Reserve Primary Fund, the failed $62.5 billion money-market fund run by Bruce R. Bent and his son Bruce R. Bent II, was faced with an economic storm much like Hurricane Sandy, which swept through the northeastern U.S. last week, a lawyer for the two men told jurors in Manhattan.
The U.S. Securities and Exchange Commission claims the Bents, their investment advisory firm Reserve Management Co. and Resrv Partners Inc. defrauded customers by falsely claiming they would support the fund financially when it faced a run by investors in the wake of the 2008 Lehman Brothers Holdings Inc. bankruptcy.
The fund held $785 million in Lehman debt on Sept. 15, 2008, the day Lehman filed the biggest bankruptcy in history, causing the run on the fund and triggering its failure the following day when it "broke the buck" by failing to maintain a $1-a-share net asset value.
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"In a lot of ways, my clients were caught up in a perfect storm," John Dellaportas, who represents the Bents, told jurors in his closing argument in federal court today.
Sandy delayed closing arguments in the case by forcing the Manhattan courthouse to close for a week.
Alexander Janghorbani, an SEC lawyer, told the seven-member jury that the Bents were trying to buy time the morning of the Lehman bankruptcy, telling investors, fund trustees, rating companies and the press that they would protect the $1 NAV "to whatever degree is necessary."
What the Bents meant was "we hope we'll be able to give your money back," Janghorbani said.
Investors in the Primary Fund had redeemed $16.5 billion by 1 p.m. on Sept. 15, he said.
"The Bents fully appreciated the magnitude of the disaster," he argued.
Both Bents testified in their own defense in the trial, which began Oct. 9. The commission seeks disgorgement of unspecified ill-gotten gains, a civil fine and an order barring the defendants from violating the securities laws in the future.
The case is SEC v. Reserve Management Co., 09-cv-04346, U.S. District Court, Southern District of New York (Manhattan).
Bloomberg News
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