United States Commodity Futures Trading Commission v. Paron Capital Management, LLC et al

Filing 157

ORDER by Judge Claudia Wilken DENYING 137 MOTION FOR LEAVE TO FILE AMENDED THIRD-PARTY COMPLAINT. (ndr, COURT STAFF) (Filed on 6/25/2012)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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UNITED STATES COMMODITY FUTURES
TRADING COMMISSION,
Plaintiff,

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v.

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PARON CAPITAL MANAGEMENT, LLC;
and JAMES D. CROMBIE,

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ORDER DENYING
MOTION FOR LEAVE
TO FILE AMENDED
THIRD-PARTY
COMPLAINT
(Docket No. 137)

Defendants.

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United States District Court
For the Northern District of California

No. C 11-4577 CW

________________________________/

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JAMES D. CROMBIE,

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Third-party Plaintiff,

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v.
PETER J. MCCONNON; TIMOTHY LYONS;
and DOES 1-25,
Third-party Defendants.

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________________________________/
Defendant and Third-party Plaintiff James Crombie seeks leave

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to file an amended third-party complaint.

Peter McConnon and Timothy Lyon oppose the motion.

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The Court

takes Crombie’s motion under submission on the papers and DENIES
it.
BACKGROUND

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Third-party Defendants

I.

Procedural History
On September 15, 2011, Plaintiff United States Commodity

Futures Trading Commission (CFTC) filed this action against
Defendants Paron Capital Management, LLC and Crombie.

CFTC

alleges that Crombie violated the Commodity Exchange Act by making

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false statements and providing fictitious documents on Paron’s

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behalf to the National Futures Association (NFA), a registered

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futures association auditing Paron, and by soliciting potential

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customers, individually and on Paron’s behalf, by using fraudulent

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promotional materials based on falsified and counterfeit account

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trading statements.

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that Crombie was in control of Paron and failed to act in good

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faith or knowingly induced the acts constituting Paron’s

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violations and is therefore liable for them.

United States District Court
For the Northern District of California

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In connection with each count, CFTC alleges

In a separate lawsuit brought on April 14, 2011 in Delaware

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Chancery Court, Paron, along with Peter McConnon and Timothy Lyon,

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who co-founded Paron with Crombie and are now the sole remaining

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members of Paron, sued Crombie for fraud.

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alleged that Crombie forged account statements from Fimat Futures

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USA LLC and Access Securities, LLC and made misrepresentations

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about his performance record, employment history and personal

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financial situation, to induce McConnon and Lyons to leave their

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jobs and form Paron with him, providing him with access to their

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money and valuable client contacts.

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Crombie (Paron I), 2012 WL 2045857, at *4 (Del. Ch.).

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Crombie continued to make and perpetuate these misrepresentations

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while working as the initial manager of Paron, they also asserted

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that he breached his fiduciary duty of loyalty to McConnon, Lyon

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and Paron under the incorporation agreement.

In the suit, they

Paron Capital Mgmt., LLC v.
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Because

Id.

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McConnon and Lyons ask the Court to take judicial notice of
this decision, and Crombie does not oppose the request. Because
its accuracy can be ascertained by reference to a source that
cannot be readily questioned, the Court grants their request and
takes judicial notice of this filing.
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The Delaware Chancery Court held a trial in early October

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2011.

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trial and did not present any evidence in his defense.

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Id.

Claiming financial hardship, Crombie did not appear at
Id.

On December 21, 2011, Crombie filed a third-party complaint

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against McConnon and Lyons in this Court, alleging that they were

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responsible for the misrepresentations in the promotional

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material, which they had authored and distributed, and that they

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had made false statements to the NFA, CFTC, this Court and the

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Delaware Chancery Court, including the denial of their involvement

United States District Court
For the Northern District of California

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in the creation of the fraudulent promotional materials.

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On January 24, 2012, the Delaware Chancery Court issued a

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memorandum opinion, denying various post-trial motions made by

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Crombie.

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opinion, the court indicated that it considered the “matter fully

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submitted and ripe for a final determination on the merits.”

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at *8.

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Paron I, 2012 WL 214777, at *1-8 (Del. Ch.).

In the

Id.

