Kenneth D.

Tolliver
Tolliver Law Firm
10 Nertb 27
th
Street Suite 310 ,
Billings, MT 59101
(406) 256-9600
FILED
J. Michael Ozier
JAN 1 2 2012
Attorney at Law
PATRICK E. DUFFY CLERK
10 North 27
th
Street, Suite 310

oeputy Clerk
Billings, MT 59101
(406) 281-8464
Attorneys for Plaintiff,
Krohne Fund, LP
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MONTANA
BILLINGS DIVISION
KROHNE FUND, LP, ) Case No. W\204
)
Plaintiff, )
Judge c..BWL.L.
)
v. ) COMPLAINT
)
STUART M. SIMONSEN, and )
)
KAPIDYIA CAPITAL )
PARTNERS, LLC, )
)
Defendants. )
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Jurisdiction and Venue
1. Plaintiff, Krohne Fund, LP (hereinafter "Krohne"), is a
California limited partnership with its principal place of business located at
5405 Pacifica Avenue, La Jolla, California 92037.
2. Defendant Stuart M. Simonsen (hereinafter "Simonsen") is an
inves1ment manager, among other businesses, and is a resident of and doing
business in Billings, Montana. He resides at 865 Paintbrush Place, Billings,
Montana 59106.
3. Defendant Kapidyia Capital Partners, LLC (hereinafter
"Kapidyia") is doing business in Billings, Montana, from its principal place
of business at 1643 Lewis Avenue, Suite 6, Billings, Montana 59102. It is an
inves1ment fmn and an associate member of the National Futures
Association, a trade association for futures market traders, brokers, dealers
and inves1ment advisors.
4. The amount of damages suffered and claimed by Krohne herein,
via the federal and state law claims asserted below, are equal to or greater
than $75,000; hence, federal jurisdiction is established based both on
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diversity and on the federal statutory violations alleged below. Further, since
both Defendants reside at Billings, Montana, venue is proper in this Court.
Allegations of Fact
5. Simonsen developed a "black box" investment program or
protocol for trading in commodities markets. A "black box" is essentially a
computer program which algorithmically directs purchases and sales, long or
short, of fmancial instruments based on a rigid framework of parameters. A
black box is generally founded on a number of assumptions which have been
market tested, and its level of investment risk is limited by algorithms such as
"stop losses". The general advantage of a black box is that it invests with an
exactly predictable and programmed methodology that is constant and
unchangeable; hence, risk is managed in an absolutely consistent way until
such time as its algorithms are changed.
6. Through an employment or other business relationship,
Simonsen markets his black box and manages commodities investments
through it via Kapidyia. Kapidyia's Principle is one JoAnne L. Beringer
who, on information and belief, is a licensed investment advisor.
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7. Axel Krohne (hereinafter referred to interchangeably with
"Krohne"), the Manager of Plaintiff Krohne and a resident of California,
learned about Simonsen and his black box through a friend in the summer of
2011. At that point, Simonsen was calling the black box Optimus. Krohne
and Simonsen were introduced via e-mail on August 5,2011. Two days later
Anthony Birbilis, a futures trader and a business associate of Simonsen,
provided a nlarketing presentation of the black box trading algorithm to
Krohne. Krohne was able to download Optimus and it included a feature
which purported to track Optimus' performance with all funds invested since
2004. Events Krohne experienced much later, after investing, caused Krohne
to question the veracity of these historic performance results. After the
presentation and the downloading ofOptimus, Krohne's interest in Optimus
was so strong that the next day he made an appointment to visit Simonsen in
Billings.
8. Simonsen met Krohne at the Billings Logan Airport on August
9,2011, and took Krohne to Simonsen's residence where Simonsen talked
about the record of success of the Optimus software. He took Krohne
through what he represented as an account statement of an Optimus investor
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showing an account growth of eighteen million dollars, up to twenty million
from a starting value oftwo million dollars, all accomplished during October,
2008. Krohne was impressed by the Optimus program's record of success,
and he was reassured by Simonsen of the fact that his money would stay
strictly in the program to be invested within preset algorithmic parameters
and, therefore, would not be subject to human whim. Further, Simonsen and
Krohne discussed certain risk management parameters Krohne would require
to enter Optimus.
9. On August 15,2011, Krohne signed the Managed Account
Agreement (hereinafter "agreemenf') offered by Kapidyia. Exhibit 1
attached. The agreement provided Kapidyia with discretionary authority over
the account - ie. to buy and sell securities - but Appendix A of the agreement
limited investments to the "Optimus SLR account with a 30% risk budget of
$2,400,000."
