Nuveen Municipal High Income Opportunity Fund v. City of Alameda
730 F.3d 1111
9th Cir.2013Background
- In 2004 the City of Alameda (through Alameda Power & Telecom) issued $33M in Revenue Bond Anticipation Notes to finance a municipal telecom system; Nuveen bought roughly $20.55M face value.
- The Official Statement disclosed risks (competition from Comcast, new technologies, programming costs, limited liquidity and operating history) but included optimistic subscriber/revenue projections and appended a consultant feasibility report.
- The system underperformed; trades in the Notes were infrequent. In 2008 Alameda sold the system to Comcast for about $15M and distributed net proceeds to noteholders; Nuveen recovered about $10.1M in principal (≈$10M shortfall).
- Nuveen sued under Section 10(b)/Rule 10b-5 and §20(a) and under California Corporate Securities Act §§24000, 25500, 25504.1, alleging the Official Statement materially misstated risks and projections and caused Nuveen’s losses.
- The district court granted summary judgment for the City on federal claims for failure to prove loss causation, and on state claims based on governmental immunity (Cal. Gov’t Code §818.8); it denied the City’s request for defense costs. Nuveen appealed; the Ninth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1) Whether Nuveen proved loss causation under §10(b)/Rule 10b-5 | Nuveen: misrepresentations induced purchase and the Notes’ ultimate low recovery resulted from those misstatements (but-for causation; risk materialization) | City: Nuveen showed transaction causation but failed to link alleged misrepresentations to the economic loss (no proximate/legal cause) | Held: Affirmed for City — Nuveen failed to prove loss causation; but-for theory collapses transaction and loss causation (Dura requirement applies) |
| 2) Whether an inefficient/ thin market alters loss-causation standard | Nuveen: thinly traded notes mean a different standard — if Notes wouldn’t have been marketed but for fraud, loss causation is met | City: Loss causation principles apply regardless of market efficiency; plaintiff must show misrepresentation substantially caused the loss | Held: Rejected Nuveen’s special rule; standard for loss causation applies in inefficient markets and requires a proximate link between misstatement and loss |
| 3) Whether California law permits statutory securities claims against a public entity (immunity) | Nuveen: California Corporate Securities Act defines “person” to include governmental entities, so immunity is abrogated | City: Government Claims Act (Cal. Gov’t Code §818.8) provides absolute immunity for misrepresentations by public entities; securities statute does not clearly withdraw that immunity | Held: City entitled to immunity under §818.8; state securities statute did not clearly abrogate that immunity, so state claims barred |
| 4) Whether City entitled to defense costs under Cal. Code Civ. Proc. §1038(a) | City: Nuveen’s suit lacked reasonable cause or good faith; seek defense costs | Nuveen: suit was tenable and brought in good faith | Held: Denial of defense costs affirmed — Nuveen had reasonable cause and acted in good faith |
Key Cases Cited
- Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (loss causation requires causal connection between misrepresentation and loss)
- In re Daou Sys., Inc., 411 F.3d 1006 (distinguishing transaction causation from loss causation)
- Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940 (loss causation shown by misrepresentation directly related to plaintiff’s economic loss)
- McCabe v. Ernst & Young, LLP, 494 F.3d 418 (materialization-of-risk and loss-causation principles)
- Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161 (materialization-of-risk standard explained)
- WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039 (loss causation in nonpublic/ thin markets)
- Schaaf v. Residential Funding Corp., 517 F.3d 544 (loss causation as proximate/legal cause)
- Ray v. Citigroup Global Mkts., Inc., 482 F.3d 991 (fraud-on-the-market and loss-causation discussion)
- Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189 (transaction causation = reliance)