Securities Regulation Daily Summary judgment against commodity adviser affirmed despite lower court’s application of wrong standard
Monday, February 4, 2019

Summary judgment against commodity adviser affirmed despite lower court’s application of wrong standard

By Rebecca Kahn, J.D.

Under both civil and criminal applications of the term "willful," no genuine issue of fact existed as to whether the adviser lied.

A Ninth Circuit panel affirmed summary judgment against a commodity adviser who "willfully" lied to an industry regulator during an investigation. Although the lower court erred in applying the civil meaning of "willfully" rather than the criminal meaning to the adviser’s conduct, there was no genuine issue of fact that the adviser had made false statements in violation of federal law. Part of the permanent injunction imposed against the adviser was vacated because this punishment’s connection to the adviser’s wrongful conduct was insufficiently clear for the panel to determine whether the lower court had abused its discretion. This section of the permanent injunction was, therefore, remanded for further explanation (CFTC v. Crombie, February 1, 2019, Berzon, M.).

Summary judgment. In July 2013, the U.S. District Court for the Northern District of California granted summary judgment in favor of the CFTC in a civil action against a California-based commodity-trading adviser, James D. Crombie. The Commission alleged that by making misstatements to the National Futures Association during a 2011 investigation, Crombie had violated Section 13(a)(4) of the Commodity Exchange Act (the Act), which makes it unlawful "willfully" to make false statements or provide false documents to certain regulatory organizations, including the NFA. The district court found no material dispute of fact that Crombie had violated the Act by willfully providing the NFA with fraudulent account statements and making false statements about the nature of payments to and from his firm, Paron Capital Management, LLC, during the investigation. The district court ruled that Crombie had willfully violated Section 13(a)(4). It also ruled that Crombie willfully provided false information about the history of his performance as an adviser that Paron used to solicit potential clients, in violation of Sections 6b(a)(1) and 6o(1) of the Act.

Relief sought. In November 2013, the district court granted the Commission’s motion in an order that almost entirely adopted the Commission’s language, without explaining why the particular relief was chosen. The order requires Crombie to pay a $750,000 civil penalty to the Commission and $746,460 in restitution, plus pre- and post-judgment interest, to Paron clients. The order also permanently enjoins Crombie from violating various provisions of the Act, as well as from engaging in a broad range of conduct related to the trading of investments regulated by the Act.

Arguments on appeal. Crombie did not contest that he made false statements to the NFA during its investigation of Paron. He argued only that the district court misinterpreted the meaning of "willfully" for the purposes of the Section 13(a)(4) claims, and that under the correct standard, there are genuine issues of material fact as to whether he acted willfully when he made three separate false statements to the NFA during its investigation of Paron.

Error. The Ninth Circuit panel found that the district court erred in applying the civil meaning of "willfully," not the generally applicable criminal meaning. The panel held that the meaning of "willfully" as used in Section 13(a)(4) cannot vary depending on whether it is relied upon directly, in a criminal fraud case, or by incorporation into Section 13a-1(a), in a civil case. In Section 13(a)(4), "willfully" must have the traditional meaning ascribed to the term in the context of criminal prohibitions against fraud: "intentionally undertaking an act that one knows to be wrongful."

Although the district court had failed to apply the heightened criminal standard for willful conduct, the panel found that all the evidence suggested that Crombie acted intentionally when providing false and misleading marketing materials to potential clients. The panel affirmed summary judgment in favor of the Commission on the Section 13(a)(4) claims after its de novo application of the correct meaning of "willfully."

Restitution and recission. Crombie challenged the propriety of the remedies imposed by the district court and the panel reviewed them for abuse of discretion. Crombie did not challenge whether the amount of the restitution order rested on an accurate calculation of losses suffered by Paron’s investors. Instead, he maintained that the entire methodology was incorrect because restitution "does not take into consideration the plaintiff’s losses, but only focuses on the defendant’s unjust enrichment." Crombie’s view of the limits of a restitutionary remedy was "too narrow" the panel ruled. Restitution is a remedy designed to prevent a defendant from unjustly enriching himself at another’s expense. Coupled with the equitable remedy of recission, which undoes a faulty transaction, the panel ruled these remedies were appropriate.

Injunction partly vacated. As most of the permanent injunction imposed by the district court restrains Crombie from committing similar violations, the connection between his violations and the prohibitions were sufficiently self-evident to conclude that imposing these future restraints on Crombie was not an abuse of discretion by the lower court. But certain provisions of the injunction forbid Crombie from engaging in covered transactions "for his own personal account or for any account in which he has a direct or indirect interest," or from having any such trades made on his behalf. The panel could not readily discern how these prohibitions were connected to preventing future violations similar to his past misconduct, so the panel could not "conduct meaningful abuse of discretion review without further explanation." The appellate court, therefore, remanded those parts of the injunction for further explanation by the lower court.

The case is No. 13-17403.

Attorneys: Martin B. White, Office of the Attorney General for the CFTC. Jared L. Gardner (Perkins Coie LLP) for James Devlin Crombie.

Companies: Paron Capital Management, LLC

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