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

Filing 267

ORDER by Judge Claudia Wilken ORDER GRANTING THE USCFTCS 234 MOTION FOR SUMMARY JUDGMENT, DENYING CROMBIES 252 CROSS-MOTION FOR SUMMARY JUDGMENT AND DENYING CROMBIES ( 191 , 194 ) MOTIONS FOR LEAVE TO FILE NEW COUNTERCLAIMS AND THIRD-PARTY CLAIMS. (ndr, COURT STAFF) (Filed on 7/26/2013)

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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,

ORDER GRANTING THE
USCFTC’S MOTION
FOR SUMMARY
JUDGMENT (Docket
No. 234), DENYING
CROMBIE’S CROSSMOTION FOR SUMMARY
JUDGMENT (Docket
No. 252) AND
DENYING CROMBIE’S
MOTIONS FOR LEAVE
TO FILE NEW
COUNTERCLAIMS AND
THIRD-PARTY CLAIMS
(Docket Nos. 191
and 194)

Plaintiff,

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No. C 11-4577 CW

v.

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JAMES D. CROMBIE,

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Defendant.
________________________________/

United States District Court
For the Northern District of California

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Plaintiff United States Commodity Futures Trading Commission
(USCFTC) and Defendant James D. Crombie have filed cross-motions
for summary judgment.

counterclaims and third-party claims.

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The Court took Crombie’s

motions for leave under submission on the papers.

Having

considered the papers submitted by the parties and their arguments
at the hearing on the cross-motions, the Court GRANTS the USCFTC’s
motion for summary judgment and DENIES Crombie’s cross-motion for
summary judgment and his motion for leave to file new claims.
BACKGROUND

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Crombie also moves for leave to file new

I. Facts
The USCFTC is an independent federal regulatory agency
created by Congress to administer the Commodity Exchange Act (the
Act) and to enforce its provisions.

First Am. Compl. (1AC) ¶ 12;

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Crombie’s Answer to the 1AC (Answer) ¶ 12; see Commodity Futures

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Trading Comm’n v. Savage, 611 F.2d 270, 273 (9th Cir. 1979).

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The National Futures Association (NFA) is a private

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corporation that is registered as a futures association with the

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USCFTC pursuant to 7 U.S.C. § 21.

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has delegated responsibility for certain aspects of the regulation

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of certain futures professionals and entities that comprise its

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membership and their associated persons.

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primarily on the qualifications, proficiency, financial

1AC ¶ 15; Answer ¶ 15.

Id.

The NFA

The NFA focuses

United States District Court
For the Northern District of California

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conditions, retail sales practices and business conduct of its

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members.

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Id.

The NFA’s members include commodity trading advisers (CTAs),

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who are defined under the Act generally to include persons who are

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in the business of advising others of the value or advisability of

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trading in items such as commodity futures contracts or who

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promulgate analyses or reports on these topics as a regular part

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of business.

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1a(12).

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1AC ¶¶ 15, 19; Answer ¶¶ 15, 19; see also 7 U.S.C. §

JDC Ventures, LLC is a California corporation incorporated in

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2005.

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252-2.1

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February 2009 to May 2010 and remains an active limited liability

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company within California at the present time, but “it does not

1AC ¶ 18; Answer ¶ 18; Crombie Decl. ¶ 8, Ex. 7, Docket No.
JDC Ventures was registered as a CTA with the NFA from

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The exhibits attached to Crombie’s declaration appear to
mistakenly include two exhibits labeled as Exhibit 6 and do not
include any exhibits labeled as Exhibits 5 or 7. See Docket No.
252-2, 37, 59. The first Exhibit 6 appears to be accurately
labeled. Docket No. 252-2, 37. The second Exhibit 6 appears to
have been mistakenly marked as Exhibit 6 instead of Exhibit 7, and
will be referred to herein as Exhibit 7. Docket No. 252-2, 59.
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have any business currently” and “hasn’t had business in several

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years.”

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Decl. ¶ 4, Ex. 3 (Crombie Depo.),2 Docket No. 234-2, 88:5-13.

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Crombie states that he was the sole member of JDC Ventures from

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2005 to 2011.

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Mot.), 2.

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registered with the NFA that utilized a proprietary quantitative

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model for trading commodity future contracts.

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Ex. 4, Docket No. 234-2, 114, 121.

1AC ¶ 18; Answer ¶ 18; Crombie Decl. ¶ 8, Ex. 7; Robell

Crombie’s Opp. and Cross-Mot. for Summ. J. (Cross-

JDC Ventures held itself out as an investment advisor

Robell Decl. ¶ 5,

United States District Court
For the Northern District of California

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Paron Capital Management, LLC (Paron) was founded as a

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Delaware corporation in 2010 by Crombie, Peter McConnon and

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Timothy D. Lyons.

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The Operating Agreement forming the company stated that it “was

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formed as JDC Trading, LLC on or about March 29, 2010,” and that

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the name of the company was later changed to Paron.

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Operating Agreement, Crombie agreed to transfer all property and

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assets of JDC Ventures, including those in its trading system, to

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Paron.

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these assets to Paron and admit McConnon and Lyons, McConnon

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agreed to loan the company $300,000, with the understanding that

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Crombie would “immediately withdraw all of the proceeds of the

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Loan and use of all of such proceeds solely to settle that certain

Id.

Robell Decl. ¶ 3, Ex. 2, Docket No. 234-2, 18.

Id.

In the

As part of the inducement for Crombie to transfer

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As explained in further detail below, separate litigation
involving Crombie, Peter McConnon, Timothy D. Lyons and Paron
Capital Management, LLC took place in Delaware Chancery Court.
Depositions were taken during that litigation and a trial took
place. Excerpts of the transcripts from the depositions and trial
in the Delaware case were submitted by both parties. References
to depositions taken in the Delaware action are indicated by the
abbreviation “Del. Depo.” and references to depositions taken in
the instant action are referred to simply as “Depo.”
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judgment against Crombie and JDC in the matter of Paul D. Porteous

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v. James D. Crombie et al. filed in the Superior Court of

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California in the County of Ventura.”

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Id.

Pursuant to the Operating Agreement, Crombie owned seventy-

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five percent of Paron, McConnon owned twenty percent and Lyons

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owned five percent.

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Initial Manager of Paron, and was given, with limited exceptions,

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“full and complete authority and discretion to make all decisions

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and determinations, and take or authorize all actions, which he

United States District Court
For the Northern District of California

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Id. at 24-25.

Crombie was designated as the

deems appropriate” on behalf of Paron.

Id. at 20.

During the period from August 2010 through March 2011, Paron

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used promotional material in the form of a PowerPoint

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presentation, known as the “Flip book,” a monthly newsletter, and

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a due diligence questionnaire (DDQ) in order to solicit potential

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clients.

1AC ¶¶ 3, 22; Answer ¶¶ 3, 22.

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In March 2011, acting on the basis of anonymous complaints

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that Crombie was advertising fictitious performance information

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and that he and JDC Ventures had been charged in several civil

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lawsuits in connection with loans made to them that totaled more

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than $1 million, NFA initiated an investigation of Paron pursuant

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to its authority delegated from the USCFTC.

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Ex. 10, Docket No. 234-3 (Aff. of Patrick Moongthaveephongsa,

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hereinafter Moongthaveephongsa Aff.), ¶¶ 3-4; see also 1AC ¶ 21;

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Answer ¶ 21.

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an onsite examination of Paron on March 21, 2011 and interviewed

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Crombie in a conference call on March 29, 2011.

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Moongthaveephongsa Aff. ¶¶ 4, 11, 16.

Robell Decl. ¶ 11,

An NFA team led by Patrick Moongthaveephongsa began

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4

Crombie states that the

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onsite examination lasted until March 23, 2011.

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Ex. 90 (Crombie Aff.), ¶ 5.3

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Crombie Decl.,

During its audit, the NFA obtained Paron promotional material

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consisting of the Flip book, the newsletter and the DDQ.

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¶ 22; Answer ¶ 22.

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creation of Paron, the promotional materials represented the

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performance of JDC Ventures.

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Decl., Ex. 5, 7 (Flip book stating, “The management company was

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founded as JDC Ventures LLC in 2005 as a company solely owned and

1AC

For historical information predating the

Crombie Depo., 195:4-196:2; Robell

United States District Court
For the Northern District of California

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managed by James Crombie as investment adviser and was re-named

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Paron Capital Management LLC in May 2010 with three admitted

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members.

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track record of the investment adviser as Managing Member of JDC

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formerly and of PCM currently.”).

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each claimed that JDC and Crombie had previously achieved annual

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rates of return as high as 38.6% in 2008.

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The DDQ claimed that the total assets “managed/advised” by Paron

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in 2011 were approximately $35 million, and that the largest

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current account was $20 million.

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answer here that the DDQ listed these figures incorrectly.

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¶ 22.

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This track record is inclusive of the live and verified

The Flip book and newsletter

Id.

1AC ¶ 22; Answer ¶ 22.

Crombie admitted in his
Answer

The NFA requested that Crombie provide it with supporting

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documentation for the historical returns cited in certain

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promotional material for Paron.

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response, Crombie provided the NFA with certain documents,

1AC ¶ 23; Answer ¶ 23.

In

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Crombie has submitted both a declaration signed under
penalty of perjury and a notarized affidavit, which is attached as
an exhibit to the declaration.
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including (1) monthly account statements or summaries purportedly

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from Fimat USA, LLC; (2) monthly account statements or summaries

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purportedly from Access Securities, LLC (Access); and (3) a

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Trading Advisory Agreement (TAA) dated December 13, 2007,

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purportedly signed by Richard Breck.

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See also Robell Decl. ¶ 12, Ex. 11, 141 (emailed document from

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Crombie to NFA personnel, stating, “On behalf of all PCM

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Principals, Crombie provided the documents per the NFA’s initial

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requests.”); Crombie Depo. 37:8-25 (testifying that he provided

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United States District Court
For the Northern District of California

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the Fimat statements to the NFA); Answer ¶¶ 26, 28 (admitting to

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providing the NFA with the Access statements and TAA).

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contends that these documents were fraudulent.

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that Crombie made a number of misstatements to the NFA during the

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course of the investigation.

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A. The Fimat statements

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Moongthaveephongsa Aff. ¶ 6.

The USCFTC

It also contends

Crombie testified that the Fimat statements showed the

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activity in two accounts held at that institution by SCR Financial

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Group, Inc. that traded based on Crombie’s futures trading

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algorithm.

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documents to the NFA, he characterized them as “account

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summaries.”

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Crombie Depo. 37:21-38:5.

When Crombie provided these

Moongthaveephongsa Aff. ¶ 6.4

SCR Financial was founded in late 2005 or early 2006 and was

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in the business of marketing financial guaranty products to

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customers seeking alternatives to posting letters of credit or

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Crombie testified that “the company, SCR” had three trading
accounts: one for “SCR Capital, LLC,” one for “SCR Financial
Group, Inc.” and one for “Dynasty International,” the last of
which was SCR’s largest client and account. Crombie Del. Depo.
30:3-12.
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other collateral for business operations funding.

Robell Decl.,

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Ex. 20 (Deposition of Robert Chmiel), 12:15-16:7.

Robert Chmiel

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served as the CFO of SCR Financial from its founding until March

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2007, and Andrew Wielbacher worked at the firm for “essentially”

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the entire time it was in existence.

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Robell Decl., Ex. 21 (Deposition of Andrew Weilbacher), 21:17-

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22:11.

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Chmiel Depo. 33:11-34:5; Weilbacher Depo. 21:17-25.

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and early 2007, the principals realized that the business model

Chmiel Depo. 15:25-17:14;

Crombie had no role in the operation of SCR Financial.
By late 2006

United States District Court
For the Northern District of California

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for SCR Financial was not going to work out successfully and began

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winding it down.

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20:16-21:5.

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time, SCR Financial did no trading activities, and specifically

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did not trade or invest in futures or securities.

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Ex. 77 (Chmiel Depo.) 26:16-21, 81:25.

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Chmiel Depo. 16:22-17:23; Weilbacher Depo.

Chmiel left in March 2007 and through at least that

Crombie Decl.,

As SCR Financial was winding down, another entity, SCR

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Capital came into existence.

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Capital in early 2007 and was given the title of Chief Investment

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Officer in March 2007.

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worked at SCR Capital until October 2007.

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SCR Capital was to be a management company over private investment

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funds.

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an off-shore and an on-shore fund.

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Fimat provided SCR Capital with Fimat account numbers for both

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funds: C230288 for the domestic fund, referred to as the “SCR

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Market Neutral Fund LP,” and C230299 for the off-shore fund,

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referred to as the “SCR Market Neutral Fund, LTD.”

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Ex. 23, 36.

Crombie began working for SCR

Crombie Depo. 66:2-67:23.

Weilbacher Depo. 17:4-5, 21:14-16.

Weilbacher also

Unlike SCR Financial,

It launched two funds,

Id. at 17:6-8.

In March 2007,

Robell Decl.,

An employee at Fimat stated that SCR Capital’s
7

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account was a “futures-centric account” and, because that employee

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was not licensed, when he was contacted by Crombie to open up the

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account, he directed Crombie to contact a different desk to do

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this. Crombie Decl., Ex. 74 (Deposition of Michael Liciardello),

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15:18-24.

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traded securities and did not trade futures.

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7, 87:7-8.

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Patterson), 48:1-3 (Fimat manager testifying, “There was futures

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trading for an account traded by somebody affiliated with at [sic]

However, Crombie repeatedly testified that SCR Capital
Crombie Depo. 83:5-

See also Crombie Decl., Ex. 74 (Deposition of Douglas

United States District Court
For the Northern District of California

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SCR Capital, not in the name of SCR Capital as the account

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itself.”); Weilbacher Depo. 60:13-14, 62:19-63:9 (recalling

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Crombie trading futures in 2007 and stating his recollection of

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Crombie’s trading was that, “in addition to the activities that

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[Crombie was] doing with SCR,” at that time, Crombie was also

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trading futures separately from the company).

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The traders at SCR Capital used a “quantitative equity market

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neutral strategy” developed by Crombie to make trading decisions,

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as well as doing some discretionary trading.

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26:21-28:15.

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actively, Weilbacher, Crombie and several others received daily

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statements from Fimat, which were sent by email from their primary

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contact at Fimat, Steve McNamee.

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Crombie testified that he “was intimately aware of the daily

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performance on a gross basis.”

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the performance of JDC Ventures during the time period covered by

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the Yulish & Associates review, discussed below).

