August 6, 2012 / 9:14 PM / in 5 years

"Mini-Madoff" ordered to pay ex-partners $35 million

(Reuters) - The founder of a hedge fund was found on Tuesday to have defrauded his former partners and was ordered to pay them $35 million in a case described by one lawyer as a “mini-Madoff.”

James Crombie, a one-time JPMorgan Chase & Co (JPM.N) trader, was ordered by a Delaware Court of Chancery judge to compensate Peter McConnon and Timothy Lyons for their contributions to starting Paron Capital Management LLC and for lost future earnings.

According to Tuesday’s 36-page opinion by Judge Donald Parsons, McConnon and Lyons left lucrative jobs at financial firms in 2010 and teamed up with Crombie to market his quantitatively based trading program, which was producing returns of 25 percent to 38 percent.

Less than a year after founding Paron, the two learned that Crombie was “a mini-Madoff,” according to Noah Hagey, of BraunHagey & Borden LLP, who represented the former partners.

Crombie had forged account statements, investment statements and had hidden personal debts.

Accounts that Crombie claimed held $24 million in fact held $40, according to Parsons’s opinion.

“Many of the representations Crombie made about his track record, employment history, and personal financial situation were outright lies,” Parsons wrote.

Crombie, who represented himself, could not be reached for comment.

Crombie filed for bankruptcy in California in February, but Hagey said the judgment will not be extinguished by that filing.

“Over the course of the next 20 years, we expect to be collecting from Crombie,” Hagey said.

    McConnon and Lyons are also looking to collect from Rothstein, Kass & Co and Yulish & Associates, which independently verified Crombie’s track record.

    Rothstein said it verified Crombie’s results with independent third-party brokers, according to Parson’s opinion.

    Rothstein and Yulish were not parties to the lawsuit and not found liable.

    “It’s a continuation of a larger problem of professionals who are meant to safeguard the public and investors such as my clients are not really doing their job as gatekeepers,” Hagey said of the accounting firms. “They should have been more skeptical.”

    Kathryn Yulish did not immediately reply to an email for a comment. Robert Solomon, a Rothstein spokesman, did not immediately return a phone call or email for a comment.

    (This is a corrected May 22 story to show Yulish verified Crombie’s results and did not audit them. Adds that Yulish and Rothstein were not parties to the lawsuit and not found liable.)

    Reporting By Tom Hals of Wilmington, Delaware; Editing by Bob Burgdorfer

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