Paron Capital Mgmt., LLC et al. v. Crombie, C.A. No. 6380-VCP (Del. Ch. May 22, 2012) (Parsons, V.C.)
In this post-trial memorandum opinion, the Court of Chancery held that a member and manager of a Delaware limited liability company committed fraud and breached his fiduciary duties to the other members of the company by, among other things, making false statements of fact about his investment software, his investment track record, and his personal financial situation. In reaching its decision, the Court determined that the defendant, as a manager of the company, owed fiduciary duties of loyalty and care to the plaintiffs. As a result, the Court granted extensive monetary damages to the plaintiffs based on their lost future earnings and other costs associated with the formation and operation of the company. The Court also granted limited injunctive relief, requiring the defendant to destroy or return copies of the investment software and to stop marketing any version of the software.
This action involved claims by a Delaware limited liability company, Paron Capital Management, LLC (“Paron”), together with two of its members, Peter McConnon (“McConnon”) and Timothy Lyons (“Lyons”), against Defendant James Crombie (“Crombie”). McConnon, Lyons, and Crombie co-founded Paron to manage client accounts using a software-based futures trading strategy, which Crombie had developed. The plaintiffs accused Crombie of falsifying records and making other dishonest statements concerning the investment software, fraudulently inducing them to form Paron, and breaching his fiduciary duties to them and Paron.
In search of new investors for his company, Crombie was introduced to McConnon and Lyon and provided them with marketing materials, which detailed his annual and daily returns from his investment software and the terms he was seeking from a potential equity investor. He also provided information about his employment history and personal financial situation. It turned out that these representations were false. The marketing materials indicated that Crombie’s trading program had annual returns of 25% in 2007 and 38% in 2008. In fact, Crombie forged the account statements that purported to show his investment performance, and in reality, these accounts only had a balance of approximately $40. In addition, Crombie misrepresented the amount of assets he had under management. Crombie asserted in his initial correspondence with McConnon and Lyons that he had $30 million in assets under management, $21 million of which belonged to a propriety account of his former employer. This claim also turned out to be false. In fact, Crombie had been terminated by his former employer within a year of his employment because of repeated violations of the company’s trading rules and for poor performance. Crombie also misrepresented his personal financial situation to McConnon and Lyons. Although Crombie disclosed one lawsuit that had been brought against him, he failed to disclose another lawsuit brought against him for fraud. Crombie also failed to disclose numerous personal debts amounting to approximately one million dollars.
Soon after Paron began operating, the National Futures Association (“NFA”) delivered an audit request to Paron. After Crombie and the plaintiffs provided numerous documents in response to the audit request, McConnon received an email from NFA requesting additional information about one of the accounts, noting that the relevant account statements showed changes in assets under management without any corresponding trading activity. McConnon then contacted the purported account owner of the account in question. The purported account owner informed McConnon that the account statements were fraudulent and that the purported account owner had no such account. Thereafter, the plaintiffs removed Crombie as a member and manager of Paron.
Subsequently, the plaintiffs filed two actions against Crombie in the Court of Chancery. The first action sought declaratory relief relating to Crombie’s removal as the manager of Paron under 6 Del. C. §§ 18-110 and 18-111. Thereafter, the parties entered into an Amended Stipulated Final Judgment under which, among other things, Crombie admitted that he was “properly, validly and permanently removed” as manager and member of Paron.
In the present action, the Court of Chancery found that Crombie committed fraud against the plaintiffs because (1) he made numerous false representations of fact to the plaintiffs before forming Paron; (2) he intended for the plaintiffs to rely on his misrepresentations in deciding to go into business with him; (3) the plaintiffs justifiably relied on Crombie; and (4) the plaintiffs suffered damages in the form of lost earnings, as well as reliance and mitigation damages, as a result of Crombie’s fraud. In addition, the Court held that Crombie breached his fiduciary duties to the plaintiffs by failing to correct his misrepresentations and by continuing to make additional misrepresentations after the formation of Paron. The Court found that Crombie owed the plaintiffs the fiduciary duties of loyalty and care based on Paron’s LLC Agreement, which stated that Crombie had a duty to “devote and render his best efforts and full time professional trading and advisory skills and services to the Company.” In addition, the LLC Agreement provided that “the fiduciary duty imposed on Crombie by the foregoing provisions…, shall not limit or be in derogation of any other fiduciary or other duties that [Crombie] or any other Manager has or shall have, including but not limited to fiduciary duties of a Manager to the Company and to the other Members pursuant to 6 Del. C. § 18-1104.” The Court then held that Crombie breached his fiduciary duties by preparing fraudulent marketing material for Paron and by continuing to conceal material information about his track record, employment history, and personal finances. The Court awarded McConnon $773,190 in reliance damages, $752,133 in mitigation costs, and $32,160,816 in lost earnings. The Court also awarded Lyons $1,892,305 in lost earnings. In addition, the Court granted limited injunctive relief, awarded the plaintiffs’ attorneys’ fees and litigation expenses and found that the plaintiffs are entitled to post-judgment interest.