Nuveen Municipal High Income Opportunity Fund v. City of Alameda

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

NUVEEN MUNICIPAL HIGH INCOME No. 11-17391

OPPORTUNITY FUND; THE NUVEEN

MUNICIPAL TRUST ON BEHALF OF ITS D.C. No.

SERIES NUVEEN HIGH YIELD 3:08-cv-04575-SI

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 No. 11-17496

OPPORTUNITY FUND; THE NUVEEN

MUNICIPAL TRUST ON BEHALF OF ITS D.C. No.

SERIES NUVEEN HIGH YIELD 3:08-cv-04575-SI

MUNICIPAL BOND TRUST,

Plaintiffs-Appellees,

OPINION

v.

2 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

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.

Appeal from the United States District Court

for the Northern District of California

Susan Illston, District Judge, Presiding

Argued and Submitted

May 13, 2013—San Francisco, California

Filed September 19, 2013

Before: M. Margaret McKeown and Paul J. Watford,

Circuit Judges, and Algenon L. Marbley, District Judge.*

Opinion by Judge McKeown

*

The Honorable Algenon L. Marbley, District Judge for the U.S.

District Court for the Southern District of Ohio, sitting by designation.

NUVEEN MUNICIPAL V. CITY OF ALAMEDA 3

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.

**

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

4 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

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.

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.

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

NUVEEN MUNICIPAL V. CITY OF ALAMEDA 5

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.

6 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

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.”

NUVEEN MUNICIPAL V. CITY OF ALAMEDA 7

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 interest payments totaling $6,516,003 over the life

of the Notes.

The Notes were set to mature on June 1, 2009.

Repayment of the Notes was secured by three sources: (1) net

revenue generated by the telecom system, (2) a potential

refinancing of the telecom system prior to or at maturity, and

(3) net available proceeds from the sale of the system. The

Official Statement represented that Alameda Power did not

expect that net revenues would suffice to cover the principal

of the Notes at maturity and that it “expect[ed] to be

dependent for the payment of principal on a revenue bond or

similar financing to the extent such a financing may be

feasible at that time.”

8 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

The system performed poorly in the years following the

issuance of the Notes. Competition from Comcast was fierce.

In 2007, the United States economy began to show signs of

a recession that deepened in 2008. During this period, the

Notes were traded infrequently. There were eighteen trades

between January 31, 2005 and May 1, 2008, all of which

were at or near the face value of the Notes.

In June 2008, Alameda Power determined that refinancing

the Notes was not a viable option in light of the overall

economic downturn and decided to sell the telecom system.

Comcast bought the telecom system in November 2008 for

approximately $15 million, and the City paid all net proceeds

from the sale to the Noteholders. Nuveen received

$10,105,110 toward the principal of the Notes it held, a

shortfall of approximately $10 million.

II. PROCEDURAL HISTORY AND NUVEEN’S CLAIMS

Nuveen brings claims against the City for alleged

violations of Section 10b-5 and Section 20(a) of the

Securities Exchange Act of 1934 and California Corporate

Securities Act §§ 24000, 25500, and 25504.1. Nuveen argues

that the Official Statement contained inflated and unrealistic

projections that materially overstated the telecom system’s

anticipated performance. According to Nuveen, these

misrepresentations induced Nuveen to purchase the Notes and

caused Nuveen to suffer economic losses when the system

was sold. Nuveen seeks to recover as damages the entire

difference between the $20,550,000 face value of its Notes

and the $10,105,110 it received from the sale of the system.

The City moved for summary judgment on all claims. On

the federal claims, the City argued Nuveen could not establish

NUVEEN MUNICIPAL V. CITY OF ALAMEDA 9

a triable issue that the City’s alleged material

misrepresentations caused Nuveen’s losses. Nuveen relied on

expert testimony to show this causal connection. Its primary

expert, Dr. David Sosa, took the position that the City’s June

2008 notice of the planned sale of the system served as a

“corrective disclosure” that revealed the truth about the City’s

allegedly fraudulent conduct, causing the Notes to lose value.

Nuveen also relied on the testimony of Gregory Rosston,

a Ph.D. economist, who was of the view that “[t]he

projections in the Official Statement lacked a reasonable

basis because they did not reflect the available information

when the Official Statement was issued on April 8, 2004.”

Rosston stated that the OS relied on “outdated assumptions

that artificially increased the expected [average revenue per

unit] and number of subscribers in the subsequent five years.”

Specifically, he noted that the Official Statement incorporated

the Uptown feasibility report prepared in August 2003, even

though “additional information about APT Cable’s

performance in the seven months from September 2003 to

March 2004 and Alameda Power’s expectations about future

performance” had come to light. Rosston also noted that ten

days before issuance of the Official Statement, the Alameda

Public Utilities Board adopted a five-year business plan for

Alameda Power that “used significantly less optimistic

projections of Alameda Power Cable’s future financial

performance than the projections in the Official Statement.”

Rosston concluded that “[r]easonable projections would have

been much lower” than those in the Official Statement.

