The Second Circuit Court of Appeals recently held in W.R. Huff Asset Management Col., LLC v. Deloitte & Touche LLP, 549 F.3d 100 (2d Cir. 2008), that an investment advisor suing on behalf of its clients under the federal securities laws did not have standing to bring such a suit. The court reached this conclusion primarily because the plaintiff did not hold a cognizable property interest in the security for which there was a claimed loss.
The plaintiff in Huff, an investment advisor, sued as attorney-in-fact for clients who owned debt securities purchased from Adelphia Communications Corporation. Id. at 104. The plaintiff alleged that the defendants were responsible for including inaccurate and misleading disclosures in Adelphia’s financial statements that led to losses by the plaintiff’s clients. The plaintiff brought claims under Sections 11 and 12(a)(2) of the Securities Act of 1933 and Sections 10(b) and 18 of the Securities Exchange Act of 1934 to recover for these alleged losses. Id.
The defendants moved to dismiss, challenging the plaintiff’s constitutional standing to sue on behalf of its clients. Id. The district court had denied the defendants’ motion, holding that the plaintiff had standing under the securities laws because of its status as attorney-in-fact and because it had unbridled discretion to make investment decisions on behalf of its clients. Id. at 104-05.
The Second Circuit reversed and held that the plaintiff did not have standing. Id. at 111. As an initial matter, the court observed that the district court had improperly focused on whether the plaintiff had standing under the securities laws, instead of focusing on whether the plaintiff had met the test for standing under the U.S. Constitution. Id. at 106. Under the Constitution, injury-in-fact, a concrete and particularized harm to a legally protected interest, is an important element for standing. Id. at 106-07. To satisfy this element, the plaintiff has to personally suffer injury or has to explain why it falls under an exception to the general injury-in-fact requirement. Id. at 107.
The Second Circuit found that the plaintiff in Huff had not personally suffered injury sufficient to satisfy the injury-in-fact requirement. First, the court held the plaintiff did not personally suffer any injury as a result of the losses incurred by its clients. Id. The court held that the plaintiff’s power of attorney — its authority to act as an agent or attorney-in-fact for its clients — was not sufficient because it does not convey an ownership interest in the securities claim such that the plaintiff personally suffered an injury. Id. at 109. As attorney-in-fact, the plaintiff’s only interest in the litigation was the recovery of its legal fees, which the court held was not sufficient. Id. The court did observe, however, that had the plaintiff’s clients assigned their claims to the plaintiff, that assignment would have been sufficient for the plaintiff to demonstrate an ownership interest such that the injury-in-fact requirement would be satisfied. Id. at 108. In such a case, the plaintiff would have a “proprietary interest” in the claim. Id.
Second, the court dispensed with the argument that the plaintiff had suffered any alleged harm, separate from its clients’ injuries, so as to satisfy the injury-in-fact requirement. Id. at 119. The plaintiff had claimed that the defendants’ alleged misconduct had damaged its reputation as an effective investor advisor because it had invested in Adelphia bonds, which ultimately proved to be a poor investment. Id. The plaintiff also suggested that it suffered unspecified “informational injury” through reliance on the allegedly untruthful information provided by Adelphia. Id. at 110. The court rejected each of these arguments, observing that the plaintiff was bringing claims for money damages associated with the losses suffered by its clients, and thus any alleged harm that the plaintiff suffered to its reputation or through “informational injury” was irrelevant. Id.
The Second Circuit also ruled that the plaintiff did not fall under an exception to the injury-in-fact requirement. The plaintiff had argued that courts recognize an exception to the injury-in-fact requirement when there is a “close relationship” to an injured party. The plaintiff suggested that the relationship it had with its investor clients, especially given the discretion it had regarding the clients’ investments, constituted such a close relationship. Id. at 109-10. The court rejected that argument, holding that the plaintiff’s mere discretion regarding investment decisions for its clients was insufficient to warrant a “close relationship” exception. Id. at 110.
For all these reasons, the Second Circuit found that the plaintiff lacked constitutional standing to bring suit for violation of the securities laws on behalf of the plaintiff’s clients.