Bruce R. Bent II, president of the failed $62.5 billion Reserve Primary money-market fund, was found negligent by a jury on one claim of violating a securities law while his father was absolved of all claims in a lawsuit by the U.S. Securities and Exchange Commission.
The federal panel of six women and one man in Manhattan yesterday cleared both Bents on claims they defrauded investors and the younger Bent on six of seven claims brought by regulators. His father, Bruce R. Bent, was cleared on all four claims against him, including that he “knowingly and recklessly violated” U.S. securities law and “aided and abetted” the company and corporate entities in violating them.
The SEC sued the Bents, their investment advisory firm Reserve Management Co. and Resrv Partners Inc. in 2009, alleging they had defrauded customers by falsely claiming they would support the fund financially when it faced a run by investors after Lehman Brothers Holdings Inc.’s 2008 bankruptcy.
The fund held $785 million in Lehman debt on Sept. 15, 2008, the day Lehman filed the biggest bankruptcy in history, causing the run on the fund and triggering its failure the following day when it “broke the buck” by failing to maintain a $1-a-share net asset value, or NAV.
The SEC alleged the Bents lied on the morning after Lehman announced its bankruptcy, falsely telling investors, regulators and the fund’s trustees that they would use money from their firm, Reserve Management, to support the $1 net asset value of fund shares. The elder Bent was vacationing in Europe when Lehman collapsed.
After 2½ days of deliberations, the jury yesterday found that RMCI and Resrv Partners “knowingly and recklessly” violated federal securities laws and that RMCI had acted “negligently” and violated a federal law regulating investment advisers. The panel also found Bruce Bent II hadn’t participated in the recklessness of the entities.
One juror, Samantha Chinn, said after the verdict that the panel concluded there wasn’t enough evidence against Bruce R. Bent to find he’d acted negligently or recklessly, citing the fact that he wasn’t even in the U.S. when Lehman collapsed.
Testimony from both Bent and his son showed the elder Bent was vacationing with his wife in Italy, celebrating their 40th wedding anniversary when the crisis erupted.
“He was a man, with a cell phone, in a foreign country,” Chinn, a lawyer from Manhattan’s Upper West Side, said in an interview after court.
John Dellaportas, a lawyer for the Bents and the company, told jurors in his closing statements that his clients didn’t lie or defraud investors. He blamed the Lehman bankruptcy and an unprecedented freeze in the credit markets for Reserve’s failure. The Bents believed they would be able to raise money to maintain the $1 NAV and pay investors’ redemption requests, he said.
Jurors said yesterday the turmoil in the wake of Lehman’s bankruptcy gave them pause in determining what was reckless and what was intentional.
“There were a lot of people who had opinions about the fund during the 24 to 48 hours after Lehman’s collapse that things were going to get better,” Chinn said. “That being said, if you work at a big company, mistakes get made was my basic thought.”
Alexander Janghorbani, an SEC lawyer, told the jury in closing arguments on Nov. 7 that the Bents were trying to buy time, telling investors, fund trustees, rating companies and the press that they would protect the $1 NAV “to whatever degree is necessary.”
What the Bents meant was “we hope we’ll be able to give your money back,” Janghorbani said. Investors in the Primary Fund had redeemed $16.5 billion by 1 p.m. on Sept. 15, 2008, he said, arguing that the Bents “fully appreciated the magnitude of the disaster.”
Juror Katherine Strock, a graphic designer from Manhattan, said that the panel found Bruce Bent II had acted negligently regarding the statement the firm posted on its website.
“He definitely held some responsibility for that,” Strock said. “It was so important because that statement went out to the investing public.”
Both jurors said while the panel considered the chaos in the wake of Lehman’s collapse, they found in favor of the SEC that RMCI and Resrv Partners were negligent for acting “knowingly and recklessly” to violate securities law because officers at the companies should have been more careful.
“There was a lot slipping through the cracks,” Strock said. “Yes it was Bruce Bent II’s responsibility but the staff was making mistakes and he was making mistakes, so it was compounded. That’s the reason why we came to negligence, they all should have been more careful.”
The elder Bent wasn’t in court yesterday.
“I wanted to thank the jury for all their time and attention,” Bruce Bent II said in an interview after court. “We are very pleased that my father and I have been completely cleared of any fraud whatsoever.”
Yesterday’s verdict allows the SEC to impose penalties. Dellaportas said he was assessing whether challenge any SEC penalties and to appeal the jury’s finding that Bruce Bent II, the Resrv Partners or RMCI were negligent.
“We are considering making an appeal regarding the potential inconsistencies” of the jury’s verdict, Dellaportas told U.S. District Judge Paul Gardephe, who presided over the case. “We want the opportunity to review it,” Dellaportas said.
Both Bents testified in their own defense in the trial, which began Oct. 9. 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.
“Today’s verdict of liability sends the message that fund executives cannot withhold from investors and trustees key information about their fund’s vulnerability,” Robert Khuzami, director of the SEC’s Division of Enforcement, said yesterday in a statement. “This case, along with our actions against more than 100 other entities and individuals, demonstrates our continuing commitment to pursuing cases arising out of the financial crisis.”
Mark Arena, a spokesman for the Reserve Fund, said the sole intention of the Bents was to safeguard the interests of investors during this volatile period.
“What transpired over those unprecedented 36 hours back in September 2008, following the collapse of Lehman was something we and the entire world financial market, had never experienced,” Arena said in a statement. “We are proud that, through our efforts, Fund investors ultimately received back more than 99 cents on every dollar invested in September 2008.”
Bent, 75, is credited with inventing the retail money-market mutual fund and was known for criticizing rivals for taking excessive risk. He has said the best money funds should be “boring.”
The fund’s closure sparked an investor run on other money funds eligible to buy corporate debt. As other funds scrambled to sell holdings to meet redemptions, global credit markets froze. The panic abated only after the U.S. Treasury guaranteed money fund shareholders against default for a year and the Federal Reserve began financing the purchase of fund holdings at face value.
The fallout also prompted a debate that is still unresolved among regulators and industry executives over whether money market funds pose a threat to the stability of financial markets.
The SEC enacted new rules in 2010, creating liquidity minimums, imposing shorter ceilings on the average maturity of holdings, tightening credit standards and forcing the funds to disclose more information on holdings.
The Financial Stability Oversight Council, a group formed by the Dodd-Frank Act and charged with addressing systemic financial risks, is scheduled tomorrow to consider a draft of additional recommended reform options for the SEC.
The case is SEC v. Reserve Management Co., 09-cv-04346, U.S. District Court, Southern District of New York (Manhattan).