A CLBING B727 OVERSHOT ITS ASSIGNED ALT BY 400 FT WHEN THE FLC WAS DISTR BY AN ERRONEOUSLY READING DME.

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WE WERE CLRED TO CLB TO FL240. AROUND FL220; WE WERE CLRED DIRECT TO THE LIBERTY VOR. I WAS FILLING OUT THE ETA'S FOR EACH FIX ON THE FLT PLAN. THE PLTS WERE DISCUSSING THE ERRONEOUS INDICATIONS THEY WERE RECEIVING FROM THE LIBERTY VOR. THE CAPT WAS HAND FLYING THE AIRPLANE; BECAME DISTR BY THE NAV PROB; AND OVERSHOT FL240 BY 400 FT. I CAUGHT THE DEV SIMULTANEOUSLY. WE HAD A TA WITH TFC ABOVE US; AND ZTL QUERIED US ABOUT OUR ALT. ALTHOUGH THE PNF DID NOT CATCH THE DEV; I COULD HAVE ASSISTED IN MONITORING. WHENEVER THE ACFT IS CLBING OR DSNDING; I WILL MAKE IT A PRIMARY DUTY TO MONITOR ACFT ALT. SUPPLEMENTAL INFO FROM ACN 419291: APCHING THE LEVELOFF POINT FOR FL240; WE NOTICED THE VOR DME WAS COUNTING AWAY FROM THE STATION INSTEAD OF TOWARD THE STATION; YET THERE WERE NO OFF FLAGS AND THE BEARING POINTERS WERE POSITIONED CORRECTLY AHEAD OF THE ACFT. I WAS DISTR WHILE VERIFYING THE LIBERTY VOR IDENT (WHICH WAS CORRECT); AND CLBED THROUGH FL240 TO FL244. I NOTICED THE DEV AND DSNDED THROUGH FL243 TO FL240 WHEN WE WERE ASKED BY ZTL TO CONFIRM LEVEL AT FL240. WE WERE BACK AT FL240 WITHIN 10 SECONDS. THIS DEV WAS A RESULT OF A DISTR BECAUSE THE LIBERTY VOR DME APPARENTLY LOCKED ONTO THE WRONG SIGNAL. SUPPLEMENTAL INFO FROM ACN 419787: WE CONFIRMED PASSING FL230 FOR FL240 BECAUSE WE NOTED THAT THE ALT ALERTER ALERTED US ABOUT 1300 FT BEFORE LEVELOFF. THE CAPT REDUCED HIS RATE OF CLB. THEN ZTL CLRED US ON A HDG DIRECT TO LIBERTY VOR WHEN ABLE. WE TURNED TO THE HDG AND RETUNED THE NAVS TO LIBERTY VOR OVER 100 NM DISTANT. THE COURSE CTRED APPROX ON OUR HDG. I LOOKED DOWN TO XCHK THE ACCURACY OF THE NAV FREQS AND LISTEN TO THE IDENT. JUST AS I RPTED THAT THE IDENTS WERE GOOD; THE CAPT MUTTERED AN EXPLETIVE AND BEGAN A RAPID DSCNT FROM FL244 BACK TO FL240. JUST BEFORE LEVELING OFF; A TCASII ALERT SOUNDED FOR THE XING TFC ABOVE US. ZTL ASKED US TO CONFIRM OUR ALT AND I RPTED THAT WE WERE LEVELING AT FL240. USING A HIGHER LEVEL OF AUTOMATION MIGHT HAVE PREVENTED MISSING THE LEVELOFF; ALTHOUGH OUR AUTOPLT THAT DAY DID NOT HAVE AN AUTO LEVELOFF FEATURE.