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Massachusetts Accuses Reserve of Fraud
By STEVE STECKLOW
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(January 13, 2009 - Tuesday) - by Steve Stecklow for the Wall Street Journal
http://online.wsj.com/article/SB123186542483477671.html?mod=googlenews_wsj
Massachusetts today accused Reserve Management Co. of fraud for allegedly making false statements about its plans to support the Reserve Primary Fund's net-asset value around the time it "broke the buck" in September.
The Primary Fund's net-asset value fell below $1 to 97 cents on Sept. 16, following the bankruptcy of Lehman Brothers Holdings Inc. The fund had held $785 million in Lehman commercial paper -- about 1.2% of its holdings. It marked the first time in 14 years that a money-market fund's net-asset value had declined, and followed a run on the Primary Fund by nervous investors.
The administrative complaint, filed by Secretary of the Commonwealth William F. Galvin, alleges that "sales personnel at Reserve Management, at the direction of senior management, made numerous statements to investors and distributed materials to investors that were intended to calm those investors and dissuade them from making redemption requests."
"Many of those statements contained outright falsities which the principals of Reserve Management knew at the time were not true," the complaint states.
A Reserve Management spokeswoman declined to comment, saying the New York firm had not yet seen the complaint.
The collapse of the $62 billion Primary Fund, which is being liquidated, has spawned numerous lawsuits against the fund's manager. The Securities and Exchange Commission also is gearing up to potentially bring an enforcement action against Reserve Management Co., the company disclosed last month.
The Massachusetts administrative complaint names Reserve Management Co., Reserve Funds Trust, Reserve Partners Inc. and Bruce Bent II, vice chairman and president of Reserve Management. It seeks restitution for all Massachusetts investors in the Primary Fund as of September 15 and 16, 2008, a censure of Reserve Partners and an administrative fine.
The complaint alleges that Reserve Management told investors on September 15 and 16 that the Lehman holdings were being valued at par, or full value, even though Primary Fund's board of trustees had met and set a value of 80 cents on the dollar by 10:15 a.m. on the 15th. The company later determined the holdings were worthless.
The complaint also alleges that Reserve Management also prioritized redemption requests from larger clients over smaller clients, despite statements to clients that redemptions were being dealt with on a first-come, first-served basis.
"Dire financial reverses are unfortunate and not uncommon over the last year, but that is no excuse for financial managers to feed untruths to their clients," Mr. Galvin said.
Write to Steve Stecklow at steve.stecklow@wsj.com
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