Settlement reached in the Reserve Primary Fund’s lawsuit
NEW YORK (Reuters) – Money market pioneer Bruce Bent and others involved in managing the Reserve Primary Fund have reached a settlement of at least $ 54.5 million in a shareholder lawsuit over the fund’s collapse at the height of the financial crisis.
The agreement, which was published in papers filed late Friday in the U.S. District Court in Manhattan, comes less than two weeks before the five-year anniversary when the one-time $ 62 billion fund came after the bankruptcy of Lehman Brothers Holdings Inc .
“We are very excited about this hard-won agreement, which is an excellent outcome for investors,” said John Browne, investor attorney.
The class action lawsuit was filed shortly after the Reserve Primary Fund announced on September 16, 2008 that its net asset value had fallen below $ 1 per share.
The decline followed losses from investments in commercial paper and other debt securities of over $ 785 million issued by Lehman, which filed for Chapter 11 bankruptcy protection the day before.
It was the first time in more than a decade that a money market fund “broke the money”. These types of funds are designed to maintain a constant net asset value of $ 1 per share.
The fund was then liquidated. The US Securities and Exchange Commission sued Bent, his son Bruce Bent II, and two reserve companies, accusing them of false information to investors.
A federal jury in November 2012 acquitted the senior Bent on all counts. Bruce Bent II was acquitted for violating securities fraud laws but was found liable for a single negligent violation.
The jury found that two of Bents’ companies, Reserve Management Co Inc and Resrv Partners Inc, were also held liable for violating securities laws.
The class action, led by Third Avenue Institutional International Value Fund LP, named both Bents and Arthur Bent III, another son of Senior Bent, and three companies, including Reserve Management Co.
U.S. District Judge Paul Gardephe dismissed claims under state law and the Investment Company Act in September 2012, but allowed various claims by the defendants for violating other federal securities laws to be brought.
Browne, a partner at Bernstein Litowitz Berger & Grossmann, said that the settlement, if approved by Gardephe, “will ensure the rapid distribution to shareholders of substantial amounts of shareholder money that have been withheld from investors for nearly five years and continuously depleted “.
As part of the class action settlement, defendants will pay $ 10 million in cash to investors in the Reserve Primary Fund, which will increase the fund’s net worth to $ 107 million.
The defendants, who continue to deny wrongdoing, will also waive more than $ 42 million out of $ 72 million in claims they made for compensation, expenses, and administrative fees against a court-ordered expense fund set up to provide money for the running costs of the reserve primary fund.
As part of the deal, defendants will also have claims against State Street Corp. release STT.Ndistributing $ 2.5 million previously withheld by the court to shareholders.
Richard Mahony, a spokesman for the Bents, said they were pleased to close the case. He said the Reserve Primary Fund’s investors have already received more than 99 percent of their 2008 investments.
“This class action lawsuit is making sure they get more,” Mahoney said.
As part of the settlement, up to $ 4 million will be withheld from the court-ordered expense fund to meet future defense costs for the Bents and other defendants in the SEC lawsuit and other litigation.
The Bents and other defendants will meanwhile release claims against the Independent Trustees of the Reserve Primary Fund for embezzlement of fund assets. An attorney for the trustee did not immediately respond to a request for comment on Friday after normal business hours.
Investor attorneys will also seek up to $ 5 million in legal fees and a reimbursement of $ 250,000 in expenses, according to court records.
The case is In re The Reserve Primary Fund Securities & Derivative Class Action Litigation, US District Court, Southern District of New York (Manhattan), No. 08-8060.
Reporting by Nate Raymond in New York; Arrangement by Michael Perry