The Securities and Exchange Commission has won a partial victory in a prominent case arising from the global financial crisis.
A federal jury found Monday that Reserve Management Co., the investment firm running the Reserve Primary Fund money-market fund, violated civil securities fraud laws. But the jury cleared the firm's well-known chairman of wrongdoing.
The SEC accused Bruce Bent Sr., a Wall Street legend who created the first money-market fund, of fraud for allegedly deceiving investors about the risks facing the Reserve Fund after the September 2008 collapse of Lehman Bros. The agency also alleged wrongdoing by his son, Bruce Bent II, the investment firm that managed the fund and the brokerage firm that handled its trades.
The $62-billion Reserve Fund fell below $1 per share – breaking the buck, in Wall Street vernacular – when its $785 million in Lehman debt was rendered worthless in the bankruptcy.
The surprise loss in the bellwether fund forced the federal government to extend a form of deposit insurance to investors in all money-market funds. The SEC worried that the Reserve Fund loss would lead to a run on the industry by shattering the confidence of small investors who view money funds as super-safe.
The jury found that Reserve Management and a related brokerage operation, Resrv Partners Inc., violated civil-securities fraud laws. The jury found Bruce Bent II liable for one negligence claim.
“Today's verdict of liability sends the message that fund executives cannot withhold from investors and trustees key information about their fund’s vulnerability,” Robert Khuzami, the agency’s enforcement director, said in a statement. “This case, along with our actions against more than 100 other entities and individuals, demonstrates our continuing commitment to pursuing cases arising out of the financial crisis.”
SEC chief Mary L. Schapiro was thwarted recently in her effort to reform money funds, including allowing fund prices to float in value rather than remain fixed at $1 per share. The industry strenuously opposed the plan.
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