The U.S. Securities and Exchange Commission denied Saturday that the commission had rejected a proposed settlement with managers of a large money market fund that "broke the buck" during the 2008 financial crisis, saying their negotiations never reached that point of consideration.
SEC lawyer Nancy Brown, in a brief court filing, said lawyers for defendants including Reserve Management Co. made a "misstatement" when claiming they had reached a settlement in principle with the regulator at the end of August, only to learn on September 5, that the SEC subsequently rejected it.
The claim that the SEC rejected a settlement with the money managers was made by John Dellaportas, a lawyer for the defendants. Dellaportas made the claim in a September 5 court filing and complained that the commission's "sudden refusal to settle" harmed fund shareholders with additional delays and costs.
"Today, much to our surprise, 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.
The alleged breakdown was viewed as significant because it 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.
Brown, the lawyer for the SEC, countered on Saturday.
"Contrary to their contention that a settlement had been considered and rejected by the Commission, the parties' negotiations never reached the point at which a proposal was submitted to the Commission for its consideration," said Brown in the filing.
Later on Saturday, Dellaportas filed a court letter in response to Brown and detailed the settlement discussions between the SEC and defendants along with his colleague Robert Romano.
"On September 5, the staff called Mr. Romano and advised him that "the Commission" would not be settling on the terms to which we had previously agreed, nor would it settle on any other terms," Dellaportas said in the filing.
A spokeswoman with the SEC did not respond to a request for comment. Brown did not respond either.
The case stems from events on September 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.
The SEC and the Reserve defendants had negotiated over issues left over from the trial, according to court filings.
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.
(Reporting By Casey Sullivan and Nate Raymond)