SEC accuses Reserve Management, top execs of fraud in ‘breaking buck’ incident

SEC accuses Reserve Management, top execs of fraud

WASHINGTON — Federal regulators on Tuesday accused Reserve Management Co. Inc. and its two top executives of fraud, saying they withheld key facts from investors when its big money-market fund “broke the buck” last fall.

The Securities and Exchange Commission filed a civil complaint against Reserve Management, its chairman Bruce Bent Sr., 71, and its vice chairman and president Bruce Bent II, who is 42. The SEC said the pair failed to provide “key material facts” about the shaky situation of Reserve’s Primary Fund after Lehman Brothers filed for bankruptcy protection in September.

New York-based Reserve Management said it “intends to defend itself vigorously” against the SEC’s allegations. “We are hopeful that this matter can be resolved quickly,” Bruce Bent Sr. said in a statement issued by the company.

The $60 billion Primary Fund “broke the buck” when the value of its assets fell to 97 cents per investor dollar put in — below the dollar-for-dollar level needed to fully repay investors. The company has said it now expects investors could receive an estimated 91.7 cents for every dollar they put in to the fund.

The SEC is seeking unspecified civil fines and restitution from Reserve Management and the two executives.

The SEC said it also seeks to expedite the distribution of the Primary Fund’s remaining assets to investors.

The agency named the fund as a relief defendant, not accused of any wrongdoing but alleged to have received illegal profits from the scheme.

The Primary Fund, established in 1970, was the first U.S. money fund. Its collapse in September was one in a cascading series of troubling events in the financial meltdown. It marked only the second time since 1994 that a money-market fund broke the buck. For nearly four decades, they have been available as an investment considered safe and readily turned into cash while earning a modest return.

After the latest $2.3 billion distribution announced April 17, about $46 billion, or about 90 percent of fund assets, had been returned to investors, the company said last month.

The fund’s trustees said in a statement Tuesday that they will continue to cooperate with the SEC “to expedite the distribution of the remaining assets to shareholders and to ensure that all decisions are made in the shareholders’ best interest.”

A spokeswoman for TD Ameritrade Holding Corp., one of two brokerage firms that have told customers they will cover losses from the Primary Fund, said Tuesday the company was reviewing the SEC’s complaint.

“This is something that we intend to follow very closely,” said spokeswoman Kim Hillyer. Omaha, Neb.-based TD Ameritrade has said it will cover up to $50 million of losses in the fallen fund.

Spokesmen for the other brokerage, Ameriprise Financial Inc., didn’t immediately return a telephone call seeking comment.

The “breaking of the buck” stoked fears over the safety of the nearly $4 trillion in assets held in money-market mutual funds in the U.S.

In the wake of the episode, the SEC is considering how regulation of money-market funds could be tightened to better protect investors, agency chief Mary Schapiro said Monday in an address to a mutual fund directors’ group.

The SEC alleged, in its complaint filed in federal court in Manhattan, that Reserve Management and the executives misrepresented when the company would provide the credit needed to protect the net asset value of the fund when it actually had no intention to do so. The agency also said the company “significantly understated” the volume of requests from investors to withdraw from the fund and failed to provide the fund’s trustees with accurate information on the value of Lehman securities.

In January, Massachusetts Secretary of State William Galvin alleged that Reserve Management sales employees were directed by managers to reassure investors that they couldn’t lose money, despite the firm’s investment in Lehman Brothers. Colorado’s securities commissioner has accused the Primary Fund of violating the state’s anti-fraud provisions.

Reserve Management also faces several investor lawsuits. The Primary Fund has set aside a $3.5 billion reserve to cover litigation costs and damages, which reduces the ultimate payout to investors.

After Lehman Brothers filed for bankruptcy protection on Sept. 15, Reserve Management board declared its $785 million investment in the investment bank’s debt worthless. That triggered a rush of orders from institutional clients to pull money out, gutting the fund’s value as its managers were forced to sell assets amid sharply declining markets.

The next day, Reserve Management said the Primary Fund had “broken the buck.” The Treasury Department stepped in with a temporary program to guarantee money-market funds, but the Primary Fund didn’t qualify and had to liquidate.

“Since we created the money fund in 1970, we have operated and grown our business by putting our shareholders’ interests first,” Bruce Bent Sr. said Tuesday. “The Lehman Brothers bankruptcy filing created an unforeseeable and out-of-control condition for many parties and the results were serious. 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.”