A district court granted summary judgment in favor of a city in an action by purchasers of municipal bonds who alleged federal and state securities claims against the city. The United States Court of Appeals for the Ninth Circuit held that the grant of summary judgment was proper because the purchasers could not show a link between the claimed misrepresentations by the city and the economic loss suffered by the purchasers. The appellate court also held that the city enjoys statutory immunity from the lawsuit on the purchaser’s California claims and that the city was not entitled to defense costs. (Nuveen Municipal High Income Opportunity Fund v. City of Alameda, California (— F.3d —-, C.A.9 (Cal.), September 19, 2013).
After the City of Alameda (“City”) decided to expand its electrical system to include cable TV and internet, Alameda Power & Telecom (“Alameda Power”), a division of the City, borrowed money to construct the telecommunications system. In 2004, Alameda Power issued $33,000,000 in Revenue Bond Anticipation Notes (“Notes”) to complete construction and refinance its debt. The Official Statement that accompanied the Notes set out certain risk factors that affect the viability of the telecommunications system, including the risk of competition by other service providers and technologies, limited financial resources, operating history, and franchise authority. The Official Statement noted “that the system could be a strong competitor in the field,” but it specifically warned purchasers “no assurances in this regard can be provided to investors in the Notes or in any future financing which Alameda [Power] may require to repay the Notes.”
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 $20,550,000 in Notes and received $6,516,003, in interest payments over the life of the Notes. The Notes were set to mature on June 1, 2009. However, the telecom system performed poorly. Alameda determined in June 2008 that refinancing the Notes was not an option and sold the telecom system to Comcast for $15,000,000. The City paid all of the net proceeds from the sale to the Noteholders, including $10,105,110 to Nuveen, which left Nuveen with a shortfall of approximately $10,000,000.
Nuveen brought a lawsuit against the City alleging violations of the federal Securities Exchange Act of 1934 and California Corporate Securities Act. The trial court granted summary judgment in favor of the City on the federal claims because Nuveen failed to establish loss causation and on the state law claims because the City enjoys immunity under California law.
The court of appeals affirmed the decision of the trial court. To state a claim pursuant to section 10(b) of the Securities and Exchange Act of 1934 and SEC Rule 10b-5, a plaintiff must show “(1) material misrepresentation or omission, (2) scienter, (3) connection with the purchase or sale of a security, (4) reliance, often referred to as transaction causation, (5) economic loss, and (6) loss causation.” Transaction causation is “ actual’ or ‘but-for’ cause.’” To establish the loss causation element, Nuveen must “show ‘proximate’ or ‘legal’ cause.”
Nuveen asserted “that because the Notes were traded only sporadically, the market was inefficient and that a novel standard should apply, namely that loss causation is satisfied if ‘the Notes could never have been sold but for the City’s fraud.’” The trial court rejected Nuveen’s assertion finding that it had no support in the law because this approach would collapse transaction causation with loss causation. The court concluded, “The loss causation element is a fixture of federal law and applies to all 10b-5 claims, whether involving securities traded in an efficient or inefficient market.”
Nuveen asserted that the Notes would not have issued “but for” the fraudulent misrepresentations by the City and, therefore, the loss causation element was satisfied. The court noted that is has consistently rejected arguments that a defendant’s fraud caused a plaintiff’s loss because it induced the plaintiff to buy shares. Such an “argument ‘renders the concept of loss causation meaningless by collapsing it into transaction causation.’” To establish loss causation, Nuveen was required to show “a causal connection between the alleged misrepresented risks in the Official Statement and the economic loss Nuveen suffered.” The court found that this critical link was missing, and determined that the trial court had properly granted summary judgment on Nuveen’s federal law securities law claims.
The court also found the City has immunity under California law. The California Corporate Securities Act imposes liability for anyone “who willfully makes a false or misleading material statement for the purpose of inducing the sale of a security.” Pursuant to section 815 of the Government Claims Act, a public entity cannot be held liable “[e]xcept as otherwise provided by statute.” Section 818.8 provides immunity for public entities “from liability ‘or an injury caused by misrepresentation by an employee of the public entity, whether or not such misrepresentation be negligent or intentional.”
The court found that the California Corporate Securities Act does not override the immunity provided by section 818.8. The court stated, “After considering the intersection between the Government Claims Act and the California Corporate Securities Act, we conclude that the City enjoys immunity from suit and is entitled to summary judgment on Nuveen’s state claims.”
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