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SEC charges operators of Reserve Primary Fund with fraud

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The Securities and Exchange Commission has filed civil fraud charges against the operators of the Reserve Primary Fund, the money market fund that

The Securities and Exchange Commission has filed civil fraud charges against the operators of the Reserve Primary Fund, the money market fund that hit the headlines back in September after it ‘broke the buck’.

The civil suit filed in a US district Court in Manhattan alleges that the Reserve Management Company, Inc (RMCI), its Chairman Bruce Bent Sr, its Vice Chairman and President Bruce Bent II, and Resrv Partners, Inc, failed to provide key material information to investors, the fund’s board of trustees, and rating agencies as Lehman Brothers filed for bankruptcy protection on September 15.

The fund, which held USD785 million in Lehman-issued securities, became illiquid when it was unable to meet investor requests for redemptions and ‘broke the buck’ the following day, when its net asset value fell below USD1 per share, meaning investors in the money market fund would lose money.

According to the SEC’s complaint, the defendants misrepresented that RMCI would provide the credit support necessary to protect the USD1 net asset value of the Primary Fund when, in fact, RMCI had no such intention.

“As we alleged in our complaint, the fund’s managers turned a blind eye to investors and the reality of the situation at hand before the fund broke the buck last September,” says SEC Chairman Mary L Schapiro. “We’re taking the lead in this matter because we want to get money back into the pockets of the investors as quickly as possible, Through this action, we hope to avoid inconsistent rulings regarding a finite pool of money and assure a fair result.”

The SEC alleges that RMCI significantly understated the volume of redemption requests received by the fund and failed to provide the trustees with accurate information concerning the value of Lehman securities. Because of these misrepresentations and omissions, the fund was unable to strike a meaningful hourly net asset value as required by the fund’s prospectus.

The SEC’s complaint seeks a final judgment ordering the defendants to pay financial penalties and disgorgement of ill-gotten gains plus prejudgment interest, and enjoining them from future violations of the federal securities laws.

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