On February 10, 2012, Crombie filed a voluntary petition for

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bankruptcy.

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Docket No. 1.

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I, 2012 WL 2045857, at *4.

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Lyons, the stay was lifted on or about February 23, 2012.

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re Crombie, Case No. 12-10389 (Bankr. N.D. Cal.), Docket No. 16.

In re Crombie, Case No. 12-10389 (Bankr. N.D. Cal.),
As a result, the Delaware action was stayed.

Paron

Pursuant to a motion by McConnon and
Id.; In

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On April 6, 2012, this Court granted McConnon and Lyons’

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motion to dismiss Crombie’s third-party complaint and quashed

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service upon them.

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things, that Crombie had not sufficiently plead the elements of

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fraud and misrepresentation under California and that he lacked

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standing to pursue his claims because of his bankruptcy filing.

Docket No. 117.

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The Court found, among other

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The Court stated that, if the bankruptcy trustee abandoned the

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claims, Crombie could move for leave to file an amended complaint,

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if he could truthfully remedy the problems identified in the

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order.

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On May 11, 2012, the bankruptcy trustee notified the Court of

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his intent to abandon the claims contained in the third-party

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complaint.

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Docket No. 135.

On May 22, 2012, the Delaware Chancery Court issued an
opinion adjudicating the merits of the Delaware action and finding

United States District Court
For the Northern District of California

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Crombie liable on both claims.

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On that date, the Delaware Chancery Court also issued a judgment

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based on the opinion.

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ruling has not yet been reduced to a final judgment such that it

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would be accorded preclusive effect under Delaware law.

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Paron I, 2012 WL 2045857, at *4.

Paron I, 2012 WL 1850728 (Del. Ch.).

The

On May 23, 2012, Crombie filed the instant motion for leave
to file an amended third-party complaint (ATPC).

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On June 6, 2012, the Bankruptcy Court confirmed the

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abandonment of the claims asserted in the third-party complaint.

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In re Crombie, Case No. 12-10389 (Bankr. N.D. Cal.), Docket No.

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49.

Thus, Crombie has standing to pursue the claims.

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II.

Contents of the Proposed ATPC

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In the proposed ATPC, Crombie alleges that, in June 2010,

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McConnon, Lyons and Crombie formed a partnership and signed an

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operating LLC agreement for Paron.

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to be in charge of managing and developing the intellectual

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property which he had contributed to the company and managing

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trading operations.

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Lyons were responsible for all operational, banking, marketing and

APTC ¶ 21.

According to Crombie, he was

He also alleges that McConnon and

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solicitation activities on behalf of Paron, including authorship

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of marketing materials and solicitation of potential clients.

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at ¶ 22.

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Id.

Crombie asserts two causes of action against McConnon and
Lyons.

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alleges that McConnon and Lyons violated section 9(a)(4) of the

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Commodity Exchange Act, codified at 7 U.S.C. § 13(a)(4), in

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several ways.

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correct disclosures for JDC Ventures, LLC,” that Paron never did

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United States District Court
For the Northern District of California

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business as JDC and that they “were negligent to project that the

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prior track record of JDC Ventures, LLC was a prior track record

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for Paron doing-business-as JDC Ventures, LLC.”

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Second, he claims that they did not make certain legal disclosures

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in a due diligence questionnaire (DDQ) or in any other marketing

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material, which was “non-compliant with the regulatory obligations

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of a registered Commodity Trading Advisor.”

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Finally, he alleges “McConnon was negligent to publish Paron

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monthly letters with inaccurate and inflated assets under

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management in the investment strategies, which he admitted

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telephonically to a NFA agent during its audit of Paron in March

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2011.”

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In the first cause of action, titled “negligence,” Crombie

First, he contends that they “did not have the

Id. at ¶ 23.

Id. at ¶ 24.

Id. at ¶ 25.

In the second cause of action, titled “misrepresentation,”

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Crombie charges McConnon and Lyons with violating section

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4b(a)(1)(A),(B) of the Commodity Exchange Act, codified at 7

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U.S.C. § 6b(a)(1)(A),(B).

