Andrews v. Prudential Securities, Inc.

• Decision Date: 02 November 1998
• Docket Number: No. 97-1746,97-1746
• Citation: 160 F.3d 304
• Parties: 14 IER Cases 909 Kyle ANDREWS, John Meehan, and J. Stephen Stout, Plaintiffs-Appellants, v. PRUDENTIAL SECURITIES, INCORPORATED, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 304

160 F.3d 304

14 IER Cases 909

Kyle ANDREWS, John Meehan, and J. Stephen Stout, Plaintiffs-Appellants, v. PRUDENTIAL SECURITIES, INCORPORATED, Defendant-Appellee.

No. 97-1746.

United States Court of Appeals Sixth Circuit.

Argued Sept. 24, 1998.

Decided Nov. 2, 1998.

Kyle Andrews, Flint, MI, pro se.

David M. Deutsch (argued), Dayton, OH, for Plaintiffs-Appellants.

John Meehan, Flint, MI, pro se.

J. Stephen Stout (briefed), Flint, MI, pro se.

Jack J. Mazzara (argued and briefed), Dennis K. Egan (briefed), Egan & Mazzara, Detroit, MI, for Defendant-Appellee.

Before: KENNEDY, WELLFORD, and BOGGS, Circuit Judges.

OPINION

KENNEDY, Circuit Judge.

Plaintiffs, Kyle Andrews, John Meehan, and J. Stephen Stout, appeal the District Court's order granting summary judgment on behalf of the defendant, Prudential Securities, in this diversity action alleging that defendant filed false Uniform Termination Notice of Securities Industry Registration forms ("U-5 forms") with the National Association of Securities Dealers. For the reasons that follow, we AFFIRM the judgment of the District Court.

I.

A. Factual Background

The plaintiffs' suit against Prudential Securities, Inc. ("Prudential") arises out of a requirement imposed upon brokerage firms by the National Association of Securities Dealers ("NASD"). When a brokerage firm terminates the employment of a broker, the firm is required to file with the NASD a Uniform Notice of Termination for Securities Industry Registration. See NASD By-laws, Art. IV, § 3(a). In the industry, the form is commonly referred to as the "U-5" form. Item 13 of the U-5 form requires a firm to make the following disclosure:

WHILE EMPLOYED BY OR ASSOCIATED WITH YOUR FIRM, WAS THE INDIVIDUAL:

....

B. the subject of an investment-related, consumer-initiated complaint that:

(1) alleged compensatory damages of $10,000 or more, fraud, or wrongful taking of property?

(2) was settled or decided against the individual for $5,000 or more, or found fraud, or the wrongful taking of property?

See Ex. 1 to Prudential's Motion for Summary Judgment. Firms are additionally required to file an amended U-5 after a broker departs if it learns of facts or circumstances which would require an affirmative response to Item 13. See NASD By-Laws, Art. IV § 3(b). As explained by the NASD, the required disclosure enables the NASD "to detect violations and subsequently sanction persons for violations of the NASD's rules and other applicable federal statutes and regulations." Further, "[f]ailure to provide this information may ... subject members of the investing public to repeated misconduct and may deprive member firms of the ability to make informed hiring decisions." See NASD Notices to Members, No. 88-67 at p. 291. The NASD cautions that failure to provide complete and accurate information in a U-5 form may subject firms to administrative, civil, and even criminal penalties. Id.

Kyle Andrews, John Meehan, and J. Stephen Stout, the plaintiffs in the instant action, were employed with Prudential as registered representatives when the Securities and Exchange Commission ("SEC") filed suit against Prudential for misconduct in connection with the sale of interests in limited partnerships. A settlement agreement between the SEC and Prudential resulted in a claims resolution process during which several of Prudential's customers filed claims naming plaintiffs as their registered representatives for their purchases of the limited partnerships. The submitted claims were all settled for various amounts over $5,000.

At the time the customer claims were submitted, plaintiffs were no longer working for Prudential; Andrews, Stout, and Meehan departed Prudential in 1989 to work for another brokerage firm. Despite their cessation of employment with Prudential, NASD By-laws required Prudential to file amended U-5 forms if it believed that Item 13 required an amended response. Accordingly, Prudential filed amended forms on December 2, 1994 (plaintiff Meehan), May 24, 1995 (plaintiff Stout), and June 22, 1995 (plaintiff Andrews).

B. U-5 Amendment: Plaintiff Andrews ¹

On June 22, 1995, Prudential filed an amended U-5 form for Andrews disclosing three complaints filed against Andrews. The amended U-5 form reads as follows:

... clients(s) submitted claim form(s) to the Claims Resolution Process relating to limited partnership purchase(s) during the period: 7/87-10/88; 2/88-4/88; 9/86-1/89. [Andrews] was the broker of record at the time of the purchase(s). No damages were alleged but the amount(s) of actual loss (out-of-pocket) is/are approximately $18,017; $14,478; $14,853.

