Reserve Management may face SEC charges over fund failure

NEW YORK (Reuters) - The New York investment manager credited with inventing the money market fund may face charges he violated federal securities laws in connection with the collapse of his $64 billion mutual fund this September, an event that sent the global credit crisis into overdrive.

Reserve Management Co Inc said on its website that U.S. Securities and Exchange Commission staff informed the company on Dec 18 that the agency intends to bring an enforcement action against the company and its president, Bruce Bent.

Charges were also recommended against Bruce Bent II, senior vice president and Arthur Bent III, chief operating officer and treasurer, it said.

Bruce Bent created the first money market mutual fund in 1970 with a partner, and money market funds eventually came to be seen as the safest class of mutual funds, tantamount to a bank savings account. Bent's Reserve Management company ran the Primary Fund, one of the oldest and biggest money-market funds.

The Primary Fund collapsed in September when its net asset value fell below $1 a share after Lehman Brothers filed for bankruptcy. It was the first U.S. money market fund to "break the buck," as a drop below $1 per share in net asset value is known in the trade, since a small fund failed in the wake of the Orange County, California, bankruptcy in 1994.

The fund had changed tactics in the year before the Lehman bankruptcy, investing heavily in commercial paper, which are short-term corporate IOUs, to improve the fund's yield. By the time Lehman filed bankruptcy on September 15, the fund held $785 million of Lehman commercial paper, which became effectively worthless overnight.

The Primary Fund announced the next day that it had broken the buck.

A run on money market funds ensued, with investors redeeming billions of dollars across the industry. The funds retrenched and all but refused to invest in anything but short-term U.S. Treasury bills. Their withdrawal from other markets, including the $1.7 trillion commercial paper market, triggered another wave of tightening credit.

That episode prompted U.S. authorities to launch a guarantee program to prevent a massive outflow from money market funds. The U.S. Federal Reserve launched a program aimed at reinjecting lost liquidity into the commercial paper market to ensure companies could raise the cash needed to finance daily activities.

Reserve Management and the three executives expect to defend themselves vigorously against the allegations, the company said.