Money market pioneer Bent cleared of SEC fraud charges

NEW YORK Mon Nov 12, 2012 11:34pm GMT

Money market pioneer Bruce Bent leaves the Manhattan Federal Court in New York October 11, 2012. Bent took a swipe at the U.S. government's response to the 2008 financial crisis when he testified at his own trial on Thursday, describing the desperate situation that led to the death of his conservative fund. REUTERS/Andrew Kelly

Money market pioneer Bruce Bent leaves the Manhattan Federal Court in New York October 11, 2012. Bent took a swipe at the U.S. government's response to the 2008 financial crisis when he testified at his own trial on Thursday, describing the desperate situation that led to the death of his conservative fund.

Credit: Reuters/Andrew Kelly

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NEW YORK (Reuters) - Money market pioneer Bruce Bent was cleared on Monday of civil fraud charges that he misled investors in the early days of the 2008 financial meltdown, in one of the rare trials of a Wall Street leader over conduct during the financial crisis.

A jury rejected all of the charges against Bent following a month-long trial in U.S. District Court in Manhattan. His son, Bruce Bent II, who also was an executive at their family-run Reserve Management Firm, and two entities were found liable on some charges.

In losing the case against the elder Bent, the SEC failed to get jurors to hold a major financial figure individually liable for actions during the 2008 financial turmoil. The Reserve Fund was the first money-market fund in the United States when Bruce Bent started it in 1970.

The case stemmed from a sell-off by investors in the Reserve Fund in September 2008, when the bankruptcy of Lehman Brothers roiled financial markets and the fund "broke the buck," meaning its net asset value fell below $1.

U.S. regulators accused the Bents of lying to investors and fund trustees in attempts to stop a run on the fund. At the time Lehman filed for bankruptcy, on September 15, 2008, Reserve held $785 million in Lehman debt, or 1.2 percent of the $62 billion it had invested in its funds.

By January 2010, Reserve said it had distributed nearly all of the $50.5 billion left in its fund after Lehman's bankruptcy.

In Monday's verdict, Bruce Bent II was cleared of knowingly violating securities fraud laws but found liable of one count of negligently violating those laws. The jury found that two of the Bents' companies, Reserve Management Co Inc (RMCI) and Reserv Partners Inc, were liable on one count of securities fraud. RMCI was also found liable of deceiving investors.

The SEC, which sought financial penalties as part of the case, said those findings were significant.

"Today's verdict of liability sends the message that fund executives cannot withhold from investors and trustees key information about their fund's vulnerability," Robert Khuzami, the commission's director of enforcement, said in a statement.

Mark Arena, a spokesman for the Bent family, said they were "gratified" by the verdict, but that they may appeal some of the jury's findings.

The regulators and the Bents failed to reach a settlement and the case went to trial on October 9 before U.S. District Judge Paul Gardephe. Bent and his son spent a total of seven days on the stand.

The verdict came one day before the Financial Stability Oversight Council, a council of regulators created by the 2010 Dodd-Frank Wall Street reform law, is set to convene in Washington, D.C. to consider a proposal to regulate money market mutual funds.

The council is taking up the issue after SEC Chairman Mary Schapiro failed to garner enough support for the reforms among her fellow commissioners. Schapiro and banking regulators often cite the run on the Reserve Fund as evidence that more needs to be done to shore up the industry.

The case is SEC v. Reserve Management Co et al, U.S. District Court, Southern District of New York, No. 09-cv-04346.

(Reporting by Basil Katz and Sarah Lynch; editing by Martha Graybow, Dan Grebler and Andrew Hay)