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Weilbacher Depo.

During the time that SCR Capital was trading

Weilbacher Depo. 40:9-42:22.

Crombie Depo. 168:7-16 (addressing

SCR Capital’s on-shore and off-shore funds suffered
significant losses in July and August of 2007.
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Weilbacher Depo.

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17:20-23.

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time and returned investments to its investors in August.

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18:2-6.

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Crombie Depo. 68:4-6.

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SCR Capital decided to liquidate both funds at that
Id. at

SCR Capital stopped trading and did not operate again.

The Fimat documents that Crombie provided to the NFA

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contained monthly information for “summary periods” from November

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2006 to December 2008 for two funds identified as an “Onshore

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Fund: SCR Market Neutral Fund, LP / FIMAT Acct. # C-230288” and an

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“Offshore Fund: SCR Market Neutral (Cayman) Fund, Ltd. / FIMAT

United States District Court
For the Northern District of California

10

Acct. # C-230299.”

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showed that the net liquidating value of the off-shore account

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grew from about $7 million in November 2006 to about $24 million

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in December 2008.

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Robell Decl., Ex. 14, 39-64.

The summaries

Id.

After the NFA received the Fimat statements, it asked Newedge

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USA, LLC, the corporate successor to Fimat, to provide NFA with

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the monthly account statements for the same accounts covered by

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the statements provided by Crombie.

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Robell Decl., Ex. 15 (Dep. of Steven Jones), 15:10-16.

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summaries provided by Crombie, the statements provided by Newedge

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for the same time period showed a total value of about eighty

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dollars in the account from September 2007 through February 2008,

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when the accounts were closed.

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(showing balance for account number C230288 between $39.90 and

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$40.16 from September 2007 to February 2008); Robell Decl., Ex.

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13, 32-37 (showing balance for account number C230299 between $40

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and $40.16 for the same time period); Jones Depo. 19:24-20:14,

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25:7-9 (testifying that SCR Capital was a customer of Fimat from

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spring 2007 “effectively” through September 2007, after which it

Moongthaveephongsa Aff. ¶ 8;
Unlike the

See Robell Decl., Ex. 12, 15-21

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was inactive for several months before it was closed and that he

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had not heard of SCR Financial).

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The USCFTC contends that the Fimat documents that Crombie

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provided to the NFA were formatted differently than authentic

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Fimat statements and that the latter contained certain items such

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as legal disclosures and a tax identification number, which the

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documents provided by Crombie did not.

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between the formal monthly statements and the documents provided

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by Crombie are immaterial.

The formatting differences

Crombie maintains that the documents

United States District Court
For the Northern District of California

10

that he provided to the NFA were summaries and not a standard

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monthly statement, and the general formatting of the documents he

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gave to the NFA is similar to that of summaries that a Fimat

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employee, Douglas Patterson, created for the SCR funds in response

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to a request from Crombie.

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compare Robell Decl., Ex. 14 (summaries given by Crombie to the

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NFA) with Robell Decl., 18 (summaries prepared by Patterson for

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the SCR funds).

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Patterson Depo. 13:16-25, 15:4-7;

However, the summaries provided by Crombie to the NFA do

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differ materially from the summaries that Patterson prepared for

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the accounts during the same time period.

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provided the NFA with a summary for the time period from August 1-

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30, 2007, a time period for which Patterson created a summary for

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the same accounts.

Compare Robell Decl., Ex. 14, 48 with Robell

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Decl., Ex. 18, 48.

In that month, the two summary documents have

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different numbers for the same categories.

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Crombie provided has no information for the domestic account,

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while the Patterson document does.

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10

For example, Crombie

Further, the document

1

In his briefs, Crombie does not cite any evidence to
establish that Fimat actually sent him the summaries that he gave

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to the NFA, and did not attest to this in his declaration.5

4

Apparently to explain why he has no evidence that the summaries

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came from Fimat, Crombie stated in his affidavit that, in March

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and April 2012, Newedge’s general counsel, Gary Prish, told him by

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email that “the ftp website Fimat had maintained for all SCR

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customer and related accounts,” which Crombie contends was the

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means by which Fimat would give him these statements, “were not

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United States District Court
For the Northern District of California

2

maintained or archived by Newedge,” and “that the SCR accounts

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related reports and other customer files are permanently

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destroyed.”

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Prish that were sent in March and April 2012 in which Prish stated

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that the SCR ftp site “no longer exists,” but nothing in which he

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stated that any reports or customer files were permanently

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destroyed.

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to suggest that Fimat employees said that the ftp site was used as

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its archive of customer documents and that if the ftp site is no

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longer there, Fimat has necessarily destroyed customer files.

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However, the depositions of the Fimat employees that he cited

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about the ftp site do not state any such thing, and instead say

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that the reports were put on the ftp site as a means to give them

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to the customers.

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to an FTP for clients to grab”), 13:4-5 (they were “put up online

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and people could go and grab them”); 40:19-41:4 (explaining that

Crombie Aff. ¶ 28.

Crombie has submitted emails from

Crombie Decl., Ex. 75.

In his reply, Crombie appears

See Patterson Depo., 12:8-9 (we “put those off

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27
5

28

Crombie alleged in his answer that “Fimat Preferred had
generated the statements for Crombie.” Answer ¶ 24.
11

1

there were “two methods that a client would use to access

2

information from Fimat at that point . . . Either they would come

3

in through a website, generic for all customers with a login and

4

password, and be able to obtain the standard monthly statements.

5

For certain clients [such as SCR], we created an FTP protocol site

6

where we would put specific information up to that site so they

7

could retrieve them.”) (errors in original).

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argues--without evidence--that Fimat provided him with the

9

summaries and suggests that the summaries referred to SCR accounts

Although Crombie

United States District Court
For the Northern District of California

10

other than the ones in the statements later produced by Fimat,

11

Crombie also does not submit evidence that the Fimat summaries

12

contained accurate information.

13
14
15

B. Access statements, Trading Advisory Agreement and Crombie’s
business with Richard Breck
Crombie provided the NFA with “monthly account

16

statements/summaries which on their face appear to be from Access

17

Securities, LLC (‘Access’), an introducing broker NFA member, for

18

an account Crombie managed in the name of FTGC LLC, for the

19

benefit of Richard Breck.”

20

1AC ¶ 26; Answer ¶ 26 (acknowledging that he provided the

21

statements to the NFA).

22

Trading Advisory Agreement (TAA) dated December 13, 2007 and

23

purportedly signed by Breck.

24

Moongthaveephongsa Aff. ¶ 6.

25

Moongthaveephongsa Aff. ¶ 6; see also

Crombie also provided the NFA with a

1AC ¶ 28; Answer ¶ 28; see also

Breck is the president of Source Trading, a division of

26

Access.

Robell Decl., Ex. 26 (Deposition of Richard Breck in his

27

personal capacity and as Rule 30(b)(6) representative of Access),

28

11:9-21.

In depositions for the Delaware litigation, he testified
12

1

that Crombie never worked for Access or Source Trading but that,

2

for several months in about 2007, Crombie provided some consulting

3

services regarding the trading of index options to Breck on behalf

4

of Source Trading and Access.

5

Depo.), 11:9-16:5; see also Breck Depo. 31:7-37:18 (stating that

6

Crombie provided trading ideas for index options).

7

recommendations to Breck, who made the transactions himself with

8

Access’s own funds.

9

Crombie a total of $35,000 in consulting fees for his services;

Crombie Decl., Ex. 86 (Breck Del.

Crombie made

Breck Del. Depo. at 11:21-13:16.

Access paid

United States District Court
For the Northern District of California

10

$25,000 was paid in 2007 and the balance was paid by check on

11

January 8, 2008.

12

87 (2007 1099-MISC form issued to Crombie from Access showing

13

$25,000 in nonemployee compensation); Crombie Decl., Ex. 88 (2008

14

1099-MISC form issued to Crombie from Access showing $10,000 in

15

nonemployee compensation); Breck Depo. 31:7-37:18 (testifying that

16

1099-MISC forms reflected the entirety of the payments by Access

17

to Crombie).

18

because Crombie was not a registered broker with Access.

19

Del. Depo. 20:20-24.

20

2007, they did not speak for years.

21

Id. at 19:5-21:23; see also Crombie Decl., Ex.

This reflected a consulting fee and not a commission

After Breck stopped trading using Crombie in
Id. at 18:12-23.

The TAA is dated December 13, 2007 and is purportedly signed

22

by Breck as “Client” and Crombie as “Manager.”

23

24, 85.

24
25
26
27
28

Breck

Robell Decl., Ex.

It provides,

Client hereby appoints the Manager, and the Manager
hereby accepts such appointment, to render trading
advisory services for the management of the Client’s
sub-account for Manager (the “Account”) at an [sic]
nationally recognized futures commission merchant
(“FCM”) in the amount of US $3,000,000.00 (“Account
Size”). The Account will initially be funded with US
$3,000,000.00 in cash margin balances.
13

1

Id. at 81.

2

purported TAA document in March 2011, that the signature that

3

appeared on the document was not his and that he did not authorize

4

anyone to sign it on his behalf.

5

61:22-62:20.

6

an account with three million dollars to be managed by Crombie.

7

Id. at 64:3-16.

8
9

Breck testified that he first became aware of the

Breck Depo. 59:3-20, 60:4-6,

He also testified that neither he nor Access funded

Crombie testified that, when Paron commissioned Rothstein,
Kass & Company, LLP (Rothstein Kass) in 2010 to do a report on

United States District Court
For the Northern District of California

10

Paron’s track record, he remembered entering into the TAA in 2007,

11

but he did not have a copy of the TAA to provide to Rothstein

12

Kass.

13

Lau of Rothstein Kass to contact Source Trading for a copy and

14

stated that he was later told by Rothstein Kass that it received

15

that item from Source Trading.

16

non-hearsay evidence that Source Trading or Access had the TAA or

17

provided it to Rothstein Kass.

18

submitted a copy of a purported facsimile, dated October 24, 2010,

19

of the TAA with a cover sheet that bears Breck’s letterhead and

20

fax number and is addressed to Lau in handwriting that Breck

21

testified looked to him like Crombie’s handwriting, although he

22

stated that he could not be sure that it was Crombie’s.

23

Depo. 58:18-61:15; Ex. 24, 80-85.

24

Crombie Depo. 103:1-17.

As a result, he directed Connie

Id.

Crombie, however, provides no

With its exhibits, the USCFTC has

See Breck

The disputed statements purport to have been issued by

25

Access, located at 30 Buxton Farm Road #300 in Stamford,

26

Connecticut, to “FTGC LLC FBO RICHARD BRECK,” located at #120 at

27

the same address.

28

January 31, 2009 and August 31, 2010.

Crombie Decl., Ex. 67.

14

They are dated between

Id. at 21-59.

They appear

1

to show an account worth about three million dollars in January

2

2009 and about three and a half million dollars in August 2010.

3

Id.

4

The statements seem to show futures trading transactions.
In deposition testimony for the Delaware action, Breck

5

testified that, in the spring of 2010, Crombie urgently need money

6

and that he loaned him $200,000 initially and some additional

7

amount thereafter.

8

wired Crombie the money, drew up a promissory note and sent it to

9

him in April 2010, although Crombie did not sign the note until

Breck Del. Depo. 42:2-14, 44:23-24.

United States District Court
For the Northern District of California

10

nine or ten months later.

11

69:21-70:12.

12

Breck

Id. at 43:5-20; see also Breck Depo.

The note stated in part,

15

For value received, the undersigned, James D. Crombie
(the “Borrower”) agrees to pay to the order of Richard
F. Breck, Jr. (the “Lender”) at Ridgefield, CT (or at
such other place as the Lender may designate in writing)
the sum of Two Hundred Thousand and no/100 Dollars
($200,000.00) with interest from April 1, 2010 at the
rate of 5% per annum.

16

. . .

17

The loan entitles Richard F. Breck to a 10% interest in
JDC Ventures or any other money management venture going
forward. The 10% interest will have veto power over the
hiring or adding of any new partners going forward in
perpetuity.

13
14

18
19
20

Robell Decl., Ex. 45.

21

this was “meant to be a loan” or “meant to be an investment at

22

that time,” Breck responded, “[I]t was sort of both.

23

loan with the caveat that if his business ended up being

24

successful, that I would own warrants or an option on a tenth, I

25

believe, of the business, 10 percent.

26

loan.”

27

deposition in the instant action, when asked if he intended “this

28

$200,000 payment to be a loan or an investment,” Breck responded,

At the Delaware deposition, when asked if

Breck Del. Depo. 43:21-44:4.

15

It was as a

But, in fact, this was a
At his more recent

1

“I think I described it properly.

2

paragraph indicates what my intent was; that if he was successful,

3

I would be remunerated for making a speculative loan, if you

4

will.”

5

a loan and it was a loan sort of--almost with a warrant, if you

6

will, that if his--if he was successful in raising money and

7

building a money management firm around his trading program, that

8

I would own a percentage of that.”).

9

It was a loan.

That short

Breck Depo. 78:23-79:5; see also id. at 14:12-20 (“it was

Crombie testified that the April 2010 agreement was “a

United States District Court
For the Northern District of California

10

personal guarantee on [Breck’s] fee advance.”

11

10 (Crombie Del. Depo. 121:9-13.

12

him fees and that it was memorialized as Crombie’s personal

13

responsibility if he “didn’t earn profits back and if fees weren’t

14

covering it.”

15

. . . as a loan in the fall of 2010.”

16

id. at 125:3-13 (“He wanted it collateralized as a loan. . . . I

17

signed it as a personal guarantee on $200,000 and a fee advance

18

from him.”); but see Crombie Del. Depo. 147:22-148:6

19

(acknowledging that the document memorializing “Breck’s loan to

20

you in the amount of $200,000” was dated April 1, 2010 and signed

21

by Crombie).

22

action, Crombie described this as a “$200,000 fee advance loan

23

from Richard Breck to James Crombie in 2010.”

24

120, 4.

Id.

Crombie Decl., Ex.

He explained that Breck advanced

Crombie stated that it was later “memorialized
Id. at 120:21-25.

See also

In his interrogatory responses in the instant

Crombie Decl., Ex.

25

Breck set up FTGC LLC as part of the 2010 loan to Crombie, as

26

a “sort of indirect ownership structure” over any money management

27

firm built around Crombie’s trading program.

28

did not exist before that time.

Id.
16

Id. at 14:12-23.

