Judge Tells Reserve Fund to Pay Out $3.5B Assets

(CN) - A federal judge in Manhattan ordered the Reserve Primary Fund to distribute $3.5 billion in remaining assets to shareholders on a pro-rated basis. The Reserve Fund was the first retail money market to "break the buck" in the economic crisis when its value dropped below $1 per share.

U.S. District Judge Paul G. Gardephe adopted the SEC's proposal, saying shareholders will recover an estimated 99 cents per share. He said he will assign a magistrate judge to oversee the distribution.

At the onset of the financial crisis, the Reserve Fund, which once had more than $62 billion in assets, became the first ever retail money market to "break the buck." The collapse was the product of the Lehman Bros. meltdown, an "event that brought the financial markets to a standstill," according to the judge.

The Reserve Fund held more than $785 million in Lehman Bros. debt securities before the investment firm filed for bankruptcy on Sept. 15, 2008.

Redemption requests from the fund began pouring in as soon as news of Lehman's impending liquidation broke. By the afternoon of Tuesday, Sept. 16, redemption requests totaled a "staggering $40 billion," Judge Gardephe wrote, or roughly two-thirds of the total assets the fund had under management.

The suspension of redemptions led to numerous lawsuits, most of which were consolidated.

The Reserve Fund set aside $3.5 billion to satisfy the losses, plus legal and accounting fees. The SEC previously supervised the distribution of more than $47 billion in assets.

Judge Gardephe decided the rest should be paid out on a pro rata basis, according to how much each investor held in the fund.

Investors holding shares representing more than 75 percent of the fund's remaining assets have supported the commission's application, as have investors who were unable to redeem their Lehman shares, the ruling states.

"Within the group of unsuccessful - by share count - investors who support the SEC's application or who have not objected to it outnumber objectors by a 3 to 1 margin," Judge Gardephe wrote.

Objectors such as E*Trade cited a number of reasons for their opposition, including their desire to redeem their shares at $1 per share.

The judge ruled that the magistrate judge will not be required to investigate potential "claw back" claims, in which investors try to collect money previously distributed.

Gardephe also barred any future claims against Reserve Management Co., founder Bruce Bent Sr., and his son, Bruce Bent II.

The SEC filed a civil action against Reserve Management and the Bents in May, claiming they lied to trustees about the fund's vulnerability as Lehman was collapsing.

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