Securities Law Updates | New Judicial Opinions
January 9, 2009
Power of Attorney Not Enough to Confer Standing to Sue, Second Circuit Rules in Adelphia Class Suit
W.R. Huff Asset Management Co. v. Deloitte & Touche
No. 06-1664-cv, U.S. Court of Appeals for the Second Circuit, 12/3/2008
In this securities fraud suit, the U.S. Court of Appeals for the Second Circuit has ruled that an investment adviser with the authority to make investment decisions and power of attorney to sue but who has not been assigned the claim does not have constitutional standing to bring an action on behalf of clients under the federal securities laws. In so doing, the Second Circuit reversed the order of the U.S. District Court for the Southern District of New York that refused to dismiss for lack of standing a case brought by plaintiff-appellee W.R. Huff Asset Management Co. ("Huff") on behalf of investors in Adelphia Communications Corp. ("Adelphia") before the latter's collapse. Huff filed the case against a slew of firms that provided underwriting, auditing or legal services to Adelphia, alleging they were complicit with Adelphia's misleading statements and disclosures about its debt levels. In ordering remand, the Second Circuit held that Huff’s clients have not transferred ownership of, or title to, their claims to Huff, as required by court precedent.
The issue in this appeal was whether an investment advisor that has (a) discretionary authority to make investment decisions for its clients, and (b) a power of attorney from its clients to bring this lawsuit, has constitutional standing to sue for violations of federal securities laws on behalf of its clients, who are the beneficial owners of the underlying securities, and not in its own name.
This issue arose after the district court (Lawrence M. McKenna, Judge) issued two orders, denying a motion to dismiss the complaint for lack of standing pursuant to Federal Rule of Civil Procedure 12(b)(1), and adhering to that ruling on a motion for reconsideration. Opinion, p.3. citing In re Adelphia Commc’ns Corp. Sec. & Derivative Litig., Nos. 03 MDL 1529(LMM), 03 Civ. 5752, 03 Civ. 5753, 2005 WL 2087811 (S.D.N.Y. Aug. 30, 2005) (“Huff I”); In re Adelphia Commc’ns Corp. Sec. and Derivative Litig., Nos. 03 MDL 1529(LMM), 03 Civ. 5752, 03 Civ. 5753, 2005 WL 2667201 (S.D.N.Y. Oct. 19, 2005) (“Huff II”).
By way of background, In the first half of 2002, Adelphia disclosed for the first time the existence of billions of dollars of debt that led, ultimately, to the company’s dissolution in bankruptcy. Many investors in Adelphia filed civil lawsuits alleging various forms of securities fraud by Adelphia, its management, underwriters, outside auditors, and others. Id., citing In re Adelphia Commc’ns Corp.Sec. and Derivatives Litig., No. 03 MDL 1529(LMM), 2005 WL 1278544, at *1 (S.D.N.Y. May 31, 2005).
Plaintiff-appellee Huff is an investment advisor for institutional investors such as public employee pension funds. Huff alleged that defendants-appellants—all firms that provided underwriting, auditing, or legal services—prepared, facilitated, or certified inaccurate and misleading disclosures in Adelphia’s financial statements, in violation of sections 11 and 12(a)(2) of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77l(a)(2), and sections 10(b) and 18 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78r.
While this case was pending before the Second Circuit, the Supreme Court held in Sprint Communications Co., L.P. v. APCC Servs., Inc. 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 proceeds from the litigation to the assignor. Id., p. 6, citing See 554 U.S. —, 128 S. Ct. 2531, 2542-44 (2008).
In resolving the appeal against Huff, the Second Circuit cited Article III of the Constitution that limits the jurisdiction of federal courts to the resolution of “cases” and “controversies.” Id., p. 7, citing U.S. Const. art. III, § 2. In order to ensure that this “bedrock” case-or-controversy requirement is met, courts require that plaintiffs establish their “standing” as “the proper part[ies] to bring” suit. Id., pp. 7-8, citing Raines v. Byrd , 521 U.S. 811, 818 (1997).
Article III standing consists of three “irreducible” elements: (1) injury-in-fact, which is a “concrete and particularized” harm to a “legally protected interest”; (2) causation in the form of a “fairly traceable” connection between the asserted injury-in-fact and the alleged actions of the defendant; and (3) redressability, or a non-speculative likelihood that the injury can be remedied by the requested relief. Id., p. 7, citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992).
The Second Circuit wrote: “In our view, Sprint makes clear that the minimum requirement for injury-in-fact is that the plaintiff have legal title to, or a property interest in, the claim.” Id., p. 10, citing Sprint at 2543-44.
“Sprint therefore implicitly supports the holding of Advanced Magnetics that a mere power-of- attorney— i.e., an instrument that authorizes the grantee to act as an agent or an attorney-in-fact for the grantor, see Black’s Law Dictionary 1209 (8th ed. 2004)—does not confer standing to sue in the holder’s own right because a power-of-attorney does not confer an ownership interest in the claim.” Id., p. 11, citing Advanced Magnetics, Inc. v. Bayfront Partners Inc., 106 F.3d 11 (2d Cir. 1997).
In the instant case, Huff’s clients have not transferred ownership of, or title to, their claims to Huff, as required by both Sprint and Advanced Magnetics. Rather, Huff claims it is “empowered by powers of attorney” to bring a lawsuit “in its representative capacity.” Huff’s power-of-attorney permits it to serve as an agent of its clients and to conduct litigation on behalf of its clients as their attorney-in-fact, but, like the relationship at issue in Advanced Magnetics, Huff’s power-of-attorney is not purported to be a valid assignment and does not confer a legal title to the claims it brings. Id.
On the basis of the foregoing, the Second Circuit reversed the district court’s judgment, and remanded the case for further proceedings consistent with its opinion.
Subscribe to Securities Law Updates
It's FREE and only takes seconds