It

1

Breck, testifying both individually and on behalf of Access,

2

attested that a number of factors show that the Access account

3

statements were fraudulent.

4

and did not exist in 2009, when many of the statements are dated.

5

Breck Del. Depo. 37:8-16; Breck Depo. 53:5-22.

6

Breck stated that he never funded an account with three million

7

dollars.

8

account, stating that if it did exist with “three million bucks in

9

it, I probably would have known about it.

First, FTGC was established in 2010

As noted above,

He also testified that he did not know about this

Because supposedly it’s

United States District Court
For the Northern District of California

10

mine.”

11

Further, the statements showed various currency balances and

12

Access did not trade currencies or have the ability to do so.

13

Breck Del. Depo. 37:20-23; Breck Depo. 53:5-17.

14

number on the statements is not an Access account number and is

15

not formatted in the way that Access formats its account numbers.

16

Breck Del. Depo. 35:21-36:23; Breck Depo. 54:10-55:14.

17

statement did not have legal disclaimers that normally appear on

18

Access’s statements, or the information for its clearing firm.

19

Breck Del. Depo. 39:3-16.

20

Breck’s office, number 120, is incorrect; although Breck

21

previously was in that suite, he moved from it at some point in

22

2008.

23

statements appeared fake because they seemed to show futures

24

trading, which his firm did not do.

Breck Depo. 53:5-25; see also Breck Del. Depo. 37:23-38:2.

The account

The

The suite number that appears for

Breck Depo. 55:15-21.

Breck also attested that the

25

One of Breck’s employees, Matthew Weber, testified that,

26

while he worked at Access between June 2009 and March 2011, he did

27

do trading on an equity trading account owned by FTGC that Breck

28

had control over, that Breck also executed trades in that program
17

1

and that he was unaware of trading being done for FTGC that was

2

distinct from this.

3

that, during the time of his employment, he utilized software

4

authored by Crombie, and was also monitoring and executing trades

5

based on the “James Crombie model” or “Paron model” that “was all

6

Futures,” but that this futures trading was not done on behalf of

7

Access, FTGC or Breck, and that he had never seen an account

8

statement for FTGC or sent one to Crombie.

9

33:4-15.

Weber Depo. 6:9-13:14, 36:4-7.

He also said

Id. at 7:14-12:18,

He also testified that he was not aware of any three

United States District Court
For the Northern District of California

10

million dollar futures account that Breck had at Access and that

11

he did not have any knowledge of Crombie trading futures on behalf

12

of FTGC or Breck.

13

Id. at 35:19-36:7.

Breck attested that he questioned his employees and that no

14

one at Access sent the statements to Crombie.

15

58:17.

16

Access, although he did not know by whom specifically and that

17

Access must have lied when it denied this.

18

268:19.

19

the statements, he does not argue or assert that the statements

20

contain accurate information.

21

Breck Depo. 56:5-

Crombie testified that he was sent the statements by

Crombie Depo. 267:17-

Although Crombie avers that someone at Access sent him

Breck testified that he considered the 2010 loan to be

22

defaulted as of the time that he learned of the fraudulent

23

brokerage account.

24

responses, Crombie described the loan as “disposed of and not

25

owing due to fees earned earlier and later in arrears on same

26

balance.”

Breck Depo. 78:4-13.

In his interrogatory

Crombie Decl., Ex. 120, 4.

27

Crombie also asserts that Breck had served as a professional

28

reference for him and that Breck told people that he had invested
18

1

in Paron and had done so for many years.

2

pieces of evidence in support of this; however, most of it is

3

inadmissible.

4

that he spoke with Breck as one of Crombie’s references in May

5

2010.

6

Ex. 82 (email from McConnon on March 28, 2011 stating that, as

7

part of his due diligence process, he had relied on a “reference

8

from Richard Breck at Access”).

9

evidence as to what Breck said to McConnon or anyone else; the

Crombie cites several

First, at the Delaware trial, McConnon testified

Crombie Decl., Ex. 27, 116:20-24; see also Crombie Decl.,

However, there is no admissible

United States District Court
For the Northern District of California

10

remaining evidence cited by Crombie is inadmissible hearsay.

11

Crombie Del. Depo. 91:11-19 (Crombie testifying that McConnon and

12

Lyons spoke to Breck in the spring of 2010); Crombie Decl., Ex. 84

13

(document that Crombie states contains notes made by Michale

14

Glennan of Tudor Investment Corp., purportedly from a conversation

15

between Glennan and Breck, in which Breck said that Crombie had

16

offered Breck the “opportunity to invest” and that Breck gave

17

Crombie “$200-250K for management and is now a small stakeholder

18

in the business”); Crombie Decl., Ex. 85 (unsworn email from

19

Philip Kent Cooke, Director of Barclays Wealth, stating that he

20

had met with Breck and Crombie in December 2010 and that Breck had

21

said “that he had been an investor in Paron with Jim for many

22

years” and “that he owned 9.2% of the Paron entity”).

23
24

C. Purported misstatements made by Crombie to the NFA
The USCFTC accuses Crombie of having made a number of

25

misstatements to the NFA during the course of the NFA’s

26

investigation about payments to or from Paron, loans and

27

litigation involving Paron and its principals.

28
19

See

1

1. Loans and payments to and from Paron
Two NFA representatives, Moongthaveephongsa and Sharon

3

Pendleton, have submitted declarations stating that, on March 29,

4

2011, after the NFA completed its onsite examination of Paron,

5

they participated in a phone conference call with Crombie.

6

Decl., Ex. 31 (Pendleton Decl.) ¶ 6; Moongthaveephongsa Decl. ¶ 9.

7

Crombie stated in his affidavit that the “NFA audit terminated on

8

March 29, 2011” and referred to this call as the “post-audit call”

9

but also stated that he “was told at the end of the March 29, 2011

10
United States District Court
For the Northern District of California

2

phone call with NFA agents that the Paron audit was completed and

11

that NFA would issue an enforcement action against Paron and

12

against me as a result of adverse findings.”

13

¶¶ 20, 22 (emphasis added).

14

Robell

See Crombie Aff.

In his affidavit, Crombie stated that, other than certain

15

questions related to Paul Porteous, Weston Capital and his home

16

mortgage, NFA agents did not ask him other verbal questions

17

regarding loans “during the NFA audit.”

18

Nonetheless, he does not seem to dispute that NFA agents asked him

19

about payments made to or from him or JDC.

20

to dispute that he was asked about loans during the March 29 phone

21

call: he stated in his affidavit that “NFA agents did not ask me

22

any verbal questions about purported loans or loans agreements

23

between JDC or me” with “anyone else during the NFA onsite audit

24

or at any other point prior to a March 29, 2011 phone call I

25

received from NFA agents.”

Crombie Aff. ¶ 11.

He also does not seem

Id. at ¶ 14.

26

Both Moongthaveephongsa and Pendleton attested that, during

27

the March 29, 2011 conference call, Pendleton “asked Mr. Crombie

28

whether he, individually or through JDC Ventures, had any loans
20

1

outstanding” and “whether Paron had any loans outstanding.”

2

Pendleton Decl. ¶ 8; Moongthaveephongsa Decl. ¶ 11.

3

stated that, in response, Crombie “identified only a loan from his

4

brother-in-law” and that he “did not identify any other loans.”

5

Pendleton Decl. ¶ 9; Moongthaveephongsa Decl. ¶ 12.

6

Both also

The USCFTC accuses Crombie of failing to disclose that

7

certain payments about which the NFA asked him during the

8

interviews were loans or that he had outstanding loans at the time

9

of the March 29, 2011 phone call.

United States District Court
For the Northern District of California

10

a. Transactions involving Paul Porteous

11

During the onsite audit, the NFA asked Crombie “about

12

transactions involving . . . Paul Porteous,” and Crombie “replied

13

. . . that the transaction with Mr. Porteous involved an

14

investment in JDC Ventures, LLC.”

15

(Moongthaveephongsa Decl.) ¶ 9.

16

“In response to NFA’s questions concerning a $200,000 payment from

17

JDC to Porteous on May 6, 2009, Crombie informed NFA that Porteous

18

had previously contributed capital to JDC in 2008, and that the

19

$200,000 payment to Porteous was in repayment of Porteous’ capital

20

contribution.”

21

34 (March 23, 2011 email from Crombie to NFA explaining the nature

22

of transactions between Porteous and JDC as follows: “Porteous

23

contributed invested capital amounts into JDC in 2008 which were

24

not for an investment account, but was an investment in JDC for a

25

share of profits in the management company. . . . Under the

26

structure of his investment he had the option to put it for cash

27

consideration, and did so in May 2009.

Robell Decl., Ex. 32

In his answer, Crombie admitted,

1AC ¶ 32; Answer ¶ 32; see also Robell Decl., Ex.

28
21

Thus, $200,000 he had

1

invested as a silent non-operating fee share investor at the

2

management company was repaid to Mr. Porteous on” May 6, 2009).

3

In his affidavit, Crombie stated that NFA agents asked him

4

“who Porteous was because they had identified $367,000 in payments

5

from JDC to him between May 2009 and May 2010.”

6

He stated that he told them that “they were payments owing to

7

Porteous from a prior business investment that was collateralized

8

by a promissory note executed by me.”

9

“NFA agents asked if I owed Porteous money and I stated no, and

Id.

Crombie Aff. ¶ 6.

He also stated that

United States District Court
For the Northern District of California

10

referenced them to page one of the Paron Op. Agmt.”

11

During his deposition, Crombie testified that Porteous had done “a

12

private loan with me in the early fall 2008” for $1.15 million.

13

Crombie Depo. 94:19-95:10.

14

personal loan . . . and I technically used all of it for personal

15

expenses.

16

my personal. . . . It was not a business loan.

17

loan.”

18

Id.

Crombie further testified, “It was a

Some of it went to my business and some of it went to
It was a personal

Id. at 101:8-17.

In his answer, Crombie further admitted, “The $200,000

19

payment from JDC to Porteous was a partial payment of a promissory

20

note, dated September 24, 2008, which Crombie had issued to

21

Porteous and which later became the subject of Porteous’ lawsuit

22

against Crombie and JDC.”

23

interrogatory responses, Crombie described this loan as a “$1.15

24

million loan from Paul Porteous to James Crombie in September

25

2008, which was partially repaid in full with interest and fees in

26

2010.”

1AC ¶ 33; Answer ¶ 33.

Crombie Decl., Ex. 120, 4.

27
28
22

In his

1
2

b. Transactions involving Steven Lamar
During the NFA investigation, NFA asked Crombie to explain

3

deposits into a JDC bank account of $50,000 and $250,000 on May 4

4

and 5, 2009 respectively.

5

Decl., Ex. 63 (email from the NFA to Crombie on March 23, 2011

6

asking about a May 4, 2009 counter credit and a May 5, 2009

7

payment from Jennifer Lamar).

8

that these deposits were payments from Steven Lamar to JDC for

9

“financial engineering services” that Crombie and JDC provided to

1AC ¶ 34;6 Answer ¶ 34; see also Robell

In response, Crombie told the NFA

United States District Court
For the Northern District of California

10

a hedge fund Lamar was setting up.

11

also Moongthaveephongsa Aff. ¶ 15; Robell Decl., Ex. 63 (email

12

from Crombie to the NFA, explaining the May 4 and 5, 2009 deposits

13

as follows:

14

Street Capital, LLC, a new hedge fund in 2009 and the investment

15

manager for this was MAX Trading, LLC.

16

entered an arrangement where JDC would provide financial

17

engineering services (building models, execution systems) as a

18

consultant to the Lamars as they started their business.

19

of an ownership in the SEC securities funds to be managed by 238

20

Main Street Capital, LLC, JDC took one time payment consideration

21

of $300K.

The $250K payment came on 5/5 in the form of a wire

22

transfer.

The prior day, 5/4, a payment via counter credit was

23

made from MAX Trading LLC to JDC to total $300,000.”).

24

affidavit, Crombie stated that he “informed NFA agents” that “JDC

1AC ¶ 34; Answer ¶ 34; see

“Jennifer Lamar and Steven Lamar had started 39 Main

MAX Trading LLC and JDC

In lieu

In his

25
26
27
28

6

The 1AC refers to May 4 and 5, 2010 instead of 2009;
Crombie answered, admitting to the contents of the paragraph in
its entirety. However, the supporting emails refer to May 4 and
5, 2009. Most other references to these transactions state 2009,
so the reference to 2010 was likely a typographical error.
23

1

and I provided professional services including software I

2

developed for 39MS [a hedge fund company owned by Steven Lamar],

3

that salaried trading and CFO staff and office space to 39MS” and

4

“that Lamar made a May 2009 investment into JDC and that JDC had

5

provided these specific services and resources to 39MS in 2009.”

6

Crombie Aff. ¶ 12.

7

In his opposition, Crombie states that “Lamar did not loan

8

any money to me; he made a $300,000 investment into JDC.”

9

18.

Opp. at

Crombie cites a signed agreement between himself and Lamar

United States District Court
For the Northern District of California

10

that stated that, in exchange for a $300,000 investment by Lamar,

11

Lamar would receive between ten percent and twenty percent of the

12

net profits of JDC Ventures.

13

provided,

14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Crombie Decl., Ex. 8.

It further

Of the US$300,000 investment in JDC Ventures, LLC by
Lamar, $250,000 will immediately be used to defease a
liability, and $50,000 will be initially retained for
working capital. This $50,000 in working capital will
be returned to Lamar with no interest within four
months. If unpaid after four months, it will be made
whole out of first fees received on month five or
beyond.
Id. (errors in original).
Crombie has repeatedly admitted that the $50,000 portion of
the money received from Lamar was a “working capital loan.”

See

Robell Decl., Ex. 11, CFTC-0000448.0005 (Crombie May 4, 2011
email); Robell Decl., Ex. 51 (Crombie April 5, 2011 email stating
that “$50K of his $300K investment was structured as a working
capital loan to be paid out of fees”); Crombie Aff. ¶ 13
(admitting that the “May 2009 agreement stipulated that $50,000 of
the $300,000 investment Lamar made into JDC would be a working
capital loan”).

For example, in his sworn interrogatory
24

1

responses, Crombie described the money from Lamar as a “$50,000

2

working capital loan from Steven Lamar to JDC Ventures, LLC in May

3

2010 which was not repaid and was in default following the

4

business insolvency of JDC in 2010.”

