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Reserve Fund Lied About Losses on Lehman, SEC Lawyer Says

Reserve Primary Fund, the failed $62.5 billion money-market fund, misled shareholders about the safety of its fund after it lost money on Lehman Brothers Holdings Inc. debt, a government lawyer told a jury.

Reserve, which held $785 million in Lehman debt, caused a run on money-market funds after its net asset value fell below $1 a share on Sept. 16, 2008, the day after Lehman filed the biggest bankruptcy in history. The failure of Reserve, the first money fund in 14 years to “break the buck,” contributed to the global financial crisis.

The U.S. Securities and Exchange Commission sued Reserve, founder and Chief Executive Officer Bruce R. Bent and his son, President Bruce Bent II, in May 2009. The SEC accuses the Bents of violating federal securities laws by making misleading statements to investors and trustees in the run-up to the collapse of the fund.

“What this case is about is how the Bents, Mr. Bent Sr. and Mr. Bent II, defrauded investors on Sept. 15 and Sept. 16, 2008,” SEC lawyer Nancy Brown told a nine-person jury in her opening statement yesterday in Manhattan federal court.

Brown told jurors that the Bents lied on the morning after Lehman announced its bankruptcy, falsely telling investors, regulators and the fund’s trustees that they would use money from their firm, Reserve Management Co., to support the $1 net asset value of fund shares.

Ill-Gotten Gains

The commission seeks disgorgement of unspecified ill-gotten gains, a civil fine and an order barring the defendants from violating the securities laws in the future.

John Dellaportas, a lawyer for the Bents and the company, told jurors in his opening statement that his clients didn’t lie or defraud investors.

He said the trial is about a 12-hour period when Lehman filed for bankruptcy and the Bents decided they didn’t have enough money to cover a $785 million shortfall.

“The whole world changed between Monday and Tuesday and the SEC says, ‘You’re lying,’” Dellaportas said.

He told the jury that both Bents will testify and explain what occurred and what they were thinking during these two days.

‘Reasonable Care’

“We are going to tell you nobody committed any fraud here and people executed their jobs with reasonable care,” Dellaportas said.

The father and son believed “sufficient capital could be made available,” he said. “Did they know on 1 p.m. on Monday Sept. 15 that the world economy was going to collapse?”

The lawyer read to jurors excerpts of statements he said were made by then SEC-Chairman Christopher Cox on that day regarding the health of the economy and the impact Lehman’s bankruptcy would have upon the markets.

“The market seems to be reasonably resilient,” Dellaportas quoted Cox as saying. “The market mechanisms continue to work as they’re supposed to.”

U.S. District Judge Paul Gardephe told the jury he expects the trial will take three weeks.

Among Gardephe’s pretrial rulings is one barring both sides from introducing evidence of how much investors lost in the fund’s collapse. The defendants had argued they should be permitted to introduce evidence demonstrating that investors recouped “most” of their investment after the fund’s collapse, demonstrating that “this is not a Madoff situation.”

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

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