A major money market firm and its top managers have been charged with fraud by federal securities regulators 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 bankruptcy of Lehman Bros. 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 resorted to deception in an effort to halt a run of withdrawals by Primary fund investors. The SEC charged that:
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 alleged campaign involved “knowing dissemination” of false information to the fund’s board of trustees, investors and rating agencies … 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. On September 16th, one day after the bankruptcy, 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 that is supposed to feature investor safety.
The SEC requested that a federal judge 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.
Source: USA Today
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