Firm that broke the buck in 2008 fails to reach SEC deal

A tentative settlement between Reserve Primary Fund, the $62.5 billion money-market fund that "broke the buck" and failed in 2008 when its net asset value fell below $1, and the Securities and Exchange Commission has fallen apart, according to a lawyer for the firm.

John Dellaportas, a lawyer for Reserve's founder and Chief Executive Officer Bruce R Bent and his son, President Bruce Bent II, told US District Judge Paul Gardephe in New York that the SEC backed out of a proposed settlement last week.

"Much to our surprise, we were informed that, not only had the commission rejected the proposed settlement agreement in principle that had been negotiated between defendants and the SEC staff, but it was also unwilling to settle with defendants on any other terms," Dellaportas said in the letter, dated September 5 and made public on Friday.

Reserve, which held $785 million in Lehman Brothers Holdings Inc debt, caused a run on money-market funds after its net asset value fell below $1 a share on September 16, 2008, the day after Lehman filed the biggest bankruptcy in history. The failure of Reserve, the first money fund in 14 years to "break the buck," contributed to the global financial crisis.

In a September 5 letter to Gardephe that was also made public on Friday, SEC lawyer Nancy Brown said, "We write to report that we have been unable to reach a settlement with defendants."

SEC's lawsuit

The SEC sued the Bents and two of their companies in May 2009. The SEC accused the Bents of violating federal securities laws by making misleading statements to investors and trustees in the run-up to the collapse of the fund. A federal jury in Manhattan last year cleared Bruce Bent and found Bruce Bent II liable for negligence.

The failed settlement may threaten a separate $54.9 million deal to settle shareholder litigation over Reserve's failure. That accord must be approved by Gardephe.

"The proposed settlement of the class action benefits investors and we hope it will be approved by the court without delay," Richard Mahony, a spokesman for the Bents, said yesterday in an e-mailed statement. "We were disappointed that we were not able to resolve the remaining issues in that case."

Florence Harmon, an SEC spokeswoman, said in an e-mail, "We believe the SEC plan for distributing funds would put more money in the pockets of investors, which is why we have asked the court to decide how best to proceed."

The SEC case is SEC v. Reserve Management Co., 09-cv-04346, and the shareholder case is Reserve Primary Fund Securities & Derivative Class Action Litigation, 08-cv-08060, U.S. District Court, Southern District of New York (Manhattan).