By Nate Raymond and Jonathan Stempel
NEW YORK, Sept 13 The U.S. Securities and Exchange Commission has backed out of a settlement with the managers of a large money market fund that "broke the buck" during the 2008 financial crisis, according to court papers made public on Friday.
Lawyers for defendants including Reserve Management Co said in a court filing they reached a settlement in principle with the regulator at the end of August, only to learn on Sept. 5 that the SEC subsequently rejected it.
The breakdown could derail a separate accord reached last week in which the founder of the fund, Bruce Bent Sr, and others agreed to settle a class-action lawsuit by the fund's investors.
The case stems from events on Sept. 16, 2008, when the net asset value of the $62 billion Reserve Primary Fund fell below the $1 per share it was designed to maintain.
Reserve Primary had held $785 million of debt from Lehman Brothers Holdings Inc, which went bankrupt the day before, and worries about the Lehman stake had spurred a flood of redemption requests that the fund could not meet.
Last November, a federal jury in New York cleared Bent and his son Bruce Bent II of civil fraud charges relating to the collapse, while finding the son liable for negligence.
The jury also found two corporate entities, Reserve Management and Resrv Partners Inc, liable on one count of securities fraud, and Reserve Management for violating a federal law governing investment advisers.
According to Friday's filings, the SEC and the Reserve defendants had negotiated over issues left over from the trial.
But in one of the filings, the SEC said it was "unable to reach a settlement" with the Bents. The SEC also asked U.S. District Judge Paul Gardephe not to approve the related class-action accord because resolution of its claims might affect the distributions available for investors.
The class-action settlement called for the Bents and others to, among other things, pay $10 million and give up $42 million of legal and other claims against a court-ordered expense fund.
Meanwhile, John Dellaportas, a lawyer for the Bents, complained that the SEC's "sudden refusal to settle" harmed fund shareholders with additional delays and costs.
"We were informed that, not only had the Commission rejected the proposed settlement agreement in principle that had been negotiated between defendants and the SEC staff, but it was also unwilling to settle with defendants on any other terms," he wrote, italicizing the last four words for effect.
Florence Harmon, an SEC spokeswoman, on Friday said the SEC plan "would put more money in the pockets of investors, which is why we have asked the court to decide how best to proceed."
John Browne, a lawyer for shareholders in the class-action case, in a court filing said the SEC's reasons to delay approval of that accord lack merit.
A spokesman for the Bents said: "We were disappointed that we were not able to resolve the remaining issues in that case but in any event we do not believe the SEC's request for a new trial is warranted."
It is unclear what may have prompted the SEC's alleged change of heart. Terms of the rejected settlement were not disclosed, though the Bents' spokesman said Bruce Bent Sr had nothing to settle because he had prevailed at trial.
Mary Jo White, who became SEC chair this year, has promised to take a tougher line in resolving higher-profile lawsuits.
Last month, the SEC extracted an admission of wrongdoing and a five-year industry ban from Philip Falcone over his management at the hedge fund Harbinger Capital, after the commission rejected an earlier accord as too lenient. [ID:nL2N0GK1CA)
The cases are SEC v. Reserve Management Co, U.S. District Court, Southern District of New York, No. 09-04346; and In re: The Reserve Primary Fund Securities & Derivative Class Action Litigation in the same court, No. 08-08060.