Finally, Peggy Garfunkel, an expert in municipal bonds,

opined that for the Notes to have been “marketable” in 2004,

“it was necessary for Alameda to show that long term revenue

bonds could be issued in 2009,” that is, that the Notes could

10 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

be refinanced when they were set to mature. She concluded

that had the Official Statement relied on earlier, lower

projections, specifically those that had appeared in a March

2004 Business Plan prepared by Alameda Power, the Notes

“would not have been marketable.”

The district court excluded Dr. Sosa’s opinion as

unsupported and unreliable and granted summary judgment

to the City on the federal claims because Nuveen failed to

establish loss causation. The district court granted summary

judgment to the City as to the state law claims on the ground

that the City enjoyed immunity under California law. The

district court denied the City’s motion for defense costs under

California Code of Civil Procedure § 1038(a). Nuveen

appealed summary judgment, and the City cross-appealed the

denial of defense costs. We review a grant of summary

judgment de novo. Szajer v. City of Los Angeles, 632 F.3d

607, 610 (9th Cir. 2011).

DISCUSSION

I. FEDERAL CLAIMS

The federal claims in this appeal turn on loss

causation—an essential element of federal securities law

claims. Section 10(b) of the Securities and Exchange Act of

1934 and SEC Rule 10b-5 require proof of: (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. Dura Pharmaceuticals, 544 U.S. at

341–42.

NUVEEN MUNICIPAL V. CITY OF ALAMEDA 11

The two elements of causation—transaction causation and

loss causation—are distinct and map onto familiar common

law concepts. Transaction causation constitutes “actual” or

“but-for” cause. In re Daou Sys., Inc., 411 F.3d 1006, 1025

(9th Cir. 2005) (“[T]o prove transaction causation, the

plaintiff must show that, but for the fraud, the plaintiff would

not have engaged in the transaction at issue. . . .”).

Transaction causation is akin to reliance; it focuses on the

time of the transaction and “refers to the causal link between

the defendant’s misconduct and the plaintiff’s decision to buy

or sell securities.” Emergent Capital Inv. Mgmt., LLC v.

Stonepath Grp., Inc., 343 F.3d 189, 197 (2d Cir. 2003)

(emphasis added). There is no dispute that Nuveen met its

burden on transaction causation by putting forth ample

evidence from which a reasonable juror could conclude that

Nuveen would not have purchased the Notes had the City not

made the allegedly fraudulent misrepresentations in the

Official Statement.

The loss causation element, however, requires that

Nuveen also show “proximate” or “legal” cause. See Schaaf

v. Residential Funding Corp., 517 F.3d 544, 550 (8th Cir.

2008) (“Though loss causation is an ‘exotic name’ for this

concept, the standard does not differ from that employed in

a common law fraud case.”). Nuveen claims 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.” We reject this

approach—which finds no support in the law—because it

collapses transaction causation with loss causation. The loss

causation element is a fixture of federal law and applies to all

12 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

10b-5 claims, whether involving securities traded in an

efficient or inefficient market.1

A. LOSS CAUSATION PRINCIPLES AND PROOF

Loss causation is simply “a causal connection between the

material misrepresentation and the loss.” Dura

Pharmaceuticals, 544 U.S. at 342. The loss causation

requirement was codified in the Private Securities Litigation

Reform Act:

In any private action arising under this

chapter, the plaintiff shall have the burden of

proving that the act or omission of the

defendant alleged to violate this chapter

caused the loss for which the plaintiff seeks to

recover damages.

15 U.S.C. § 78u-4(b)(4) (emphasis added). The statute

applies to “any private action” and does not carve out a

different or special standard depending on the type of market

in which securities are traded.

1

As the Seventh Circuit aptly explained, “‘[e]fficiency’ is not an

all-or-nothing phenomenon.” Eckstein v. Balcor Film Investors, 8 F.3d

1121, 1130 (7th Cir. 1993). “The price in an open and developed market

usually reflects all available information, because the price is an outcome

of competition among knowledgeable investors. . . . We call a market

‘efficient’ because the price reflects a consensus about the value of the

security being traded—not necessarily because the price captures the true

value of the firm’s assets but because the price is the best available device

to assess the significance of additional bits of information.” Id. at

1129–30. Although “[t]he more thinly traded the stock, the less well the

price reflects the latest pieces of information,” even “inefficient” market

prices “change in response to news, including statements by the issuers.”

Id. at 1130.

NUVEEN MUNICIPAL V. CITY OF ALAMEDA 13

The Supreme Court reinforced the centrality of loss

causation in Dura Pharmaceuticals, noting that “[t]he

securities statutes seek to maintain public confidence in the

marketplace. . . . But the statutes make these [private

securities fraud] actions available, not to provide investors

with broad insurance against market losses, but to protect

them against those economic losses that misrepresentations

actually cause.” 544 U.S. at 345. “A plaintiff is not required

to show ‘that a misrepresentation was the sole reason for the

investment’s decline in value’ in order to establish loss

causation. ‘[A]s long as the misrepresentation is one

substantial cause of the investment’s decline in value, other

contributing forces will not bar recovery under the loss

causation requirement’ but will play a role ‘in determining

recoverable damages.’” In re Daou Sys., 411 F.3d at 1025

(internal citation omitted) (quoting Robbins v. Koger Props.,

Inc., 116 F.3d 1441, 1447 n.5 (11th Cir. 1997) (emphasis

added in Daou)).

