q. Really?
A. If you take two numbers and lower one of them -- if you take two
numbers, add them together, and then lower one of them, yes, you will get
a lower answer.
Q. Let's take a look at the Cochrane article -- oh, I'm sorry, the
Cochrane chapter -- on 460. Cochrane says at the bottom of page 460,
quote, “Several other arguments suggest a bias, that a substantial part
of the 8 percent average excess return of the last 50 years was good
luck, comma, and that the true equity premium is more like 3 to 4
percent,” period. DO you see that?
A. Okay.
A. Sure. Yes.
Q. So -- so, the arguments he's citing are not frivolous ones, correct?
MR. GOTTESDIENER: Objection.
Q. Isn't it true that the risk premium that you used in coming up with
your 10.73 and by extension 8.45 interest crediting rate estimate
exceeded 3 to 4 percent?
A. I honestly can't say. I guess I'd like to point out that on paragraph
14 -- I believe this is what you've been talking about -- I think Dr.
Warther replies on a risk premium measurement that he's done there on my
analysis. And this is a risk premium that he computed based on the
Ibbotson historical data, which he then adjusts I believe based on
Cochrane's estimate here and lowers my crediting rate accordingly. And
Ibbotson historical data crediting -- risk premium is not necessarily the
risk premium implied by my model.
Q. Right.
A. Yes.
Q. Well --
A. So --
Q. -- well, Mr. -- Mr. Maxam, let -- let me just cite you to page 7 of
your report where you say that “Towers follow generally accepted
financial modeling principles”. Do you see that?
A. Mm-hmm.
Q. Yes?
A. Yes.
A. I do.
A. I didn't --
A. -- mean -- I did not mean to imply that 3.2 percent was generally
accepted. I really meant to imply that large cap stocks plus a risk
premium is generally accepted.
Q. So, if you were rewriting this, you would make that clear --
Q. Perhaps.
A. Perhaps.
A. Clearly.
Q. Isn't it true that if -- strike that. Turn to Warther paragraph 15.
Warther says in -- in paragraph 15, in the second sentence, quote, “In
Dr. Maxam's long-term historical analysis, the standard deviation of the
historical annual returns to Dr. Maxam's replication of the Plan's
portfolio is 13.7 percent,” end quote. Do you see that?
A. Yes.
A. I believe Dr. Warther took the Ibbotson data on the portfolio returns
and computed standard deviation and that came out to 14 -- he took the
log of 1 plus the returns and took the standard deviation, and that came
out to 13.7 percent.
A. Yes.
Q. Right.
Q. Okay, and do you agree that the 10.25 was anticipated by Alliant in
1978 (sic)?
A. Yes, I do. The 13.7 percent number is based on the historical analysis
of the Ibbotson data that is not the standard deviation of the portfolio
return in my stochastic simulation.
Q. But --
MR. GOTTESDIENER: No, I just want to hear if you're going to get into
that.
MR. CASCIARI: Well, at least I let you speak. More than what I can say
about you --
MR. GOTTESDIENER: -- when you watch this deposition, you'll see a lawyer
who knows the rules. I arn letting you ask your questions, noting my
objections and not interfering with your deposition.
Q. All right. So, looking at the -- the -- just at the Ibbotson analysis,
your standard deviation of 13.7 percent is higher than the 10.25 percent
anticipated by Alliant, right?
A. -- portfolio --
Q. Yeah.
Q. But you did -- but you did make a Ibbotson analysis, right?
A. I --
Q. Look at --
A. -- portfolio.
Q. -- look at --
MR. GOTTESDIENER: Would you let him finish his answer? You obviously
don't want to know the truth.
A. Mm-hmm.
Q. Well, how far back would you go if you had data? Would you go back to
the 1700s or 1600s?
A. Reliable data?
Q. Right.
A. I'd go back as far as I could find reliable data that I felt I could
trust.
A. As far back.
A. Not necessarily.
Q. Possibly?
A. You have to consider all kinds of things when you evaluate data.
Q. All right.
Q. It is true, isn't it, that in using a stochastic model, that the model
you've well-calibrated to the actual asset allocation history of the
trust whose returns you were trying to model. Right?
A. Yes.
A. I did.
Q. So, none of the Exhibits that you attach to your expert report contain
all or a portion of the overarching formula that you employed to
determine the path results from your Monte-Carlo study. Is that right?
