Court Awards $35M In Delaware Hedge Fund Fraud

May 23 2012 | 8:52am ET

Peter McConnon and Timothy Lyons of hedge fund Paron Capital Management have been awarded damages of $35 million by the Delaware Court of Chancery which ruled that their former partner, James Crombie, had lied about his track record.

McConnon and Lyons founded Paron with Crombie who claimed to have developed highly successful futures trading software. The Court found “that Crombie committed fraud and breached his fiduciary duties to the plaintiffs and the Company by making false statements of fact about his program, his investment track record, and his personal financial situation.”

The Court also found that McConnon and Lyons had done “extensive” due diligence on Crombie, including reviewing a verifier’s report prepared by an independent hedge fund accounting firm. The partners also commissioned Rothstein Kass to independently verify Crombie’s historical trading performance.

Neither Rothstein Kass nor the independent accounting firm—who were not parties in the case against Crombie—were accused of or found liable for any wrongdoing.

By the time Crombie’s forgery was discovered, "Rothstein's verification" had been used in marketing materials Paron had sent to over 100 client contacts.

The Court held that Crombie’s fraud had derailed McConnon’s and Lyons’s “highly successful” careers in the financial services industry and that “plaintiffs are entitled to extensive damages against Crombie based on their lost future earnings and other costs associated with the formation and operation of Paron.”

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