Corporate Governance

From the Pages of The Pomerantz Monitor: Investment Advisors? Standing to File Suits on Behalf of Their Clients Is Curtailed by a Federal Appeals Court

By Carolyn Moskowitz

As Pomerantz Managing Partner Stan Grossman reports in the January issue of The Pomerantz Monitor, when Congress passed the Private Securities Law Reform Act (?PSLRA?) in 1995, it changed the rules for the appointment of a lead plaintiff in securities class actions, to encourage institutional investors to seek that role. Many institutional investors accepted that invitation and have sought lead plaintiff status. Among them have been investment advisors who filed actions on behalf of their clients for whom they purchased shares. A recent decision of the Second Circuit Court of Appeals in a case called Huff makes it more difficult for investment advisors to proceed in this way.

Plaintiff W.R. Huff Asset Management described itself as ?an investment advisor for institutional investors such as public employee pension funds.? It brought a non-class  action under the federal securities laws on behalf of its advisory clients, seeking recovery of losses arising from the Adelphia financial debacle. Huff did not allege that it was an investor in Adelphia. Rather, it sued as ?the investment advisor and attorney-in-fact? on behalf of certain of its clients, on whose behalf Huff had purchased Adelphia securities. Huff had obtained a power of attorney to bring litigation on its clients? behalf; but it was the clients, not Huff, who had suffered the financial loss.

The Court of Appeals held that Huff lacked standing to bring the action under Article III of the U.S. Constitution. Under that provision, the jurisdiction of federal courts is limited to ?cases? and ?controversies,? which as a general rule cannot exist unless the plaintiff has personally suffered an injury. Here, of course, it was not Huff but its clients who had suffered the injury.

Relying on the recent Supreme Court decision in Sprint Communications, the Second Circuit held in Huff that the powers of attorney that Huff had received from its clients were insufficient to confer standing. Only if Huff?s clients had assigned their claims to Huff, so that it would have legal title to, or a property interest in the claim, would the standing requirement be satisfied.

Investment advisors often bring securities fraud actions on behalf of their clients, and sometimes even seek the lead plaintiff position, arguing that they have the greatest ?financial interest? in the action because their clients, collectively, had the greatest losses. Because Huff was not a class action the Court did not decide when, in the context of a securities class action, an investment advisor could qualify as a suitable lead plaintiff under the PSLRA. It noted, however, that district courts should be mindful that putative class representatives ?must allege and show that they personally have been injured, not that injury has been suffered by other, unidentified members of the class to which they belong and which they purport to represent.? Unless they can demonstrate the requisite cause or controversy between themselves personally and defendants, they may not seek relief on behalf of themselves or any other member of the class.

Full post as published by PomTalk on January 05, 2009 (boomark / email).