A. Yes.
A. The formula?
Q. Yes.
A. And they contain the formulas for the stock process, for the interest
rate process, the inflation process. They contain a spreadsheet that you
can utilize to generate those -- it's a stochastic simulation, so you
have to generate returns using that process. And I outline in the
technical appendix the formula, I guess, in the case -- in that case of a
algorithm is that you take the returns generated from the models, you
look at the asset allocation -- so if you are 45 percent large cap, you
would take the large cap output and multiple it times 45 percent, small
cap times 10 percent, international times 10 percent, fixed income times
30 percent --
Q. Well, let me --
A. -- cash times 5 percent, add them up, and you have a portfolio of
return. If that's what you mean by an --
A. -- overarching formula.
Q. -- testify -- did you testify in the S.C. Johnson that -- that the
Exhibits to your expert report did not contain all or a portion of the
overarching formula that you employed to determine the path results?
MR. GOTTESDIENER: -- report. Yes, you do. You don't know the first --
MR. GOTTESDIENER: No, you cant. Not -- you just -- you are trying to do
an impeachment. You need to --
MR. GOTTESDIENER: -- read the witness the question and answer, you have
to lay a foundation. I object. Do not answer the question until he asks
it properly.
Q. All right. Were you asked this question and did you give this answer
during your deposition in the S.C. Johnson case? Question. Just to
clarify the record, did any other Exhibits to your expert report contain
all or a portion of the overarching formula that you employed to
determine the path results from your Monte-Carlo study? Question. Answer,
no.
MR. GOTTESDIENER: You are now required to show him so he can see it.
A. I do not recall the full context of that question. I remember
discussing that in my deposition and I remember giving the same answer I
just gave you --
Q. Well --
A. -- as that --
Q. Did you --
Q. Did -- did you test -- did -- were you asked this question and did you
get this answer during your deposition in the S.C. Johnson case?
Question.
Q. And the body of your report does not contain any portion of the
overaching formula that you employed to determine the path results from
your Monte-Carlo study. Correct? Answer, that's correct.
Q. Did you give that testify in -- during your deposition under oath in
the S.C. Johnson case?
Q. Right.
Q. And that's your testimony with respect to the body of your report in
this case?
Q. Mr. Maxam, have you created a model like you've done in this case in
other circumstances?
A. A stochastic model?
Q. Yes.
A. Yes.
A. I believe so.
Q. Have you altered it in the past the same way you've done so in this
case?
A. Yes, I have.
A. Well, not precisely, but I evaluated the inputs just as I did in this
case, looked at them in the the context of the point at which I was
standing in the real world, evaluated those -- so, for example, in this
case the volatility number that I modified reflected the Ibbotson data
from inception up to the point at which I wanted the model to begin to
forecase. So, up to the end of December 1997. So, I modified in that way
and modified interest rate and inflation -- not modified but inserted.
The model calls for those variables to be inserted and changed to fit the
parameters of the time in --
Q. How --
Q. How many stochastic models have you created that match the one you've
done for this case?
A. That match the I've done?
Q. Yes.
A. That case?
Q. Yes.
A. No.
A. Yes.
A. 1984.
A. Yes.
Q. And then you worked for a company called Carroll, McEntee and McGinley
--
A. Yes.
Q. In New York?
A. In Chicago.
Q. In Chicago. And you worked for them for a year and a half roughly?
A. Yes.
A. I was a clerk and then an arbitrage trader for them on the chicago
Board of Trade floor.
A. I was hired away by one of their customers who was expanding their
trading operations.
A. I worked for them for about three years in California. And then came
back to Chicago.
Q. Yes.
A. Yes.
Q. Were you trading the money the -- the -- the capital of the company
you worked for?
A. Yes.
Q. And you said that for Security Pacific futures, you were also a
trader. Right?
A. Yes.
Q. Trading what?
A. Financial futures.
A. Yes.
A. Yeah.
A. And then your next position was with New York Investment Management.
Is that right?
A. Yes. Technically Monitor Capital Advisors.
Q. In Bozeman?
A. Yes.
Q. Doing what?
Q. What was your investment policy when you were managing those funds?
A. Investment policy?
Q. Yes.
A. Yes.
A. Yes.
Q. When you said you had a lifestyle change, were you burned out trading?
A. I wouldn't say burned out, but I was recognizing that it was not an
endeavor I was going to be doing for ten more years.
Q. Why?
Q. In what sense?
Q. Your next position was with Meka MV Funds, Ltd.? Is that right?
A. Yes.
Q. As a board member?
A. Yes.
A. Yes.
Q. Yes.
A. Monitor was purchased by New York Life. Well, they were a subsidiary
of New York Life and they were folded back into New York Life Investment
Management, and I was asked to move to New York City, and I didn't want
to do that, so I left that position.
