Co-authored by Jason F. Clouser.
The U.S. District Court for the District of Montana granted defendants Simonsen and Kapidiya’s (Simonsen) motion to dismiss plaintiff Krohne Fund LP’s (Krohne) securities fraud claim arising under Section 10(b) of the Securities Exchange Act of 1934, but denied Simonsen’s motion to dismiss Krohne’s common law fraud claim based on the same set of operative facts.
Krohne engaged Simonsen to manage its financial investments, based on the latter’s Optimus trading software. Simonsen allegedly assured Krohne that its investments would remain within the Optimus trading program’s algorithm, and that Krohne could choose the degree of risk to be programmed into the algorithm. On September 29, 2011, Krohne’s account showed a loss $437,627 in excess of the expected loss based on a simulation of the Optimus program over the period. When questioned, Simonsen allegedly could not explain the discrepancy. Krohne withdrew its funds and filed several claims, including a Section 10(b) claim and a state law fraud claim contending that Simonsen wrongfully traded securities outside of the algorithm.
The district court held that the heightened pleading standard of the Private Securities Litigation Reform Act of 1995 (PSLRA) requires a plaintiff to plead specific facts establishing a strong inference of scienter. Krohne’s allegation that Simonsen traded outside or not in accordance with the algorithm does not, standing alone, establish the necessary strong inference. In contrast, the state law claims survived dismissal because Rule 9(b) of the Federal Rules of Civil Procedure allows for general allegations of malice, intent and knowledge.
Krohne Fund LP v. Simonsen, No. CV 12-04-BLG-RFC, 2012 WL 2120785 (D.Mont. June 12, 2012).