SEC staff backs more charges over buck-breaking fund

— -- The Securities and Exchange Commission's enforcement staff has recommended action against a second affiliate of a New York-based money market firm for alleged securities law violations.

The recommendation involves Reserve Partners, the broker-dealer arm of The Reserve, the firm whose flagship Primary Fund fell below the $1-per-share industry standard in September, raising the specter of investor losses.

The Primary Fund froze following a run of investor withdrawals prompted by the Sept. 15 bankruptcy of Lehman Bros. At the time, the fund held Lehman debt with a face value of roughly $785 million.

The Reserve wrote the Lehman debt down to zero after the investment bank's collapse, and subsequently began liquidating the flagship fund.

Reserve Partners, principal underwriter and distributor of the firm's funds, was notified of the SEC recommendation on March 3, the company disclosed Friday. The proposed action would involve either a federal court lawsuit or an SEC administrative proceeding, the firm said.

While the corporate announcement did not include specifics of specific charges, it said "Reserve Partners expects to defend vigorously against the allegations."

SEC spokesman Kevin Callahan declined to comment on the disclosure, and a Reserve spokesman could not immediately be reached.

The SEC's enforcement staff in December recommended similar action against Reserve Management, its president, Bruce Bent, and his sons, Bruce Bent II, the firm's senior vice president, and Arthur Bent III, the chief operating officer. No charges have been filed to date.

However, state securities regulators in Massachusetts and Colorado have filed separate civil actions against Reserve and various corporate affiliates and officials.

Last month, Reserve said it had redistributed to investors $43.8 billion of Primary Fund assets, or roughly 85% of fund assets. The company said it is holding $3.5 billion of the remaining assets in a special reserve for lawsuits, legal and accounting fees and other expenses.