A New York federal judge ruled Wednesday that the Securities and Exchange Commission’s lawsuit against Reserve Management, its founder, Bruce Bent, Sr., and his son, Bruce Bent II, can proceed since the SEC adequately proved they committed fraud through misstatements and omissions of facts about the flagship Primary Fund.
At the next conference on the case, Securities and Exchange Commission v. Reserve Management Co. et al, on March 23, the court will determine whether a settlement is possible.
The SEC has charged the money market fund, which held $62 billion in assets before it broke the buck in Sept. 15, 2008, of failing to disclose to investors, the board and rating agencies information about potentially risky investments, most notably its $785 million exposure to Lehman Brothers, which was rendered worthless when the investment bank went bankrupt. As a result, the fund’s net asset value fell below $1, there was a run on the fund and Reserve froze assets after some of the largest institutional investors were able to withdraw their money.
U.S. District Court Judge Paul Gardephe said the SEC case was sound. However, he decided not to let the SEC include information on how the Reserve attempted to value the Lehman paper, due to the “chaos and uncertainty” following the bankruptcy.
The SEC’s May 2009 lawsuit against the company said that “in order to persuade investors to refrain from redeeming shares, defendants systematically violated federal securities laws by misrepresenting material facts, most notably by falsely assuring shareholders that Reserve Management [would] provide the fund with sufficient capital to maintain its NAV at $1.00. Rather than comply with their fiduciary obligations, they placed their own financial and reputational interests ahead of the fund and its shareholders."