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W. R. Huff Asset Management Co., LLC v. Deloitte & Touche LLP

December 3, 2008

W. R. HUFF ASSET MANAGEMENT CO., LLC, PLAINTIFF-APPELLEE,
v.
DELOITTE & TOUCHE LLP, CREDIT SUISSE SECURITIES (USA) LLC, CREDIT SUISSE, NEW YORK BRANCH, THE ROYAL BANK OF SCOTLAND PLC, THE BANK OF NOVA SCOTIA, TORONTO DOMINION TEXAS, LLC (F/K/A TORONTO DOMINION TEXAS, INC.), MIZUHO INTERNATIONAL PLC, ABN AMRO INC., BANC OF AMERICA, N.A., FLEET SECURITIES, INC. (N/K/A BANK OF AMERICA, N.A.), BANC OF AMERICA SECURITIES LLC, BARCLAYS CAPITAL INC., BARCLAYS BANK PLC, BNY CAPITAL MARKETS, INC., THE BANK OF NEW YORK COMPANY, INC., CIBC WORLD MARKETS CORP., CIBC, INC., CITIBANK, N.A., CITIGROUP INC., CITICORP USA, INC., CITIGROUP GLOBAL MARKETS, INC., SALOMON SMITH BARNEY INC. (N/K/A CITIGROUP GLOBAL MARKETS, INC.), CALYON SECURITIES (USA), INC. (F/K/A CREDIT LYONNAIS SECURITIES (USA) INC.), CALYON NEW YORK BRANCH (SUCCESSOR BY OPERATION OF LAW TO CREDIT LYONNAIS NEW YORK BRANCH), DEUTSCHE BANK ALEX. BROWN, INC., DEUTSCHE BANK AG, HARRIS NESBITT CORP., JPMORGAN CHASE & CO., MORGAN STANLEY & CO., INC., JPMORGAN SECURITIES INC., SCOTIA CAPITAL (USA), INC., COWEN & CO., LLC (F/K/A SG COWEN SECURITIES CORPORATION), SOCIETE GENERALE, ALSO KNOWN AS A FRENCH BANKING INSTITUTION, SUNTRUST CAPITAL MARKETS, INC., SUNTRUST BANK, TD SECURITIES (USA), INC., ABN AMRO BANK N.V., BMO NESBITT BURNS CORP. (N/K/A HARRIS NESBITT BURNS CORP.); CREDIT LYONNAIS SECURITIES (USA) INC., SG COWEN SECURITIES CORP., AND BUCHANAN INGERSOLL & ROONEY PROFESSIONAL CORPORATION, DEFENDANTS-APPELLANTS.



SYLLABUS BY THE COURT

Defendants-appellants filed this interlocutory appeal from two orders of the United States District Court for the Southern District of New York (Lawrence M. McKenna, Judge), denying their motion to dismiss plaintiff-appellee's complaint for lack of standing, and adhering to that decision upon reconsideration. We reverse on the ground that plaintiff, an investment advisor that has (a) the discretionary authority to make investment decisions on its clients' behalf, and (b) the power of attorney to file suit on its clients' behalf, but does not have ownership or title of the claim itself, lacks constitutional standing to bring a securities action in a representative capacity on behalf of its clients.

Reversed and remanded.

The opinion of the court was delivered by: JOSÉ A. Cabranes, Circuit Judge

Argued: November 7, 2007

Before: CABRANES, SACK, and KATZMANN, Circuit Judges.

We are asked to determine 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 question is before us on an interlocutory appeal of two orders of the United States District Court for the Southern District of New York (Lawrence M. McKenna, Judge)-entered August 30, 2005 and October 19, 2005-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. See 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"). See also In re Adelphia Commc'ns Corp. Sec. and Derivative Litig., Nos. 03 MDL 1529(LMM), 03 Civ. 5752, 03 Civ. 5753, 2006 WL 708303, at *4-5 (S.D.N.Y. Mar. 20, 2006) (ordering certification for immediate appeal pursuant to 28 U.S.C. § 1292(b)).