Typically, “to satisfy the loss causation requirement, the

plaintiff must show that the revelation of that

misrepresentation or omission was a substantial factor in

causing a decline in the security’s price, thus creating an

actual economic loss for the plaintiff.” McCabe v. Ernst &

Young, LLP, 494 F.3d 418, 425–26 (3d Cir. 2007). Loss

causation was adequately alleged, for instance, where

investors claimed that a company had engaged in improper

accounting practices and that the “stock fell precipitously

after [the company] began to reveal figures showing the

company’s true financial condition.” In re Daou Sys.,

411 F.3d at 1026 (explaining that “if the improper accounting

did not lead to the decrease in Daou’s stock price, plaintiffs’

reliance on the improper accounting in acquiring the stock

would not be sufficiently linked to their damages”). Courts

14 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

typically describe this sequence of events as the “fraud-on-

the-market” scenario. See, e.g., Ray v. Citigroup Global

Mkts., Inc., 482 F.3d 991, 995 (7th Cir. 2007).

In the absence of a responsive market price, “the factual

predicates of loss causation fall into less of a rigid pattern.”

McCabe, 494 F.3d at 426. Addressing a Rule 10b-5 case

concerning shares of a privately held company, we explained

that “a comparison of market stock price to establish loss

causation has less relevance because market forces will less

directly affect the sales prices of shares of a privately held

company.” WPP Luxembourg Gamma Three Sarl v. Spot

Runner, Inc., 655 F.3d 1039, 1053 (9th Cir. 2011). We

observed that plaintiffs may nonetheless show loss causation

by showing “that the revelation of the truth is directly related

to the economic loss alleged.” Id. (emphasis added). Loss

causation was therefore adequately alleged where a loss

followed revelations that the company founders had been

secretly selling their own shares in a privately held company.

Id. at 1054; see also McCabe, 494 F.3d at 425–26.

Disclosure of the fraud is not a sine qua non of loss

causation, which may be shown even where the alleged fraud

is not necessarily revealed prior to the economic loss. The

“materialization of the risk” approach, adopted by some

circuits, recognizes loss causation where a plaintiff shows

that “misstatements and omissions concealed the

price-volatility risk (or some other risk) that materialized and

played some part in diminishing the market value” of a

security. Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161,

176–77 (2d Cir. 2005); see also Ray, 482 F.3d at 995.

Although “it cannot ordinarily be said that a drop in the value

of a security is ‘caused’ by the misstatements or omissions

made about it, as opposed to the underlying circumstance that

NUVEEN MUNICIPAL V. CITY OF ALAMEDA 15

is concealed or misstated,” materialization of the risk

recognizes that “a misstatement or omission is the ‘proximate

cause’ of an investment loss if the risk that caused the loss

was within the zone of risk concealed by the

misrepresentations and omissions alleged by a disappointed

investor.” Lentell, 396 F.3d at 173. Under this theory, the

plaintiff must show that “it was the very facts about which the

defendant lied which caused its injuries.” McCabe, 494 F.3d

at 431 (internal quotation marks omitted).

Along similar lines, we have recognized that loss

causation can be established by showing “that the

Defendants’ misrepresentation was directly related to the

actual economic loss [the plaintiff] suffered.” Livid Holdings

Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 949 (9th

Cir. 2005); see also McCabe, 494 F.3d at 434–36; Emergent

Capital, 343 F.3d at 197. Put another way, a plaintiff can

satisfy loss causation by showing that “the defendant

misrepresented or omitted the very facts that were a

substantial factor in causing the plaintiff's economic loss.”

McCabe, 494 F.3d at 425 (emphasis added).

These principles of loss causation are well established and

Nuveen does not argue otherwise. Instead, Nuveen contends

that its “but for” theory, which it conflates with the

16 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

materialization of the risk approach, satisfies loss causation.2

We disagree.

B. NUVEEN’S “BUT FOR” THEORY

Nuveen takes the position that because the Notes would

not have been issued “but for” the City’s fraudulent

misrepresentations, the loss causation requirement is

satisfied. Only in its reply brief did Nuveen move beyond

this “but for” theory and claim that its position is “consistent

with ‘the materialization of the risk’ approach.”3 Nuveen’s

2

Nuveen also maintains that the district court improperly required it to

prove loss causation by performing a “mathematical event study,” a

statistical analysis that isolates fluctuations in stock price and is often

employed to show loss causation in the typical “fraud-on-the-market”

scenario involving publicly traded stocks. The district court, however,

expressly stated that it “agree[d] with [Nuveen] that a traditional event

study is not feasible, given the type of ‘market’ here in which there were

very few trades.” Nuveen relied on the testimony of its expert, Dr. Sosa,

to try to show that the value of the Notes dropped after the City revealed

the truth by announcing its plan to sell the telecom system. The district

court excluded the testimony, not because Dr. Sosa failed to perform a

mathematical study, but because he did not attempt to quantify the value

of the telecom system either at issuance or at sale or relate how any

specific misrepresentations or revelations impacted the value of the

system. In its opening brief, Nuveen expressly abandoned reliance on

Sosa’s theory that the sale notice served as a corrective disclosure that

caused the Notes’ value to drop.

