Shareholders filed a lawsuit in U.S. District Court in Manhattan against Reserve Funds' Primary Fund for halting redemption of holdings of $10,000 or more on Tuesday due to the fund falling to 97 cents on the dollar.

The lawsuit faulted the fund for deviating from its stated objective to preserve capital and liquidity but, instead, to pursue higher yields. "This strategy was exemplified by the fund's disastrous and unreasonable concentration of $785 million face value in commercial paper issued by Lehman," the lawsuit said. In the past 37 years, Reserve founder and money market fund pioneer Bruce Bent "always touted that his funds would never hold commercial paper," noted Connie Bugbee, managing editor at iMoneyNet. "But they started to do so a couple of years ago." Now, she said, that has proven to be a fatal move.

A spokeswoman for Reserve declined to comment on the lawsuit or the future of the fund and the firm.

Putnam Investments ClosesPrime Money Market Fund

Putnam Investments announced Thursday that it was liquidating the institutional Putnam Prime Money Market Fund and distributing the fund's assets due to marketwide liquidity issues and high redemptions on Wednesday, rather than to exposure to uncreditworthy investments in AIG, Lehman Brothers or Washington Mutual. The fund has a minimum initial investment of $10 million and maintained a $1 NAV as of Tuesday. "Serious constraints on liquidity in money market instruments created the risk that to process redemptions, the fund would realize losses in selling its securities," Putnam said.

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