The Delaware Court of Chancery on May 22 found James Crombie liable for fraud and breaches of his fiduciary duty of loyalty in awarding plaintiffs Paron Capital Management, LLC. and two of its principals, Peter McConnon and Timothy Lyons, more than $35 million.
The plaintiffs are also pursuing litigation against accounting firm Rothstein Kass and hedge fund administrator Yulish & Associates in San Francisco Superior Court (the parties have since reached a confidential settlement of Plaintiffs’ claims against Yulish & Associates).
The order found that Crombie, forged his track record and fraudulently used third party accountants to verify his work.
The three men were partners in Paron Capital Management a commodity trading advisor that utilized a proprietary algorithm developed by Crombie. The court found “that Crombie committed fraud and breached his fiduciary duties to the plaintiffs and the company by making false statements of fact about his program, his investment track record, and his personal financial situation.”
Both the National Futures Association and the Commodity Futures Trading Commission filed actions against Paron and Crombie in 2011. A September 2011 CFTC complaint states, “After providing NFA with the initial false, fictitious, and fraudulent statements, Paron, by and through Crombie, and Crombie individually made subsequent false, fictitious, and fraudulent statements to NFA in an attempt to further conceal Defendants' conduct and impede NFA's investigation and audit of Paron.”
The Delaware court found that McConnon and Lyons conducted extensive due diligence on Crombie. Part of this included reviewing an Independent Verifier’s Report prepared by Yulish’s principal Joshua Sack, and commissioning Rothstein Kass to independently verify Crombie’s historical trading performance.
According to a statement from Paron, “Crombie’s record was forged, yet Rothstein Kass and Yulish verified the forged record as authentic. By the time McConnon and Lyons eventually discovered the forgery, Plaintiffs used Rothstein’s verification in their marketing materials for Paron, which they sent to well over a hundred of McConnon’s and Lyons’s client contacts.”
The complaint against Rothstein Kass alleges that it came into material information about another fraud claim against Crombie but failed to disclose it.
Neither Yulish nor Rothstein Kass were defendants in the Delaware action.
Noah Hagey attorney for Paron says, “There will always be Crombie’s out there, [but it is] how they are enabled that is the disappointing part. The [accountants and other gatekeepers] are supposed to be protecting investors from this type of activity.”
Rothstein Kass spokesperson Farley Neuman, partner at Goodman Neuman Hamilton noted in an e-mail, “Rothstein Kass was never hired to perform an audit, and it acted entirely in accordance with standards for CPAs. This is a meritless case, which we will defend vigorously.”