SEC staff recommends action against Reserve Management

ByABC News
December 24, 2008, 7:48 PM

— -- The Securities and Exchange Commission's enforcement staff has recommended action against a controversial money market management firm and its top executives for alleged securities law violations, the firm disclosed Tuesday.

Reserve Management, whose flagship Primary fund fell below the $1-a-share standard for money market funds in September, raising the specter of losses for millions of investors, announced the development on the firm's website.

The SEC enforcement staff notified Reserve's attorneys on Dec. 18 of plans to recommend action against the New York-based firm, its president, Bruce Bent, and his sons, Bruce Bent II, the company's senior vice president, and Arthur Bent III, the chief operating officer.

The Reserve and the Bents "expect to defend vigorously against the allegations," while independent members of the funds' trustee boards cooperate with the SEC staff, the company said.

Specifics of the alleged violations have not been made public. SEC spokesman Kevin Callahan said he could not comment because there has been no public action by the full commission, which would weigh the enforcement staff's recommendation.

Attorney Harvey Wolkoff of Ropes & Gray in Boston, the law firm representing Ameriprise Financial Services in a federal lawsuit against Reserve and the Bents, said he is "gratified" by the action.

"We feel we have brought the Bents' actions to light," said Wolkoff, referring to the lawsuit's allegations that Reserve improperly alerted selected investors that the $64 billion Primary fund would "break the buck," or fall below $1 a share.

The alleged tip-offs enabled those investors to withdraw their money ahead of a torrent of redemption requests triggered by the Primary fund's exposure to Lehman Bros. debt when the investment bank filed for bankruptcy-court protection on Sept. 15.

So far, Reserve has returned to shareholders about 78% of the $51.8 billion that remained in the fund on Sept. 16. It is unclear what percentage Primary fund investors will ultimately recover.