"Money Fund Managers Are Accused of a Fraud
The Securities and Exchange Commission on Tuesday accused the father-and-son team that operated the Reserve Primary Fund of securities fraud, contending they had lied to investors when the fund “broke the buck” last fall and created a near panic in the money market fund industry.
Bruce Bent Sr. and his son, Bruce Bent II, were charged in a civil lawsuit with “falsely assuring” shareholders, the fund’s board and rating agencies that their flagship fund remained safe and liquid at a time when the bankruptcy of Lehman Brothers had made the fund far more precarious than investors realized.
The Bents “engaged in a systematic campaign to deceive the investing public,” the S.E.C. said in the lawsuit, which was filed in Federal District Court in Manhattan. The government also said that the two men had “placed their own financial and reputation interests ahead of the fund and its shareholders.”
The $62 billion Reserve Primary Fund, founded in 1970, was the nation’s first and one of the largest money market funds. The senior Mr. Bent, who helped invent the money fund concept, was described by the S.E.C. as “the public face” and “a longtime advocate of the safety and stability of money market funds.”
Yet, on Sept. 15, the day Lehman filed for bankruptcy, the Reserve Primary Fund held $785 million in Lehman securities. The government contends that the Bents gave false assurances that they would provide “unqualified financial support” to maintain the fund’s per-share value at a dollar and prevent a “calamitous ratings downgrade.”
A day later, the fund reported a value of 97 cents a share, becoming only the second money fund ever to “break the buck.” This action forced the government to set up an ad hoc insurance program to calm panicky shareholders. In addition, virtually all the money funds operated by Mr. Bent’s management company, the Reserve Management Company, froze shareholder withdrawals, prompting 29 lawsuits from investors seeking the return of their money.
“The fund’s managers turned a blind eye to investors and the reality of the situation at hand before the fund broke the buck last September,” said Mary L. Schapiro, chairwoman of the S.E.C.
In a statement, the senior Mr. Bent said that his company would defend itself vigorously and that the Lehman bankruptcy had “created an unforeseeable and out-of-control condition for many parties and the results were serious. Our management worked extremely hard throughout the chaotic and fast-moving events of Sept. 15-16 and we remain confident we acted in the best interests of our shareholders.”
To resolve a logjam created by the various investor lawsuits, the S.E.C. also sought Tuesday to force the distribution of $3.5 billion that the Bents have been holding in reserve because of litigation against the fund, its trustees and its corporate officers.
The S.E.C. is asking that the $3.5 billion be distributed to investors on a pro-rata basis and is seeking to obtain a ruling in federal court within 60 days. The court has the option of either rejecting or accepting the request of the S.E.C., or devising an alternative plan to distribute the money. If a distribution plan were ordered, it would resolve the outstanding litigation against the Bents and the fund.
Harvey J. Wolkoff, a lawyer with the firm of Ropes & Gray who represents Ameriprise Financial, a financial planning firm that has sued the Reserve Primary Fund, said he was “gratified by the S.E.C.’s actions” in seeking the pro-rata distribution.
“The Reserve Management’s actions were so fraudulent that the only fair thing to do would be to distribute what’s left of the fund on an equal, pro-rata basis, so that all shareholders, large and small, would be treated equally, with the large institutional investors gaining no advantage over the small,” Mr. Wolkoff said.
In its complaint, the government outlines a steady — and increasingly risky — shift in the investment strategy by the Bents. Historically, the Reserve Primary Fund invested in conservative assets, which brought high ratings and allowed the Bents to promise safety and liquidity.
But in 2007 and 2008, the fund began to seek higher yields by buying risky commercial paper from Lehman, Merrill Lynch and Washington Mutual, a move that attracted billions from new shareholders. Unlike other money market funds that are affiliated with large public companies or commercial banks that could inject cash if needed, the Reserve Primary Fund was operated by a private family-owned company.
This meant that investors relied solely on the Bent family’s ability to support the value of the fund.
Yet on the day that Lehman filed for bankruptcy — and shareholders withdrew more than $10 billion and requested redemptions for an additional $10 billion — the Bents did not disclose the fund’s deteriorating financial situation or that State Street Bank in Boston had suspended the fund’s overdraft privileges, the regulatory complaint said.
Instead, in a series of meetings with trustees, in public statements and in information given to the ratings agencies, the Bents “actively fostered the impression that the situation was under control,” according to the complaint.