UPDATE 1-Shareholders sue Reserve Primary Fund over Lehman

Thu Sep 18, 2008 1:09pm EDT

(Adds details, quotes from lawsuit, fund declines comment)

NEW YORK, Sept 18 (Reuters) - Shareholders have sued Reserve Primary Fund REPXX.O over its halting of redemption of shares two days ago, when its net asset value fell below $1 after the bankruptcy of Lehman Brothers Holdings Inc LEHMQ.PK.

The lawsuit, filed Wednesday in U.S. District Court in Manhattan, seeks damages for a class of shareholders who had not redeemed their shares as of Sept. 16, when the fund halted redemption.

The lawsuit said the fund "deviated from its stated investment objective by sacrificing preservation of capital and liquidity in pursuit of higher yields.

"This strategy was exemplified by the Fund's disastrous and unreasonable concentration of $785 million face value in commercial paper issued by Lehman."

It said the investments led to the fund "breaking the buck" on Tuesday, when its net asset value fell to 97 cents.

A spokeswoman for the fund declined comment on the lawsuit.

It is the first lawsuit against the money-market mutual fund whose assets tumbled because of its losses on debt issued by Lehman, which went bankrupt on Monday in the worst financial crisis since the 1930s.

The fund said it had about $23 billion in assets on Tuesday, down from about $65 billion in assets as of Aug. 31.

The fund's owner, New York-based Reserve Management Corp, said in a statement Tuesday that investor redemptions will be delayed as long as seven days. The management company and Reserv Partners Inc were also named as defendants.

The lawsuit identified the plaintiffs as Jay Pomeranz of Nassau County, New York, and other shareholders. (Reporting by Grant McCool; editing by Jeffrey Benkoe)

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