NEW YORK (Reuters) - Money market pioneer Bruce 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.
The U.S. Securities and Exchange Commission sued Bent, his son Bruce Bent II and their family-run Reserve Management firm in 2009, saying they lied to investors about the safety of their money after Lehman Brothers filed for bankruptcy on September 15, 2008, intensifying a global financial crisis.
Reserve held $785 million in Lehman debt, or 1.2 percent of the $62 billion it had invested in its funds. There was a run on Reserve funds and sources of liquidity dried up in the market turmoil, making it impossible to keep up with demand for redemptions.
Bent, answering a question on the Manhattan federal court witness stand about the government helping troubled financial institutions after the historic Lehman collapse, responded sharply: “Two days later everybody got it, except Reserve.”
Part of the defense strategy is to shift the blame onto the SEC, which sued the Bents. Bruce Bent’s testimony implies that the government should have made Reserve part of the bailout of financial institutions in an unprecedented crisis.
The white-haired, flush-faced Bent, 75, at times appeared irritated with the pointed questioning of SEC lawyer Nancy Brown, saying “no, no, no,” before correcting her. His son Bruce Bent II, 46, is also expected to testify at the trial.
Brown’s questioning over more than three hours took Bent and the jury through three Reserve board meetings and phone calls between the Bents, senior fund executives and lawyers during two hectic days of September 15 and September 16, 2008. The eight jurors heard that Reserve approached the New York Federal Reserve Bank and told the SEC itself about its dire straits.
Bent testified they were in a “desperation situation” and “we’re throwing it at the wall, we’re hoping something sticks.”
The Reserve “broke the buck” - an almost unheard of event for money market funds when their net asset value falls below $1 a share. By January 2010, Reserve said it had distributed nearly all of the $50.5 billion left in its Reserve Primary fund after Lehman’s bankruptcy.
Investors recovered about 99 cents on the dollar.
The regulators and the Bents failed to reach a settlement and the case went to trial on Tuesday. The trial is expected to last three weeks before U.S. District Judge Paul Gardephe.
The jury is being asked to decide whether or not the Bents played by the rules of the securities markets. The SEC seeks unspecified gains the Bents might have made and a fine.
Reserve was the first money-market fund in the United States when Bruce Bent started it in 1970. Its collapse was a driver of the credit market seizure following Lehman’s bankruptcy. New regulations have since reduced the credit and maturity risks that money funds may take.
The case is SEC v. Reserve Management Co et al, U.S. District Court, Southern District of New York, No. 09-04346
Reporting By Grant McCool; Editing by Richard Chang