Bloomberg News

Reserve Mangement, Bent Los Bid to Dismiss SEC Fraud Suit

March 29, 2012

Reserve Management Co. lost a bid for dismissal of a U.S. Securities and Exchange Commission lawsuit claiming it defrauded investors seeking to redeem shares in the Reserve Primary Fund after the collapse of Lehman Brothers Holdings Inc.

U.S. District Judge Paul Gardephe in Manhattan today issued a two-page order denying a dismissal request by defendants including Reserve Management and Bruce R. Bent Sr., chairman and founder of the Reserve Funds Inc. (0218803D:US)

The judge also rejected the SEC’s request for a ruling in its favor on the issue of liability.

Reserve Primary, which was run by New York-based Reserve Management, on Sept. 16, 2008, became the second money-market fund to break the buck, or drop below $1 a share. The news sparked an industrywide run on money funds that worsened a global freeze in credit markets.

The SEC sued in 2009, claiming the company failed to provide key material facts before freezing the $62.5 billion fund in September 2008.

Fran M. Jacobs, a lawyer for Reserve Management, didn’t have an immediate comment on the rulings.

“We are pleased with the ruling and look forward to proving our case,” John Nester, a spokesman for the SEC, said in a statement.

Gardephe didn’t rule on the merits of the case.

‘Gaping Holes’

Reserve sought dismissal because of what it said in court papers were “gaping holes in the SEC’s case,” including its claim that statements the fund allegedly made weren’t “material.”

The SEC said in court papers that it made sufficient allegations to support its lawsuit, including a claim that the company conveyed “disinformation” to ratings agencies and others around the time of Lehman’s bankruptcy.

The case is SEC v. Reserve Management, 09-cv-4346, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David Glovin in New York at dglovin@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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