Prudential Securities Inc. v. Dalton

John Dalton (plaintiff) was a registered securities dealer and manager of the Tulsa branch of Prudential Securities Inc. (Prudential) (defendant). Dalton and Prudential were required to arbitrate their disputes. In July 1989, Dalton voluntarily resigned from Prudential. Prudential filed a U-5 form reflecting the reason for Dalton’s departure. In January 1991, a former client of Prudential, John Lytle, filed a claim against Prudential, Dalton, and two subsequent branch managers for selling unsuitable investments in limited partnerships to Lytle. At the time, government and industry regulators were investigating Prudential for its national sales of limited partnerships. Prudential settled the claim with Lytle for $137,000. Dalton did not pay any part of the settlement. Prudential believed it was required to file an amended U-5 as to Dalton to reflect the Lytle settlement. Prior to filing, Prudential sent a copy of the proposed amendment to Dalton’s counsel; the proposed amended U-5 merely stated that Lytle had alleged “unsuitability in connection with investments in limited partnerships.” Dalton or his counsel did not respond to Prudential. Prudential’s later filed amended U-5 included a line that Lytle’s alleged damages were “in excess of $10,000,” and further, the form indicated that Dalton had been the subject of a consumer complaint that was settled against Dalton for $5,000 or more. Dalton initiated arbitration against Prudential, alleging breach of fiduciary duty and tortious interference with future economic advantage based on the amended U-5. In response, Prudential filed a motion to dismiss, primarily arguing that its conduct was privileged and that Dalton’s claim was barred by estoppel. Dalton argued that Prudential filed an intentionally misleading amended U-5 to shift blame from itself to Dalton because Prudential was then under investigation. The amended U-5 tended to implicate Dalton in fraudulent conduct even though Dalton had not paid any settlement money. The arbitration panel granted Prudential’s motion to dismiss without allowing discovery or an evidentiary hearing. In district court, Dalton filed a motion to vacate the award.