A. Meka -- Meka --
Q. Meka.
Q. High risk?
Q. Hedge fund?
A. Hedge fund, yes.
Q. You -- so, you went back into the high risk field?
Q. New Jersey.
A. New Jersey.
A. No.
A. Yes.
Q. Yes. In a lawsuit.
A. Only one time recently and related to a fraudulent medical bill. And
it was dismissed.
A. I was alleged -- alleged to have not paid -- pay a bill. But the bill
was not -- not valid. And collection agency filed on it.
A. No.
A. No.
Q. So, then your next position was April 2005 to May 2008 with Braddock
Financial Corporation. Is that right?
A. Yes.
A. I suppose so.
Q. Give me an example.
A. Yes.
A. You can magnify your returns, you can also mangnify your losses.
A. Yes.
A. Sure.
A. Yes.
Q. Let me go back to Braddock. Why did you leave Braddock in May of 2008?
A. In May of 2008 -- as you well know, 2008 was not a great year for the
mortgage-backed securities business. And Braddock had a rough run in
terms of performance. Lost assets under management. And they made
cutbacks and no longer needed my services.
A. No.
Q. When you say no longer needed, what -- what reason did they give you?
A. Basically they were cutting back. They could no longer afford a -- let
several people go, and I was one of those people.
A. I was in Denver.
Q. H-e-r-n?
A. A-h-e-r-n.
A. Yes.
A. Yes --
Q. -- that you --
A. -- Den --
Q. -- moved to?
A. Yes.
A. Right.
A. Yes.
Q. Moscow, Idaho?
A. Correct.
Q. Or Moscow?
A. Moscow.
Q. Moscow, Idaho? That's not a larger city than Colorado -- than Boulder,
is it?
A. No.
Q. All right. Are you aware that he used as one of his damage
calculations a five-year average?
A. I --
A. I have a very vague recollection that there may be some basis for that
calculation that he relied upon but I don't recall what it was.
A. No. No.
Q. Okay.
RECORDER: B-e-r-g-e-r?
RECORDER: Thanks.
A. Yes.
Q. Do you?
A. Correct.
A. That's correct.
BY MR. GOTTESDIENER:
Q. Dr. Maxam, I want to direct your attention to Dr. Warther's report and
your report that you have there in front of you, please.
A. Okay.
RECORDER: I'm just going to move this so this is closer to you, Mr.
Gottesdiener, so your voice comes through clearly.
A. Yes.
Q. Does Dr. Warther anywhere in his report actually demonstrate what your
models implied equity risk premium is?
A. No. He does not. He uses the Ibbotson historical data to compute his
own risk premium and then uses that number compared to the Cochrane that
he cites, which -- which he says ranges from 3 to 13 percent, but he
chooses a number and then he adjusts the Ibbotson historical data by the
Cochrane number to do so.
Q. And the Ibbotson historical risk premium, is that the same as the risk
premium implicit in your model?
A. The Ibbotson historical premium that he calculates is not going to be
the same as the one implied by my model.
A. The -- I would have to look at the details of the input parameters and
do some computations, but I believe that those parameters were created on
a different set of data than the Ibbotson data.
A. No. I take the parameters that would influence the equity risk premium
from the default parameters specified by the SOA model.
A. Yes.
Q. Dr. War -- Dr. Warther expresses bafflement on page 10, footnote 24,
about why you would find it relevant to attempt to determine, at least as
a thought exercise, how much someone would pay in the market to buy the
option that is represented by the interest crediting rate in this plan.
Could you try to explain Dr. Warther is here, why you discussed that
point of view?
A. Yes.
Q. Did you do any research in an attempt to find any support for the use
of Black-Scholes on an entire portfolio?
A. Okay.
Q. Did he --
Q. -- do it that way?
A. Well, as I stated in my paper, you want to make sure that you use as
much data as you possibly can so that you can have a degree of confidence
in your result and the historical -- number of historical data points in
the Alliant Plan is -- is not sufficient to achieve that.
Q. And --
A. -- in that --
Q. Now, with respect to the Tower Perrin stochastic model that you were
asked a lot of questions about, what year was that done?
A. I believe 2001.
Q. And what information did you have as to the inputs that went into that
model?
A. Very limited in terms of the information that went into that, and I
had no information at all on the actual stochastic processes that used in
that model.
Q. And how many passes did they do for that model to obtain the results
that they did?
Q. If you look at 48 and 49, the Towers Perrin -- 47 and 48, the Towers
Perrin Asset/Liability Studies, do you recall seeing any report by Towers
Perrin that compared the future expected return on plan assets and the
future expected return on the interest crediting rate?