3

In its opening brief, Nuveen nowhere referenced a “materialization of

the risk” theory. It put forward such a theory before the district court,

which explicitly considered, and rejected, proof of loss causation under

the materialization of the risk standard. See In re Nuveen Funds/City of

Alameda Sec. Litig., C 08-4575 SI, 2011 WL 1842819, at *10 (N.D. Cal.

May 16, 2011) (“Plaintiffs’ reliance on a ‘materialization of the risk’

theory is also unavailing.”). We do not agree with Nuveen’s position that

the district court’s view on Nuveen’s corrective disclosure evidence

NUVEEN MUNICIPAL V. CITY OF ALAMEDA 17

effort to shoehorn its “but for” argument into the risk

materialization construct finds no support in the case law.

Although it is difficult to discern under which umbrella

Nuveen seeks shelter, its bottom line remains the same—but

for the fraud, the Notes would not have been marketed and

Nuveen would not have suffered a loss.

We have consistently rejected loss causation arguments

like Nuveen’s—that a defendant’s fraud caused plaintiffs a

loss because it “induced them to buy the shares”—because

the argument “renders the concept of loss causation

meaningless by collapsing it into transaction causation.”

McGonigle v. Combs, 968 F.2d 810, 821 (9th Cir. 1992); see

also The Ambassador Hotel Co. v. Wei-Chuan Inv., 189 F.3d

1017, 1027 (9th Cir. 1999); Ray, 482 F.3d at 995 (“Although

they try mightily to convince us otherwise, it seems to us that

plaintiffs here are confusing loss causation . . . with

transaction causation.”). Nuveen’s argument fails for the

same reasons.

To show loss causation, Nuveen must demonstrate a

causal connection between the alleged misrepresented risks

in the Official Statement and the economic loss Nuveen

suffered. This critical link is missing. Nuveen’s expert

testimony focuses instead on the proposition that the Notes

would not have been “marketable” in 2004 had the City not

inflated its projections of the system’s performance. Nuveen

invites the court to assume that the misrepresentations

account for the entire difference between the 2008 sale price

and the par value of the Notes, arguing that the Notes were

“dead on arrival and preordained to fail” because the City

tainted the district court’s analysis of the materialization of the risk theory.

In any event, our review of this theory on appeal is de novo.

18 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

knew in 2004 that it would not be able to refinance the Notes

at maturity.4

Nuveen’s assertions that the Notes were “doomed” rests

on a significant misapprehension. Contrary to Nuveen’s

assumption, the City’s decision to sell the telecom system,

rather than refinance the Notes for the long term, did not on

its own cause an injury or economic loss to Nuveen.

Nuveen’s loss results from the decline in value of the Notes,

as reflected in the sale price, not the fact of sale. Had

Comcast purchased the system for the par value of the Notes,

$33 million, Nuveen would not have suffered any economic

loss at all.

In its reply brief, Nuveen suggests that the misrepresented

risks “materialized” over time and caused the economic loss.

Even if we credit this argument despite its emergence in the

reply brief, Nuveen’s evidence fails to create a triable issue

4

Nuveen’s focus on “marketability” bears resemblance to the “fraud-

created-the-market” theory of transaction causation, recognized in some

circuits, under which a “presumption of reliance is established where a

plaintiff proves that the defendants conspired to bring to market securities

that were not entitled to be marketed.” Malack v. BDO Seidman, LLP,

617 F.3d 743, 747–48 (3d Cir. 2010) (internal quotation marks and

alteration omitted). Because this is a transaction causation theory, it has

no bearing on loss causation. The close similarity of Nuveen’s argument

highlights that Nuveen is in fact urging an improper merger of the two

types of causation. Notably, even as a reliance theory, “fraud-created-the-

market” has been criticized in many circuits and we have not accepted it

in ours. See Malack, 617 F.3d at 748–49 (rejecting theory); Eckstein,

8 F.3d at 1130–31 (same); see also Desai v. Deutsche Bank Sec. Ltd.,

573 F.3d 931, 942 (9th Cir. 2009) (affirming district court’s refusal to

adopt “integrity of the market” presumption of reliance where

manipulation “allegedly destroys the efficiency of the market, and with it

the reliability of the market’s price”).

NUVEEN MUNICIPAL V. CITY OF ALAMEDA 19

on this point.5 Nuveen focuses on alleged misrepresentations

in the Official Statement regarding the system’s access to

apartment buildings, the success of competitors such as

satellite television providers and Comcast, and growing

programming expenses, and on evidence that the City inflated

service-area and subscriber projections. Nuveen’s experts

presented no opinions that these alleged misrepresentations

masked the facts that resulted in Nuveen’s economic loss.

Rather, the expert testimony targeted the reasonableness of

the City’s projections at the time the Notes were issued. This

left a gap between the alleged misrepresentations and a

substantial cause of Nuveen’s claimed loss—either the lower

valuation or the City’s inability to refinance the Notes when

they came due—that cannot now be bridged by conjecture.

