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U.S. Role in Lehman Collapse Allowed in Reserve Trial

The U.S. government’s role in the collapse of Lehman Brothers Holdings Inc. will be allowed as evidence in the Oct. 9 trial over allegations that Reserve Primary Fund misled investors in 2008, a federal judge in Manhattan ruled.

The company will be permitted to present evidence that its confidence in Lehman’s finances were based in part on the U.S. Securities Exchange Commission’s oversight of the investment bank under a voluntary regulatory program, according to the decision by U.S. District Judge Paul Gardephe.

A trial is scheduled to begin Oct. 9 in the SEC’s case alleging that the company misled investors about the safety of the fund after it suffered losses in Lehman investments. The fund, which held $785 million in debt issued by Lehman, became the first money fund in 14 years to expose investors to losses when Lehman filed for bankruptcy protection in September 2008.

“Defendants intend to argue that Bent Sr. believed that Lehman’s financial reports were sound, and this belief was critical to his state of mind on September 15 and 16,” Gardephe said in his ruling, referring to Reserve Partners founder and Chief Executive Officer Bruce R. Bent, who is a defendant along with his son, Bruce Bent II.

Bailout Programs

The judge excluded evidence regarding government actions following Lehman’s bankruptcy filing and the beginning of Reserve Primary Fund’s collapse, including government bailout programs and the SEC’s investigation of Lehman and other financial firms.

Reserve’s net asset value fell below $1 per share on Sept. 16, 2008, a day after Lehman sought Chapter 11 bankruptcy protection, making investors vulnerable to losses and triggering a run on money-market funds that worsened the global financial crisis.

John Dellaportas, a lawyer for the defendants, and SEC attorney Nancy A. Brown didn’t immediately return calls for comment on the ruling.

The case is SEC v. Reserve Management Co. Inc. 09-cv-04346, Southern District of New York (Manhattan).

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