Massachusetts Files Complaint Against Reserve, Alleges Firm Lied to Investors

By Mark Jewell
Associated Press
Wednesday, January 14, 2009

BOSTON, Jan. 13 -- Massachusetts' top securities regulator on Tuesday accused managers of a fallen money-market fund of lying about its safety in an ultimately futile bid to prevent investors from pulling out cash before they suffered almost unprecedented losses in a normally safe type of investment.

Secretary of the Commonwealth William F. Galvin's administrative complaint against Reserve Management comes three weeks after the company that pioneered money-market funds said it expected federal securities regulators to bring a separate civil case against it. That case has not yet been filed.

Galvin's complaint alleges Reserve sales workers were directed by managers to reassure investors that they could not lose money, even though Reserve's Primary Fund had made an investment in unsecured debt of Lehman Brothers.

That investment totaled about 1 percent of the Primary Fund holdings that stood at $64 billion three days before Lehman's Sept. 15 bankruptcy filing. The same day, the bankruptcy prompted Reserve Management's board to write down the value of the $785 million in Lehman debt, the complaint alleges.

But on that day and the next, Reserve was telling investors that the Lehman holdings were being valued on par, the complaint says.

Written and oral statements to investors "contained outright falsities which the principals of Reserve Management knew at the time were not true," the complaint says. It seeks restitution on behalf of 566 Massachusetts businesses and residents who had invested about $2.1 billion in the Primary Fund, according to the complaint. It also seeks an unspecified administrative fine.

Reserve Management spokeswoman Ming Lee Hatch declined to comment, saying the New York-based company had not yet seen the complaint.

Reserve's purchase of commercial paper from Lehman -- a type of short-term corporate debt that company co-founder Bruce Bent once said was risky for conservative money-market funds -- triggered a rush of redemption orders by institutional clients. Those orders gutted the fund's value as fund managers were forced to sell assets amid sharply declining markets.

The night of Sept. 16, Reserve said the Primary Fund had "broken the buck" when the value of its assets fell to 97 cents per investor dollar put in -- below the dollar-for-dollar level needed to fully repay clients. The episode was the first such investor exposure to money-market losses since 1994, and created fears about the safety of the more than $3 trillion in assets held in money-market funds.

The government ultimately stepped in with a temporary program to guarantee money funds, but the Primary Fund -- the first money fund, established in 1970 -- didn't qualify and is in the process of liquidating.

Securities and Exchange Commission spokesman John Heine declined to comment Tuesday on the status of any pending case against Reserve.

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