Rosston, Nuveen’s economist, adjusted the April 2004

Official Statement’s projections based on information in the

City’s March 2004 business plan, which he considered more

reasonable. Rosston’s conclusion, that “[t]he projections in

the Official Statement lacked a reasonable basis because they

did not reflect the available information when the Official

Statement was issued on April 8, 2004,” did not bear on the

system’s valuation in 2008. Garfunkel’s expert opinion was

similarly directed at the time of the Notes’ issuance. She

concluded only that the Notes would not have been

“marketable” in 2004 if the Official Statement had relied on

the more reasonable projections in the March 2004 business

5

The Ninth Circuit has not adopted the materialization of the risk

approach, though district courts in the circuit have applied it. See, e.g.,

Cement & Concrete Workers Dist. Council Pension Fund v. Hewlett

Packard Co., 12-CV-04115-JST, 2013 WL 4082011, at *11 (N.D. Cal.

Aug. 9, 2013). Given our conclusion that Nuveen fails to establish loss

causation under its parameters, we need not decide whether to endorse the

approach here.

20 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

plan. Again, absent was testimony linking the 2004

projections to the economic loss in 2008.

We reject Nuveen’s suggestion that the 2008 sale price

reflects the reduction in value attributable to the alleged 2004

fraud. For debt instruments like the Notes, Nuveen argues

that a default, “result[s in] a situation where the value of the

debt—which, in default, is reduced to the value of the

collateral—reflects the results of the fraud before the fraud

becomes known.” Nuveen analogizes its position to that of

a mortgage lender, whose “only recourse . . . would be to

recover as much of its initial investment as possible from the

sale of the collateral for the Notes.” This argument fails to

recognize that devaluation of collateral may be influenced by

all sorts of factors unrelated to the reasons for the default.

Because there are a tangle of factors that affect

refinancing and sale, evidence that certain misrepresented

risks are responsible for a loss must reasonably distinguish

the impact of those risks from other economic factors. The

Supreme Court succinctly summarized the reality of market

conditions: a security’s “lower price may reflect, not the

earlier misrepresentation, but changed economic

circumstances, changed investor expectations, new

industry-specific or firm-specific facts, conditions, or other

events, which taken separately or together account for some

or all of that lower price.” Dura Pharmaceuticals, 544 U.S.

at 343; see also Schaaf, 517 F.3d at 550 (“In a securities case,

this standard requires the plaintiff to show that the

defendant’s fraud—and not other events—caused the

security’s drop in price.”). In a similar vein, the Tenth

Circuit, for example, affirmed summary judgment for the

defendants where the plaintiffs’ expert’s “theories of loss

causation could not distinguish between loss attributable to

NUVEEN MUNICIPAL V. CITY OF ALAMEDA 21

the alleged fraud and loss attributable to non-fraud related

news and events.” In re Williams Sec. Litig.-WCG Subclass,

558 F.3d 1130, 1132 (10th Cir. 2009). Like Nuveen’s

experts, the plaintiffs’ expert “assumed that almost the entire

decline in price was the result of the truth gradually leaking

into the market, despite the fact that the decline in . . . share

price closely correlated with the overall decline in the

telecommunications industry as a whole.” Id. at 1135.

Although Nuveen repeatedly promotes a different

standard for Rule 10b-5 claims arising from “inefficiently

traded” securities, the need to reliably distinguish among the

tangle of factors affecting a security’s price is no less urgent

in inefficient markets. “[F]undamentally, the same loss

causation analysis occurs in both typical and non-typical

§ 10(b) cases.” McCabe, 494 F.3d at 425 n.2. In either case,

whether a misrepresentation “was a substantial factor in

causing . . . economic loss includes considerations of

materiality, directness, foreseeability, and intervening

causes.” Id. at 436; see also id. at 436–37 (affirming

summary judgment in favor of defendants where plaintiffs

merely asserted that a company’s breach of various

contractual and registration agreements was “[a]mong the

reasons for [the company’s] failure to meet earnings and

revenue targets” (internal quotation marks omitted)). These

concerns apply to all covered securities transactions.

To be sure, the system did not perform as reportedly

expected and the City’s allegedly inflated projections were

not in fact met. But it does not follow from the proposition

that the Official Statement downplayed certain risks that

those particular risks were substantially responsible for the

economic loss Nuveen suffered. Had Nuveen shown that

access to apartment buildings, success of competitors,

22 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

programming expenses, and inflated subscriber

projections—the very facts the City allegedly misrepresented

or omitted—were a substantial factor in causing its loss, it

may have established a triable issue on loss causation. See

Livid, 416 F.3d at 949; McCabe, 494 F.3d at 429. But

Nuveen has presented no evidence on that score, and we

decline its invitation to infer a connection. The City is

entitled to summary judgment on the federal claims.

II. IMMUNITY UNDER CALIFORNIA LAW

Nuveen’s state law claims present a threshold question,

namely, whether the City has immunity under California law.

The California Corporate Securities Act provides for the

liability of “any person” who willfully makes a false or

misleading material statement for the purpose of inducing the

sale of a security. Cal. Corp. Code §§ 25400, 25500. The

law defines “person” to include “a government, or a political

subdivision of a government.” Cal. Corp. Code § 25013.

