(CN) - A federal judge in Manhattan refused to dismiss the SEC's lawsuit accusing the Reserve Primary Fund and the father and son who ran it of lying to trustees and rating agencies amid the fund's "unprecedented collapse."
The Reserve Fund held $785 million in Lehman paper when the investment firm announced it intended to file for bankruptcy, prompting redemption requests of about $40 billion.
The Reserve Fund once held more than $62 billion in assets.
"On Sept. 16, 2009, the Fund announced that it had 'broken the buck' - i.e., its share net asset value had fallen below $0.995 - and officially suspended redemptions to investors," the SEC claimed.
It marked the first time any retail money market saw its value drop that low.
U.S. District Judge Paul G. Gardephe decided that the SEC had shown enough evidence to prove that the defendants may have acted with "conscious misbehavior or recklessness" in making false statements to keep investors from jumping ship.
The lawsuit named the Reserve Fund, Reserve Management, Resrv Partners, Bruce Bent Sr. and Bruce Bent II as defendants.
Bent Sr. was the companies' chairman while his son served as vice chairman.
As the fund was collapsing, the SEC claimed, "the defendants engaged in a systematic campaign to deceive the investing pubic into believing that the Primary Fund ... was safe and secure despite its substantial Lehman holdings."
The Reserve Primary Fund - referred to as the Bents' "flagship" fund- "historically invested in conservative assets selected for safety and liquidity," the SEC said. "In 2007 and 2008, however, the Fund allegedly began to invest in higher risk commercial paper by financial institutions, including Lehman, for the purpose of generating a higher return."
After Lehman filed for bankruptcy, the Primary Fund was "besieged by shareholders seeking to redeem their shares," according to the ruling.
"At 10:10 am on September 15, State Street Bank and Trust Co., the Primary Fund's custodial bank - having processed $10 billion in redemptions - stopped funding redemption requests and suspended the Fund's overdraft privileges," Gardephe wrote.
In the aftermath, the Bents allegedly lied to investors to keep them from redeeming their shares, and to keep new investors buying shares in the fund.
Despite the defendants' "extremely grim assessment of the situation," they "falsely assured investors via telephone communications and email that the Primary Fund was not experiencing any liquidity problems and that the delay in transmitting money was caused by operational or technical delays at State Street," the ruling states.
The Bents allegedly told Moody's that "redemptions appeared to have stopped," saying they sold off assets for the necessary cash.
The Bents also informed both investors and the rating agency that it would enter into a credit support agreement if it had to, though it made no attempt to do so, the SEC claimed.
Judge Gardephe ruled that even if the SEC had not alleged facts to demonstrate motive and opportunity for the Bents to have committed fraud, which it did, the circumstantial evidence was strong enough for the case to move forward.
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