A major money market firm and its top managers were charged with fraud by federal securities regulators Tuesday for allegedly concealing key facts from investors as the company’s flagship fund fell below the $1-per-share industry standard last year.
The Securities and Exchange Commission lawsuit accuses Reserve Management, Chairman Bruce Bent Sr. and President Bruce Bent II of running a “campaign of misinformation” about the shaken finances of the firm’s Primary fund after the Sept. 15 Lehman Bros. bankruptcy.
The $62 billion Primary fund at the time held Lehman debt with a face value of $785 million. The SEC charges that Reserve and its executives, trying to halt a run of withdrawals by Primary fund investors, resorted to deception.
“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 charged.
The alleged campaign involved “knowing dissemination” of false information to the fund’s board of trustees, investors and rating agencies, the SEC charged, plus “knowing concealment” of the impact of the Lehman holdings.
Reserve falsely assured investors the firm would protect the fund’s net asset value to “whatever degree is required,” honor withdrawals and get a capital infusion, the SEC charged.
But on Sept. 16, the firm announced the Primary fund had “broken the buck” or fallen below the $1-per-share needed to fully repay investors.
The news rocked money market funds, prompting an emergency federal guarantee of an industry supposed to feature investor safety. Reserve, which has made four distributions to Primary fund investors since Sept. 15, has said shareholders may ultimately receive 91.7 cents for each dollar invested.
The company, which faces similar charges by Colorado and Massachusetts, said it would “defend itself vigorously” from the SEC allegations.
“The Lehman Bros. bankruptcy filing created an unforeseeable and out-of-control condition,” Bruce Bent Sr. said in a statement. “Our management worked extremely hard throughout the chaotic and fast-moving events … and we remain confident that we acted in the best interest of our shareholders.”
The SEC asked a federal judge to order a pro rata distribution to investors of the Primary fund’s remaining holdings. That includes $3.5 billion Reserve has held to defend against investor lawsuits. The SEC also seeks unspecified fines and repayment of improper gains.
Reserve’s independent trustees said they would continue cooperating with the SEC to speed investor repayments.