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Nuveen Municipal High Income Opportunity Fund v. City of Alameda, California

United States Court of Appeals, Ninth Circuit

September 19, 2013

Nuveen Municipal High Income Opportunity Fund; The Nuveen Municipal Trust on Behalf of its Series Nuveen High Yield Municipal Bond Trust, Plaintiffs-Appellants,
v.
City of Alameda, California, on behalf of itself and Alameda Power & Telecom; Alameda Power & Telecom, a department of the City of Alameda; Alameda Public Financing Authority; Alameda Public Improvement Corporation, Defendants-Appellees Nuveen Municipal High Income Opportunity Fund; The Nuveen Municipal Trust on Behalf of its Series Nuveen High Yield Municipal Bond Trust, Plaintiffs-Appellees,
v.
City of Alameda, California, on behalf of itself and Alameda Power & Telecom; Alameda Power & Telecom, a department of the City of Alameda; Alameda Public Financing Authority, Alameda Public Improvement Corporation, Defendants-Appellants

Argued and Submitted May 13, 2013—San Francisco, California.

Appeal from the United States District Court for the Northern District of California D.C. No. 3:08-cv-04575-SI Susan Illston, District Judge, Presiding

COUNSEL

Scott W. Wilkinson (argued), Michael P. Cillo, and Melissa J. Hessler, Davis & Ceriani, P.C., Denver, Colorado, for Plaintiffs-Appellants and Cross-Appellees.

Gregory R. Aker (argued), Eric J. Firstman, and Richard E. Elder, Wulfsberg Reese Colvig & Firstman, P.C., Oakland, California; Janet C. Kern, Office of the City Attorney, City of Alameda, Alameda, California, for Defendants-Appellees and Cross-Appellants.

Before: M. Margaret McKeown and Paul J. Watford, Circuit Judges, and Algenon L. Marbley, District Judge.[*]

SUMMARY[**]

Securities Fraud

The panel affirmed the district court's summary judgment in a securities fraud action brought by purchasers of municipal bonds offered by the City of Alameda to finance the development of a cable and Internet system.

The panel held that for federal claims under §§ 10(b)(5) and 20(a) of the Securities Exchange Act of 1934, the bond purchasers failed to establish a triable issue of fact on the issue of loss causation. The panel held that the purchasers' theory that they would not have purchased the bonds but for the City's alleged misrepresentation of the risks went only to show reliance, or transaction causation. Missing was the necessary link between the claimed misrepresentations and the economic loss the purchasers suffered when the City sold the cable and Internet system. The panel held that the fact that the bonds were traded on an inefficient market, rather than a more familiar efficient market like one of the stock exchanges, did not change the result.

The panel held that the City enjoyed statutory immunity on the bond purchasers' state law claims because California courts have applied § 818.8 of the California Government Claims Act to immunize public entities from liability for misrepresentations sanctioned by those entities, and the California Corporate Securities Act does not override that immunity.

Affirming the district court's denial of the City's motion for defense costs, the panel held that although the City was entitled to summary judgment, the bond purchasers had reasonable cause to bring suit, and the evidence sufficed to establish their good faith.

OPINION

McKEOWN, Circuit Judge:

This appeal stems from the City of Alameda's offering of municipal bonds to finance the development of a cable and Internet system. Nuveen Municipal High Income Opportunity Fund, the Nuveen Municipal Trust for the Nuveen High Yield Municipal Bond Fund, and Pacific Specialty Insurance Company (collectively, "Nuveen") purchased about twenty million dollars worth of the bonds and then lost money on the bonds when the City sold the system several years later. Nuveen brought federal and state securities claims against the City, alleging that the City misrepresented the risks to investors. We affirm the district court's summary judgment in favor of the City.

For its federal claims under Section 10b-5 and Section 20(a) of the Securities Exchange Act of 1934, Nuveen has not shown a triable issue of fact on the issue of loss causation. Nuveen's theory that it would not have purchased the securities but for the City's alleged misrepresentation of the risks goes only to show reliance, or transaction causation. Missing is the necessary link between the claimed misrepresentations and the economic loss Nuveen suffered.

Although Nuveen pitches its appeal as novel because the notes were traded on an inefficient market, rather than a more familiar efficient market like one of the stock exchanges, this wrinkle does not change the result. Federal securities law requires proof of both transaction and loss causation. Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005).

The City enjoys statutory immunity from suit on Nuveen's state claims. California courts have applied § 818.8 of California's Government Claims Act to immunize public entities from liability for misrepresentations sanctioned by those entities. The California Corporate Securities Act does not override that immunity.

Finally, we also affirm the district court's denial of the City's motion for defense costs. Although the City is entitled to summary judgment, Nuveen had reasonable cause to bring suit and the evidence suffices to establish its good faith.

Background

I. The Notes

The City of Alameda decided to expand its municipal electrical system to include telecommunications—cable TV and Internet—in the late 1990s. Alameda Power & Telecom (Alameda Power or "APT"), a division of the City, borrowed money to construct the system. In 2004, Alameda Power issued $33 million in Revenue Bond Anticipation Notes ("Notes") to refinance its debt and complete construction. Alameda Power hired Stone & Youngberg, a municipal bond underwriter, to prepare the Official Statement accompanying the Notes, which set forth projections regarding the telecom system's viability and profitability. Alameda Power also hired consultant Uptown Services to issue a feasibility report on the proposed refinancing, on which Stone & Youngberg relied in part.

The Official Statement included discussion of "certain risk factors" affecting the viability of the system. It specifically disclosed the risk of competition from other cable television and Internet service providers, chief among them Comcast. It also discussed the risks presented by competitive technologies such as Internet and satellite-based television, programming costs, limited financial resources that could "increase the vulnerability of the Telecom System to general adverse economic and cable industry conditions, " limited operating history, and limited franchise authority. Although the Official Statement expressed an expectation that the system could be a strong competitor in the field, it specifically warned that "no assurances in this regard can be provided to investors in the Notes or in any future financing which Alameda P&T may require to repay the Notes."

As the Notes were not rated, the Official Statement also warned that they had limited liquidity. The minimum purchase amount for the Notes was $250, 000, limiting the offering to sophisticated investors. The Notes offered an interest (coupon) rate of 7 percent, with yield to maturity at 7.25 percent. Reflecting the high-risk nature of the Notes, this return was more than double the yield of a typical tax-free municipal bond in 2004.

The Official Statement included Uptown's feasibility report as an appendix. In preparing the August 2003 report, Uptown relied on information that Alameda Power provided as of July 2003, including a five-year financial forecast and subscriber and financial growth projections.

Nuveen purchased $17, 750, 000 in face value of the Notes at issuance and made several additional purchases of the Notes over the following year and a half. Ultimately, Nuveen held $20, 550, 000 in face value of the Notes. Nuveen received ...


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