I could probably answer the first 2 questions
1. Most times fairly accurate, depending on the accuracy of the transponder in the aircraft. It just means that ATC havent verified the altitude on that particular flight. (Which is why we have to say our altitude passing on first contact in a radar environment). Lets face it how mny times do ATC tell us that the transponder is giving the wrong reading? Not often.
2. There will be a few clowns VFR in IMC, rare but possible.
As for 3, possible however chances are that they were on another frequency anyway.