The California Tort Claims Act of 1963 (as amended and

now referred to as the Government Claims Act)6 provides

public entity immunity and is arguably in tension with the

general corporate code. Section 815 of the Government

Claims Act prohibits holding a public entity liable “[e]xcept

as otherwise provided by statute.” Cal. Gov’t Code § 815.

Section 818.8 specifically immunizes public entities from

liability “for an injury caused by misrepresentation by an

employee of the public entity, whether or not such

6

Consistent with the California Supreme Court, we “adopt the practice

of referring to the claims statutes as the ‘Government Claims Act,’ to

avoid the confusion engendered by the informal short title ‘Tort Claims

Act.’” City of Stockton v. Superior Court, 171 P.3d 20, 23 (Cal. 2007).

NUVEEN MUNICIPAL V. CITY OF ALAMEDA 23

misrepresentation be negligent or intentional.” Cal. Gov’t

Code § 818.8.

Nuveen takes the position that the California Corporate

Securities Act expressly “provide[s] by statute,” Cal. Gov’t

Code § 815, that a public entity is not immune by including

public entities within the definition of “person[s]” that may

be held liable for securities violations. Nuveen further argues

that § 818.8 is inapplicable because it prohibits liability

founded on employees’ misrepresentations, whereas here the

alleged misrepresentations in the Official Statement were

made with the City’s own imprimatur. The City maintains

that the Government Claims Act, and in particular § 818.8,

immunizes it from suit.

The City has the better argument. To begin, California

courts have applied § 818.8 to immunize public entities from

liability for their own misrepresentations, not only for

misrepresentations by their employees. In Jopson v. Feather

River Air Quality Management District, 133 Cal. Rptr. 2d 506

(Ct. App. 2003), for example, the court considered an action

by a ranch owner alleging that a public entity was negligent

in calculating certain pollution credits earned by the ranch.

The public entity itself was “responsible for calculating,

issuing, and registering” the credits. Id. at 507. The court

held that § 818.8 barred the suit, relying on “a long line of

California cases,” including cases under § 818.8 that

addressed allegations that the public entity itself had made

misrepresentations. Id. at 510 (citing Brown v. City of Los

Angeles, 73 Cal. Rptr. 364 (Ct. App. 1968), and Hirsch v.

Dep’t of Motor Vehicles, 115 Cal. Rptr. 452 (Ct. App. 1974)).

Nuveen has cited no contrary California case law that

adopts the employee versus entity distinction it posits with

24 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

regard to § 818.8. Although the text of § 818.8 refers to

“misrepresentation by an employee of the public entity,” the

commentary conflates employees and entities, explaining that

the “section provides public entities with an absolute

immunity from liability for negligent or intentional

misrepresentation.” Cal. Gov’t Code § 818.8 (Legislative

Committee Comments–Senate). The California courts of

appeal appear to have adopted this interpretation, see, e.g.,

Freeny v. City of San Buenaventura, 157 Cal. Rptr. 3d 768,

778 (Ct. App. 2013) (“[I]t is well settled that section 818.8

confers upon public entities an absolute immunity for all

misrepresentations . . . .”) (emphasis in original), and we are

not free to ignore their decisions. “In the absence of a

pronouncement by the highest court of a state, the federal

courts must follow the decision of the intermediate appellate

courts of the state unless there is convincing evidence that the

highest court of the state would decide differently.” Briceno

v. Scribner, 555 F.3d 1069, 1080 (9th Cir. 2009) (internal

quotation marks omitted). Application of § 818.8 to both

employees and entities is not so illogical as to persuade us

that the California Supreme Court would reject the approach.

Our decision that the City may properly invoke § 818.8

does not resolve its liability completely. We must consider

the additional question of whether this immunity should

prevail in the face of the provisions of the California

securities law. That these are separate questions is

highlighted by Janis v. California State Lottery Commission,

80 Cal. Rptr. 2d 549 (Ct. App. 1998). There, the court found

that § 818.8 barred common law claims that the California

State Lottery had misrepresented the legality of the game

Keno. See id. at 552. But it separately considered whether

the plaintiff could maintain statutory claims under

California’s Unfair Practices Act. Because that Act did not

NUVEEN MUNICIPAL V. CITY OF ALAMEDA 25

include governmental entities in the definition of “persons”

to which the statute applied, the court concluded the claims

failed as a matter of law. Id. at 553; see also Trinkle v.

California State Lottery, 84 Cal. Rptr. 2d 496, 498 (Ct. App.

1999) (same).

Unlike the Unfair Practices Act, the California Corporate

Securities Act includes governmental entities in the definition

of persons liable. Cal. Corp. Code § 25013. This inclusion

may be necessary to abrogate immunity, but is it sufficient?

Both the structure of the Government Claims Act and the case

law persuade us that it is not. Although no published

decisions have considered the precise immunity question

presented here, other California case law interpreting the

Government Claims Act suggests that the specific immunity

provision of § 818.8 overrides the liability provision in the

securities statute because the statute does not expressly

withdraw such immunity.

