Reserve Primary Fund, the failed $62.5 billion money-marketfirm, begins trial today on civil claims by the U.S. Securities andExchange Commission that it misled shareholders about the safety ofits fund after it lost money on Lehman Brothers Holdings Inc.debt.

Reserve, which held $785 million in Lehman debt, caused a run onmoney-market funds after its net asset value fell below $1 a shareon Sept. 16, 2008, the day after Lehman filed the biggestbankruptcy in history. The failure of Reserve, the first money fundin 14 years to “break the buck,” contributed to a global financialcrisis.

The SEC sued Reserve, founder and Chief Executive Officer BruceR. Bent and his son, President Bruce Bent II, in May 2009. The SECaccuses the Bents of violating federal securities laws by makingmisleading statements to investors and trustees in the run-up tothe collapse of the fund.

The commission seeks disgorgement of unspecified ill-gottengains, a civil fine and an order barring the defendants fromviolating the securities laws in the future. The parties arescheduled today to select a jury in Manhattan federal court at thestart of what the parties say may be a three-week trial.

A lawyer for Reserve, John Dellaportas, told U.S. District JudgePaul Gardephe in September that he was hopeful of reaching asettlement with the SEC.

The SEC accuses the Bents of distorting the condition of thefund just as Lehman Brothers' bankruptcy filing was roiling theU.S. financial markets.

'Systematic Campaign'

“Defendants engaged in a systematic campaign to deceive theinvesting public into believing that the Primary Fund — theirflagship money market fund — was safe and secure despite itssubstantial Lehman holdings,” the SEC said in its complaint.

The Bents and their New York-based firm deny they made false ormisleading statements and say that the Lehman bankruptcyprecipitated a wave of redemptions by investors that continuedthrough the following day.

“The enormous number or redemptions, which coincided with aperiod of extreme turmoil in the nation's credit markets, left thefund unable to sell assets sufficient to pay redemptions as theycame due,” Dellaportas said in court papers. “As a result, the fundhad to suspend trading, and thereafter underwent a court-supervisedliquidation.”

Among Gardephe's pretrial rulings is one barring both sides fromintroducing evidence of how much investors lost in fund's collapse.The defendants had argued they should be permitted to introduceevidence demonstrating that investors recouped “most” of theirinvestment after the fund's collapse, demonstrating that “this isnot 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).

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