Securities Law | Expert Legal Commentary
March 3, 2009
Huff v. Deloitte & Touche: Investment Advisor Lacked Standing to Sue for Clients
W.R. Huff Asset Management Co. v. Deloitte & Touche
Josh Lawler of Zuber Lawler & Del Duca and Joel Ginsberg
In W.R. Huff Asset Management Co. LLC v. Deloitte & Touche LLP, 549 F.3d 100 (2nd Cir. 2008), the Second Circuit Court of Appeals held that an investment advisor who held the power of attorney to sue on behalf of his clients still lacked the standing to sue because it did not actually have ownership or title to the underlying claim itself. In rendering this decision, the Court makes it clear that a valid assignment of a claim is required to fulfill the constitutional requirement of an injury-in-fact and enable an advisor to conduct litigation as its client’s representative.
W.R. Huff Asset Management (“Huff”) is an investment advisor for institutional investors and pension funds. Huff had purchased securities from Adelphia Communications Corporation on behalf of a number of its clients. Adelphia collapsed into bankruptcy in 2002, causing Huff’s clients to suffer significant financial losses.
Huff brought this suit as “the investment advisor and attorney-in-fact” on behalf of its clients who bought Adelphia securities. In the complaint, Huff alleged that the defendants were complicit in providing the inaccurate and misleading disclosures in Adelphia’s financial statements and SEC filings that ultimately led to Huff’s clients’ losses. Huff alleged violations of Sections 11 and 12(a)(2) of the Securities Act of 1933 and Sections 10(b) and 18 of the Securities Exchange of 1934.
The defendants moved to dismiss the case, claiming that Huff lacked constitutional standing to sue on behalf of its clients. The District Court initially rejected defendants’ motion, finding that Huff’s status as attorney-in-fact for its clients (through power of attorney) satisfied the constitutional standing requirements. The defendants moved for reconsideration, citing Advanced Magnetics Inc. v. Bayfront Partners Inc., 106 F.3d 11, 17-18 (2nd Cir. 1997) for the proposition that a company that possesses powers of attorney from shareholders still lacks constitutional standing without a valid assignment of the shareholders’ claims. The District Court stuck by its original decision on the grounds that Huff was attorney-in-fact and had unbridled discretion to make investment decisions on its clients’ behalf.
The defendants filed this appeal. While the appeal was pending, the U.S. Supreme Court decided Sprint Communications Co., L.P. v. APCC Servs. Inc., 554 U.S. ___, 128 S.Ct. 2531 (2008), holding that an assignee who holds legal title to an injured party’s claim has constitutional standing to pursue that claim, even if the assignee has agreed to remit all litigation proceeds to the assignor. 128 S.Ct. at 2542-44 (2008).
Power of Attorney to sue does not confer constitutional standing
The Second Circuit focused on the injury-in-fact element of Article III constitutional standing, which requires “a concrete and particularized harm to a legally protected interest.” W.R. Huff Asset Management Co. LLC v. Deloitte & Touche LLP, 549 F.3d 100, 106 (2nd Cir. 2008). The court determined that Huff did not personally suffer any injury-in-fact as a result of the losses incurred by its clients.
Specifically, the court held that Huff’s power of attorney was insufficient to confer constitutional standing without an accompanying transfer of the entire interest in the title or ownership of the underlying claim. Id. at 109. In reaching this decision, the Court discussed the Advanced Magnetics holding, which similarly found that the plaintiff lacked constitutional standing to sue. In Advanced Magnetics, the injured parties had assigned to the plaintiff “the power to commence and prosecute lawsuits,” but had not assigned their “entire interest” in the underlying claim—they retained the right to terminate the assignee and pursue the claims themselves. Rather than a complete assignment of title, the assignment at issue in Advanced Magnetics “amounted to little more than a grant of a power of attorney,” which is insufficient to confer standing. Id. at 108.
The Court determined that the Sprint ruling “implicitly supports” the Advanced Magnetics holding by confirming that an assignee has constitutional standing to pursue a claim if it holds full legal title to that claim. Id.
The Court further rejected Huff’s argument that it fell under the prudential exception to the injury-in-fact requirement because of its unbridled authority to make investment decisions for its clients. Id. at 109-110. The Court held that an investment advisor-client relationship is not the type that creates a prudential exception because the clients were not reliant upon Huff’s standing in order to protect their interests. Id. at 110.
Huff did not suffer any personal injury-in-fact
The Second Circuit also rejected Huff’s argument that it personally suffered an injury as the result of defendants’ actions. Huff argued damage to its reputation as an effective investment advisor and an unspecified “informational injury” due to its reliance on defendants’ representations. Id. at 110.
The court pointed out that Huff had brought the suit on behalf of its clients, not itself, and the remedies sought in the complaint would not redress Huff’s asserted personal injuries. As a result, Huff’s claims of personal injury, given the way the suit was brought, were insufficient to meet constitutional standing requirements. Id. at 110-111.
Clear and complete assignments are critical
The Huff case should impart one clear message: contractual third-parties have no constitutional standing to sue where the third party has not suffered any actual injury and has no direct economic interest in the outcome of the lawsuit. Only a complete and valid assignment of a claim will enable an assignee-plaintiff to fulfill the injury-in-fact requirement for constitutional standing. Despite the existence of a power of attorney to file litigation, an advisor will be barred from conducting the litigation if the client does not also transfer ownership or title to the underlying claims.
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