The Government Claims Act was enacted after the

California Supreme Court had largely abrogated common law

governmental immunity. The Court explained that the “intent

of the Act is not to expand the rights of plaintiffs in suits

against governmental entities or employees, but to confine

potential governmental liability to rigidly delineated

circumstances: immunity is waived only if the various

requirements of the Act are satisfied.” Caldwell v. Montoya,

897 P.2d 1320, 1328 (Cal. 1995) (internal quotation marks

and alterations omitted).

26 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

Section 815 establishes the analytical approach for

determining liability and applicable immunities:

Except as otherwise provided by statute:

(a) A public entity is not liable for an injury,

whether such injury arises out of an act or

omission of the public entity or a public

employee or any other person.

(b) The liability of a public entity established

by this part (commencing with Section 814) is

subject to any immunity of the public entity

provided by statute, including this part, and is

subject to any defenses that would be

available to the public entity if it were a

private person.

Cal. Gov’t Code § 815 (emphasis added). According to

subsection (a), the general rule provides for governmental

immunity unless a statute provides otherwise. According to

subsection (b), even if liability is established by statute, that

liability is subject to the various specific governmental

immunities set forth in the Government Claims Act or

elsewhere. The commentary to the section accordingly

explains that “the immunity provisions will as a general rule

prevail over all sections imposing liability.” Id. (Legislative

Committee Comments–Senate). One such liability-imposing

section is the California corporate securities law. However,

“the general rule is that the governmental immunity will

override a liability created by a statute outside of the

[Government] Claims Act.” Gates v. Superior Court, 38 Cal.

Rptr. 2d 489, 506 (Ct. App. 1995); see also Clark v. Optical

Coating Lab., Inc., 80 Cal. Rptr. 3d 812, 843 (Ct. App. 2008)

NUVEEN MUNICIPAL V. CITY OF ALAMEDA 27

(“The [Government] Claims Act governs all liability against

public entities in California.”) (emphasis added).7

To rebuff this general rule, a liability-creating statute

must clearly withdraw statutory immunities. The California

Supreme Court articulated this clarity requirement in

Caldwell, which considered whether public employees could

be held liable under the state’s Fair Employment and Housing

Act (“FEHA”).8 FEHA’s imposition of a general duty and

liability on public employees did not override immunity for

discretionary acts under Cal. Gov’t Code § 820.2. Discussing

FEHA, the court explained:

Such a statute may indeed render the

employee liable for his violations unless a

specific immunity applies, but it does not

remove the immunity. This further effect can

only be achieved by a clear indication of

legislative intent that statutory immunity is

withheld or withdrawn in the particular case.

7

Nuveen mischaracterizes the relationship between § 815 and the

subsequent statutory immunities. In arguing that “Section 818.8 may be

‘absolute’ within the confines of Section 818.8, but does not trump

Section 815,” Nuveen claims that wherever liability is “provided by

statute,” § 815, all specific immunities fall away. This argument ignores

subsection (b) of § 815, which expressly subjects liability to subsequent

immunities.

8

FEHA made it unlawful for any covered “employer” to engage in

certain employment discrimination and permitted suits for violations of

the act; the act provided that an “employer” includes “any person acting

as [the employer’s] . . . agent” and also made it unlawful for “any person”

to aid or abet violations of the act. Caldwell, 897 P.2d at 1324 n.3.

28 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

Caldwell, 897 P.2d at 1329 (first emphasis added). The court

emphasized that FEHA is a general statute that governs both

public and private employers and displays no special

emphasis on public employees. Id.

The Caldwell decision did not explain what exactly a

“clear indication” would look like. However, in a footnote,

the court discussed previous cases that had implicitly found

such an indication in a whistle-blower protection statute.

That statute “subjected ‘any’ state ‘officer or employee’ to

direct civil liability” for retaliating against whistle-blowers,

ostensibly overriding the asserted statutory governmental

immunities. Id. at 1329–30 n.7 (citing S. Cal. Rapid Transit

Dist. v. Superior Court, 36 Cal. Rptr. 2d 665 (Ct. App. 1994),

and Shoemaker v. Myers, 4 Cal. Rptr. 2d 203 (Ct. App.

1992)). The court highlighted the “specific nature and

purpose” of whistle-blower protection statutes, which have as

their “core statutory objective[]” the prevention of

government misconduct. The court distinguished this

essentially government-focused scheme from FEHA, which

“promotes much more general policies throughout the public

and private sectors and advances no specifically

governmental interest that would support a finding of intent

to abrogate any immunity of public employees.” Id. at 1330

n.7 (emphasis original). Following this approach, the

California Corporate Securities Act is more akin to FEHA

than it is to the whistle-blower statute. Nuveen has cited no

legislative history or other authority, and we are aware of

none, showing that any particular concern with municipal

liability underlay the state securities law.

