The Securities & Exchange Commission issued a release yesterday entitled, "SEC Charges Operators of Reserve Primary Fund With Fraud", alleging that The Reserve "misrepresented that RMCI would provide the credit support necessary to protect the $1 net asset value of the Primary Fund when, in fact, RMCI had no such intention" and "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".
It reads, "The Securities and Exchange Commission today filed fraud charges against several entities and individuals who operate the Reserve Primary Fund for failing to provide key material facts to investors and trustees about the fund's vulnerability as Lehman Brothers Holdings, Inc. sought bankruptcy protection. In bringing the enforcement action, the SEC also seeks to expedite the distribution of the fund's remaining assets to investors. In a complaint filed in U.S. District Court for the Southern District of New York, the agency is asking the court to enter an order compelling a pro rata distribution of remaining fund assets, which would release a significant amount of money that is currently being withheld from investors pending the outcome of numerous lawsuits against the fund, the trustees and other officers and directors of the Reserve entities."
SEC Chairman Mary L. Schapiro says, "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." She adds, "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."
"Fund managers have serious obligations to keep their trustees and investors informed in both good times and bad, and cannot choose to reveal only favorable facts," said James A. Clarkson, Acting Director of the SEC's New York Regional Office. The release says, "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."
Dow Jones quotes a response from Reserve Chairman Bruce Bent, "Since we created the money fund in 1970 we have operated and grown our business by putting our shareholders' interests first. The Lehman Brothers bankruptcy filing created an unforeseeable and out-of-control condition for many parties and the results were serious. Our management worked extremely hard throughout the chaotic and fast-moving events of September 15-16 and we remain confident that we acted in the best interest of our shareholders. We are hopeful that this matter can be resolved quickly."
