Adviser Lacks Standing to Sue on Behalf of Clients
The US Court of Appeals for the 2nd Circuit has dismissed an investment adviser’s claim on behalf of its clients because the adviser lacked Constitutional standing. The adviser had purchased Adelphia bonds for its clients. Due to alleged securities fraud, the clients suffered significant financial loss. The adviser, who had a power of attorney for its clients, sued the underwriters, auditors, and lawyers. The Court held that the adviser lacked standing under Article III’s “cases” and “controversies” clause because the adviser did not suffer any injury. The Court rejected the adviser’s argument that his reputation was harmed. The Court explained that it would have reached a different conclusion had the investors assigned their claim to the adviser such that any award would be subject to claims of the adviser’s creditors, even if the adviser ultimately assigned any award back to the investors.
OUR TAKE: The concept of taking an assignment of a claim may work for high net worth investors. However, institutional investors would not likely assign the claim because they will want to pursue the claim themselves and continue to seek redress from the adviser.