Friday, September 20, 2013
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City Held Not Liable to Investors in Its Failed Telecom Venture
By KENNETH OFGANG, Staff Writer
The City of Alameda is not liable to investors who lost money when the city sold its recession-battered cable/Internet venture at a loss, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
Judge M. Margaret McKeown, writing for the panel, said District Judge Susan M. Ilston of the Northern District of California was correct in granting summary judgment to the city. The investors, she said, failed to show that the alleged violations of federal law caused their losses, while their state claims are barred by sovereign immunity.
Nuveen Investments invested $20 million in anticipation notes issued by the municipal utility, Alameda Power & Telecom—since renamed Alameda Municipal Power. The city began considering the project in the last 1990s and issued a total of $33 million in notes to finance the system in 2004.
By 2007, trading in the notes weakened as the economy showed signs of the recession that was to hit full-force the following year. The system also faced fierce competition from Comcast, which held a local franchise, and in June 2008, Alameda Power concluded that it had not viable alternative to selling the system.
Comcast purchased the system in November 2008 for about $15 million.
Risks Associated With Bonds
Nuveen sued the city for more than $10 million, representing the difference between the face value of the bonds and what it received from the sale. Nuveen claimed city officials and their underwriter, Stone & Youngberg, did not fully disclose the risks associated with the bonds and that the city could have done more to make the system profitable.
To prevail on its federal securities claims, McKeown explained, the plaintiff not only had to prove transaction causation—that it would not have purchased the notes in the absence of what it alleged to be misrepresentations in the “official statement” offering them for sale—but also loss causation, a causal connection between the alleged misrepresentations and the loss.
She rejected the plaintiff’s theory that because the notes traded only sporadically, there was an “inefficient market” and a lesser standard of loss causation should apply, permitting the plaintiff to prevail if “the Notes could never have been sold but for the City’s fraud.” The theory was “novel” and had “no support in the law,” the appellate jurist said.
“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,” McKeown said. “Missing is the necessary link between the claimed misrepresentations and the economic loss Nuveen suffered.”
Code Applies to Claim
The judge also concluded that Government Code Sec. 818.8, which immunizes public entities and officials from liability for misrepresentation, applied to Nuveen’s claim.
She rejected the argument that the immunity did not extend to statements made by the city itself, in the official statement, as opposed to statements made by city employees. That contention is inconsistent with the interpretations of the statute by California courts, she said.
Nor, she added, does the California Corporate Securities Act, which includes governmental entities in the definition of persons liable, abrogate the immunity, McKeown said. She cited Government Code Sec. 815(b), part of the Government Claims Act, which says that any public entity liability “is subject to any immunity of the public entity provided by statute.”
Because the legislative history of the securities law does not show a specific intent to do away with immunity, the more specific provision of Sec. 818.8 controls, McKeown reasoned.
The court, however, agreed with the district judge that the plaintiff sued in good faith, so the defendant cannot recover attorney fees under Code of Civil Procedure Sec. 1038.
The case is Nuveen Municipal Trust v. City of Alameda, 11-17496.
Copyright 2013, Metropolitan News Company