Settlement(s) with the ... client(s) has/have been reached in the Claims Resolution Process. The dollar amount(s) of the settlements(s) is/are approximately $15,990; $14,670; $31,605.

This matter resulted from the unprecedented, unsolicited mailing of claim forms by Prudential to over 340,000 investors who purchased Limited Partnerships through Prudential from January 1, 1980 to January 1, 1991. The ... client(s) submitted claim form(s) in response to this mailing ...

See Ex. 2 to Prudential's Motion for Summary Judgment.

A review of the customer complaints that formed the basis for the U-5 amendment reveals that the complaints alleged not only unhappiness with the purchases of the limited partnership but also specific dissatisfaction with the representations made by Andrews concerning the partnerships.

See Ex. 7 to Prudential's Motion for Summary Judgment.

C. U-5 Amendment: Plaintiff Stout

On May 24, 1995, Prudential filed an amendment to the U-5 form filed upon Stout's departure from the firm. The amendment disclosed two complaints brought by consumers during the Claims Resolution Process. The language of the Stout Amendment resembled the Andrews Amendment except for the customer names, out-of-pocket losses and settlement amounts. Like the complaints filed by customers of Andrews, the complaints filed by several of Stout's clients alleged specific dissatisfaction with Stout's representations of the partnerships. Also like the Andrews complaints, Stout's customers complained that the partnerships were not suitable to their financial situations and that they were not fully informed regarding the nature of the partnerships or of the risky nature of the limited partnerships.

D. Procedural History

As a result of Prudential's filing of the amended U-5 forms, plaintiffs, on March 22, 1996, filed a complaint against Prudential asserting seven counts: (1) fraud/misrepresentation; (2) breach of fiduciary duty and violation of NASD and New York Stock Exchange rules; (3) defamation; (4) intentional infliction of emotional distress; (5) tortious interference with business relations; (6) gross negligence; and (7) violation of due process. In response to a motion to dismiss the complaint, the District Court dismissed the fraud, breach of fiduciary duty, tortious interference, and due process counts. However, the court granted plaintiffs leave to file an amended complaint in order to plead the defamation count with specificity and to identify the U-5 forms upon which they based their allegations. ²

Following the plaintiffs' filing of an amended complaint on October 1, 1996, ³ the District Court dismissed Meehan's defamation claim on statute of limitations grounds. Thus, the claims which remained to be litigated included the defamation claims of Andrews and Stout and all of the plaintiffs' claims for intentional infliction of emotional distress and gross negligence.

Following the close of discovery, Prudential filed a motion for summary judgment on the remaining three claims. On June 4, 1997, the District Court granted Prudential's motion. Regarding the defamation claims, the court held that the U-5 forms were protected by a qualified privilege which could be defeated only upon a showing of actual malice. Because plaintiffs failed to adduce any evidence that the reports were published with actual malice, the court held that the defamation claims could not withstand Prudential's motion. Alternatively, the court held that the defamation claims could not be maintained because the U-5 forms contained only true statements. Regarding plaintiffs' causes of action for intentional infliction of emotional distress, the court concluded that the filing of the U-5s

did not constitute extreme and outrageous conduct. Lastly, the court dismissed the gross negligence claims because, in its view, such a cause of action was not viable in Michigan under the facts alleged and, alternatively, because defendant's actions did not amount to gross negligence.

Plaintiffs now appeal from the order granting summary judgment on behalf of Prudential.

II.

This Court's review of a grant of summary judgment is de novo; we use the same test as used by the district court. See Brooks v. American Broadcasting Cos., 932 F.2d 495, 500 (6th Cir.1991). In reviewing summary judgment motions, courts must view the evidence in the light most favorable to the nonmoving party to determine whether a genuine issue of material fact exists. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970). Under Fed.R.Civ.P. 56(c), summary judgment is proper if the evidence " 'show[s] that there is no genuine issue as to any material fact and that the moving party is entitled to [a] judgment as a matter of law.' " Canderm Pharmacal, Ltd. v. Elder Pharmaceuticals, Inc., 862 F.2d 597, 601 (6th Cir.1988)(quoting Fed.R.Civ.P. 56(c)).

III.

A. Defamation

Plaintiffs assert that there is an issue of fact as to whether the statements on the U-5 form are true and thus the District Court erred in granting summary judgment on behalf of Prudential on their defamation claims. Under Michigan law, ⁴ a plaintiff must establish each of the following four elements to maintain a defamation action: "(a) a false and defamatory statement concerning plaintiff; (b) an unprivileged publication to a third...