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Thursday, January 15, 2009 3:22:59 PM
Filing Accuses Reserve Fund Executives of Lying By DIANA B. HENRIQUES - Published: January 15, 2009
State regulators in Massachusetts have accused top executives of the Reserve Fund of lying to shareholders about the safety of their investments hours before the firm’s largest money fund disclosed that its share price had fallen below a dollar — and then giving big shareholders first crack at avoiding losses.
The blunt accusations were made in an administrative complaint filed this week by William F. Galvin, the secretary of the Commonwealth and the senior securities regulator in Massachusetts. They expand on claims already made in a shareholder lawsuit in federal court in Minneapolis, and may explain why the enforcement staff at the Securities and Exchange Commission has recommended a full-scale investigation of the Reserve’s complex management.
The episode attracting all this regulatory attention began early on Monday, Sept. 15, when the investment bank Lehman Brothers filed for bankruptcy protection. It ended late the next day, when the Reserve’s Primary Fund — blaming losses on its Lehman holdings — reported a value of 97 cents a share and became only the second money fund ever to “break the buck.”
Investors were shaken by the news and, within days, withdrew hundreds of millions of dollars from money funds, forcing the federal government to set up an ad hoc insurance program to calm panicky shareholders and prevent the complete evaporation of short-term corporate credit.
According to Mr. Galvin’s complaint, the Reserve Fund’s managers began to deceive shareholders about the potential impact of the Lehman bankruptcy within hours of its announcement. The Reserve Fund has declined to comment.
The Reserve Primary Fund held about $785 million in Lehman notes at the time of the bankruptcy filing, or about 1.2 percent of its portfolio. When shareholders raised questions about the Lehman stake, Reserve fund executives assured them that the fund would not break the buck and that redemptions would be honored on a “first-come, first-served” basis.
Those assurances, according to the Galvin complaint, “contained outright falsities which the principles of Reserve Management knew at the time were not true.”
According to the complaint, the lies included a claim on Sept. 15 that the Reserve was already negotiating with the S.E.C. over a plan to support the fund’s share price at a dollar. That claim was made by Bruce R. Bent II, the Reserve chairman’s son and a senior management executive, in a midday e-mail message that was widely circulated by the Reserve sales force and in a statement posted on the Reserve Web site on Tuesday, Sept. 16.
There was no such support plan and negotiations with federal regulators consisted of a single inconclusive telephone call on Sept. 15 that lasted about five minutes, according to the complaint, whose exhibits include copies of the e-mail messages and sales literature.
Nor did the fund honor redemptions in the order they were received, according to the complaint. Instead, it claims, fund managers “deviated dramatically from that paradigm,” and satisfied requests from “larger favored clients” before requests from smaller clients.
After the Primary fund broke the buck, the Reserve complex was forced to freeze all redemptions and began liquidating most of its money funds. Tens of thousands of investors are still waiting for final distributions from those liquidations.
http://www.nytimes.com/2009/01/16/business/economy/16fund.html?ref=business
George.
State regulators in Massachusetts have accused top executives of the Reserve Fund of lying to shareholders about the safety of their investments hours before the firm’s largest money fund disclosed that its share price had fallen below a dollar — and then giving big shareholders first crack at avoiding losses.
The blunt accusations were made in an administrative complaint filed this week by William F. Galvin, the secretary of the Commonwealth and the senior securities regulator in Massachusetts. They expand on claims already made in a shareholder lawsuit in federal court in Minneapolis, and may explain why the enforcement staff at the Securities and Exchange Commission has recommended a full-scale investigation of the Reserve’s complex management.
The episode attracting all this regulatory attention began early on Monday, Sept. 15, when the investment bank Lehman Brothers filed for bankruptcy protection. It ended late the next day, when the Reserve’s Primary Fund — blaming losses on its Lehman holdings — reported a value of 97 cents a share and became only the second money fund ever to “break the buck.”
Investors were shaken by the news and, within days, withdrew hundreds of millions of dollars from money funds, forcing the federal government to set up an ad hoc insurance program to calm panicky shareholders and prevent the complete evaporation of short-term corporate credit.
According to Mr. Galvin’s complaint, the Reserve Fund’s managers began to deceive shareholders about the potential impact of the Lehman bankruptcy within hours of its announcement. The Reserve Fund has declined to comment.
The Reserve Primary Fund held about $785 million in Lehman notes at the time of the bankruptcy filing, or about 1.2 percent of its portfolio. When shareholders raised questions about the Lehman stake, Reserve fund executives assured them that the fund would not break the buck and that redemptions would be honored on a “first-come, first-served” basis.
Those assurances, according to the Galvin complaint, “contained outright falsities which the principles of Reserve Management knew at the time were not true.”
According to the complaint, the lies included a claim on Sept. 15 that the Reserve was already negotiating with the S.E.C. over a plan to support the fund’s share price at a dollar. That claim was made by Bruce R. Bent II, the Reserve chairman’s son and a senior management executive, in a midday e-mail message that was widely circulated by the Reserve sales force and in a statement posted on the Reserve Web site on Tuesday, Sept. 16.
There was no such support plan and negotiations with federal regulators consisted of a single inconclusive telephone call on Sept. 15 that lasted about five minutes, according to the complaint, whose exhibits include copies of the e-mail messages and sales literature.
Nor did the fund honor redemptions in the order they were received, according to the complaint. Instead, it claims, fund managers “deviated dramatically from that paradigm,” and satisfied requests from “larger favored clients” before requests from smaller clients.
After the Primary fund broke the buck, the Reserve complex was forced to freeze all redemptions and began liquidating most of its money funds. Tens of thousands of investors are still waiting for final distributions from those liquidations.
http://www.nytimes.com/2009/01/16/business/economy/16fund.html?ref=business
George.
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