NEW YORK/WASHINGTON (Reuters) - Reserve Primary Fund founder Bruce Bent Sr. was among those charged with fraud on Tuesday by securities regulators for allegedly failing to tell investors about the fund's vulnerability to Lehman Brothers' bankruptcy.
The Securities and Exchange Commission said Reserve Management Co, its chairman Bruce Bent Sr, vice chairman and president Bruce Bent II and Resrv Partners Inc failed to provide key information about Lehman holdings to investors, the fund's board of trustees, and rating agencies.
The Reserve Primary Fund, which had $785 million in Lehman-issued securities, became illiquid in September when the fund was unable to meet investor requests for redemptions.
The Primary Fund sent shock waves through the investment management world when it halted redemptions and triggered a run on money-market funds, which had been considered safe in times of market turmoil.
The SEC said in its complaint that the defendants engaged in a "systematic campaign to deceive the investing public" into believing the fund was safe and secure despite its substantial Lehman holdings.
The case was brought against Bruce Bent Sr, 71, and his son, Bruce Bent II, 42, both of Manhasset, New York.
The complaint called Bruce Bent Sr "the public face of the Reserve, and a longtime advocate of the safety and stability of money market funds."
The SEC said that since it was created in 1971, the Reserve Primary Fund historically invested in very conservative assets such as government securities and bank certificates of deposit.
But, starting in 2007 and 2008, the fund began to purchase riskier commercial paper issued by financial firms including Lehman, Merrill Lynch and Washington Mutual, with the higher yields paid by these securities generating attractive returns for fund shareholders, the SEC said.
The SEC is seeking financial penalties and the repayment of ill-gotten gains.
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