5

Crombie Decl., Ex. 120, 4.

c. Transactions involving Weston Capital Management

6

In an email exchange dated March 23, 2011, the NFA asked

7

Crombie about three payments from Weston Capital Management to JDC

8

between February and April 2009 totaling $200,000.

9

Decl., Ex. 101, 2.

See Crombie

After seeking clarification about the dates of

United States District Court
For the Northern District of California

10

the transactions for which the NFA sought information, Crombie

11

responded by email,

12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

JDC contracted a relationship with Weston Capital
Management. Weston Capital owns and manages funds under
the Wimbledon label . . . In the relationship Weston
owns the funds, and the investment advisor is hired as a
consultant to the fund for compensation. . . . These
were for professional fees paid to JDC from Weston
Capital Management totaling $200,000 for the first
calendar quarter of 2009.
Id. at 1.
In his affidavit, Crombie also stated that
during the onsite audit, NFA agents asked me about
$200,000 in fee advance payments to JDC from Weston
Capital (“Weston”) in 2009. I told NFA agents these
were working capital advances. NFA agents asked me if I
still had a relationship with or open working capital
balances owing to Weston and I said no; and added that
the Weston relationship ended with the November 2009
insolvency of a Weston hedge fund which invested in JDC
and that the working capital advances were not owed by
me or JDC to Weston. The working capital advances were
extinguished by the insolvency of the Weston fund in
2009, and this was confirmed to me by Jeffrey Hallac who
was an officer of Weston and also a member of the Board
of Directors of the insolvent Weston fund. NFA agents
did not query me further about Weston, the Weston fund
or any money balances owing from or to Weston by JDC or
me.

28
25

1

Crombie Aff. ¶ 9; see also Crombie Decl., Ex. 20, viii

2

(identifying Jeffrey Hallac as a director of the Wimbledon

3

Tactical Futures Trading Fund Offshore SPC and a Senior Managing

4

Director of Weston); Crombie Del. Depo. 147:1-10 (stating that he

5

has no written documentation of the waiver and that Jeffrey and

6

Albert Hallac “said that with the closure of their fund, the legal

7

closing of the entity, there would be no agreement between us”).

8

Crombie has not offered any non-hearsay evidence regarding

9

statements made by Jeffrey or Albert Hallac.

As previously noted,

United States District Court
For the Northern District of California

10

Crombie has stated that the onsite audit ended on March 23, 2011.

11

In his interrogatory responses, Crombie described these payments

12

as “$200,000 business working capital loans from Weston Capital to

13

JDC Ventures, LLC in 2009.

14

collected, and was disposed and not owing of following the

15

insolvency of Weston Capital’s Wimbledon branded fund that

16

retained JDC.”

17

Depo. 128:13-129:15 (testifying that he was given a “$200,000 fee

18

advance” that was “structured as a loan” and that they “waived the

19

loan”).

The capital was not repaid or

Crombie Decl., Ex. 120, 4.

See also Crombie Del.

20

Weston’s CEO, Albert Hallac, who was deposed as its Rule

21

30(b)(6) representative, testified that the loans made to Crombie

22

were not a payment of professional fees by Weston or an investment

23

of any kind in JDC.

24

19.

25

Hallac told Crombie that the loans had been forgiven but that he

26

did not have the authority to forgive a loan on behalf of Weston.

27

Id. at 47:15-24.

28

the loan was waived or forgiven.

A. Hallac Depo. 9:21-22; 40:23-46:10, 48:13-

Albert Hallac also testified that he had “no idea” if Jeffery

He testified that he did not tell Crombie that
Id. at 47:25-48:4.
26

As the

1

representative of Weston, he also testified he considered the

2

loans outstanding today.

3

Id. at 48:5-6.

d. Paul LeCoque

4

Paul LeCoque testified in a deposition for the Delaware

5

matter that he was a good friend of Crombie and that, in February

6

or March 2010, Crombie called him and told him that he had lost a

7

lot of money and needed “a quick loan, just to get me through,

8

help me pay the mortgage.”

9

Depo.) 6:6-14, 8:1-17.

Robell Decl., Ex. 47 (LeCoque Delaware

Crombie was adamant that he would be able

United States District Court
For the Northern District of California

10

to pay it back very quickly, by the next month.

11

Crombie asked for $15,000 and LeCoque agreed.

12

They did not enter into a formal loan agreement.

13

According to LeCoque, Crombie never paid the loan back.

14

9:19-20.

15

Id. at 9:14-17.

Id. at 8:21-24.
Id. at 8:18-20.
Id. at

In his affidavit, Crombie attested that “I did not have in

16

March 2011, or at any other time, any loan agreements or

17

outstanding loans owing to” LeCoque.

18

corresponding statement made for JDC).

19

Crombie Aff. ¶ 19 (no

Crombie testified likewise in his depositions that LeCoque

20

had not lent him money but had paid him for services and was

21

seeking a return of the money paid.

22

132:1; 161:15-16; see also Crombie Depo. 276:10-15 (testifying

23

that LeCoque was lying when he stated that he lent Crombie

24

$15,000).

25

different accounts of what services he provided LeCoque and why

26

LeCoque wanted the payment returned.

27

Delaware deposition that, in 2009, he “referred an investor who

28

invested a small amount of money with an investment manager in the

Crombie Del. Depo. 131:11-

However, in the two depositions, Crombie provided

27

Crombie testified in his

1

East Bay named Paul LeCoque, and that investor redeemed at a loss

2

three months later, and [LeCoque] wanted his finder’s fee [of

3

$15,000 given] back to him.”

4

his deposition in the instant matter, Crombie stated that LeCoque

5

had paid him $15,000 because “I had provided to him options

6

trading formulae which he had used to hedge his portfolio and his

7

hedge fund,” and that LeCoque asked for the money back “[b]ecause

8

he was not happy with the results.

9

of the program, and he was not happy with the results.”

Crombie Del. Depo. 131:11-18.

In

I was not happy with his use
Crombie

United States District Court
For the Northern District of California

10

Depo. 278:20-279:4.

11

NFA asked him for work product samples for work performed for

12

LeCoque, Beckham and Steele (who are discussed below), and that he

13

told the NFA that he did not retain that.

14

(he told NFA agents that “all software work product that he

15

executed on for JDC customers were provided to them in original

16

digital copies onto disk copies or onto servers via ftp downloads

17

to the customers and were the intellectual property of the

18

customers alone.

19

customers after the work product is provided to them.”).

20

Crombie also stated in his affidavit that the

See Crombie Aff. ¶ 17

I do not keep the items that are proprietary to

The USCFTC has offered two email exchanges purportedly

21

between Crombie and LeCoque to support that LeCoque had loaned

22

Crombie $15,000.

23

email exchange, which allegedly took place on August 19, 2010,

24

LeCoque sent Crombie an email stating, “My wife is getting very

25

upset over this whole situation.

26

back in a few weeks and it’s now been 6 months.

27

money too.

28

Decl., Ex. 48.

Robell Decl., Exs. 48 and 49.

In the first

I told her we’d have the money
This was her

It’s causing some real strains between us.”

Robell

He received a response from [e-mail]
28

1

that stated, “I am begging for it.

2

be amended close to immediate.”

3

allegedly took place on September 2, 2010, LeCoque asked Crombie

4

when he expected to be paid $30,000 by Tudor and how much Crombie

5

could pay him out of that amount right away, and received a

6

response from [e-mail] stating in part, “I put

7

invoice into Tudor this AM for 30K, so hope they can turn that

8

around promptly.”

I am so sorry, but this will

Id.

In the second exchange which

Robell Decl., Ex. 49.

The USCFTC, however, has not offered any testimony or

10
United States District Court
For the Northern District of California

9

declaration by Crombie or LeCoque to authenticate these emails.

11

LeCoque was not asked about the emails in the portion of his

12

deposition that was offered into evidence.

13

his depositions about one of the email exchanges and the email

14

address.

15

that he did not write the email to LeCoque in August 2010, that he

16

was not using the [e-mail] email address in the

17

“normal course of business in August 2010” and that, if he was

18

using the email address at all at that time, “it was by mistake.”

19

Crombie Depo. 277:6-281:3.

20

stated that he “stopped using that e-mail account in the--in the

21

early--actually in the winter of 2010, . . . January/February,

22

something like that.

23

stop using it.”

24

that he accessed it in the spring of 2011 and found correspondence

25

from several people that had been sent to him from a while

26

earlier.

Crombie was asked in

In the deposition in the instant case, Crombie testified

In the Delaware deposition, Crombie

I mean, but I literally stopped--close to

Crombie Del. Depo. 231:22-232:25.

Id. at 231:22-234:2.

27
28
29

He also said

1
2

e. Daniel Beckham
Daniel Beckham testified in his deposition in the Delaware

3

action that Crombie had approached him about financial problems he

4

was having in the summer of 2010 and that he had agreed to loan

5

Crombie money to support himself and his family.

6

Ex. 46 (Beckham Del. Depo.) 7:2-10:15; see also id. at 6:6-17

7

(explaining that he met Crombie through their children who went to

8

school together).

9

$200,000” and that he wired Crombie $150,000 on August 24, 2010.

Robell Decl.,

He stated that Crombie “said that he needed

United States District Court
For the Northern District of California

10

Id. at 9:18-25.

11

to Crombie’s account on February 2, 2011 which he understood would

12

be used by Crombie for various expenses; Beckham explained that he

13

viewed this as following through on the $200,000 that he had

14

originally agreed to loan Crombie.

15

stated that no loan documents were drawn up.

16

Beckham testified that the money was not given to Crombie in

17

connection with any business arrangement between the two,

18

including any investment, payment for services, advance on work or

19

as a performance fee for trading, and that he did not have a

20

working relationship with Crombie, other than to loan him this

21

money; he had never invested money with Crombie or licensed

22

software from him.

23

Beckham said that he transferred another $50,000

Id. at 12:3-13:7.

He also

Id. at 10:16-17.

Id. at 10:18-22:11.

On March 24, 2011, Crombie responded to an email from the NFA

24

in which it asked him to provide written agreements with “David

25

Beckham” and “explain what the loan to David Beckham was

26

regarding.”

27
28

Crombie Decl., Ex. 96.

Crombie responded,

JDC and Crombie do not have a relationship with a David
Beckham. JDC and Crombie have had past business
dealings with Daniel Beckham, a hedge fund manager and
30

1
2
3
4
5
6
7
8
9

entrepreneur. JDC/Crombie has no formal contract with
Dan Beckham, but has had a non-futures trading business
relationship with Beckham. JDC provides consulting
services for quantitative research and other
computerized models for trading securities in earlier
times. For Dan Beckham JDC deployed costs to research
options and baskets trading of stocks and has been
repaid for those costs and also compensated for work
done. There is no formal contract between the parties
for services: services were provided and then paid for
or compensated.
Crombie/JDC have never had a direct futures related
mandate with this party, has not traded a proprietary
account or had POA over any accounts for these parties
and has had no activities as a CTA or as a futures
trader with these party, and has never had a futures
related mandate for this party.

United States District Court
For the Northern District of California

10

. . .

11

The business relationship between Crombie and Beckham is
fully explained above.

12
13
14
15

JDC/Crombie did have expenses drawn to research an
initiative together with Beckham for securities trading
(not futures) and was paid for these expenses and was
paid additional amounts for services.
Id. at 2, 4 (errors in original).

16

During his deposition in the Delaware matter, Crombie

17

testified that he “was paid money by Mr. Beckham for development

18

of what we’ve discussed and will continue to do,” and that Beckham

19

had paid him $200,000 in the fall of 2010 as “an advance on the

20

work I did in 2009/2010, payable in 2010.”

21

120:8-20.

22

Crombie’s testimony on this was not truthful.

23

17:2-18:9.

24

Crombie testified that Daniel Beckham had transferred $150,000

25

dollars to him on August 24, 2010 and $50,000 on February 2, 2011,

26

but that these were not loans and that he and JDC Ventures did not

27

have a loan from Beckham outstanding.

28

He stated that these instead were payments for business services

Crombie Del. Depo.

Beckham, who was deposed after Crombie, stated that
Beckham Del. Depo.

In his more recent testimony in the instant matter,

31

Crombie Depo. 252:1-254:6.

1

involving financial analysis and a part of a potential future

2

business venture.

3

testimony that he loaned Crombie $200,000 was false.

4

254:25-255:3.

5

not have in March 2011, or at any other time, any loan agreements

6

or outstanding loans owing to” Beckham.

7

corresponding statement made for JDC).

8
9

Id.

Crombie also testified that Beckham’s
Id. at

In his affidavit, Crombie also attests that “I did

Crombie Aff. ¶ 19 (no

f. Mark Steele and KKS Securities
In email exchanges on March 23 and 24, 2011, the NFA asked

United States District Court
For the Northern District of California

10

Crombie what a “$50,000 payment to Mark Gordon Steele” was for and

11

about his relationship with Steele and his company, KKS

12

Securities.

13

“did consulting work for Mark Steele,” which included “financial

14

modeling and analysis” and “code work,” built computer models,

15

research sheets and “client trade allocations” for KKS, and that

16

Crombie and JDC were paid in compensation for these services.

17

Steele testified in depositions in both the instant case and the

18

Delaware matter that Steele and KKS each lent Crombie $50,000.

19

Robell Decl., Ex. 40 (Steele Depo.), 51:1-17; Robell Decl., Ex. 41

20

(Steele Del. Depo.), 6:9-9:1.

21

explained that he and Crombie had “been friends for a long time”

22

and that Crombie had asked to borrow $250,000 for seven days

23

“because he had some cash flow shortages” as a result of clients

24

being “slow at paying things.”

25

said that Crombie wrote a loan agreement for $250,000 and signed

26

it, and that Steele told him that he did not need a written loan

27

agreement and did not need to charge him interest for a short term

28

loan because they were friends.

Robell Decl., Exs. 34, 39.

Crombie responded that he

Id.

In the Delaware deposition, he

Steele Del. Depo. 6:12-8:7.

Id. at 7:17-8:7.
32

He

He testified

1

that Crombie had “never done any work” for KKS and Steele and that

2

it “was just a personal loan to him.”

3

stated that Crombie never paid back KKS and paid Steele back only

4

$2,400.

5

KKS had ever given Crombie a Form 1099.

6

Id. at 9:2-5.

Id. at 8:18-19:1.

He also

He also testified that neither Steele nor
Id. at 9:17-21.

At his deposition in the instant case, Steele gave similar

7

testimony.