10. On August 18,2011, Krohne wired $2,056,543 to a futures
account at the R.J. O'Brien brokerage which he had set up specifically to
trade in Optimus. On September 1, 2011, Krohne received his first monthly
statement from Kapidyia showing a profit of $242,699, generated in less than
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two weeks' time. He was also required to pay Kapidyia $66,540:
approximately $48,000 as a management fees for the quarter closing at the
end of September and the rest as a "performance fee." As a result of this
immediate success, Krohne wired an additional $500,000 into the account on
September 3,2011, with the intent to ramp the notional value of the account
to ten million dollars. On September 8, he wired an additional 1.4 million
dollars to the account.
11. Kapidyia received compensation from investors using Optimus
via quarterly management fees of .5% of the account's notional value.
Notional value differs from actual value. It represents the hypothetical
maximum amount of futures that could be purchased on margin with all of
the funds in the account - e.g., if an account had an actual cash value of $1
million and the margin requirement was twenty percent, the account's
notional value would be $5 million. On October 3, 2011, the notional value
ofKrohne's account was fifteen million dollars and thereon, Kapidyia took a
quarterly fee of $75,000.
12. Krohne was able to visually access the program on his desktop
computer and thus could monitor activities, profits and losses in his account,
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whenever he chose. On September 29, 2011, he noted an alarmingly large
Loss ($657,627) in the account. When Krohne asked Simonsen about the
losses via e-mail, Simonsen called them "extremely rare" and offered that he
was "extremely sorry it had to happen to you so soon after you started."
13. During the fITst half of October, 2011, Krohne's anxiety about
the losses plagued him. Consequently, in late-October and the beginning of
November, with the Optimus software still available and its historical
activities visible on his desktop, Krohne conducted his own "backtest" of the
performance of his account within all Optimus parameters. He could only
verify a loss of a little over $220,000 by simulating the Optimus trades. He
queried Simonsen and Birbilis as to the startlingly lower losses in his backtest
simulation (about 113 less than his actual account losses). Neither could
explain the differences relative to the Optimus program. On November 30,
2011, fed up with the lack of any explanation as to how the actual results in
his account had so underperformed the Optimus results, Krohne withdrew his
funds from trading in Optimus.
14. As ofthe date of filing ofthis Complaint, neither Simonsen nor
any of his associates has provided an explanation even suggesting that the
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Optimus program did or could have violated its programmed algorithmic
instructions. Krohne, however, has perfonned additional back testing. For
example: (a) a backtest for October 31, 2011, showed that Krohne somehow
did the opposite of what Optimus told it to do; and (b) a backtest of Optimus
trades for November 17, 2011, showed a theoretical $110,250 gain for
Krohne under the Optimus instructions, while Krohne actually lost $522,375
according to Kapidyia statements. Krohne's total losses in Optimus were
$1.8 million, including management fees paid.
The Claims
COUNT I: FRAUD AND DECEPTION, FEDERAL SECURITIES LAWS
15. Plaintiff re-alleges as if fully restated herewith the allegations
contained in Paragraphs 1 through 14 above.
16. Defendant Kapidyia, its Principal Beringer and Simonsen were
investment advisors under federal and Montana statutes. By entering into the
agreement with Krohne at Exhibit 1 and representing therein that Krohne's
account would be managed in accordance with the programmed instructions
resident in Optimus, Kapidyia had a duty to perfonn its investment
management function in accordance with the agreement. Similarly,
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Simonsen made representations to Krohne regarding the algorithms within
the Optimus program, both as to their proven record of profitable trading and
as to their risk parameters; hence, he had a duty to trade in the Krohne
account only in accordance with Optimus programmed instructions. Finally,
by manipulating the historical records in Optimus, Simonsen over
represented the quality of Optimus' historical results.
17. At no time relevant herein was it possible for Optimus to
arbitrarily depart from its programming without the programming being
changed or being manually overridden. Similarly, at no time relevant herein
did Krohne authorize the Defendants to trade outside the Optimus program.
Simonsen and/or Klapidyia caused Krohne's account to enter into trading
transactions outside Optimus, and in so doing, along with the acts described
in Paragraph 16 above, committed fraudulent and/or deceptive acts while
serving as an investment advisor to Krohne, which violate 15 U.S.C. 80b-6
(Section 206 of the Investment Advisors' Act of 1940) and the Securities Act
of 1933. These actions directly and/or consequently caused millions of
dollars in losses to Plaintiff Krohne.
