Senior officials of the Primary Reserve fund, a $63bn US money market fund that imploded last September, were charged with fraud on Tuesday by the Securities and Exchange Commission.Bruce Bent Sr, who founded the Primary Reserve fund in 1970; his son, Bruce Bent II; and their company, Reserve Partners, were accused by the SEC of hiding or failing to provide key facts to investors and trustees in the two days after Lehman Brothers sought bankruptcy protection on September 15.
The fund owned $785m in Lehman debt that became worthless as a result of the bankruptcy. The Reserve eventually told shareholders their investment was worth only 97 cents on the dollar, making the money market fund the first in 14 years to ??break the buck? ?? meaning investors would not get back what they had paid in.
The event triggered a run on money market funds, with investors pulling out $200bn within a few weeks, threatening the funds?? reputation as a safe harbour.
Regulators became extremely concerned because of the funds?? crucial role in the financial system ?? they own 40 per cent of all commercial paper, and provide daily liquidity in the bond markets.
Mary Schapiro, SEC chairman, said: ??The fund??s managers turned a blind eye to investors and the reality of the situation at hand before the fund broke the buck.?
The SEC??s civil fraud complaint said: ??Over a two-day period ... defendants engaged in a systematic campaign to deceive the investing public into believing that the Primary fund ... was safe and secure despite its substantial Lehman holdings.?
Bruce Bent Sr pledged to mount a vigorous defence against the charges. He said the Lehman bankruptcy ??created an unforseeable and out-of-control condition for many parties? and maintained that the company??s management ??acted in the best interest of our shareholders?.
Investors in the fund still have not received most of their money.
The Reserve has used some of the money in the fund to defend itself against 29 lawsuits.
The SEC said it was ??asking the court to enter an order compelling the pro rata distribution of remaining fund assets, which would release a significant amount of money?.
