Reserve Primary Fund, the failed $62.5 billion money-marketfund, misled shareholders about the safety of its fund after itlost money on Lehman Brothers Holdings Inc. debt, a governmentlawyer told a jury.

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 the globalfinancial crisis.

The U.S. Securities and Exchange Commission 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 ofviolating federal securities laws by making misleading statementsto investors and trustees in the run-up to the collapse of thefund.

“What this case is about is how the Bents, Mr. Bent Sr. and Mr.Bent II, defrauded investors on Sept. 15 and Sept. 16, 2008,” SEClawyer Nancy Brown told a nine-person jury in her opening statementyesterday in Manhattan federal court.

Brown told jurors that the Bents lied on the morning afterLehman announced its bankruptcy, falsely telling investors,regulators and the fund's trustees that they would use money fromtheir firm, Reserve Management Co., to support the $1 net assetvalue of fund shares.

The commission seeks disgorgement of unspecified ill-gottengains, a civil fine and an order barring the defendants fromviolating the securities laws in the future.

John Dellaportas, a lawyer for the Bents and the company, toldjurors in his opening statement that his clients didn't lie ordefraud investors.

He said the trial is about a 12-hour period when Lehman filedfor bankruptcy and the Bents decided they didn't have enough moneyto cover a $785 million shortfall.

“The whole world changed between Monday and Tuesday and the SECsays, 'You're lying,'” Dellaportas said.

He told the jury that both Bents will testify and explain whatoccurred and what they were thinking during these two days.

'Reasonable Care'

“We are going to tell you nobody committed any fraud here andpeople executed their jobs with reasonable care,” Dellaportassaid.

The father and son believed “sufficient capital could be madeavailable,” he said. “Did they know on 1 p.m. on Monday Sept. 15that the world economy was going to collapse?”

The lawyer read to jurors excerpts of statements he said weremade by then SEC-Chairman Christopher Cox on that day regarding thehealth of the economy and the impact Lehman's bankruptcy would haveupon the markets.

“The market seems to be reasonably resilient,” Dellaportasquoted Cox as saying. “The market mechanisms continue to work asthey're supposed to.”

U.S. District Judge Paul Gardephe told the jury he expects thetrial will take three weeks.

Among Gardephe's pretrial rulings is one barring both sides fromintroducing evidence of how much investors lost in the fund'scollapse. The defendants had argued they should be permitted tointroduce evidence demonstrating that investors recouped “most” oftheir 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).

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