Prudential Securities, Inc. v. Dalton

• Citation: 929 F. Supp. 1411
• Decision Date: 18 April 1996
• Docket Number: No. 95-CV-1110-B.,95-CV-1110-B.
• Parties: PRUDENTIAL SECURITIES, INCORPORATED, Plaintiff, v. John B. DALTON, Defendant.
• Court: U.S. District Court — Northern District of Oklahoma

929 F. Supp. 1411

PRUDENTIAL SECURITIES, INCORPORATED, Plaintiff, v. John B. DALTON, Defendant.

No. 95-CV-1110-B.

United States District Court, N.D. Oklahoma.

April 18, 1996.

William B. Federman, Day Edwards Federman Propester & Christensen, Oklahoma City, OK, Samuel A. Keesal, Jr., Robert D. Feighner, Paul J. Schumacher, Keesal Young & Logan, Long Beach, CA, for Plaintiff.

Brian S. Gaskill, C. Raymond Patton, Sneed Lang Adams Hamilton & Barnett, Tulsa, OK, for Defendant.

ORDER

BRETT, Chief Judge.

The Court has for consideration Cross-Motions for Summary Judgment pursuant to Fed.R.Civ.P. 56 of Plaintiff Prudential Securities, Incorporated ("Prudential") (docket # 16), seeking confirmation of an Arbitration award, and Defendant/Counter-claimant John B. Dalton ("Dalton") (docket # 14), seeking vacation of the same Arbitration award.

After an extensive review of the record and being fully advised, the Court concludes the Arbitration award should be and hereby is VACATED, based on the following analysis.¹

STIPULATED FACTS²

1. Dalton was employed with Prudential from January of 1983 through July of 1989. From April 1983 through March 1988, Dalton served as office manager of the Tulsa branch of Prudential. Dalton was then demoted and remained with Prudential as a registered representative until he voluntarily resigned in July 1989.

2. As a prerequisite to employment in the securities industry, Dalton executed a Uniform Application for Securities Industry Registration ("U-4") on or about January 18, 1983.

3. Paragraph 5 of the U-4 contains an arbitration provision which is not disputed. In addition, both parties are governed by Section 3708(a) of the NASD Code of Arbitration Procedure ("Arbitration Code") which contains an additional arbitration clause.

4. On or about July 18, 1989, Dalton voluntarily left Prudential. At that time, as required by Article IV, Section 3(b) of the NASD By-Laws, Prudential issued a Uniform Termination Notice for Securities Industry Registration ("Form U-5" or "U-5") reflecting the reason for his departure.

5. On January 15, 1991, John Lytle ("Lytle"), a former client of Prudential, filed a Statement of Claim before the NASD against Prudential, Dalton, two subsequent branch managers of Prudential's Tulsa office, and a Prudential account executive. The claim alleged that (1) the account executive sold Lytle unsuitable investments, (2) Prudential, Dalton, and the two subsequent Prudential branch managers had failed to supervise the account executive, and (3) Prudential breached its fiduciary duty to Lytle and engaged in an ongoing fraud.

6. The NASD arbitration filed by Lytle alleged among other things damages as a result of purchasing various limited partnerships through Prudential. Prudential has entered into class action settlements, as well as a settlement agreement with the SEC, with respect to the partnerships purchased by Lytle. In June 1992, Prudential was aware of investigations being conducted by the NASD and SEC with respect to the limited partnerships purchased by Lytle.³

7. The Lytle claim was settled by Prudential for the sum of $137,000. Neither Dalton, nor the two subsequent Prudential branch managers, contributed to the settlement. As a result of that settlement, Prudential filed an Amended U-5 reflecting the Lytle settlement.⁴ No amendments were filed as to one of the subsequent branch managers.

8. Prior to filing the Amended U-5, Prudential wrote to Dalton's counsel, C. Raymond Patton ("Patton"), on April 24, 1992, enclosing a copy of the Disclosure Reporting Page from the proposed U-5 amendment. The page provided to Patton stated "Claimant alleged unsuitability in connection with investments in limited partnerships." It did not contain the additional language "alleged damages in excess of $10,000." Boxes 13B(1) and 13B(2), which relate to questions in item 13, were not marked. Prudential received no response from either Patton or Dalton.

9. On the Amended U-5 in response to Question 7 concerning Lytle's allegations, Prudential quoted from the allegation in the Lytle Statement of Claim and responded that "Claimant alleged unsuitability in connection with investments in limited partnerships. Alleged damages in excess of $10,000." In addition, Prudential checked boxes 13B(1) and 13B(2) of the form indicating that Dalton had been the subject of an investment-related consumer initiated complaint that (1) alleged compensatory damages of $10,000 or more, fraud, or the wrongful taking of property and (2) was settled or decided against the individual for $5,000 or more, or found fraud or the wrongful taking of property.