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that “McConnon provided all initial responses to the NFA’s request

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for documents” and “later falsely stated to the CFTC that Crombie

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had provided all the documents to the NFA.”

Id. at ¶ 29.

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In support, he alleges

Id. at ¶ 27.

Crombie

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also claims that McConnon provided the documents to the NFA in

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March 2011, which was the document production “in which the CFTC

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complaint alleges there were false and misleading statements and

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documents.”

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that Crombie was responsible, and that he had authored, controlled

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and distributed all marketing materials,” but that documents they

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produced in February 2012 showed that their “assertions were

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patently false,” because they showed that “the native files for

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Paron’s monthly letters, power point presentation, DDQ, and other

Id.

He states that “McConnon and Lyons had claimed

United States District Court
For the Northern District of California

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marketing materials were all created and further modified by

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McConnon.”

Id. at ¶ 28.

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Crombie requests a declaration that McConnon and Lyons

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violated the relevant sections of the Act and restitution “should

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the Court decide that their violations had caused harm to any

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person or entity associated with Paron.”

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LEGAL STANDARD

Id. at 11.

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Federal Rule of Civil Procedure 15(a) provides that leave of

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the court allowing a party to amend its pleading “shall be freely

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given when justice so requires.”

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when assessing the propriety of a motion for leave to amend: undue

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delay, bad faith, futility of amendment, prejudice to the opposing

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party and whether the plaintiff has previously amended the

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complaint.

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1055 n.3 (9th Cir. 2009).

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generally all considered, “futility of amendment alone can justify

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the denial of a motion.”

Courts consider five factors

Ahlmeyer v. Nev. Sys. of Higher Educ., 555 F.3d 1051,
Although these five factors are

Id. at 1055.

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DISCUSSION

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McConnon and Lyons oppose Crombie’s motion for leave to amend

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on the basis that amendment would be futile.

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failed to allege properly the elements to state a claim for any

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violation, that he lacks standing and that he did not comply with

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the heightened pleading requirements of Rule 9(b).

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alternative, they contend that res judicata will bar his claims

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once the Delaware Chancery Court enters its final judgment and

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that the Court should hold this motion in abeyance until that

United States District Court
For the Northern District of California

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I.

In the

time.

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They argue that he

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First claim for violation of Section 9(a)(4)
Section 9(a)(4) of the Commodity Exchange Act makes it

unlawful for
[a]ny person willfully to falsify, conceal, or cover up
by any trick, scheme, or artifice a material fact, make
any false, fictitious, or fraudulent statements or
representations, or make or use any false writing or
document knowing the same to contain any false,
fictitious, or fraudulent statement or entry to a
registered entity, board of trade, or futures
association designated or registered under this Act
acting in furtherance of its official duties under this
Act.
7 U.S.C. § 13(a).
Section 22(a) of the Commodity Exchange Act also provides for
a private right of action for actual damages resulting from a
violation of the Act.

7 U.S.C. § 25(a).

Except as provided by

other specified sections, this section is the “exclusive” remedy
“available to any person who sustains loss as a result of any
alleged violation of this Act.”

Id. at § 25(a)(2).

This remedy,

however, is limited to persons who received trading advice from
the violator for a fee, who made a contract for the sale of a
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commodity for future delivery through the violator, or who

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purchased from or sold to the violator certain options or

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contracts.

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held that the Act did not preempt “common law remedies . . .

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available to commodity customers who had suffered financial injury

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as a result of a breach of common law duties,” including common

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law fraud claims.

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1204, 1207-1208 (9th Cir. 1982) (noting that the Act created the

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CFTC as the exclusive authority for regulating commodities trading

Id. at § 25(a)(1)(A)-(D).

The Ninth Circuit has also

Kotz v. Bache Halsey Stuart, Inc., 685 F.2d

United States District Court
For the Northern District of California

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and as such preempted any substantive state law on that subject

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that was contrary or inconsistent with federal law).

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It is not clear from Crombie’s proposed ATPC if he is

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attempting to assert a cause of action for negligence per se or

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directly for violation of section 9(a)(4).

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§ 669 (elements of negligence per se are that (1) defendant

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violated a statute or regulation; (2) the violation caused

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plaintiff’s injury; (3) the injury resulted from the kind of

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occurrence the statute or regulation was designed to prevent; and

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(4) plaintiff was a member of the class of persons the statute or

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regulation was intended to protect).