The DeJung decision invoked by Nuveen does not

support the proposition that the inclusion of governmental

entities in the definition of “person” is sufficient evidence of

NUVEEN MUNICIPAL V. CITY OF ALAMEDA 29

intent to abrogate immunities. The California Court of

Appeal concluded there that FEHA’s similar definitional

scheme expressly subjected a public employer to liability for

discrimination. DeJung v. Superior Court, 87 Cal. Rptr. 3d

99, 106–07 (Ct. App. 2008). Critically, however, the court

did not consider that liability in the face of a properly invoked

statutory immunity. Rather, the court rejected the public

employer’s argument that it was shielded by the § 820.2

discretionary act immunity for public employees, reasoning

that the statutory liability asserted against the employer was

not derivatively based on employees’ actions but directly

based on the employer’s own actions. The employer

therefore had no basis for invoking the Government Claims

Act’s provision on vicarious liability and immunity, which

provides that, “[e]xcept as otherwise provided by statute, a

public entity is not liable for an injury resulting from an act

or omission of an employee of the public entity where the

employee is immune from liability.” Id. at 106 (citing Cal.

Gov’t Code § 815.2(b)).

Here, by contrast, the City properly invoked immunity

under § 818.8. Despite that provision’s nominal reference to

employees, California case law permits public entities to rely

directly on the grant of immunity for their own

misrepresentations. 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.

III. DEFENSE COSTS

The City cross-appeals the denial of its motion for

defense costs. Under California law, “applicable defendants

30 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

may recover defense costs . . . if the trial court finds the

plaintiffs lacked either reasonable cause or good faith in

filing or maintaining the lawsuit.” Kobzoff v. Los Angeles

Cnty. Harbor/UCLA Med. Ctr., 968 P.2d 514, 516 (Cal.

1998); Cal. Code Civ. Proc. § 1038(a).

The district court noted that the City raised “some

forceful arguments” in its § 1038 motion but ultimately

determined that there “is no basis in the record to conclude

that [the] claims presentment arguments were brought in bad

faith or without reasonable cause.” The main complaint in

the City’s cross-appeal is that the court did not individually

address each of its arguments for defense costs. In fact, the

order provides considerable detail as to the court’s reasoning

and nothing requires the district court to respond to each

argument tit-for-tat or in explicit detail. Indeed, this court

“infer[s] from the court’s denial of the City’s motion that it

made the determinations necessary to support its order.”

Laabs v. City of Victorville, 78 Cal. Rptr. 3d 372, 397 (Ct.

App. 2008).9

Reasonable cause is “defined under an objective standard

as whether any reasonable attorney would have thought the

9

Relying on Federal Rules of Civil Procedure 52(a)(1) and 54(d)(2)(C),

the City argues that “whatever the rule may be in state courts, the rules

applicable in federal courts . . . require specific findings of fact.” These

authorities are inapposite. Rule 52(a)(1) governs findings in bench trials.

Rule 52(a)(3), governing motions, provides “[t]he court is not required to

state findings or conclusions when ruling on a motion under Rule 12 or 56

or, unless these rules provide otherwise, on any other motion.” Fed. R.

Civ. P. 52(a)(3) (emphasis added). Rule 54(d)(2)(C) merely requires

courts considering motions for attorney’s fees to proceed in accordance

with Rule 52(a), where, as noted, the applicable subsection is (a)(3) rather

than (a)(1). Fed. R. Civ. P. 54(d)(2)(C).

NUVEEN MUNICIPAL V. CITY OF ALAMEDA 31

claim tenable.” Kobzoff, 968 P.2d at 518 (internal quotation

marks omitted).10 The City’s reasonable cause argument

focuses on the propriety of allegations in Nuveen’s First

Amended Counterclaim, specifically the allegation that

Alameda pressured Uptown to revise the projections included

in the Official Statement. Regardless of this particular

allegation, a reasonable lawyer could “have thought the

claim[s] tenable” when they were asserted. Kobzoff, 968 P.2d

at 518. While the City characterizes the assertedly false

allegation as “key” to the claims, Nuveen’s claims relied on

a far broader set of allegations and do not rise or fall on the

veracity of the Uptown projection allegation. We agree with

the district court that Nuveen had reasonable cause to

maintain its claims.

“Good faith, or its absence, involves a factual inquiry into

the plaintiff's subjective state of mind.” Clark, 80 Cal. Rptr.

3d at 843 (emphasis and internal quotation marks omitted).

The district court, which lived with this case from 2008 until

judgment in 2011, found no support in the record for the

City’s claims that Nuveen acted in bad faith. The court was

well acquainted with the City’s concerns about the adequacy

of Nuveen’s discovery responses and disclosures about its

theory of the case. The focus of the good faith inquiry for

defense costs is a party’s honest belief in the viability of the

claims, see Laabs, 78 Cal. Rptr. 3d at 397, and the record

10

Although we generally review fee decisions under state law for abuse

of discretion, see Champion Produce, Inc. v. Ruby Robinson Co., 342 F.3d

1016, 1020 (9th Cir. 2003), in keeping with California law and giving the

City the benefit of the doubt, we review de novo the objective

determination of reasonable cause. Hall v. Regents of Univ. of California,

51 Cal. Rptr. 2d 387, 390 (Ct. App. 1996).

32 NUVEEN MUNICIPAL V. CITY OF ALAMEDA

amply suffices to support the district court’s finding that

Nuveen had such a belief.

AFFIRMED.