8

Crombie money because they were purportedly friends); 39:6-40:23

9

(to the best of his knowledge, Crombie did not do any work for

See Steele Depo. 38:3-9, 51:1-22 (Steele and KKS lent

United States District Court
For the Northern District of California

10

Steele or KKS and they never gave him W2s or 1099s); 57:19-58:20

11

(to the best of his knowledge, Crombie never provided computer

12

code to KKS, never referred clients or financial professionals to

13

KKS and did not have an arrangement with KKS for payment for any

14

such referrals, JDC Ventures did not do work for KKS and no

15

company affiliated with Crombie did work for KKS or Steele).

16

Steele also identified a check that he brought with him to the

17

deposition as the check that KKS had issued to Crombie as its loan

18

to him and stated that he got the copy of the check from Joe

19

Klein, KKS’s CFO.

20

Robell Decl., Ex. 42.

21

noted on the memo line.

22

Steele Depo. 51:8-14; 120:11-15; see also
The check had the words “personal loan”
Id.

During both of his depositions, Crombie testified that the

23

money he received from Steele and KKS was in payment for doing

24

work for the company, including doing software development work

25

revamping its execution and order management systems, and that

26

Steele lied when he said that these were loans.

27

234:24-236:1, 241:23-242:4; Crombie Del. Depo. 129:19-130:19; see

28

also Crombie Del. Depo. 161:15-18 (the NFA “asked about Mark
33

Crombie Depo.

1

Steele, and I said correctly that I did investment services for

2

his firm”).

3

broker dealer affiliate, Girard Securities, Inc., provided him or

4

his accountant with a 1099 for the payments.

5

236:21-25; Crombie Del. Depo. 131:8-10; Crombie Aff. ¶ 17.7

6

his affidavit, Crombie attested, “I did not have in March 2011, or

7

at any other time, any loan agreements or outstanding loans owing

8

to” Steele.

9

statement made for JDC.

He also testified that Steele or his registered

Crombie Aff. ¶ 19.

Crombie Depo.
In

He made no corresponding

He also stated that the check that he

United States District Court
For the Northern District of California

10

received from KKS “did not have . . . any notation as a loan on

11

the check memo section” and that he “executed no loan agreements

12

and signed no loan documents with Steele or his company KKS for

13

any sum of money at any time.”

14

Crombie Ex. 10, 129-130-131, 161 (“they asked about Mark Steele,

15

and I said correctly that I did investment services for his

16

firm”).

17
18

Crombie Aff. ¶ 18; see also

2. Purported Misstatements Regarding Litigation
On March 14, 2011, McConnon sent the NFA a list of documents

19

and Paron’s answers to audit questions that the NFA had propounded

20

in advance of the onsite interview.

21

In response to a request for “Customer Complaint File Including

22

any Litigations, Arbitrations, or Settlements with Customers

23

During the Past 2 Years for APs, Principals, and PCM,” Paron

24

answered, “No formal complaints,” and identified “[o]ne informal

25

email complaint.”

Crombie Decl., Exs. 42, 43.

Crombie Decl., Ex. 43, 140.

26
27
28

7

Crombie has not offered either of these 1099 forms into
evidence and states that the “1099-MISC form Steele provided to me
appears to be a forgery.” Crombie Aff. ¶ 17 n.3.
34

1

McConnon testified at his deposition in the instant matter

2

that Crombie filled out the questionnaire, told McConnon that he

3

was having computer problems, sent him the files, and asked him to

4

send them to the NFA.

5

126:8-128:5.

6

that he had “no internet service issues” during that weekend and

7

that, if he had, he could not have sent the files to McConnon.

8

Crombie Aff. ¶ 29.

9

that McConnon “had authored the edits of including [sic] all Paron

United States District Court
For the Northern District of California

10

Crombie Decl., Ex. 80 (McConnon Depo.)

In his affidavit, Crombie disputed this, stating

In Crombie’s declaration, he further stated

responses to NRA questionnaire.”

Crombie Decl. ¶ 44.

11

In his recent affidavit, Crombie attested that NFA agents

12

“did not ask me about legal matters or lawsuits during the NFA

13

audit.”

14

(“I told them the Porteous matter was discharged . . . They did

15

not ask me directly about lawsuits, nor did I answer it.”); 168:2-

16

6 (affirming that the “NFA agent has misrepresented or perjured

17

himself in respect to this affidavit regarding his questions”

18

because he “didn’t ask me directly about loans, and he didn’t ask

19

me directly about lawsuits”).

20

“During NFA’s examination, Crombie represented that there were no

21

lawsuits against him, PCM, or JDC,” but did not state what

22

questions, if any, NFA agents asked Crombie about litigation.

23

Moongthaveephongsa Aff. ¶ 13.

24

onsite examination of Paron, Crombie did not disclose the Porteous

25

and Lamar lawsuits.

26
27

Crombie Aff. ¶ 6; see also Crombie Del. Depo. 166:3-19

Moongthaveephongsa attested,

He also stated that, during the

Id. at ¶¶ 7-8.

In an email that he sent on April 5, 2011, Crombie stated in
part,

28
35

The NFA asked about current litigation from futures
clients in specific. They also mentioned the Porteous
and Lamar payments from bank accounts, and asked about
those disputes. . . .

1
2
3

The NFA did ask about open lawsuits and they were aware
that Porteous was a closed matter and not open
litigation. The original Operating Agreement for Paron
also noted it, and they asked about it. They also asked
about the Lamar investment (and deemed this to be a loan
not an investment) and I told them of the failed
investment and the dispute. . . .

4
5
6
7

I was asked about litigation directly and answered their
questions directly as noted above.

8
9

Robell Decl., Ex. 51 (Crombie email to Rory Cohen).
In his interrogatory responses, Crombie stated that he was

United States District Court
For the Northern District of California

10
11
12
13
14
15
16
17

involved in six lawsuits between January 1, 2008 and the date of
the responses, including five that were filed before the NFA
investigation began in March 2011.

According to his responses, none of those five lawsuits, including
two involving Porteous and one involving Lamar, were still pending
in March 2011.

20
21
22
23
24
25
26
27

Id.

II. The Paron promotional materials
Both the Flip book and the Newsletter had monthly performance

18
19

Robell Decl., Ex. 33, 3.

tables that date back to 2006, four years before Paron was formed.
Robell Decl., Exs. 5, 52.

Both relied upon Crombie’s purported

track record at JDC Ventures for the performance data prior to
Paron’s inception.

Id.; see also Robell Decl., Ex. 53 (Crombie

email to the NFA explaining that the “returns record is for my
program pre-Paron”).

Both claimed that Crombie’s annual rate of

return at JDC Ventures was about 27.5 percent in 2007, about 38.6
percent in 2008 and 9.8 percent in 2009.
52.

28
36

Robell Decl., Exs. 5,

1

In a March 19, 2011 email from Crombie to the NFA, in

2

response to a request for information underlying the claimed

3

performance statistics, Crombie identified SCR as “the specimen

4

account for November 2006 – January 2009” and noted that the

5

performance review of that time period was conducted by a third

6

party, Yulish & Associates.

7

deposition, he further stated that Omega Advisors, Inc., through

8

Peninsula LP, was also a client account upon which the purported

9

percentage rate of return for 2008 was based, although he

Robell Decl., Ex. 53.

At his

United States District Court
For the Northern District of California

10

continued to testify that “Yulish would be the only entity that

11

could say what JDC Ventures’ performance was on a yearly basis.”

12

Crombie Depo. 146:5-147:20.

13

provided in the Flip book and the Newsletter for this time period

14

correspond to the net rates of return calculated in the Yulish

15

report.

16

52.

17

The yearly and monthly numbers

Compare Crombie Decl., Ex. 60, with Robell Decl., Exs. 5,

The Yulish report, when explaining the procedures performed,

18

stated that the firm “obtained third party brokerage statements

19

for the trading account to which JDC serves as investment manager

20

to trade futures in the S&P 500 and in the Nikkei 225 indices.

21

. . . We relied upon the information contained in these statements

22

as an accurate representation of the investment activity and

23

results for each period verified.”

24

Delaware trial, McConnon attested that he had spoken with someone

25

at Yulish who said the report was accurate that they “had done the

26

third-party verifications.”

27

also testified that the person from Yulish later admitted to him

Crombie Decl., Ex. 60.

At the

Crombie Decl., Ex. 27, 63:5-16.

28
37

He

1

that he had not received the statements from the broker.

2

157:1-20; 208:8-20.8

Id. at

According to Crombie, in conducting its review, Yulish

4

“focused on the SCR Financial statements,” which were discussed

5

previously.

6

did, yes.”); see also Crombie Del. Depo. 29:13-30:12 (Crombie’s

7

testimony that Yulish verified “the trading account relationship

8

that I had with the company, SCR,” with which he had three trading

9

accounts); 35:9-14 (testifying that he provided Yulish with the

10
United States District Court
For the Northern District of California

3

SCR summary reports and the contact information for individuals

11

from whom he could obtain the full account statements).

12

Id. at 301:9-12 (Crombie testifying, “That’s all they

When the NFA asked for documentation to support the

13

historical returns, for the period for January 2009 through August

14

2010, Crombie identified the Access account and referred to a

15

review that was conducted by the accounting firm Rothstein Kass.

16

Robell Decl., Ex. 53.

17

Flip book and the Newsletter for this time period match the

18

“monthly net of hypothetical fees rate of return” calculated in

19

the Rothstein Kass report.

20

Robell Decl., Exs. 5, 52.

The monthly rates of return provided in the

Compare Crombie Decl., Ex. 68, with

21
22
23
24
25
26
27
28

8

Crombie asserts that Albert Hallac from Weston testified
that the JDC performance record from SCR was also independently
confirmed to Weston in 2009, suggesting that this was separate
from the Yulish report. Opp. at 8. Hallac testified that, before
Weston sponsored Crombie as a manager on its fund, Weston was
“given [a] performance track record, which was verified by outside
third parties” that included “an accounting firm” but that he
could not recall “what outside parties” in particular they were.
Hallac Depo. 25:24-26:22. This is consistent with Weston having
been provided the Yulish report and does not suggest that there
was a separate verification conducted.
38

1

Crombie testified in the Delaware deposition that, in the

2

fall of 2010, Paron decided to seek an additional review of

3

Crombie’s track record after the time period covered by the Yulish

4

review “for marketing purposes, to not leave a gap in the investor

5

promotion materials . . . So that marketing materials could be

6

written.”

7

(The review was “seeking to confirm performance for the purpose of

8

track record.”).

9

the Access statements described above.

Crombie Del. Depo. 90:12-91:1; see also id. at 91:9-12

For the second review, Rothstein Kass analyzed
Crombie Depo. 301:5-21;

United States District Court
For the Northern District of California

10

see also Crombie Del. Depo. 91:4-8 (“I was asked for a specimen

11

account, and I provided Richard Breck” and no other account,

12

“[b]ecause Richard Breck was the only one that was contiguous

13

through the entire period.”), 103:18-103:25 (stating that he

14

provided the Access monthly statements to Rothstein Kass).

15

Crombie testified in the Delaware deposition that Rothstein Kass

16

had asked him for additional information that he did not have,

17

including the TAA, that he told Rothstein Kass to contact Access

18

and ask for that information because “part of the scope of your

19

engagement is to get that, confirm that,” and that “they did so”

20

and told him that they did.

21

Crombie Del. Depo. 102:24-103:25.

The DDQ that Paron sent to customers claimed that the total

22

assets managed or advised by Paron in 2011 was approximately $35

23

million.

24

Crombie admitted to the NFA that this amount was incorrect.

25

42; Answer ¶ 42; see also Crombie Aff. ¶ 8.

26

II. Procedural history

27
28

Robell Decl., Ex. 1.

During the course of the audit,
1AC ¶

On September 15, 2011, the USCFTC filed this action against
Defendants Paron and Crombie.
39

1

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

2

Chancery Court, Paron, along with McConnon and Lyon, sued Crombie

3

for fraud.

4

statements from Fimat Futures USA LLC and Access Securities, LLC

5

and made misrepresentations about his performance record,

6

employment history and personal financial situation, to induce

7

McConnon and Lyons to leave their jobs and form Paron with him,

8

providing him with access to their money and valuable client

9

contacts.

In the suit, they alleged that Crombie forged account

Paron Capital Mgmt., LLC v. Crombie (Paron I), 2012 WL

United States District Court
For the Northern District of California

10

2045857, at *4 (Del. Ch.).

11

to make and perpetuate these misrepresentations while working as

12

the initial manager of Paron, they also asserted that he breached

13

his fiduciary duty of loyalty to McConnon, Lyon and Paron under

14

the incorporation agreement.

15

Because Crombie purportedly continued

Id.

The Delaware Chancery Court held a trial in early October

16

2011.

17

trial and did not present any evidence in his defense.

18

Delaware Chancery Court denied his motion to dismiss the action on

19

the grounds of forum non conveniens due to his purported financial

20

hardship.

21

its earlier holding).

22

Id.

Claiming financial hardship, Crombie did not appear at
Id.

The

Paron I, 2012 WL 3206410, at *2 (Del. Ch.) (summarizing

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

23

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

24

responsible for the misrepresentations in the promotional

25

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

26

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

27

Delaware Chancery Court, including the denial of their involvement

28

in the creation of the fraudulent promotional materials.
40

1

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

2

memorandum opinion, denying various post-trial motions made by

3

Crombie.

4

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

5

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

6

at *8.

7

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

In the

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

8

bankruptcy.

9

Docket No. 1.

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

10
United States District Court
For the Northern District of California

Id.

I, 2012 WL 2045857, at *4.

11

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

12

Paron

re Crombie, Docket No. 16.

Pursuant to a motion by McConnon and
Id.; In

13

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

14

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

15

service upon them.

16

things, that Crombie had not sufficiently plead the elements of

17

fraud and misrepresentation under California law and that he

18

lacked standing to pursue his claims because of his bankruptcy

19

filing.

20

Docket No. 117.

The Court found, among other

On May 11, 2012, the bankruptcy trustee moved for an order

21

permitting him to abandon the claims that were the subject of

22

Crombie’s dismissed third-party complaint.

23

No. 40.

24
25
26

In re Crombie, Docket

On May 15, 2012, the bankruptcy court granted Crombie a
discharge.

In re Crombie, Docket No. 45.

On May 22, 2012, the Delaware Chancery Court issued an

27

opinion adjudicating the merits of the Delaware action and finding

28

Crombie liable on both claims.

Paron I, 2012 WL 2045857, at *4.
41

1

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

2

based on the opinion.

