The U.S. Securities and Exchange Commission has filed fraud charges against the operators of the Reserve Primary Fund for failing to warn investors and trustees about the fund’s vulnerability to Lehman Brothers Holdings, Inc.’s bankruptcy last fall, the SEC said Tuesday.

The money market fund “broke the buck” last fall, meaning that its net asset value fell below US$1 per share, implying that investors in the fund would lose money. Today, the SEC alleged that the fund’s manager, Reserve Management Company, Inc., its chairman, vice chairman and president, failed to provide key material information to investors, the fund’s board of trustees, and rating agencies as Lehman filed for bankruptcy protection.

The fund, which held US$785 million in Lehman-issued securities, became illiquid when Lehman filed for bankruptcy protection, and the fund was unable to meet redemption requests.

According to the SEC’s complaint, the defendants misrepresented that the firm would provide the credit support necessary to protect the US$1 net asset value of the fund. It also alleges that RMCI significantly understated the volume of redemption requests received by the fund and failed to provide the trustees with accurate information concerning the value of Lehman securities. These allegations have not been proven.

In a complaint filed in U.S. District Court for the Southern District of New York, the SEC is asking the court to enter an order compelling a pro rata distribution of remaining fund assets, which the SEC says would release a significant amount of money that is currently being withheld from investors pending the outcome of numerous lawsuits against the fund, the trustees and other officers and directors of the Reserve entities.

“We’re taking the lead in this matter because we want to get money back into the pockets of the investors as quickly as possible,” said SEC chairman Mary Schapiro. “Through this action, we hope to avoid inconsistent rulings regarding a finite pool of money and assure a fair result.”

The SEC’s complaint also seeks a final judgment ordering the defendants to pay financial penalties and disgorgement of ill-gotten gains plus prejudgment interest, and enjoining them from future violations of the federal securities laws.

Reserve Management Company Inc. issued a statement in response to the SEC’s complaint indicating that it is “in the process of reviewing the filing and intends to defend itself vigorously.”

“Since we created the money fund in 1970 we have operated and grown our business by putting our shareholders’ interests first. The Lehman Brothers bankruptcy filing created an unforeseeable and out- of- control condition for many parties and the results were serious. Our management worked extremely hard throughout the chaotic and fast-moving events of September 15-16 and we remain confident that we acted in the best interest of our shareholders,” said Bruce Bent, chairman of the firm.

IE