10. On June 17, 1992, Patton, on behalf of Dalton, wrote to the NASD alleging that the Amended U-5 was misleading, and requesting that it be expunged from Dalton's record. Patton acknowledged that Dalton had a right to provide a summary of the transaction on the Disclosure Reporting Page, which Dalton did by filing an amended U-4 on July 23, 1992. On July 9, 1992, Keith E. Hinrichs, Assistant Director of the NASD, responded to Patton's letter by confirming that Prudential was required to amend Dalton's U-5 to include information concerning the Lytle settlement.

PROCEDURAL HISTORY

11. On May 25, 1994, Dalton initiated arbitration proceedings before the NASD by filing an Uniform Submission Agreement.

12. On May 27, 1994, Dalton filed his Statement of Claim.

13. On September 20, 1994, Prudential filed its Joint Response to the Statement of Claim and a motion to dismiss. Prudential also executed the Uniform Submission Agreement.

14. The Uniform Submission Agreement, which was signed by all parties, obligates the parties to conduct the arbitration in accordance with the Arbitration Code. The Uniform Submission Agreement provides in part:

1. The undersigned parties hereby submit the present matter in controversy, as set forth in the attached statement of claim, answers, cross-claims and all related counter-claims and/or third party claims which may be asserted, to arbitration in accordance with the Constitution, By-Laws, Rules, Regulations and/or Code of Arbitration Procedure of the sponsoring organization.

* * * * * *

3. The undersigned parties agree in the event a hearing is necessary, such hearing shall be held at a time and place as may be designated by the Director of Arbitration or the arbitrator(s). The undersigned parties further agree and understand that the arbitration will be in accordance with the Constitution, By-Laws, Rules, Regulations and/or NASD Code of Arbitration procedure of the sponsoring organization.

* * * * * *

4. The undersigned parties further agree to abide by and perform any award(s) rendered pursuant to this Submission Agreement and further agree that a judgment and any interest due thereon may be entered upon such award(s) and, for these purposes, the undersigned parties hereby voluntarily consent to the jurisdiction of any court of competent jurisdiction which may properly enter such judgment.

15. The applicability of the Arbitration Code was not modified by the parties either in their agreement to arbitrate or in the Uniform Submission Agreements.

16. In addition to paragraph 4 of the Submission Agreement, Section 3741 of the NASD's Arbitration Code provides that:

(a) All awards shall be in writing and signed by a majority of the arbitrators or in such manner as is required by applicable law. Such awards may be entered as a judgment in any court of competent jurisdiction.

(b) Unless the applicable law directs otherwise, all awards rendered pursuant to this Code shall be deemed final and not subject to review or appeal.

17. On October 5, 1994, Dalton filed his response to Prudential's motion to dismiss. In his response Dalton noted the Arbitration Code does not refer to a motion proceeding which challenges the validity of a complaint. However, the Arbitration Code does not contain language precluding such a proceeding.

18. On December 21, 1994, Prudential filed its reply in support of its motion to dismiss.

19. On July 17, 1995, Prudential filed a supplemental brief. On August 10, 1995, Dalton filed his reply to Prudential's supplemental brief and Prudential filed a final supplement attaching a recent judicial opinion.

20. Prudential requested that the NASD schedule a pre-hearing conference for the purpose of hearing Prudential's motion to dismiss. On June 9, 1995, the NASD notified the parties that the pre-hearing conference was scheduled for August 18, 1995, at which time Prudential's motion to dismiss was to be heard.

21. On August 18, 1995, in Tulsa, Oklahoma, the parties attended a pre-hearing conference at which time the panel heard substantial argument on Prudential's motion to dismiss. At that time, the parties accepted the panel's composition. The panel did not admit evidence other than that which was attached to the Statement of Claim, Prudential's Response or other submissions made by the parties in regard to the motion to dismiss.

22. On August 24, 1995, the NASD arbitration administrator notified the parties that Prudential's motion had been granted, thereby dismissing Dalton's claim with prejudice.

23. On October 12, 1995, the arbitration administrator wrote the parties enclosing a copy of the NASD final order setting forth the panel's ruling granting Prudential's motion to dismiss Dalton's claim.

24. Prudential's complaint was timely filed in accordance with Section 9 of the Federal Arbitration Act, 9 U.S.C. § 9, which provides that a petition to confirm must be brought within one year after the award is made.

The Standard of Fed.R.Civ.P. 56 Motion for Summary Judgment

Summary judgment pursuant to Fed. R.Civ.P. 56 is appropriate where "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477...