U.S. judge orders Reserve Fund distribution

U.S. District Judge Paul Gardephe said in a written ruling that the U.S. Securities and Exchange Commission and the fund's trustee estimate that investors would recover 99 cents per share under the plan, which was proposed by the market regulator.

The Primary Fund held US$785 million worth of commercial paper issued by Lehman Brothers Holdings Inc when Lehman went bankrupt on Sept. 15 last year. After Lehman's meltdown, the net asset value of Primary Fund shares fell below US$1. “Breaking the buck” is not supposed to happen to money market funds, which have been regarded as super-safe investments.

“From the start, our goal was to return money to investors as quickly and fairly as possible and to avoid the extended quagmire of litigation that would have only served to deplete the finite pool of money used to pay investors,” SEC Chairwoman Mary Schapiro said in a statement. “Today's ruling affirms our approach and should enable all investors to get back their money quickly.”

The judge ruled in Manhattan federal court that the net asset values struck on Sept. 15-16, 2008 were “are not reliable and cannot be credited if all investors are to be treated equitably.”

He said he would order the appointment of a magistrate judge to oversee the distribution.

But Gardephe said the magistrate judge will not be required to investigate potential “claw back” claims ─ to recover money that was previously distributed ─ “where it is not clear that there is legal authority to support such claims.”

Several attorneys for investors had opposed the SEC proposal for distribution. Some of those investors had redeemed at a net asset value of US$1 in the frenetic hours following Lehman's bankruptcy.

Caryn Gail Schechtman, a lawyer for one of the objectors, E*Trade Financial Corp, could not immediately be reached for comment on the ruling.

She told the judge at a hearing on Sept. 23 that objectors believed more gathering of evidence and fact-finding was needed before accepting the SEC's proposal.

Gardephe wrote that he would issue an injunction barring all claims against Reserve Management Co, founder Bruce Bent, his son Bruce Bent II and others to the extent such claims are subject to indemnification by the fund.

In May, the SEC sued Bruce Bent Sr., one of the pioneers of the money market mutual fund business, his son and the investment company, saying they deceived investors into believing the flagship Primary Fund was safe.

Lawyers for Bent and Reserve could not immediately be reached for comment.

The collapse of the once US$62 billion fund triggered a guarantee program by U.S. authorities to prevent a massive outflow from money funds. The collapse of the fund also led to numerous lawsuits.

Among those plaintiffs was Ameriprise Financial Services Inc, which in October last year asked a U.S. judge to permit the release of taped phone calls to customers of the Reserve Primary Fund the day before the fund's share price fell below a dollar.

Ameriprise's allegations included an accusation that the fund tipped off certain investors before the drop in net asset value to 97 cents on Sept. 16 so they could redeem at full value.

“The order is very fair and also allows thousands of individual shareholders to finally get the vast majority of their money back,” said Robert Skinner, a lawyer for Ameriprise.

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