Firm That Broke the Buck in 2008 Fails to Reach SEC Deal

A tentative settlement between Reserve Primary Fund, the $62.5 billion money-market fund that “broke the buck” and failed in 2008 when its net asset value fell below $1, and the Securities and Exchange Commission has fallen apart, according to a lawyer for the firm.

John Dellaportas, a lawyer for Reserve’s founder and Chief Executive Officer Bruce R. Bent and his son, President Bruce Bent II, told U.S. District Judge Paul Gardephe in New York that the SEC backed out of a proposed settlement last week.

“Much to our surprise, we were informed that, not only had the commission rejected the proposed settlement agreement in principle that had been negotiated between defendants and the SEC staff, but it was also unwilling to settle with defendants on any other terms,” Dellaportas said in the letter, dated Sept. 5 and made public yesterday.

Reserve, which held $785 million in Lehman Brothers Holdings Inc. 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.

In a Sept. 5 letter to Gardephe that was also made public yesterday, SEC lawyer Nancy Brown said, “We write to report that we have been unable to reach a settlement with defendants.”

Penalties, Disgorgement

In a letter to the judge today, Brown asked Gardephe to rule on the SEC’s plan for penalties and disgorgement now that negotiations have ended.

“Contrary to their contention that a settlement had been considered and rejected by the commission, the parties’ negotiations never reached the point at which a proposal was submitted to the commission for its consideration,” Brown wrote in the letter.

Responding to the SEC’s letter, Dellaportas said in a court filing today that SEC staff had told Reserve lawyers that they had reached an agreement in principle.

“The SEC’s latest demands and ever-shifting positions reinforce the need for a conference of all interested parties at the court’s earliest availability,” Dellaportas said in the letter to Gardephe.

SEC Lawsuit

The SEC sued the Bents and two of their companies in May 2009. The SEC accused 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. A federal jury in Manhattan last year cleared Bruce Bent and found Bruce Bent II liable for negligence.

The failed settlement may threaten a separate $54.9 million deal to settle shareholder litigation over Reserve’s failure. That accord must be approved by Gardephe.

“The proposed settlement of the class action benefits investors and we hope it will be approved by the court without delay,” Richard Mahony, a spokesman for the Bents, said yesterday in an e-mailed statement. “We were disappointed that we were not able to resolve the remaining issues in that case.”

Florence Harmon, an SEC spokeswoman, said in an e-mail, “We believe the SEC plan for distributing funds would put more money in the pockets of investors, which is why we have asked the court to decide how best to proceed.”

The SEC case is SEC v. Reserve Management Co., 09-cv-04346, and the shareholder case is Reserve Primary Fund Securities & Derivative Class Action Litigation, 08-cv-08060, U.S. District Court, Southern District of New York (Manhattan).

Before it's here, it's on the Bloomberg Terminal. LEARN MORE