Managers of buck-breaking Reserve fund accused of fraud

— -- Massachusetts' top securities regulator accused Reserve Management of fraud Tuesday for allegedly lying to investors who tried to withdraw their money from the firm's flagship money market fund during last year's financial meltdown.

Reserve said its Primary fund "broke the buck," falling below the $1-per-share needed to repay investors in full, on Sept. 16, the day after the Lehman Bros. bankruptcy filing. The $62 billion fund at the time held Lehman debt with a face value of $785 million, or 1.2% of its holdings.

Thousands of Primary fund investors, anxious about the Lehman holdings and fearing the first money market fund collapse in 14 years, tried to withdraw their cash before the announcement.

But Reserve sales personnel, acting under direction of senior management, issued verbal and written statements aimed at convincing investors their money was safe, according to the administrative complaint filed by Massachusetts Secretary of State William Galvin's office.

"Many of those statements contained outright falsities which the principals of Reserve Management knew at the time were not true," the complaint charges.

Reserve spokeswoman Ming Lee Hatch declined to comment on the complaint, which seeks an unspecified fine and restitution for Massachusetts investors who lost money in the fund that's now undergoing liquidation.

Colorado last week filed similar fraud allegations against Reserve, which has also been hit with private civil lawsuits. Separately, Reserve disclosed in December that the Securities and Exchange Commission's staff has recommended federal action against the firm for securities violations.

The Massachusetts case, based on subpoenaed Reserve testimony, e-mails and records, provides new details about the panic that threatened the $3 trillion mutual fund industry and forced Washington to launch an emergency stabilization plan. According to the complaint:

•Reserve Management President Bruce Bent II sent a Sept. 15 e-mail telling the firm's sales force the firm would protect the Primary fund's asset value "to whatever degree is required" and had sought SEC approval of an emergency rescue bid. The statements were relayed to investors.