Fund Burned by Lehman Bros. Can’t Be Retried

(CN) - Securities regulators cannot retry a money-market fund that sank while trying to redeem investors' money from Lehman Brothers after its bankruptcy, a federal judge ruled.

On Sep. 14, 2008, the Reserve Primary Fund held assets of $62.5 billion, including $785 million of debt securities issued by Lehman Bros, according to the ruling.

That day, Lehman announced that it would file for bankruptcy, triggering a run on the fund, which received redemption requests totaling $40 billion in two days.

On Sept. 16, 2008, the fund suspended redemptions because it had "broken the buck" when its share price had fell below $0.995.

Six months later, the Securities and Exchange Commission sued the fund's management company, its chairman Bruce Bent Sr., and vice-chairman Bruce Bent Jr., alleging that they "engaged in a systematic campaign to deceive the investing public into believing that the Primary Fund ... was safe and secure despite its substantial Lehman holdings."

Though a federal jury in New York acquitted Bent Sr. on all counts, it found Bent Jr. guilty of negligence and the corporate defendants guilty of knowingly violating federal securities laws.

The SEC then moved for a new trial, while the defendants sought a judgment as a matter of law.

U.S. District Judge Paul Gardephe affirmed the jury's verdict Monday, finding that the SEC waived its right to a new trial based on the jury's inconsistent verdict.

"When asked after the verdict was delivered - but before the jury was discharged - whether it had 'any applications with respect to the jury's verdict,' the SEC answered, 'No, your Honor,'" the ruling states. "The commission thereby waived its objection to any inconsistency in the jury's verdict."

Gardephe also denied the corporate defendants judgment as a matter of law because he found it had been sufficiently misleading for them to email investors after Lehmen's collapse that the fund's Lehman holdings would not have a "material impact" on the fund.

Likewise the jury's scienter, or wrongful intent, findings should not be struck because it was defense counsel's request that the court write separate jury questions to make clear whether the jury found a defendant guilty based on negligence or scienter, Gardephe said.

"The jury's mental state findings are relevant to this court's determination of remedies in this case. In fashioning a remedy, courts often consider whether a defendant acted with scienter - even as to violations that do not require a scienter finding," the 43-page opinion states.

Gardephe imposed a civil penalty of $325,000 on Reserve Management Co. Inc. and Resrv Partners, and a $100,000 civil penalty on Bent Jr. The judge also denied the SEC's request for a permanent injunction against the defendants.

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