BACKGROUND

In the first half of 2002, Adelphia Communications Corporation ("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. See 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) (describing the background of the litigation).

Plaintiff-appellee W.R. Huff Asset Management Co., LLC ("Huff") is an investment advisor for institutional investors such as public employee pension funds. Huff alleges 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.

Huff brings this lawsuit as "the investment adviser and attorney-in-fact on behalf of certain purchasers of... debt securities issued by Adelphia." (2d Am. Compl. 1.) Huff does not allege that it was an investor in Adelphia; instead, Huff claims that it provided investment advice to its clients and, from 1999 until 2002, purchased Adelphia securities on their behalf. These clients, not Huff, have suffered financial losses as a result of Aldelphia's collapse.*fn1 Indeed, Huff explicitly disclaims that it "suffered an injury individually in a way that is separate from its agency function." (Transcript of Feb. 20, 2003 Hearing, 19.)See also id. at 14 ("We are not seeking damages except on behalf of the beneficial owners of the securities from whom we secured powers of attorney.").*fn2

Defendants challenged Huff's constitutional standing to sue on behalf of its investment clients in a motion to dismiss the complaint pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure, which concerns a federal court's lack of subject matter jurisdiction.*fn3 Relying in part on Indemnified Capital Invs., SA. v. R.J. O'Brien & Assocs., Inc., 12 F.3d 1406, 1410 (7th Cir. 1993) (concluding that an investment advisor did not have standing where beneficial owners did not assign their rights to sue to the investment advisor), the District Court initially concluded that Huff's status as attorney-in-fact satisfied the requirements of constitutional standing. See Huff I, 2005 WL 2087811, at *3.

Defendants brought a motion for reconsideration, arguing that the District Court had overlooked our decision in Advanced Magnetics, Inc. v. Bayfront Partners Inc., 106 F.3d 11 (2d Cir. 1997), in which we held that a company that possessed powers of attorney from aggrieved shareholders, but did not have a valid assignment of the shareholders' claims, lacked constitutional standing to sue on behalf of the shareholders. See id. at 17-18 ("The grant of a power of attorney... is not the equivalent of an assignment of ownership; and, standing alone, a power of attorney does not enable the grantee to bring suit in his own name."). Nonetheless, the District Court adhered to its original decision and distinguished Advanced Magnetics on the ground that Huff was not only an "attorney-in-fact," but also an investment advisor with unfettered discretion to make investment decisions. See Huff II, 2005 WL 2667201, at *1 ("Here... in addition to the powers of attorney Huff was given by its clients, Huff was also the clients' investment advisor with unrestricted decision making power over the clients' investments, including those in Adelphia securities."). The District Court cited, as an analogous decision, Weinberg v. Atlas Air Worldwide Holdings, Inc., 216 F.R.D. 248, 255 (S.D.N.Y. 2003), in which an investment advisor that brought a lawsuit on behalf of its clients was found to have statutory standing to sue as a "purchaser" of securities because the investment advisor was the attorney-in-fact and had unrestricted authority to make investment decisions for its clients. See Huff II, 2005 WL 2667201, at *1.

On appeal,*fn4 defendants-appellants argue that the District Court misapplied Advanced Magnetics because the central inquiry of that case was whether an investment advisor's clients properly assigned title or ownership of their securities claims to the named plaintiff, not whether the named plaintiff had previously purchased securities for its clients. See Advanced Magnetics, 106 F.3d at 17 (observing that a valid assignment must "transfer at least title or ownership... to accomplish a completed transfer of the entire interest of the assignor in the particular subject of the assignment" (internal quotation marks and citation omitted)). Huff replies with a different interpretation of Advanced Magnetics. According to Huff, an assignment of claims "is sufficient to confer standing," but is not "necessary for standing to be found." Under Huff's interpretation, its status as both "attorney-in-fact" and "investment advisor" provides equally sufficient grounds for constitutional standing.

We note that nowhere in this appeal, in the proceedings below, or in its complaint has Huff alleged that its clients-the Beneficial Owners-assigned ...


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