3

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

On May 23, 2012, Crombie filed a motion in this case for

4

leave to file an amended third-party complaint against McConnon

5

and Lyons asserting claims for negligence, misrepresentation and

6

violation of sections 9(a)(4) and 4b(a)(1)(A),(B) of the Commodity

7

Exchange Act.

8
9

United States District Court
For the Northern District of California

10

Docket No. 137.

On June 6, 2013, the bankruptcy court granted the trustee’s
motion and confirmed the abandonment of the claims in the proposed
third-party complaint.

In re Crombie, Docket No. 49.

11

On June 25, 2012, this Court denied Crombie’s motion for

12

leave to file a third-party complaint against McConnon and Lyons,

13

holding that the proposed complaint failed to state a claim.

14

Docket No. 157.

15

On August 2, 2012, the Delaware Chancery Court denied

16

Crombie’s motion to alter the judgment entered there and to stay

17

execution of that judgment.

18

court concluded there was no manifest injustice that required

19

alteration of the judgment, noting that it had previously

20

considered Crombie’s arguments based on financial hardship and

21

proceeding in Delaware and his contentions that McConnon and Lyons

22

abused the discovery process.

23

supplemental judgment against Crombie at that time.

24

Paron I, 2012 WL 3206410, at *2.

Id.

The

The Chancery Court entered a
Id. at *5.

On September 5, 2012, this Court entered a consent order

25

resolving the USCFTC’s claims against Paron in the present case,

26

prohibiting Paron from, among other things, trading or entering

27

into any transactions involving commodity futures and options.

28

Docket No. 190.
42

1

On March 13, 2013, the Delaware Supreme Court affirmed the

2

Chancery Court’s judgment based on its May 22, 2012 and August 2,

3

2012 orders.

Paron I, 62 A.3d 1223, at *1 (Del. 2013).

4

On April 1, 2013, the bankruptcy trustee filed a report and

5

certification, showing that the bankruptcy estate had been fully

6

administered and that the claims that Crombie seeks leave to

7

assert now were abandoned.

8

following day, the bankruptcy court discharged the trustee and

9

closed Crombie’s bankruptcy case.

In re Crombie, Docket No. 75.

United States District Court
For the Northern District of California

10
11

The

In re Crombie, Docket No. 76.

DISCUSSION
I.

Cross-motions for summary judgment

12

A. Legal standard

13

Summary judgment is properly granted when no genuine and

14

disputed issues of material fact remain, and when, viewing the

15

evidence most favorably to the non-moving party, the movant is

16

clearly entitled to prevail as a matter of law.

17

56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986);

18

Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 1288-89 (9th Cir.

19

1987).

20

Fed. R. Civ. P.

The moving party bears the burden of showing that there is no

21

material factual dispute.

22

true the opposing party’s evidence, if supported by affidavits or

23

other evidentiary material.

24

815 F.2d at 1289.

25

in favor of the party against whom summary judgment is sought.

26

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,

27

587 (1986); Intel Corp. v. Hartford Accident & Indem. Co., 952

28

F.2d 1551, 1558 (9th Cir. 1991).

Therefore, the court must regard as

Celotex, 477 U.S. at 324; Eisenberg,

The court must draw all reasonable inferences

43

1

Material facts which would preclude entry of summary judgment

2

are those which, under applicable substantive law, may affect the

3

outcome of the case.

The substantive law will identify which

4

facts are material.

Anderson v. Liberty Lobby, Inc., 477 U.S.

5

242, 248 (1986).

6

Where the moving party does not bear the burden of proof on

7

an issue at trial, the moving party may discharge its burden of

8

production by either of two methods:

9

United States District Court
For the Northern District of California

10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

The moving party may produce evidence negating an
essential element of the nonmoving party’s case, or,
after suitable discovery, the moving party may show that
the nonmoving party does not have enough evidence of an
essential element of its claim or defense to carry its
ultimate burden of persuasion at trial.
Nissan Fire & Marine Ins. Co., Ltd., v. Fritz Cos., Inc., 210 F.3d
1099, 1106 (9th Cir. 2000).
If the moving party discharges its burden by showing an
absence of evidence to support an essential element of a claim or
defense, it is not required to produce evidence showing the
absence of a material fact on such issues, or to support its
motion with evidence negating the non-moving party’s claim.

Id.;

see also Lujan v. Nat’l Wildlife Fed’n, 497 U.S. 871, 885 (1990);
Bhan v. NME Hosps., Inc., 929 F.2d 1404, 1409 (9th Cir. 1991).

If

the moving party shows an absence of evidence to support the nonmoving party’s case, the burden then shifts to the non-moving
party to produce “specific evidence, through affidavits or
admissible discovery material, to show that the dispute exists.”
Bhan, 929 F.2d at 1409.
If the moving party discharges its burden by negating an
essential element of the non-moving party’s claim or defense, it
44

1

must produce affirmative evidence of such negation.

2

F.3d at 1105.

3

burden then shifts to the non-moving party to produce specific

4

evidence to show that a dispute of material fact exists.

5

Nissan, 210

If the moving party produces such evidence, the

Id.

If the moving party does not meet its initial burden of

6

production by either method, the non-moving party is under no

7

obligation to offer any evidence in support of its opposition.

8

Id.

9

ultimate burden of persuasion at trial.

This is true even though the non-moving party bears the
Id. at 1107.

United States District Court
For the Northern District of California

10

B. Discussion

11

In the 1AC, the USCFTC charges Crombie with three counts of

12

violating the Commodity Exchange Act: (1) concealing material

13

facts and making false statements or representations to the NFA in

14

violation of § 9(a)(4) of the Act; (2) solicitation fraud in

15

violation of § 4b(a)(1)(A) and (B) of the Act; and (3) fraud by a

16

CTA in violation of § 4o(1)(A) and (B) of the Act.

17

1. Section 9(a)(4) of the Commodity Exchange Act

18

Section 9(a)(4) of the Act makes it illegal for

19

Any 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 . . .
futures association designated or registered under this
Act acting in furtherance of its official duties under
this Act.

20
21
22
23
24
25

7 U.S.C. § 13(a)(4).
In the 1AC, the USCFTC alleges that Crombie violated

26

§ 9(a)(4) because, in March 2011, in response to the NFA

27

investigation and audit, he willfully made false statements and

28

misrepresentations to the NFA, including
45

1
2
3
4
5
6
7

(1) providing fraudulent account statements to NFA;
(2) providing a fraudulent TAA to NFA; (3) making false
statements to NFA concerning the existence of lawsuits
in which the Defendants were named parties; (4) making
false statements to NFA concerning capital contributions
to Paron; (5) making false statements to NFA concerning
large-sum payments to and from JDC; (6) making false
statements to NFA concerning the number of outstanding
loans owed by Paron; and (7) making false statements to
NFA regarding the sources of the fraudulent documents.
1AC ¶ 47.
In its motion, the USCFTC seeks summary judgment that Crombie
willfully violated this section by willfully providing the

9

fraudulent Fimat and Access statements and the fraudulent TAA to

10
United States District Court
For the Northern District of California

8

the NFA and by making false statements regarding the payments to

11

and from Crombie and JDC Ventures, about outstanding loans and

12

about lawsuits filed against him.

13

finding that Crombie violated § 9(a)(4) by making false statements

14

about the sources of the fraudulent documents.

15

motion, Crombie seeks summary judgment on each of the seven

16

purported violations listed in the 1AC.

17

The USCFTC has not requested a

In his cross-

There is no dispute of material fact that the NFA is a

18

registered futures association under the Act or that it was acting

19

in furtherance of its official duties when investigating Paron.

20

First Amended Complaint (1AC) ¶¶ 15, 21; Answer ¶¶ 15, 21.

21

parties disagree about whether there is a material dispute of fact

22

regarding whether the documents were false, whether, if they were

23

false, Crombie willfully provided them to the NFA, and whether he

24

made false statements to it.

25
26
27
28

The

a. Documents provided to the NFA
i. Fimat statements
The USCFTC alleges that Crombie willfully provided the NFA
with fraudulent account summaries purportedly from Fimat.
46

There

is no dispute of material fact that the information in the Fimat

2

summaries that Crombie gave the NFA was false.

3

appears to suggest that the summaries may have referred to a

4

different account that was also controlled by SCR and that was the

5

source of the discrepancies, the summaries he provided did not

6

match the financial information contained in the authentic

7

statements for the Fimat accounts with the same account number.

8

Thus, even if some other SCR account may have had other activity,

9

the accounts purportedly reflected on the summaries did not.

10
United States District Court
For the Northern District of California

1

There is also no dispute of material fact about whether

Although Crombie

11

Crombie acted willfully.

12

well settled that: ‘if a person 1) intentionally does an act which

13

is prohibited,-- irrespective of evil motive or reliance on

14

erroneous advice, or 2) acts with careless disregard of statutory

15

requirements, the violation is willful.’”

16

Futures Trading Comm’n, 759 F.2d 767, 773 (9th Cir. 1985) (quoting

17

Flaxman v. Commodity Futures Trading Comm’n, 697 F.2d 782, 787

18

(7th Cir. 1983)).

19

show that Crombie’s actions were “intentional as opposed to

20

accidental.”

21

(citing Hinkle Northwest, Inc. v. SEC, 641 F.2d 1304, 1307-08 (9th

22

Cir. 1981)).

Id.

“For purposes of the Act, . . . it is

Lawrence v. Commodity

To establish willfulness, the USCFTC need only

“Proof of an evil motive is unnecessary.”

Id.

23

The USCFTC argues that Crombie either knew that the Fimat

24

summaries contained inaccurate information about the amount of

25

money in the accounts, or “[a]t the very least” that he acted with

26

“careless disregard” of their falsity, when he gave them to the

27

NFA.

28

Crombie acknowledged that he knew of the daily performance of his

Reply at 2 & n.2.

The USCFTC has submitted evidence that

47

1

trading program and that he received daily reports from Fimat of

2

the performance on the SCR Capital accounts, which bore the

3

numbers of the accounts reflected on his statement.

4

Crombie did not create the summaries himself, he should have known

5

that they did not reflect the actual performance of those

6

accounts.

7

Thus, even if

ii. Access statements and TAA

8

There is no dispute of material fact that the Access

9

statements provided by Crombie to the NFA contained inaccurate

United States District Court
For the Northern District of California

10

information.

11

during the relevant years for FTGC that traded futures and that he

12

did not sign a TAA with Crombie.

13

recalled signing a trading agreement with Breck, but never

14

testified that the copy of the TAA that he gave to the NFA was an

15

actual copy of that agreement; instead, he primarily argued that

16

he got the copy from a third party.

17

that the statements were fraudulent: Breck testified that the

18

account did not exist to his awareness, that he did not trade in

19

futures, that he had never given Crombie three million dollars

20

with which to fund the account, and that no one at Access sent

21

Crombie the statements.

22

sufficient to create a dispute of fact: although Weber testified

23

that Breck had a trading account for FTGC and Crombie testified

24

that he received the statements from Access, Crombie did not

25

introduce any evidence that the statements contained accurate

26

information, including that the account traded in futures, as the

27

statements reflected, or that Breck had ever funded the account

28

with three million dollars.

Breck testified that he did not have an account

Crombie testified that he

The USCFTC offered evidence

Crombie did not introduce evidence

48

1

There is also no dispute of material fact that Crombie

2

provided the NFA with the fraudulent documents willfully.

3

has testified that he received the copy of the TAA from Rothstein

4

Kass, which told him that it obtained the copy of the Access

5

statements.

He also testified that Access sent him the

6

statements.

However, even if he did not create the documents

7

himself, Crombie has cited no evidence, not even his own sworn

8

statement, to support that the Access account actually existed or,

9

more importantly, that he believed that it did.

Crombie

Thus, he has

United States District Court
For the Northern District of California

10

raised no dispute of material fact about whether he knew that the

11

statements were fraudulent.

12
13

iii. Payments to Porteous
There is no dispute that the NFA asked Crombie by email to

14

provide a written explanation of the purpose of the $200,000

15

payment to Porteous or that Crombie responded that it was a

16

repayment of a capital investment in JDC Ventures.

17

admitted during his deposition that Porteous had actually made a

18

personal loan to him.

19

material fact that Crombie willfully made a misstatement to the

20

NFA about the loan from Porteous.

Crombie

Accordingly, there is no dispute of

21

iv. Payments from the Lamars

22

There is no dispute that the NFA asked Crombie by email to

23

provide a written explanation of the payments totaling $300,000

24

from the Lamars, or that Crombie responded in writing that these

25

deposits were payments from Steven Lamar to JDC for “financial

26

engineering services” that Crombie and JDC provided for a hedge

27

fund Lamar was setting up.

28
49

1

There is also no dispute of fact that $50,000 of this money

2

was in fact a loan from the Lamars to Crombie.

3

asserts in his opposition that “Lamar did not loan any money to

4

me: he made a $300,000 investment into JDC,” Opp. at 18, Crombie

5

has repeatedly admitted, including in his interrogatory responses,

6

that $50,000 was a “working capital loan.”

7

Steven Lamar and Crombie is not to the contrary; it specifically

8

provides that Crombie will use $50,000 as working capital and will

9

repay the amount in some fashion.

Although Crombie

The agreement between

Thus, there is no dispute that

United States District Court
For the Northern District of California

10

Crombie misrepresented the nature of the payments from the Lamars

11

when he told the NFA that they were for “financial engineering

12

services.”

13

Further, Crombie admitted in his interrogatory responses that

14

this loan “was not repaid and was in default following the

15

business insolvency of JDC in 2010.”

16

that the NFA agents asked Crombie during the March 29, 2011

17

conference call what outstanding loans he, JDC or Paron had, and

18

that he disclosed only a loan from a family member.

19

Crombie states in his opposition that “NFA put no verbal questions

20

. . . to me about loans to JDC or me . . . during the NFA audit,”

21

in the evidence that he cites, his affidavit, he distinguishes the

22

“NFA audit” from “the post-audit phone call” and states only that

23

he was not asked these questions during the audit “or at any point

24

prior to a March 29, 2011 phone call I received from NFA agents.”

25

See Opp. at 15; Crombie Aff. ¶¶ 11, 14.

26

dispute of material fact that Crombie made a false representation

27

when he told the NFA that the only outstanding loan that he had at

28

the time of the phone call was the one from his family member.
50

There is no material dispute

Although

Accordingly, there is no

1

v.

