Reserve Fund Hopes to Settle with SEC: Lawyer

Trial on SEC’s charges against money fund manager set to begin Oct. 1.

A lawyer for the failed Reserve Primary Fund told the federal judge he’s hopeful about reaching a settlement in a lawsuit filed by the U.S. Securities and Exchange Commission.

The SEC sued managers of Reserve Primary in May 2009, accusing them of misleading shareholders about the safety of the fund after it suffered losses on Lehman Brothers Holdings Inc. debt. Reserve’s net asset value fell below $1 a share on Sept. 16, 2008, making investors vulnerable to losses and triggering a run on money-market funds that worsened the global financial crisis.

A three-week trial is set to begin Oct. 1 before U.S. District Judge Paul Gardephe in Manhattan. At a pre-trial hearing yesterday, the judge asked both sides whether they had held settlement discussions.

Nancy Brown, a lawyer with the SEC, said, “No, Your Honor.”

John Dellaportas, a lawyer for Reserve Partners Inc., told the judge, “It is our hope” that if he ruled on issues pending before the court, “the parties are close enough” to reaching a settlement “between now and the trial.”

After court, Dellaportas declined to comment when asked about his statements to the judge about a possible accord. Dellaportas also represents Bruce R. Bent, the founder and chief executive officer of Reserve Partners, which ran Reserve Primary, and his son, Bruce Bent II, the firm’s president.

The SEC accuses the Bents of violating federal securities laws by making misleading statements to investors and trustees in the run-up to the collapse of the $62.5 billion Reserve Primary Fund in September 2008.

The fund, which held $785 million in debt issued by Lehman, became the first money fund in 14 years to expose investors to losses, when Lehman filed for bankruptcy protection.

Bent and his New York-based firm deny they made false or misleading statements and say that the Lehman bankruptcy on Sept. 15, 2008, precipitated a wave of redemptions by investors that continued through the following day.


‘Extreme Turmoil’

“The enormous number or redemptions, which coincided with a period of extreme turmoil in the nation’s credit markets, left the fund unable to sell assets sufficient to pay redemptions as they came due,” Dellaportas said in court papers. “As a result, the fund had to suspend trading, and thereafter underwent a court-supervised liquidation.”

Gardephe has issued a series of rulings in the case before trial. The defendants had argued they should be permitted to introduce evidence demonstrating that investors recouped “most” of their investment after the fund’s collapse, demonstrating that “this is not a Madoff situation.”

The judge yesterday denied the request saying that neither side would be permitted to present evidence of shareholder loss or lack of loss.

The case is SEC v. Reserve Management Co. Inc. 09-cv-04346, Southern District of New York (Manhattan).


Bloomberg News

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