MR. CASCIARI: No --
MR. CASCIARI: No --
MR. CASCIARI: No --
Q. -- direct your --
Q. -- to --
MR. CASCIARI: -- of quest -- would you --
Q. -- where they show that the interest crediting rate is going to exceed
the plan's rate of return?
Q. -- my question?
MR. CASCIARI: -- I want the report -- the rebuttal report in writing, and
I want to investigate it and I want cross-examination over it. If it's
going to be allowed. I object because the judge did not say it's allowed.
A. Yes, I do.
Q. Could you tell us what page you're on, which document you're on?
WITNESS: Page 7.
WITNESS: Of 47.
Q. Go ahead.
A. And it shows the compound portfolio return expected for current 2015
is 7.7. The comparable rate for the geometric average crediting rate on
page 19 is 8.23. So, it shows that they are showing a crediting rate that
is greater than the expected portfolio return.
Q. So, let me make sure I understand this. That Towers Perrin in this
study -- Towers Perrin that designed the plan and sold it to Alliant as a
good idea is doing an analysis -- now, they don't -- they don't make that
explicit anywhere in this report, do they?
Q. They don't point out to the plan sponsor that they've adopted a
interest crediting rate that is expected to return more than the actual
plan that is intended to fund the interest crediting rate --
Q. Did you see any other -- did you see the -- subsequent to your report,
did you see another stochastic model done on the plan's future expected
rate of return as well as the future expected rate of return of the
interest crediting rate?
Q. And that was not information you had at the time that you reached your
conclusions and offered the court the -- the rate of 8.45 percent at an
80 percent confidence level?
A. That's correct. The first time I saw that was within the last two
weeks.
Q. And you said you had mentioned the Wyatt report earlier. Was it in the
context of the asset allocation that you mentioned it?
A. Right. In that report they -- they show that the -- it indicated that
the Alliant investment policy statement was targeted at 70 percent
equities in 2007.
MR. GOTTESDIENER: I --
MR. CASCIARI: No --
MR. GOTTESDIENER: Oh, no. You like them. You get to get them. I want to
know what does independent mean. As for a legal conclusion.
Q. The examination that you just went through with your counsel is -- was
rehearsed with you completely independent of my questions, wasn't it?
A. Rehearsed? No.
Q. Spoken about?
A. We discussed some of the points over the course of the last couple
days.
Q. All right. Points to come out regardless of what questions I would ask
you, correct?
A. I don't know.
A. Yes.
A. Sure. Yes.
Q. And will you -- will you allow us to review your notes and ask you
questions about those notes?
MR. GOTTESDIENER: You can ask the questions right now. This is your
opportunity. He ran his study. You have Dr. Warther and Mr. Black-Scholes
right here. This is your opportunity. You called him as witness, we got
summary judgment coming up, you use it or lose it. We will introduce
those maybe, but he did his analysis, Black-Scholes is inappropriate, he
made his adjustments, you can ask him about it right now. And if you
don't, too bad.
Q. Will you allow us to review your notes and ask you further questions
about how you arrived at --
MR. GOTTESDIENER: No --
Q. When -- when --
MR. GOTTESDIENER: No --
MR. GOTTESDIENER: I'm instructing him not answer about when he's going to
produce notes. You haven't served him with a subpoena. Next question.
Q. What -- what -- are you -- are you going to comply with that demand --
demand from Mr. Gottesdiener?
MR. GOTTESDIENER: -- you can ask him what he did. But he -- he's not
going to answer a question about when he's going to make production.
That's for a -- you haven't served a subpoena, I haven't reviewed it,
that's a legal question. Next question.
Q. Is Mr. Gossendiener --
Q. He is instructing you not to answer. Are you going to comply with that
direction?
MR. GOTTESDIENER: Go ahead and answer the question. Wh?? -- you know,
will you produce your notes?
Q. -- immediately?
Q. In Idaho?
A. Yeah.
MR. GOTTESDIENER: No, you can't ask him things like that. I -- he -- you
can answer --
Q. Will you?
A. I --
MR. GOTTESDIENER: He doesn't know the rules of governing this, and you
certainly don't follow rules.
Q. What do your notes say?
MR. GOTTESDIENER: That you can ask him. I encourage you to do that.
A. They take a look at the use of the Black-Scholes option pricing model
as applied to portfolio returns, they look at one of the assumptions
regarding projecting the future value of the option at the risk-free
rate.
Q. How many pages of the notes did you -- did you create?
A. No, I can't.
Q. Why is that?
MR. GOTTESDIENER: You can identify the person by description. You don't
have to give a name.
WITNESS: Okay.