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COUNT II - BREACH OF WRITTEN CONTRACT
18. Plaintiff re-alleges the allegations contained in Paragraphs 1
through 14 above as if fully restated herewith.
19. Kapidyia entered into a written contract with Krohne to manage
its commodity investments pursuant to Optimus' instructions. It charged
Krohne fees to manage and perform the investments in accordance with the
agreement. Kapidyia's failure to perform in accordance with the agreement
resulted in direct and circumstantial losses to Krohne.
COUNT ill - PROMISSORY ESTOPPEL
20. Plaintiffre-alleges the contents ofParagraphs 1 through 14
above as if fully restated herewith.
21. Simonsen made oral representations to Krohne, including formal
marketing presentations, with respect to the past performance of Optimus and
as to risk limitations ifthe Optimus program were the sole source of
investment instructions. Because Simonsen was the developer of Optimus,
Krohne reasonably relied on Simonsen's representations. Thereafter,
Simonsen did not cause Krohne's account resources to be invested solely by
Optimus, and as a result Krohne suffered $1.8 million in losses while he
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should have made a $2.4 million profit with Optimus trades only.
COUNT IV - FRAUD, CONSTRUCTIVE FRAUD
22. Plaintiff re-alleges as if fully restated herewith the allegations
contained in Paragraphs 1 through 21 above.
23. Simonsen, through oral representations and formal
presentations, and Kapidyia, through its agreement, made specific
representations about Optimus, including that Krohne's account would be
traded only on its instructions and about its past results for investors.
Simonsen knew these representations were false or maliciously disregarded
their truth or falsity, knowing they placed Krohne in peril of losses in any
subsequent account. Simonsen and/or Kapidyia later acted in complete
disregard of them by trading the Krohne account outside of Optimus,
demonstrating that they had no intention of performing the prior promise to
submit Krohne's account to Optimus trading only. The then current and
knowingly inflated representations of the past performance of Optimus and
the representation that the Krohne account would be limited to trades inside
Optimus' programmed instructions were material to Krohne' s decision to
invest through Optimus.
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24. Krohne believed the above representations and fully expected
them to guide the management of his account. Simonsen and Kapidyia knew
that Krohne relied on the above representations. Thus, in this context of
securities investment and the management fees charged for these services by
an organization that was an associate member of the NF A, Krohne had the
right to rely that such representations would be followed regarding his
account. Hence, these false representations were given to obtain and profit
from the Krohne account. The account was subsequently traded outside
Optimus' instructions, resulting in substantial fmancial damage to Krohne.
COUNT V - MONTANA UNFAIR TRADE PRACTICES
25. Plaintiff re-alleges as if fully restated herewith the allegations
contained in Paragraphs 1 through 24 above.
26. Pursuant to Montana Code Ann. 30-14-202 and 205 et seq., the
employment of fraud in a commercial transaction within Montana constitutes
an unfair trade practice. In this instance, the above fraudulent acts caused
serious fmancial damage to Krohne and he is entitled to restitution thereon.
COUNT VI - CONSlRUCTIVE TRUST
27. Plaintiff re-alleges as if fully restated herewith the allegations
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contained in Paragraphs 1 through 26 above.
28. Should any or all of above allegations of fraud, or constructive
fraud be proven in this action, Plaintiff is entitled to a constructive trust for
his benefit covering any and all assets under Defendants' actual or legal
control or ownership for the value of all damages he has sustained.
COUNT VII - PUNITIVE DAMAGES
29. Plaintiff re-alleges as if fully restated herewith the allegations
contained in Paragraphs 1 through 28 above.
30. According to proof that Plaintiff had the right to rely on
representations made by Defendants which were, in fact, fraudulent or were
malicious as defmed in Montana Code Ann. 27-1-221(2)(b), Plaintiff seeks
exemplary damages to punish and to deter Defendants and others in the
investment business from similar bad acts in the future.
WHEREAS, Plaintiff prays for the following relief:
1. The difference between actual fmancial market losses resulting
from Defendants' conduct, including brokers' fees and
commissions, and the profits Plaintiff would have made
exclusively from Optimus;
2. All management and performance fees swept and retained by
Defendants from Plaintiff's account;
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3. Punitive damages;
4. Statutory interest on all fmancial awards;
5. Reasonable attorney fees and costs; and
6. Such other and further relief as this Court deems just and
proper.
DATED this ~ a y of January, 2012.
Kenneth D. Tolliver
Tolliver Law Firm
J. Michael Ozier
Attorney at Law
Attorneys for Plaintiff
Krohne Fund, LLP
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