Ninth Circuit Gives Hedge Fund Second Chance at Claims

(CN) – A hedge fund that lost almost $2 million in 2011 after it entrusted its funds to an investment manager will get another chance in front of a federal court to argue its claims for breach of contract, negligent misrepresentation, and fraud, the Ninth Circuit Court of Appeals ruled.

When Krohne Fund LP hired Stuart Simonsen and Kapidyia Capital Partners to manage its investments, it believed that trades would be handled through software called Optimus, which was powered by Simonsen’s algorithmic computerized system.

However, the arrangement lasted only a few months. According to court documents, Krohne Fund’s Optimus account had a profit of $242,699 at the beginning of September 2011. That plummeted to a loss of $657,627 near the end of the month. Simonsen and Kapidyia Capital were unable to explain the loss.

Krohne sued in the District of Montana, claiming that Kapidyia Capital had made unauthorized manual trades on its account. The trial court ruled in favor of Simonsen and Kapidyia Capital at a bench trial.

In an unpublished, seven-page memorandum, the Ninth Circuit panel wrote Thursday that the trial court misread the Managed Account Agreement (MAA) between the parties, which only allowed for computerized, automatic trades. Manual trades required expressed authorization from Krohne.

“[T]he MAA requires that the trades made by the Investment Manager be made exclusively through the XynaQuant software using the Optimus SLR protocol unless Krohne Fund agreed otherwise,” the panel wrote. “The District Court’s conclusion that ‘[t]he MAA contains no language requiring Kapidyia to make trades based only on the Optimus SLR protocol or using exclusively the XynaQuant software’ was therefore error.”

The case now heads back to federal court to reassess Krohne’s breach of contract claim and to determine whether Krohne ever authorized any manual trades. Krohne’s claims for misrepresentation and fraud will be revived as well.

Josh Oie from Moss & Barnett in Minneapolis represented Krohne Fund and did not return a request for comment by press time Friday.

Simonsen and Kapidyia Capital were represented by Tom Singer from Axilon Law Group PLLC in Billings, Montana. Singer said he disagrees with the ruling but declined to comment further.

U.S. Circuit Judges Raymond Fisher, Richard Paez and Consuelo Callahan reviewed the case.