The U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) reversed a district court decision and held that an investment adviser that has (a) discretionary authority over clients’ accounts and (b) power of attorney to file suit on its clients’ behalf, but does not have ownership or title of the claims themselves, lacks constitutional standing to bring securities fraud actions in a representative capacity on its clients’ behalf. The adviser in question, whose clients were institutional investors such as public employee pension funds, sought to bring a lawsuit as “the investment advisor and attorney-in-fact on behalf of certain purchasers of … debt securities issued by Adelphia [Communications Corporation]” against firms that provided underwriting, auditing and legal services in connection with the offering of those debt securities. The suit alleged that those firms had violated Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended, and Sections 10(b) and 18 of the Securities Exchange Act of 1934, as amended. The case came before the Second Circuit on an interlocutory appeal from the District Court for the Southern District of New York (the “District Court”) denying a motion to dismiss the suit on the grounds that the plaintiff lacked constitutional standing to sue on its clients’ behalf.
The Injury-In-Fact Requirement. The Second Circuit found that the District Court’s decision was inconsistent with its own authority in Advanced Magnetics, Inc. v. Bayfront Partners Inc., 106 F.3d 11 (2d Cir. 1997), and a Supreme Court decision rendered after the District Court’s decision, Sprint Communications Co., L.P. v. APCC Serv., Inc., 128 S. Ct. 2531 (2008). The Second Circuit noted that the fundamental question was whether or not the named plaintiffs could demonstrate an “injury-in-fact,” i.e., whether the plaintiffs could show that they had personally suffered some actual or threatened injury as a result of the putatively illegal conduct of the defendants. The Second Circuit viewed Sprint as making clear that the minimum requirement for injury-in-fact is that the plaintiff have legal title to, or a property interest in, the claim. The Second Circuit therefore saw Sprint as implicitly supporting the holding of Advanced Magnetics that a mere power-of-attorney 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. The Second Circuit noted that nowhere in the appeal, in the proceedings in the District Court or in its complaint had the adviser alleged that its clients assigned title or ownership of their claims against the defendants to the adviser. The Second Circuit also dismissed arguments that the adviser had satisfied the injury-in-fact requirements because it suffered reputational harm as a result of investing its clients’ assets in Adelphia securities and “informational injury” as a result of its reliance on allegedly untruthful information provided by Adelphia in connection with those investments. The Second Circuit observed that the suit was brought on behalf of the adviser’s clients, not itself, so that the relief sought in the complaint would not remedy either of the harms the adviser alleged it suffered.
Exceptions to the Injury-In-Fact Requirement. The Second Circuit examined exceptions to the injury-in-fact requirement that permit a third party to have standing where it can demonstrate (a) a close relationship to the injured party and (b) a barrier to the injured party’s ability to assert its own interest. The Second Circuit rejected the adviser’s assertion of a potential exception based on “investment manager standing,” finding that the investment adviser‑client relationship is not the type of close relationship the courts have recognized as creating such an exception and that the adviser has failed to demonstrate that, absent a recognition of its standing claim, there was a hindrance to its clients’ ability to protect their own interests. On the latter point, the Second Circuit observed that the clients in question were relatively sophisticated parties with a demonstrated capacity to protect their own interests in the absence of the adviser’s intervention. The Second Circuit went on to note that several of the adviser’s clients had filed parallel individual suits in the Adelphia litigation, and others had proceeded as part of a class action pursuing similar claims.
The case was remanded to the District Court for further proceedings consistent with the Second Circuit’s opinion.