No Do-Over for SEC in Reserve Primary Fund Case
The U.S. Securities and Exchange Commission has lost its bid for substantial penalties or a new trial against executives of the Reserve Primary Fund, the now-defunct $62 billion money-market fund that "broke the buck" in 2008. U.S. District Judge Paul Gardephe in Manhattan denied the SEC's requests on Monday, mostly siding with the fund and its execs, represented by Morgan, Lewis & Bockius.
The Reserve Primary Fund (RPF), the oldest money-market fund in the country, held $785 million in commercial paper from Lehman Brothers when Lehman declared bankruptcy in September 2008. RPF couldn't absorb the hit, and on Sept. 16, 2008, the net value of the fund's assets fell below $1 a share. In May 2009, the SEC sued RPF and its managers—investment pioneer Bruce Bent and his son Bruce Bent II—accusing them of making false statements to investors in the two days following Lehman's collapse in hopes of propping up their sagging fund.
In Monday's opinion, Gardephe levied just $750,000 in penalties against the company and Bent II, a tiny fraction of the $131 million the SEC sought.
A Manhattan jury in November 2012 cleared the elder Bent of all six of the SEC's fraud claims and held his son liable for just one negligence claim. The jury also largely rejected the SEC's allegations against two RPF corporate entities, though it did side with the agency on one securities fraud claim. We named the Bents' lawyer, John Dellaportas, our Litigator of the Week for gutting the SEC's case at trial.
Dellaportas, who moved from Duane Morris to Morgan Lewis in May, referred our request for comment to a spokesman for RPF and the Bents. In a statement, the spokesman said the Bents "are gratified that the SEC's motion for a new trial was denied and that the penalty assessed by the judge is less than 1 percent of what the SEC sought. These results are consistent with the jury verdict, which found that Bruce Bent and Bruce Bent II committed no fraud."
As we previously reported, a war of words broke out a couple of weeks ago between the SEC and the defense. In filings, the Morgan Lewis lawyers claimed the SEC's commissioners vetoed a settlement in the case that would have resolved the motions addressed in Monday's ruling. A lawyer for the SEC told Gardephe the parties never reached a settlement.