Payments from Weston Capital

2

There is no dispute that the NFA asked Crombie by email on

3

March 23, 2011 about the payments totaling $200,000 from Weston

4

Capital Management to JDC or that he responded on that day that

5

these payments were for “professional fees.”

6

attests in his affidavit that he provided a verbal explanation to

7

the agents sometime during the onsite audit that took place

8

between March 21 and 23, 2011 that these were “working capital

9

advances” and that he did not have a balance owed to Weston

However, he also

United States District Court
For the Northern District of California

10

because of the insolvency of the Weston fund he had been hired to

11

manage in 2009.

12

Crombie later admitted in his interrogatory responses that

13

these payments amounted to a “business working capital loan.”

14

This is obviously inconsistent with the written representation

15

that the payments were “professional fees.”

16

dispute of fact as to whether Crombie was being willfully

17

untruthful because he has attested that he provided a roughly

18

contemporaneous verbal explanation to the NFA agents during the

19

onsite audit that these were “working capital advances.”

20

there is a dispute as to whether he was being recklessly or

21

intentionally false when he wrote that the payments were

22

“professional fees.”

23

However, there is a

Thus,

Although Crombie has not introduced any non-hearsay evidence

24

that Weston in fact forgave the loan, there is also a dispute of

25

material fact as to whether Crombie reasonably believed that the

26

debt was forgiven and thus that it was no longer outstanding at

27

the time of the audit and did not need to be disclosed when the

28

NFA agents asked him to provide details of all outstanding loans.
51

1

Although the younger Hallac may not have had the authority to say

2

the loan was forgiven, if he did say that it was forgiven, as

3

Crombie has attested, there is a material dispute regarding

4

whether Crombie could have reasonably believed that it was.

5

vi. Payments from LeCoque, Beckham and Steele

6

There is also a material dispute of fact as to whether

7

Crombie made misstatements to the NFA regarding the nature of the

8

payments from LeCoque, Beckham and Steele when he told the NFA

9

that these were payments for services provided and did not

United States District Court
For the Northern District of California

10

disclose that these were personal loans.

11

Crombie has testified that he provided them or their companies

12

with services and that their payments were not loans.

13

stated in his affidavit that he never had any loans outstanding to

14

these individuals.

15

that these were loans and that he did not provide them with

16

services in return for payment, which supports that Crombie lied

17

about the nature of these transactions.

18

argues that Crombie has not offered evidence to support his claims

19

and has just “concoct[ed] unsupported conspiracy theories,” he has

20

offered sworn statements that are sufficient to create a dispute

21

of material fact about the real nature of these transactions and

22

thus whether he lied in his statements to the NFA.

23

vii. Involvement in litigation

24

In each instance,

He also

LeCoque, Beckham and Steele have testified

Although the government

There are several disputes of material fact that preclude

25

summary adjudication for either party on whether Crombie made

26

fraudulent statements about whether he, Paron or JDC had been

27

involved in litigation.

28
52

1

First, there is a material dispute of fact as to whether it

2

was Crombie or McConnon who authored the written response to the

3

USCFTC, in answer to its request for information on all

4

litigation, arbitrations or settlements it was involved in with

5

customers during the two years prior to the audit.

6

testified that Crombie wrote the response, and Crombie stated in

7

his declaration that McConnon did.

8
9

McConnon

Second, Crombie has attested that the NFA did not ask him
about litigation during the audit and there is a material dispute

United States District Court
For the Northern District of California

10

of fact as to what he was asked.

11

that Crombie’s assertion is contradicted in its entirety by the

12

contemporaneous email he wrote stating that he was asked about

13

litigation, that email appears to refer to questions from the NFA

14

about ongoing litigation.

15

no ongoing litigation involving Crombie, Paron or JDC.

16
17

viii.

Although the USCFTC contends

At the time of the NFA audit, there was

Sources of the fraudulent documents

Crombie seeks a finding that he did not violate § 9(a)(4) by

18

misrepresenting the source of the fraudulent documents.

19

there is a material dispute of fact on this point.

20

However,

Crombie told the NFA that he obtained the statements from

21

Fimat and Access and that he got the copy of the TAA from

22

Rothstein Kass, which in turn obtained it from Access.

23

has submitted evidence suggesting that these statements were

24

false: Access has denied that it sent the statements, Fimat has

25

provided summaries that it says were the correct ones, and there

26

is some evidence that Access never sent the TAA to Rothstein Kass

27

and that Crombie may have done so instead.

28
53

The USCFTC

1
2

ix.

Summary

The Court grants the USCFTC’s motion for summary judgment on

3

its first cause of action charging Crombie with violation of

4

§ 9(a)(4) of the Commodity Exchange Act and denies Crombie’s

5

cross-motion for summary judgment.

6

that Crombie willfully provided the NFRA with fraudulent FIMAT and

7

Access statements and that he made false statements to the NFA

8

about the payments to and from Porteous and the Lamars.

9

disputes of fact as to the other statements do not preclude

United States District Court
For the Northern District of California

10
11
12

There is no material dispute

The

summary judgment on this cause of action.
2. Sections 4b(a)(1)(A),(B) and 4o(1)(A),(B) of the
Commodity Exchange Act
In relevant part, § 4b(a)(1) of the Act makes it unlawful

13
14
15
16
17
18
19
20
21
22

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; . . .
to cheat or defraud or attempt to cheat or defraud the
other person; [or]
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 . . .
7 U.S.C. § 6b(a)(1).
“The elements of a fraud action under section 4b of the CEA

23

are ‘derived from the common law action for fraud.’”

24

Futures Trading Comm’n v. King, 2007 WL 1321762, at *2 (N.D. Tex.)

25

(quoting Puckett v. Rufenacht, Bromagen & Hertz, Inc., 903 F.2d

26

1014, 1018 (5th Cir. 1990)).

27

“CFTC had the burden of proving three elements: (1) the making of

28

a misrepresentation, misleading statement, or a deceptive

Commodity

Thus, to establish a violation,

54

1

omission; (2) scienter; and (3) materiality.”

2

Trading Comm’n v. R.J. Fitzgerald & Co., 310 F.3d 1321, 1328 (11th

3

Cir. 2002).

4

law of Torts, ‘reliance’ on the representations is not a requisite

5

element in an enforcement action.”

Commodity Futures

“Unlike a cause of action for fraud under the common

Id. at 1328 n.6.

6

“The CFTC must additionally show that the fraud was (1) in

7

connection with an order to make or the making of a contract of

8

sale of a commodity for future delivery, and (2) made for or on

9

behalf of another person.”

United States Commodity Futures

United States District Court
For the Northern District of California

10

Trading Comm’n v. Driver, 2012 U.S. Dist. LEXIS 93038, at *13

11

(C.D. Cal.) (citation omitted).

12

include those made to customers when soliciting their funds.”

13

at *14 (citing Commodity Futures Trading Comm’n v. Rosenberg, 85

14

F. Supp. 2d 424, 447-48 (D.N.J. 2000); Saxe v. E.F. Hutton & Co.,

15

789 F.2d 105, 110-11 (2d Cir. 1986)).

“Actionable misrepresentations

16

Similarly, § 4o(1) of the Act makes it

17

Id.

unlawful for a commodity trading advisor . . . by use of
the mails or any means or instrumentality of interstate
commerce, directly or indirectly---

18
19

to employ any device, scheme, or artifice to defraud any
client or participant or prospective client or
participant; or

20
21

to engage in any transaction, practice, or course of
business which operates as a fraud or deceit upon any
client or participant or prospective client or
participant.

22
23

7 U.S.C. § 6o(1).

Here, there is no dispute that Paron was a

24
commodity trading adviser or that Crombie was one of its
25
principals.

See 1AC ¶ 14; Answer ¶ 14.

Thus, the elements of a

26
violation of § 4o(1) largely overlap with those of a violation of
27
§ 4b.
28
55

1

Unlike § 4b of the Act, § 4o(1)(B) does not have a scienter

2

requirement because it “does not expressly require ‘knowing’ or

3

‘willful’ conduct as a prerequisite for establishing liability.”

4

Commodity Futures Trading Comm’n v. Weinberg, 287 F. Supp. 2d

5

1100, 1108 (C.D. Cal. 2003).

6

claim for violation of this provision, the USCFTC must “prove only

7

that the commodity trading advisor intentionally made the

8

statements complained of, and not that the advisor acted with the

9

intent to defraud.”

Thus, to succeed on an enforcement

First Nat’l Monetary Corp. v. Weinberger, 819

United States District Court
For the Northern District of California

10

F.2d 1334, 1342 (6th Cir. 1987); see also Commodity Futures

11

Trading Comm’n v. Savage, 611 F.2d 270, 285 (9th Cir. 1979)

12

(holding that “an action for injunctive relief by the [US]CFTC

13

under section 4O(1) requires only that the violator have acted

14

intentionally.

15

‘device, scheme, or artifice’ but it is not necessary that he know

16

that its result will be to defraud the client or prospective

17

client.”).

That is, he must have intended to employ the

18

a. Misrepresentations and omissions to prospective
customers

19

The USCFTC contends that, even if Crombie did not author the

20

promotional material himself--as he contends--he provided the

21

false information about his performance history that was used in

22

the promotional material, including by giving the Fimat and Access

23

statements to Yulish and Rothstein Kass for their review.

24

offered no evidence that he did not do this.

25

discussed, he has also raised no dispute of fact that the

26

information in the statements themselves was false or thus that

27

the reports based on these statements were as well.

28

Crombie has admitted that the DDQ contained false information
56

He has

As previously

Further,

1

about the amount of assets managed or advised by Paron.

2

Answer ¶ 22; see also Crombie Aff. ¶ 8 (“Following the onsite call

3

I made admissions to NFA agents the managed account AUMs were

4

materially less than $10 million”).

5

1AC ¶ 22;

There is no dispute that Paron did use these materials to

6

solicit potential clients.

7

that, between August 2010 and March 2011, “Defendants used the

8

Flip Book, the Newsletter, and the DDQ as promotional materials

9

for the solicitation of potential clients for Paron”).

See 1AC ¶ 22; Answer ¶ 22 (admitting

Crombie

United States District Court
For the Northern District of California

10

himself has testified that he participated in meetings in which

11

potential clients were solicited and were given these materials.

12

Crombie Depo. 183:23-184:16, 194:13-196:2.

13

states in his opposition that his “communications with investors

14

on calls or at meeting[s] was [sic] limited to demonstrating

15

software systems I had authored or was expert in,” Opp. 3, the

16

cited deposition transcript does not support his assertion.

17

Instead, at the deposition, he testified that he did not discuss

18

JDC Venture’s past performance but that, at these meetings, Paron

19

did give potential customers the Flip book, DDQ and other

20

materials which had the performance information for JDC Ventures.

21

Crombie Depo. 183:23-184:16, 194:13-196:2.

22

dispute of material fact that Crombie directly participated in the

23

solicitation of clients using these materials.

24
25

Although Crombie

Thus, there is no

b. Scienter
As discussed above, scienter is an element of a § 4b claim.

26

Thus, to prove that claim, the USCFTC must show that Crombie

27

“intentionally violated the Act or acted with ‘careless disregard’

28

of whether his actions violated the Act.”
57

CFTC v. Noble Metals

1

Int’l, Inc., 67 F.3d 766, 774 (9th Cir. 1995).

2

mistake, or inadvertence fails to meet Section 4b’s scienter

3

requirement.’”

4

348 (9th Cir. 1990)).

5

defendant’s conduct involves intentional omissions or

6

misrepresentations that present a risk of misleading customers,

7

either known to the defendant or sufficiently manifest that the

8

defendant ‘must have been aware of’ the risk.”

9

Trading Comm’n v. King, 2007 WL 1321762, at *2 (N.D. Tex.)

United States District Court
For the Northern District of California

10
11

“‘Mere negligence,

Id. (quoting Wasnick v. Refco, Inc., 911 F.2d 345,
“Scienter has been found when the

Commodity Futures

(quoting R.J. Fitzgerald, 310 F.3d at 1328).
For the same reasons that the Court found there was no

12

material dispute of fact that Crombie acted willfully in providing

13

the fraudulent statements to the NFA, the Court also finds that

14

there is no material dispute that he acted with scienter as to the

15

rates of return in the promotional materials.

16

Crombie has admitted knowledge that the DDQ contained false

17

information about the amount of assets managed or advised by

18

Paron.

19

did not take steps to address these--even if he were not the one

20

who prepared the DDQ--and participated in its distribution

21

demonstrates that he acted in “careless disregard” of whether his

22

actions violated the Act.

23
24

In addition,

That he knew that the DDQ contained misrepresentations,

c. Materiality
“A statement or omitted fact is ‘material’ if there is a

25

substantial likelihood that a reasonable investor would consider

26

the information important in making a decision to invest.”

27

Tech. Servs., Ltd. v. CFTC, 205 F.3d 165, 169 (5th Cir. 2000); see

28

also R.J. Fitzgerald, 310 F.3d at 1332 (finding misrepresentations
58

R & W

1

material where “an objectively reasonable investor’s decision-

2

making process would be substantially affected” by them and they

3

would, “as a matter of law, alter the total mix of relevant

4

information available to the potential commodity option

5

investor”).

6

The USCFTC contends that an objectively reasonable investor’s

7

decision-making would have been affected by misrepresentations of

8

the historic rate of return and the amount of assets under

9

management, particularly in light of how dramatically overstated

United States District Court
For the Northern District of California

10

they were.

11

would be material to a reasonable investor.

12

Crombie has not disputed that such misrepresentations

d. Controlling person liability

13

The USCFTC argues that, in addition to being directly liable

14

for his own actions, Crombie is also liable for the acts of Paron

15

as a controlling person.

16

Section 13(b) of the Act provides,

17

Any person who, directly or indirectly, controls any
person who has violated any provision of this Act or any
of the rules, regulations, or orders issued pursuant to
this Act may be held liable for such violation in any
action brought by the Commission to the same extent as
such controlled person.

18
19
20

7 U.S.C. § 13c(b).

To establish liability under this section, the

21
USCFTC must prove that “the controlling person did not act in good
22
faith or knowingly induced, directly or indirectly, the act or
23
acts constituting the violation.”

Id.

“To satisfy the latter

24
standard, CFTC must show that the controlling person had actual or
25
constructive knowledge of the core activities that make up the
26
violation at issue and allowed them to continue.”

R.J.

27
Fitzgerald, 310 F.3d at 1334.

“Section 13c(b), therefore, is

28
59

1

about power, and imposing liability for those who fail to exercise

2

it to prevent illegal conduct.”