Q. Or her name?
MR. GOTTESDIENER: I thought you were the one who's into the stipulation
that we signed. I'm -- I -- I don't even have to allow that, but I'll
allow you because you don't -- we're not afraid of discovery. You're not
entitled to the person's name. You can describe who it is. Go ahead. Or I
don't know if there's a question pending anymore because Mr. Casciari is
looking through his notes.
MR. CASCIARI: Yes. I get to know the guy's name. Just like you asked Mr.
Warther -- let's go on the record.
MR. CASCIARI: You asked Mr. Warther about who in his office be worked in
coming up with his report. I got to ask who you worked with.
MR. GOTTESDIENER: -- those people and you -- you pay them money, money, a
hu -- $240,000. That's what this is about. So, you paid them the money.
You have to disclose that. He -- the -- nobody got any mo -- ask him. Did
the guy get any money from --
Q. Who did you confer with? What was -- who's the name of the me --
what's the name of the mathematician you conferred with?
Q. Where is he located?
Q. I want you to --
A. -- person.
Q. I want you to take me through, step by step, what you did when you did
your Black-Scholes analysis. Step by step. And I'm going to write it
down. From start to finish. With -- with detail.
Q. Let me ask you this. How can I evaluate your process without knowing
your process?
Q. Take me through your process step by step. Step one, step two, step
three, so I can get the final number which was some 8 point something
number. I want to go step by step so I can see how you got from start to
finish.
Q. Go ahead. Step --
A. I don't have --
Q. -- one.
Q. -- examine you?
MR. GOTTESDIENER: Just explain in general what you did to make Black-
Scholes --
Q. No, tell me --
Q. Performed by --
A. -- I derived.
Q. I'm sorry?
A. Derived.
A. Yes.
A. I did.
Q. Well, if you could have done it yourself, why did you seek his
counsel?
Q. At what rate?
A. 175 an hour.
A. If the interest rate changed, then the crediting rate would change.
Yes.
A. The higher the interest rate, the higher the crediting rate.
Q. And you can't tell me what interest rate be used - or how he came up
with it. Right?
Q. What other variables were in this model that you utilized in two pages
of your notes?
A. Yes.
WITNESS: L-i-b-o-r.
A. I.
Q. So, what were the -- the different variables that you inserted in Dr.
Warther's Black-Schools model to come up with a different interest
crediting estimate?
MR. GOTTESDIENER: He just told you. The only thing that was different was
he used the correct interest rate rather than the risk-free rate.
Q. Is that it?
A. There's some theoretical aspects of it, but it boils down to the fact
that owning an option is a risky proposition and that the owner of an
option expects to earn more than the risk-free rate.
Q. I asked you what were the differences that you put in your two-page
notes --
MR. GOTTESDIENER: No, you didn't. You didn't just say that that was two-
page notes. You said what were the differences. Now, you're making it
sound like he said that that's all that's an his notes.
A. I'm not saying that's the only difference. It's what it boils down to
and that's --
Q. Tell me what --
Q. -- the --
A. -- at the moment.
Q. Tell me --
MR. GOTTESDIENER: You'll get your answers if you ask the questions that
are non-repetitive. If you have any other questions.
A. And -- and I can't at this point fully recall or explain that. I'm
trying to do the best I can to, you know, explain --
Q. How many?
Q. For the interest rate? What was the general method used for the
interest rate?
A. Again, the interest rate was -- came out of a calculation that implied
the interest rate and that had to do with the beginning value of the
option and the ending value of the option.
Q. Was it CAPN?
A. No.
WITNESS: Theoretical.
A. I --
Q. No, the interest rate that you used in the Black-Scholes model that
you worked on. Does it --
Q. -- a name?
MR. GOTTESDIENER: Mark, you better finish up your questions because we've
already given you more time.
A. The best I can do is tell you that a lot of the intuitive explanation
that came from the Hall book that Dr. Warther cited.
Q. Can you cite other authorities that you used for your procedure?
A. No.
MR. GOTTESDIENER: Well, too bad. You shouldn't have started an hour late.
Q. -- to find --
Q. Tell me -- tell me the extensive research that you did to find whether
or not Black-Scholes is applicable in this circumstance.
Q. Did you --
A. -- portfolio --
A. -- options.
Q. You --
Q. You --
MR. GOTTESDIENER: -- direct examination.
MR. GOTTESDIENER: Goodbye. We're done. All of this is within the scope of
direct. You wasted an hour waiting for a videographer. Can I have you
card or card where I can get a --
RECORDER: I will --
RECORDER: We're concluding the record today at 5:51 p.m. Mr. Casciari
thinks we haven't finished, so maybe we'll come back another day