Reuters: Regulatory News: Reserve Primary Fund founder fails to end SEC fraud case

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Reserve Primary Fund founder fails to end SEC fraud case Mar 29th 2012, 20:23 Thu Mar 29, 2012 4:23pm EDT * SEC says defendants fraudulently blocked redemptions * Reserve Primary broke the buck after Lehman bankruptcy * Fund once held $62 billion By Jonathan Stempel March 29 (Reuters) - Managers of the Reserve Primary Fund lost their bid to dismiss a U.S. Securities and Exchange Commission civil fraud lawsuit on Thursday, perhaps foreshadowing a trial over a major cause of the 2008 financial crisis. U.S. District Judge Paul Gardephe in Manhattan on Thursday issued an order denying the requests of Reserve Management Co and its co-founder Bruce Bent Sr. to end the SEC case over the money market fund, which once invested $62 billion. He rejected an SEC request for a finding of liability. The judge also directed the SEC and the defendants to advise by April 6 "what outstanding issues must be resolved before this case proceeds to trial." A conference is scheduled for April 9. "We're pleased with the court's ruling and look forward to proving our case," SEC spokesman John Nester said. Fran Jacobs, a lawyer for the defendants, did not immediately respond to a request for comment. The SEC accused Reserve, Bent and a son of fraudulently dissuading nervous investors from redeeming shares in Reserve Primary on Sept. 15-16, 2008, hours after Lehman Brothers Holdings Inc had gone bankrupt, and representing that the fund was safe. Instead, Reserve Primary became the second money fund to fall below $1 per share, known as "breaking the buck," when its share price dropped to 97 cents on Sept. 16, 2008. The fund had held $785 million of Lehman debt. Its collapse was a key driver of the credit market seizure that followed Lehman's demise. New regulations have since reduced the credit and maturity risks that money funds may take. By January 2010, Reserve said it had distributed nearly all of the $50.5 billion left in Reserve Primary after Lehman's bankruptcy. Investors recovered about 99 cents on the dollar. In a court filing, Reserve and the Bents said any statements they may have made to induce investors to hold onto their shares were neither material nor made with fraudulent intent. They also said there are no ill-gotten gains to recover, and that an injunction is not needed to prevent a recurrence. The SEC disagreed. "What happened on September 15 and 16 was not an isolated, uncharacteristic lapse of long-standing compliance; it was just another -- much more serious -- instance of defendants' disregard for their obligations to abide by the securities laws," it said in another court filing. The case is SEC v. Reserve Management Co et al, U.S. District Court, Southern District of New York, No. 09-04346. Link this Share this Digg this Email Reprints

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