Id.

3

The parties dispute whether Crombie controlled Paron.

4

USCFTC argues that Crombie controlled Paron based on the facts

5

that he was a principal of Paron, was its Initial Manager, had a

6

seventy-five percent ownership of it and controlled its trading

7

program.

8

because the Operating Agreement placed various limits on his

9

control and because he was in debt to McConnon.

Crombie argues that he was not the controlling person,

Crombie also

10
United States District Court
For the Northern District of California

The

argues that McConnon was the controlling person of Paron and

11

should be held liable instead of him.

12

Even if McConnon could be held liable as a controlling

13

person, this does not preclude Crombie from being deemed a

14

controlling person as well.

15

330 (4th Cir. 2002) (“Because control may be exercised jointly by

16

a group, several persons may simultaneously be controlling persons

17

of the same corporation.”).

18

individual “needs to have actually exercised general control over

19

the operations of the wrongdoer,” and also “must have had the

20

power or ability--even if not exercised--to control the specific

21

transaction or activity that is alleged to give rise to

22

liability.”

23

F.3d 907, 911-912 (7th Cir. 1994); see also Baragosh, 278 F.3d at

24

330.

See CFTC v. Baragosh, 278 F.3d 319,

To be a control person, the

Donohoe v. Consolidated Operating & Prod. Corp., 30

25

Crombie asserts that he did not have general control over the

26

company because, even though he was the Initial Manager and held a

27

seventy-five percent interest, the operating agreement provided

28

that many decisions had to be approved by a super-majority vote of
60

1

at least ninety percent in interest of the members.

2

¶ 3, Ex. 2, 22.

3

actions that required a super-majority vote, including “engaging

4

in any activity not authorized by a business plan adopted by a

5

Supermajority Vote of the Members,” or “entering into or

6

modifying, amending, extending or terminating any Investment

7

Management Account.”

8

percent ownership interest, McConnon a twenty percent interest and

9

Lyons a five percent interest, this clause means that in practical

Robell Decl.

The operating agreement listed twenty-five

Id.

Because Crombie held a seventy-five

United States District Court
For the Northern District of California

10

terms, at least McConnon and Crombie had to agree on any of the

11

listed actions for it to take place.

12

had to agree does not mean that Crombie was not a control person.

13

At most, this suggests that both had power and control over the

14

decision, not that Crombie was not in control.

15

However, that McConnon also

Crombie further asserts that McConnon actually had control

16

because Crombie was in debt to him.

17

evidence that supports that the fact that Crombie was in debt to

18

McConnon meant that McConnon had effective control.

19

agreement specifically provided that Crombie alone was to have

20

control over all decisions except those that required a super-

21

majority vote, even though it also provided that Crombie was to

22

get a loan from the company and McConnon.

23

contemplated that he would be in debt to McConnon, yet still gave

24

him general control over the company.

25

contends that McConnon and Lyons were in control of marketing and

26

solicitation, he has admitted that he was actually in control of

27

the trading program itself and that he provided the account

28

statements from his past trading to the auditors.
61

However, Crombie cites no

The operating

Thus, the agreement

Further, although Crombie

These were the

1

core activities which made up the violations and which formed the

2

basis of the fraudulent numbers contained in the marketing

3

documents.

4

marketing documents and thus at least had actual or constructive

5

knowledge of the figures in them, yet allowed them to be used.

6

In addition, Crombie has admitted that he edited the

Accordingly, the Court finds that there is no material

7

dispute of fact that Crombie is liable as a controlling person for

8

the acts of Paron.

9

United States District Court
For the Northern District of California

10

e. Summary
For the reasons set forth above, the Court finds that there

11

is no material dispute of fact that Crombie violated

12

§§ 4b(a)(1)(A) and (B) and 4o(1)(A) and (B) of the Commodity

13

Exchange Act.

14

for summary judgment on its second and third causes of action

15

against Crombie and denies his cross-motion for summary judgment

16

on these claims.

17

Accordingly, the Court grants the USCFTC’s motion

3. Affirmative defenses

18

Crombie has asserted that he should be granted summary

19

judgment on all claims because “Plaintiff’s damages, if any, were

20

not caused by me.”

21

USCFTC is a government agency charged with enforcing compliance

22

with the Act by commodity trading professionals and is not seeking

23

damages to remedy a harm to itself, as may have been the case if

24

it were a private litigant seeking damages as a result of the

25

fraud or misconduct.

26

to itself as an element of its case.

Opp. at 27 (formatting omitted).

However, the

The USCFTC is not required to prove damages

27

Crombie also asserts that he is not liable for the actions of

28

McConnon or Lyons and that he had no control over them, apparently
62

1

relying again on his argument that they actually were responsible

2

for writing the marketing documents.

3

Crombie’s liability is the result of his own actions in providing

4

fraudulent documents that served as the basis for the numerical

5

representations made in the promotional materials.

6

However, as explained above,

Finally, Crombie claims that the USCFTC’s claims against him

7

are barred by unclean hands.

8

was not asserted in his answer.

9

showing that this defense may be applicable here.

United States District Court
For the Northern District of California

10

The Court notes that this defense
Further, he has not made a

“[E]quitable defenses against government agencies are

11

strictly limited.”

12

53, 73 (D. Conn. 1988) (collecting cases).

13

permitted equitable defenses to be raised against the government,

14

they have required that the agency’s misconduct be egregious and

15

the resulting prejudice to the defendant rise to a constitutional

16

level.”

17

only where the alleged misconduct occurred during the

18

investigation leading to the suit and the misconduct prejudiced

19

the defendant in his defense of the action.’”

20

2002 U.S. Dist. LEXIS 24112, at *23 (S.D.N.Y.) (quoting Elecs.

21

Warehouse, 689 F. Supp. at 73); see also SEC v. Cuban, 798 F.

22

Supp. 2d 783, 794 (N.D. Tex. 2011) (reviewing case law involving

23

government enforcement actions and concluding that, “to the extent

24

the defense of unclean hands is available in an SEC enforcement

25

action, it is in strictly limited circumstances.

26

misconduct must be egregious, the misconduct must occur before the

27

SEC files the enforcement action, and the misconduct must result

28

in prejudice to the defense of the enforcement action that rises

Id.

SEC v. Elecs. Warehouse, Inc., 689 F. Supp.
“Where courts have

“Furthermore, ‘courts have permitted the defense

63

SEC v. Follick,

The SEC’s

1

to a constitutional level and is established through a direct

2

nexus between the misconduct and the constitutional injury.”).

3

Here, Crombie has not offered evidence that the USCFTC has

4

engaged in misconduct that caused prejudice rising to the

5

constitutional level.

6

not investigate its claims thoroughly, discredited his evidence

7

and testimony, and relied on the testimony of others.

8

allegations do not demonstrate egregious misconduct and, even if

9

true, he has not shown that it prejudiced his defense of this

He argues, in essence, that the USCFTC did

United States District Court
For the Northern District of California

10

action, especially to a constitutional level.

11

II.

Crombie’s

12

Crombie’s motions for leave to file new claims
Crombie moves for leave to file claims against the USCFTC,

13

the NFA, McConnon, Lyons, Paron and the law firm BraunHagey &

14

Borden LLP for negligence, misrepresentation, defamation, fraud or

15

breach of fiduciary duty.

16

Docket Nos. 191 and 194.

The case management order in this action provided that the

17

deadline to add additional parties or claims was March 23, 2012.

18

Docket No. 67.

19

modified except upon a showing of good cause and by leave of the

20

district judge.”

21

been filed, a party’s ability to amend the pleadings is “governed

22

by Rule 16(b), not Rule 15(a).”

23

Inc., 975 F.2d 604, 608 (9th Cir. 1992).

24

here, a party seeks to amend a pleading after the date specified

25

in a scheduling order, it must first show “good cause” for the

26

amendment under Rule 16(b).

27
28

Under Rule 16(b), “[a] schedule shall not be

Fed. R. Civ. Pro. 16(b).

Where a schedule has

Johnson v. Mammoth Recreations,
Therefore, where, as

Id.

In order to determine whether good cause exists, courts
primarily consider the diligence of the party seeking the
64

1

modification.

2

232 F.3d 1271, 1294 (9th Cir. 2000).

3

participate from the outset in creating a workable Rule 16

4

scheduling order but they must also diligently attempt to adhere

5

to that schedule throughout the subsequent course of the

6

litigation.”

7

Cal. 1999).

8
9

Id. at 609; see also Coleman v. Quaker Oats Co.,
“[N]ot only must parties

Jackson v. Laureate, Inc., 186 F.R.D. 605, 607 (E.D.

If good cause is shown, the party must next demonstrate that
the amendment is proper under Rule 15.

Johnson, 975 F.2d at 608.

United States District Court
For the Northern District of California

10

Under that rule, courts consider five factors when assessing the

11

merits of a motion for leave to amend: undue delay, bad faith,

12

futility of amendment, prejudice to the opposing party and whether

13

the plaintiff has previously amended the complaint.

14

Nev. Sys. of Higher Educ., 555 F.3d 1051, 1055 n.3 (9th Cir.

15

2009).

16

“futility of amendment alone can justify the denial of a motion.”

17

Id. at 1055.

18

Ahlmeyer v.

Although these five factors are generally all considered,

Even if Crombie had made a showing that he acted diligently

19

in seeking a modification of the schedule of this case, his

20

proposed amendments would be futile for a variety of reasons.

21

First, as an agency of the United States, the USCFTC is immune to

22

suit, in the absence of a waiver of sovereign immunity, on

23

Crombie’s claims.

24

waiver is applicable here.

25

F.2d 513, 514 (9th Cir. 1970) (“The filing of a suit in the name

26

of the United States does not amount to a waiver of sovereign

27

immunity subjecting the United States to an affirmative adverse

28

judgment on a counterclaim filed by the defendant.”).

Crombie has made no showing that any such
See also United States v. Agnew, 423

65

1

Further, many of Crombie’s allegations against the USCFTC,

2

NFA and BraunHagey are barred by California’s litigation

3

privilege.

4

“reckless and grossly negligent in bringing the complaint and

5

amended complaint,” causing him harm, and that BraunHagey made

6

unfounded, untrue statements about him “in litigation.”

7

allegations are not actionable due to the litigation privilege,

8

which, as explained by the California Supreme Court, is intended

9

“to afford litigants . . . the utmost freedom of access to the

Crombie alleges, for example, that the USCFTC was

Such

United States District Court
For the Northern District of California

10

courts without fear of being harassed subsequently by derivative

11

tort actions.”

12

“The litigation privilege applies to any communications (1) made

13

in a judicial proceeding; (2) by litigants or other participants

14

authorized by law; (3) to achieve the objects of the litigation;

15

(4) that have some connection or logical relation to the action.”

16

Sharper Image Corp. v. Target Corp., 425 F. Supp. 2d 1056, 1077

17

(N.D. Cal. 2006) (citing Silberg, 50 Cal. 3d at 212).

18

privilege also applies to “prelitigation communication” that

19

“relates to litigation that is contemplated in good faith and

20

under serious consideration.”

21

of Santa Monica, 41 Cal. 4th 1232, 1251 (2007).

Silberg v. Anderson, 50 Cal. 3d 205, 213 (1990).

The

Action Apartment Ass’n Inc. v. City

22

In addition, as Paron, McConnon and Lyons argued in

23

opposition to Crombie’s first motion for leave to amend, the

24

claims that he seeks to assert against them are barred by res

25

judicata.

26

Lyons made false and misleading statements in Paron marketing and

27

solicitation materials and in connection with the Rothstein Kass

28

and Yulish reports and the NFA investigation.

Crombie alleges, among other things, that McConnon and

66

These, and the

1

other related issues raised by Crombie, were previously at issue

2

in the Delaware litigation and were resolved on their merits

3

adversely to Crombie.

4

these issues is futile.

5

Accordingly, his attempt to re-litigate

Finally, Crombie does not seek to assert proper third-party
claims under Federal Rule of Civil Procedure 14.

7

provides that “a defending party, as a third-party plaintiff, may

8

cause a summons and complaint to be served upon a person not a

9

party to the action who is or may be liable to the third-party

10
United States District Court
For the Northern District of California

6

plaintiff for all or part of the plaintiff’s claim against the

11

third-party plaintiff.”

12

party claim may be asserted only when the third party’s liability

13

is in some way dependent on the outcome of the main claim and is

14

secondary or derivative thereto.”

15

Co., 845 F.2d 196, 199-200 (9th Cir. 1988) (affirming dismissal of

16

third-party complaint when it failed to show the requisite

17

derivative or secondary liability on the part of the third-party

18

defendants).

19

Stewart explained, “The crucial characteristic of a Rule 14 claim

20

is that the defendant is attempting to transfer to the third-party

21

defendant the liability asserted against him by the original

22

plaintiff.

23

arises from the same transaction or set of facts as the original

24

claim is not enough.”

25

Practice & Proc. § 1446 at 257 (1971 ed.)).

26

Crombie’s purported third-party claims arise from the same

27

transaction or set of facts as the original claims.

28

allowing him to amend to assert them would be futile.

Rule 14(a)

As the Ninth Circuit instructs, a “third-

Stewart v. Am. Int’l Oil & Gas

Quoting Professors Wright and Miller, the court in

The mere fact that the alleged third-party claim

Id. at 200 (quoting 6 Wright & Miller, Fed.

67

Here, at most,

Accordingly,

1

CONCLUSION

2

For the reasons set forth above, the Court GRANTS the

3

USCFTC’s motion for summary judgment (Docket No. 234) and DENIES

4

Crombie’s cross-motion for summary judgment (Docket No. 252) and

5

motions for leave to file counterclaims and third-party claims

6

(Docket Nos. 191, 194).

7

In its motion for summary judgment, the USCFTC did not

8

address the relief it seeks to address the violations of the

9

Commodity Exchange Act for which Crombie has been found liable.

United States District Court
For the Northern District of California

10

Within two weeks of the date of this Order, the USCFTC shall file

11

a motion addressing the relief that it seeks and shall include a

12

proposed judgment.

13

an opposition to the USCFTC’s motion.

14

later.

15

Within two weeks thereafter, Crombie may file
Any reply is due one week

The motion will be resolved on the papers.

IT IS SO ORDERED.

16
17
18

Dated: 7/26/2013

CLAUDIA WILKEN
United States District Judge

19
20
21
22
23
24
25
26
27
28
68