Reserve Primary Fund, the failed $62.5 billion money-market firm, begins trial today on civil claims by the U.S. Securities and Exchange Commission that it misled shareholders about the safety of its fund after it lost money on Lehman Brothers Holdings Inc. debt.
Reserve, which held $785 million in Lehman debt, caused a run on money-market funds after its net asset value fell below $1 a share on Sept. 16, 2008, the day after Lehman filed the biggest bankruptcy in history. The failure of Reserve, the first money fund in 14 years to “break the buck,” contributed to a global financial crisis.
The SEC sued Reserve, founder and Chief Executive Officer Bruce R. Bent and his son, President Bruce Bent II, in May 2009. 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 fund.
The commission seeks disgorgement of unspecified ill-gotten gains, a civil fine and an order barring the defendants from violating the securities laws in the future. The parties are scheduled today to select a jury in Manhattan federal court at the start of what the parties say may be a three-week trial.
A lawyer for Reserve, John Dellaportas, told U.S. District Judge Paul Gardephe in September that he was hopeful of reaching a settlement with the SEC.
The SEC accuses the Bents of distorting the condition of the fund just as Lehman Brothers’ bankruptcy filing was roiling the U.S. financial markets.
“Defendants engaged in a systematic campaign to deceive the investing public into believing that the Primary Fund -- their flagship money market fund -- was safe and secure despite its substantial Lehman holdings,” the SEC said in its complaint.
The Bents and their New York-based firm deny they made false or misleading statements and say that the Lehman bankruptcy precipitated a wave of redemptions by investors that continued through the following day.
“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.”
Among Gardephe’s pretrial rulings is one barring both sides from introducing evidence of how much investors lost in fund’s collapse. 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 case is SEC v. Reserve Management Co. Inc. 09-cv-04346, U.S. District Court, Southern District of New York (Manhattan).