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claim as “negligence,” in the text, he alleges that McConnon and

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Lyons violated the statute itself and seeks a declaration that

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they did so.

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See Cal. Evid. Code

While he titles his first

Either, Crombie has failed to state a claim.

As McConnon and Lyons point out, Crombie has failed to allege

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that he suffered any damages or that their actions were the cause

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of any such damages.

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the alleged actions of McConnon and Lyons “permanently destroyed

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my reputation and livelihood and placed me into the epicenter of

While, in his reply, Crombie asserts that

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regulators alleges [sic] of same acts by McConnon and Lyons,”

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Reply at 5, such allegations are not contained in his ATPC.

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noted above, damages are a required element for both negligence

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per se and for a claim made pursuant to section 22(a).

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In re Amaranth Natural Gas Commodities Litig., 587 F. Supp. 2d

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513, 530 n.104 (S.D.N.Y. 2008) (because “a person who violates the

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CEA is liable to a private plaintiff only for ‘actual damages

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resulting from’ the violation, . . . a plaintiff who failed to

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allege damages or causation would have failed to state a claim”).

United States District Court
For the Northern District of California

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As

See also

Crombie has also failed to allege that any fraudulent

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statement or misrepresentation made by McConnon and Lyons was done

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willfully, which is required by the plain terms of section 9(a)(4)

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and further renders both potential claims defective.

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first and third theories, Crombie plainly alleges that McConnon

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and Lyons acted “negligently,” and thus he could not remedy this

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deficiency without contradicting the contents of the proposed

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ATPC.

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and Lyons affirmatively and willfully falsified, concealed, or

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covered up anything; instead, he merely alleges that they failed

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to make certain disclosures.

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For his

In the second theory, Crombie has not alleged that McConnon

To the extent Crombie may be attempting to bring a claim

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pursuant to section 22(a), he does not fall into the classes of

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people who may bring such actions.

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received trading advice from McConnon and Lyons for a fee, that he

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made a contract for the sale of a commodity for future delivery

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through McConnon and Lyons, or that he purchased from or sold to

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McConnon and Lyons any options or contracts.

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§ 25(a)(1)(A)-(D).
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He does not allege that he

See 7 U.S.C.

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To the extent Crombie may be seeking to pursue a claim for

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negligence per se, he is likewise not a member of the class of

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persons the statute was intended to protect.

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to be intended to assist in the effective oversight of commodities

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traders in order to protect investors and the public from the harm

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of improper trading practices, not to protect traders from fraud

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by their business partners.

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The statute appears

McConnon and Lyons also argue that Crombie failed to plead
that certain alleged misstatements were material.

In the context

United States District Court
For the Northern District of California

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of the Commodity Exchange Act, a “statement or omitted fact is

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‘material’ if there is a substantial likelihood that a reasonable

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investor would consider the information important in making a

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decision to invest.”

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165, 169 (5th Cir. 2000).

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U.S. 438, 449 (1976).

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disclosures” McConnon and Lyons purportedly failed to make or how

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such failures were material.

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II.

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R & W Tech. Servs., Ltd. v. CFTC, 205 F.3d
See also Tsc Indus. v. Northway, 426

Crombie does not specify what “legal

Second claim for violation of section 4b(a)(1)(A),(B)
Section 4b(a)(1) of the Commodity Exchange Act makes it

unlawful
for any person, in or in connection with any order to
make, or the making of, any contract of sale of any
commodity in interstate commerce or for future delivery
that is made, or to be made, on or subject to the rules
of a designated contract market, for or on behalf of any
other person . . .

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(A) to cheat or defraud or attempt to cheat or
defraud the other person; [or]

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(B) willfully to make or cause to be made to the
other person any false report or statement or willfully
to enter or cause to be entered for the other person any
false record . . .

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7 U.S.C. § 6b(a)(1).

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under this section “are derived from the common-law action for

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fraud.”

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Cir. 1985).

