The lawsuit filed by Securities and Exchange Commission against the founder of Reserve Primary Fund and his son may spell bad news for the heads of Wall Street firms that failed or had to take additional government assistance last year or the early months of this year.
The lawsuit accuses the two men of fraud in misleading investors, ratings firms and trustees when they issued reassuring statements in the wake of the collapse of Lehman Brothers. When Lehman collapsed, the Primary Fund had held $785 million in Lehman commercial paper, which amounted to about 1.2% of its holdings. That paper became worthless when Lehman declared bankruptcy. Fears over the fund’s financial health sparked a run on the fund, causing it to “break the buck.” Eventually, the government guaranteed money market funds to stem such runs.
In a statement, the elder Mr. Bent said, “Our management worked extremely hard throughout the chaotic and fast-moving events of September 15-16 and we remain confident that we acted in the best interest of our shareholders. We are hopeful that this matter can be resolved quickly.”
The fund’s manager, Reserve Management Co., which is also named in the lawsuit, said it “intends to defend itself vigorously.”
The SEC lawsuit accuses the two men of falsely assuring the funds’ investors and trustees that Reserve Management, which is controlled by the Bent family, had ample resources to support the loss of the Lehman paper and maintain the fund’s $1 net-asset value.
“Their decision to announce unqualified financial support for the Primary Fund was driven by a desire to falsely reassure shareholders that the Fund remained safe, thus slowing the rate of redemptions, and a desire to placate Moody’s and Standard & Poor’s, thus avoiding a calamitous ratings downgrade,” the lawsuit states.
Of course, the Bent’s weren’t the only firms to talk up their health in the midst of the financial crisis. Bear Stearns’ Alan Schwartz and Lehman Brothers’ Dick Fuld made similar statements, for instance. The case against the Reserve Primary Fund executives will likely be watched closely by these men, as it could provide an insight into a future case against them.