Bruce R. Bent II, president of the failed $62.5 billion ReservePrimary money-market fund, was found negligent by a jury on oneclaim of violating a securities law while his father was absolvedof all claims in a lawsuit by the U.S. Securities and ExchangeCommission.

The federal panel of six women and one man in Manhattanyesterday cleared both Bents on claims they defrauded investors andthe younger Bent on six of seven claims brought by regulators. Hisfather, 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 corporateentities in violating them.

The SEC sued the Bents, their investment advisory firm ReserveManagement Co. and Resrv Partners Inc. in 2009, alleging they haddefrauded customers by falsely claiming they would support the fundfinancially when it faced a run by investors after Lehman BrothersHoldings Inc.'s 2008 bankruptcy.

The fund held $785 million in Lehman debt on Sept. 15, 2008, theday Lehman filed the biggest bankruptcy in history, causing the runon the fund and triggering its failure the following day when it“broke the buck” by failing to maintain a $1-a-share net assetvalue, or NAV.

The SEC alleged the Bents lied on the morning after Lehmanannounced its bankruptcy, falsely telling investors, regulators andthe fund's trustees that they would use money from their firm,Reserve Management, to support the $1 net asset value of fundshares. The elder Bent was vacationing in Europe when Lehmancollapsed.

After 2½ days of deliberations, the jury yesterdayfound that RMCI and Resrv Partners “knowingly and recklessly”violated federal securities laws and that RMCI had acted“negligently” and violated a federal law regulating investmentadvisers. The panel also found Bruce Bent II hadn't participated inthe recklessness of the entities.

One juror, Samantha Chinn, said after the verdict that the panelconcluded there wasn't enough evidence against Bruce R. Bent tofind he'd acted negligently or recklessly, citing the fact that hewasn't even in the U.S. when Lehman collapsed.

Testimony from both Bent and his son showed the elder Bent wasvacationing with his wife in Italy, celebrating their 40th weddinganniversary 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 interviewafter court.

Redemption Requests

John Dellaportas, a lawyer for the Bents and the company, toldjurors in his closing statements that his clients didn't lie ordefraud investors. He blamed the Lehman bankruptcy and anunprecedented freeze in the credit markets for Reserve's failure.The Bents believed they would be able to raise money to maintainthe $1 NAV and pay investors' redemption requests, he said.

Jurors said yesterday the turmoil in the wake of Lehman'sbankruptcy gave them pause in determining what was reckless andwhat was intentional.

“There were a lot of people who had opinions about the fundduring the 24 to 48 hours after Lehman's collapse that things weregoing to get better,” Chinn said. “That being said, if you work ata big company, mistakes get made was my basic thought.”

Alexander Janghorbani, an SEC lawyer, told the jury in closingarguments on Nov. 7 that the Bents were trying to buy time, tellinginvestors, fund trustees, rating companies and the press that theywould protect the $1 NAV “to whatever degree is necessary.”

What the Bents meant was “we hope we'll be able to give yourmoney back,” Janghorbani said. Investors in the Primary Fund hadredeemed $16.5 billion by 1 p.m. on Sept. 15, 2008, he said,arguing that the Bents “fully appreciated the magnitude of thedisaster.”

Juror Katherine Strock, a graphic designer from Manhattan, saidthat the panel found Bruce Bent II had acted negligently regardingthe 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 theinvesting public.”

Both jurors said while the panel considered the chaos in thewake of Lehman's collapse, they found in favor of the SEC that RMCIand Resrv Partners were negligent for acting “knowingly andrecklessly” to violate securities law because officers at thecompanies should have been more careful.

'Making Mistakes'

“There was a lot slipping through the cracks,” Strock said. “Yesit was Bruce Bent II's responsibility but the staff was makingmistakes and he was making mistakes, so it was compounded. That'sthe reason why we came to negligence, they all should have beenmore 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 verypleased that my father and I have been completely cleared of anyfraud whatsoever.”

Yesterday's verdict allows the SEC to impose penalties.Dellaportas said he was assessing whether challenge any SECpenalties and to appeal the jury's finding that Bruce Bent II, theResrv Partners or RMCI were negligent.

“We are considering making an appeal regarding the potentialinconsistencies” of the jury's verdict, Dellaportas told U.S.District Judge Paul Gardephe, who presided over the case. “We wantthe opportunity to review it,” Dellaportas said.

Both Bents testified in their own defense in the trial, whichbegan Oct. 9. The commission seeks disgorgement of unspecifiedill-gotten gains, a civil fine and an order barring the defendantsfrom violating the securities laws in the future.

“Today's verdict of liability sends the message that fundexecutives cannot withhold from investors and trustees keyinformation about their fund's vulnerability,” Robert Khuzami,director of the SEC's Division of Enforcement, said yesterday in astatement. “This case, along with our actions against more than 100other entities and individuals, demonstrates our continuingcommitment to pursuing cases arising out of the financialcrisis.”

Mark Arena, a spokesman for the Reserve Fund, said the soleintention of the Bents was to safeguard the interests of investorsduring this volatile period.

“What transpired over those unprecedented 36 hours back inSeptember 2008, following the collapse of Lehman was something weand 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 everydollar invested in September 2008.”

'Boring' Funds

Bent, 75, is credited with inventing the retail money-marketmutual fund and was known for criticizing rivals for takingexcessive risk. He has said the best money funds should be“boring.”

The fund's closure sparked an investor run on other money fundseligible to buy corporate debt. As other funds scrambled to sellholdings to meet redemptions, global credit markets froze. Thepanic abated only after the U.S. Treasury guaranteed money fundshareholders against default for a year and the Federal Reservebegan financing the purchase of fund holdings at face value.

The fallout also prompted a debate that is still unresolvedamong regulators and industry executives over whether money marketfunds 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 moreinformation on holdings.

The Financial Stability Oversight Council, a group formed by theDodd-Frank Act and charged with addressing systemic financialrisks, is scheduled tomorrow to consider a draft of additionalrecommended 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).

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