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UPDATE 1-US judge awards $750,000 in case of money fund that 'broke buck'
09/30/2013 Email this story  |  Printable Version

By Nate Raymond and Jonathan Stempel

NEW YORK, Sept 30 (Reuters) - The U.S. Securities and Exchange Commission lost much of its bid Monday for civil penalties in a lawsuit arising out of the 2008 collapse of a large money market fund that famously "broke the buck."

U.S. District Judge Paul Gardephe in New York awarded just $750,000 to the SEC - a small fraction of the more than $130 million that the regulator had sought - saying the agency had not demonstrated that Bruce Bent II, a co-manager of the Reserve Primary Fund, and two Reserve entities should have to pay more penalties or disgorge profits.

"These entities were in business for decades and committed few regulatory violations," Gardephe wrote. "Their wrongful conduct took place over a period of less than 36 hours and during a time of enormous economic stress."

The penalties assessed amount to $100,000 against Bent and $325,000 for each entity, Reserve Management and Resrv Partners Inc.

Gardephe also rejected the SEC's request for a permanent injunction from committing future securities law violations against the Reserve entities and Bent.

The decision follows a jury verdict last November that cleared money market pioneer Bruce Bent Sr and Bruce Bent II, his son, of civil fraud charges stemming from Reserve Primary Fund's collapse.

The jury found the son liable for negligence, and the corporate entities liable on other counts.

Richard Mahony, a spokesman for the Bents, said they were gratified that the SEC's request for a new trial was denied and that the judge awarded less than 1 percent of the penalties the agency sought.

"These results are consistent with the jury verdict, which found that Bruce Bent and Bruce Bent II committed no fraud," Mahony said in an email. "Investors have already received more than 99 percent of their investment from 2008."

A representative for the SEC did not respond to a request for comment.

At the heart of the case was Reserve Primary Fund, a $62 billion fund that collapsed at the height of the 2008 financial crisis.

Reserve held $785 million in debt securities issued by Lehman Brothers Holdings Inc. After the bank filed for bankruptcy in September 2008, Reserve began receiving redemption requests and soon announced it had "broken the buck," meaning its net asset value fell below the $1 per share it was designed to maintain.

The SEC sued the Bents and the Reserve entities in May 2009, accusing the defendants of deceiving investors into believing the fund was safe and secure despite its Lehman holdings. The defendants denied wrongdoing.

After the trial, the SEC sought an order by the judge finding the Reserve entities liable of securities violations as a matter of law. Alternatively, the agency sought a new trial.

Gardephe rejected both of the SEC's requests, saying it had waived its right to a new trial.

The SEC also sought substantial financial remedies. It asked the judge to award $1.3 million penalties against Bent II, $130 million against the Reserve entities and to require them to disgorge profits earned through their securities law violations.

Gardephe, though, said the defendants' securities law violations didn't cause Primary Fund to collapse, and the SEC had not shown that any fees or expenses they earned managing the fund afterward were connected to their violations.

In awarding a fraction of what the SEC sought against the Reserve entities, the judge said the "defendants confronted conditions not seen since the Great Depression."

"The markets were in chaos and the ramifications of Lehman's bankruptcy were not initially well understood, even by sophisticated fund managers and Government regulators," Gardephe wrote.

Gardephe said the SEC's request for $1.3 million in penalties against Bent II "does not reflect the jury's determination of either Bent II's liability or culpability."

In not issuing an injunction against Bent, Gardephe said such orders are normally reserved for "individuals who have engaged in merely negligent conduct have generally involved more pervasive and repeated misconduct than that at issue here."

The decision comes less than a month after the Bents and other defendants agreed to a class-action settlement requiring them to, among other things, pay $10 million and give up $42 million of legal and other claims against a court-ordered expense fund.

The SEC had earlier this month asked Gardephe not to approve the settlement, citing the commission's post-trial motions, since decisions in both cases would affect a court-ordered fund holding Reserve Primary Fund assets.

The case is SEC v. Reserve Management Co et al, U.S. District Court, Southern District of New York, No. 09-04346.


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