Bruce Bent, founder of the first money market fund, was cleared of fraud charges Monday after the Securities and Exchange Commission alleged that he deceived investors leading up to the Primary Reserve Fund “breaking the buck.”
While the jury rejected the charges against Bent in what turned out to be a monthlong trial in U.S. District Court in Manhattan, the jury did find Reserve Management Co. and Resrv Partners Inc. liable of fraud and Bruce Bent II liable for negligence.
The SEC alleged in its 2009 complaint that the Reserve Management (RMCI), its chairman, Bruce Bent Sr., its vice chairman and president, Bruce Bent II, and Resrv Partners 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 Sept. 15.
SEC Chairwoman Mary Schapiro noted at the time the complaint was filed that: "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."
The Reserve Fund, which held $785 million in Lehman-issued securities, became illiquid on Sept. 15 when the fund was unable to meet investor requests for redemptions.
Robert Khuzami, director of the SEC’s Enforcement Division, said in a statement on Monday that “today’s verdict of liability sends the message that fund executives cannot withhold from investors and trustees key information about their fund’s vulnerability. This case, along with our actions against more than 100 other entities and individuals, demonstrates our continuing commitment to pursuing cases arising out of the financial crisis.”
However, Thomas Gorman, a partner at the international law firm Dorsey Whitney, says that “the jury’s verdict should be seen as a significant loss for the SEC.”
The complaint in this case, Gorman says, “painted a vivid picture of intentional fraud by the defendants. Yet the jury found against the SEC on each intentional fraud charge. While the jury did find in favor of the SEC on some charges, each of those was based on negligence,” which he said is “a far cry from the wrongful and intentional conduct that the SEC alleged in its complaint.”
This verdict, he continued, “should cause the SEC to carefully re-evaluate the way it writes complaints and charges defendants to ensure that the facts and charges are carefully matched and appropriate.”
The Financial Stability Oversight Council met Tuesday to discuss proposed recommendations regarding money market mutual fund reform, pursuant to the council’s authority under section 120 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.