However the Bents
' fraud trial ends up, we finally have a look at what went down in the Reserve Primary Fund
's final days.
To read the full, continuing saga of the collapse of the Reserve Primary Fund and the ensuing legal battle, see MFWire's living timeline.
In nearly seven hours of testimony today in the federal court for the Southern District of New York, Bruce Bent II
relived his efforts to save the dying money fund in the frenzied days following Lehman Brothers' collapse. He sparred with the prosecutor for the Securities and Exchange Commission
over whether his firm, the Reserve Management Company
, truly intended to do whatever it took — including investing its own cash — to save the fund.
Bent's father, company founder and CEO Bruce Bent, Sr.
, had left for a vacation to Italy on the Saturday before Lehman filed for bankruptcy, leaving his son in charge of keeping alive the $62.5-billion Reserve Primary Fund, which had nearly $800 million of exposure to Lehman.
Central to the charges of fraud is an email Bent II wrote on the afternoon of Monday, September 15, after redemptions from the fund had already passed $15 billion, in which he instructed his sales team to reassure Primary Fund shareholders.
"We [Reserve Management Company Inc.] intend to protect the NAV on the Primary fund to whatever degree is required. We have spoken with the SEC and are waiting for the final approval, which we expect to have in a few hours. You may communicate this to clients on an as needed basis," reads the statement Bent emailed to his sales and marketing chiefs.
But the Federal prosecutor contended that Bent really never intended to contribute the money needed to save the fund, repeatedly noting that the company put "not one nickel" into the Primary Fund before it collapsed. Bent said he had a preliminary agreement to use $10 million of the company's $50 million of available cash to fund a credit support agreement, pending SEC approval. But this agreement was never put in place.
Bent testified that during a conference call to set up the agreement, a lawyer, whom he couldn't name, told him that $10 million would be a good amount to contribute to the fund. But the prosecutor disputed this claim.
"You were never told that, were you?" he asked.
"That is absolutely not the case," Bent retorted.
Around noon on the day Lehman filed for bankruptcy, the Bents would have needed to come up with about $157 million — the shortfall represented by a 20 percent writedown on their Lehman holdings — to keep from breaking the buck. Still worse, State Street
, the fund's custodian, was slow to meet customers' redemption requests. Then, sometime on Monday afternoon, the custodian stopped meeting requests at all, which intensified the run on the fund.
"We didn't have $157 million in cash," Bent said. "I didn't know how much money we would need for credit support because I didn't know what would happen in the market. I didn't know that this was a world economic crisis … It still was not completely making sense that things were going to get worse and not better."
To raise money, Bent first tried to call
then-chairman of the New York Fed Tim Geithner
, who did not return the calls. He tried to set up the credit support agreement. He ordered his traders not to sell anything at a loss — and later, on Tuesday morning, he ordered them not to sell at all. He "leaned on" State Street to meet customer redemptions. And he continued the frenzied efforts to find a buyer for the Reserve Management Company.
At around nine PM on Monday the 15th, with his father still on vacation in Italy, Bent II testified he got off the phone with potential buyers for the company, without a deal. By midnight he had decided that a credit support agreement would be "fruitless." All that remained was to call his father and tell him that he had decided to shut down the business.
"Once I had gone through the assessment and determined that we were out of options, I waited an hour, hoping to call him in the morning rather than the middle of the night," said Bent.
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