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819 F.2d 1334, 1340 (6th Cir. 1987); Hartwig Transit, Inc. v. RBS

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Citizens, N.A., 2011 U.S. Dist. LEXIS 92483, at *6 (N.D. Ill.) (“A

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claim for relief under 7 U.S.C. § 6b is based on the principles of

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common law fraud where the relevant inquiry is whether a plaintiff

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actually relied upon the defendant’s representations.”).

The elements of a securities fraud action

Horn v. Ray E. Friedman & Co., 776 F.2d 777, 780 (8th
See also First Nat’l Monetary Corp. v. Weinberger,

“The

United States District Court
For the Northern District of California

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elements of intentional misrepresentation, or actual fraud, are:

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‘(1) misrepresentation (false representation, concealment, or

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nondisclosure); (2) knowledge of falsity (scienter); (3) intent to

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defraud (i.e. to induce reliance); (4) justifiable reliance; and

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(5) resulting damage.’”

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U.S. Dist. LEXIS 141944, at *9-10 (C.D. Cal.) (quoting Anderson v.

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Deloitte & Touche LLP, 56 Cal. App. 4th 1468, 1474 (1997)).

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Cross v. Wells Fargo Bank, N.A., 2011

As in his original third-party complaint, Crombie has failed

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to state a claim for fraud.

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alleged that he was harmed by McConnon and Lyons’ purported

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misstatements.

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and Lyon intended for him to rely on these statements or that he

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did in fact rely on them to his detriment.

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III.

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As discussed above, Crombie has not

Crombie again also fails to allege that McConnon

The heightened pleading requirements of Rule 9(b)
Because both of Crombie’s claims are based on allegations of

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fraud, he is required to comply with the heightened pleading

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requirements of Rule 9(b).

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Citigroup Global Mkts., Inc., 2009 U.S. Dist. LEXIS 35040, at *7

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(S.D.N.Y.) (applying to fraud claim under section 4b of the

See, e.g., Walrus Master Fund Ltd. v.

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Commodity Exchange Act); United States CFTC v. Amaranth Advisors,

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L.L.C., 554 F. Supp. 2d 523, 535 (S.D.N.Y. 2008) (“because claims

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under section 9(a)(4) sound in fraud, they are subject to the

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heightened pleading requirements in Rule 9(b)”).

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rule, when “alleging fraud or mistake, a party must state with

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particularity the circumstances constituting fraud or mistake.”

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Federal Rule of Civil Procedure 9(b).

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place and nature of the alleged fraudulent activities are

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sufficient, Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439

Pursuant to this

Statements of the time,

United States District Court
For the Northern District of California

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(9th Cir. 1987), provided the plaintiff sets forth “what is false

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or misleading about a statement, and why it is false.”

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GlenFed, Inc., Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994).

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In re

Crombie has again failed to meet this requirement.

In his

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first claim, Crombie did not state what McConnon and Lyons wrote

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to “project” that the prior track record of JDC was attributable

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to Paron in the way suggested, or when or in which materials they

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did this.

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when and in which documents.

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they made about “inaccurate and inflated assets” in what

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documents, when and how the statements were inaccurate.

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second claim, he does not identify the time, place and manner of

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the alleged statement to the CFTC that Crombie provided all the

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documents to the NFA.

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McConnon and Lyons claimed that Crombie was responsible for the

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marketing materials or when.

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He fails to state what disclosures they failed to make,
He fails to state what statements

In his

Crombie also fails to specify to whom

CONCLUSION
For the reasons set forth above, the Court finds that
Crombie’s proposed amended third-party complaint fails to state a
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claim and DENIES Crombie’s motion for leave to file it (Docket No.

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137).

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the deficiencies in his third-party complaint, denial is without

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leave to amend further.

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Further, because Crombie has had an opportunity to correct

Having denied Crombie’s motion on other grounds, the Court

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does not reach Lyons and McConnon’s request to hold his motion in

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abeyance pending the final judgment from the Delaware Chancery

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Court.
The further case management conference and hearing on case

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United States District Court
For the Northern District of California

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dispositive motions are maintained as currently set on December

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20, 2012 at 2:00 p.m.

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IT IS SO ORDERED.

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Dated:

6/25/2012

CLAUDIA WILKEN
United States District Judge

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