City scores victory in telecom suit

City scores victory in telecom suit

Michele Ellson

The city scored a victory against investors in its former cable and Internet business last week when a federal appeals court nixed the investors’ $10 million fraud case.

The Ninth District Court of Appeals ruled that attorneys representing Nuveen Municipal High Income Opportunity Fund and a trio of other Nuveen funds failed to show how the former Alameda Power & Telecom’s alleged misrepresentations in documents that accompanied a 2004 bond offering led to the $10 million loss they suffered on their investment.

Judges agreed that the cable and Internet system failed to perform as expected and that the city’s “allegedly inflated” subscriber projections were not met. But they said Nuveen failed to show how the misrepresentations they alleged caused their losses.

“Nuveen has presented no evidence on that score, and we decline its invitation to infer a connection,” they wrote in a 32-page opinion issued Thursday.

The court also upheld a lower court’s decision that the city has legal immunity from facing Nuveen’s state law claims. But they said the city will have to pay its own legal bills for defending the case.

In 2004, the utility issued $33 million in bond anticipation notes to complete construction of the cable and Internet system and refinance existing debt. Nuveen ultimately bought $20.6 million of the notes.

The funds’ attorneys said the investors relied on disclosure documents that offered “inflated and unrealistic projections” that “materially overstated” the anticipated financial performance of the cable and Internet system. They also claimed that utility managers’ decision to sell the system lowered the value of the notes. Nuveen lost $10 million when the system was sold, the funds’ attorneys said.

The judges said the utility’s documents specifically warned investors of the risks and that the notes were offered only to sophisticated investors.

The city sold its telecom business to Comcast in 2008, for $17 million.

A separate suit filed by Vectren Communications Services, which had an agreement to build and operate the telecom system, is still pending. In 2010, a jury awarded Vectren $1.95 million of the $10.3 million it sought, and the city appealed that ruling.

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