Where is the proof of security of Diffie's cipher?

There is an apparently provably secure cipher that was proposed by Diffie, but enhanced by R.A. Rueppel. The scheme, which was mentioned in Applied Cryptography, works like this:

1. Measure the length of the plain-text, $n$.
2. Multiply it by $128$.
3. Generate this much ($128·n$ bytes of) real random data and split it out into 128 byte-arrays of length each equal to the plain-text. This can be thought as a two dimensional array:
1. One of the indices gives the sequence number ($0\dots 127$).
2. One of the indices gives the position in the sequence, $0 \dots n-1$.
4. Use a 128-bit key to choose which of these streams to XOR together. Each bit of the key corresponds to "yes/no" on whether to use particular sequence. All the selected sequences are XORed together to make a single keystream, $K$.
5. Compute $P \oplus K$ to give the cipher-text $C$.
6. Serialize the two dimensional array and append it to the cipher text.
7. Send the whole package to Bob, who can then decrypt by de-serializing the matrix and selecting the same rows.

Apparently, this scheme is completely secure. The attacker has to examine every possible combination of sequences ($2^{127}$ on average) in order to break the encryption scheme.

What is the proof of this? I can't find the paper that discusses this anywhere.

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This looks totally weak. If you know 128 bits of known plaintext, you can infer the corresponding 128 bits of keystream. The keystream being the multiplication of the random matrix by the key (in the vector space $\mathbb{F}_2^{128}$), the key is then revealed through a basic matrix inversion.