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Tuesday, October 16, 2012

The Bents Trace a Twisting Paper Trail

Reported by Chris Cumming

Lesson number one from the Bents' fraud trial: pay attention to marketing materials, especially during a crisis.

To read the full, continuing saga of the collapse of the Reserve Primary Fund and the ensuing legal battle, see MFWire's living timeline.

On day two of Bruce Bent II's testimony during the SEC's fraud trial against the Reserve Management Company (RMC), both the prosecution and defense focused on the Bents' abortive plans to enter into a credit-support agreement to save the Reserve Primary fund.

The day Lehman filed for bankruptcy, the Bents worked on -- and publicized -- a plan under which RMC would put up company cash to protect the fund's $1 NAV. They abandoned this plan sometime between midday Monday, September 15, 2008, when Lehman filed, and one AM Tuesday, when Bent II called his father in Italy and told him the fund could not be saved.

The SEC's prosecutor argued that the Bents never really intended to spend their company money to save the fund, though they were happy to tell clients and potential investors that the NAV was safe.

One piece of evidence supporting this argument that the Commission presented today is an email Bent II wrote to his sales chief, in which he authorized him to instruct clients that RMC would protect the $1 NAV "to whatever degree is required."

Another piece of evidence: A marketing document entitled "The Reserve Insights," released shortly before the Bents abandoned plans for a credit support agreement, that read in part, "Furthermore, our support agreements ensure the integrity of a $1 NAV."

Much of the defense's cross-examination of Bent II was concerned with determining how that inaccurate sentence found its way into the brochure and whether Bent II had authorized it. The defense tried to trace the document's murky origins by showing the jury -- composed of eight people, seven women and one man -- document-review slips as well as earlier drafts of similar marketing materials with Bent II's handwritten edits in the margins.

This line of questioning seemed to puzzle both the judge and the jury. The judge interrupted the defense attorney several times to clarify a point or ask a further question. And the trial halted for several minutes when a juror slipped the judge a note with a pointed question about the sequence of events.

Bent II, for his part, seemed equally perplexed by the sentence's provenance and couldn't remember having reviewed it.

"I had approved the director of marketing to put together an informational piece. At certain points I got the language for talking points, things like that," he said. "I set it in motion and it was their job to get it done"

The prosecutor also questioned Bent II on what he told the ratings agencies as the fund melted down. Bent testified about a meeting in the summer of 2008 with Moody's SVP Henry Schilling, at which Schilling expressed concerns to Bent Sr. about RMC's ability to bail the Reserve Primary fund out in case of a run. Bent Sr. told Schilling that the fund had about $50 million on hand and that he thought they could raise $100 million if necessary.

But when Bent II called his investment banker at Credit Suisse, whom RMC had hired to explore a sale of the company, on Monday afternoon, hoping to find a buyer or a strategic partner for the Reserve Management Company -- adding that it was "not a prerequisite" that the buyer support the $1 NAV -- none were forthcoming. He testified that he had discussions with Legg Mason about them possibly buying the firm.

Bent II testified that on the Monday Lehman collapsed, somebody on the board -- he did not specify who -- told him that it was not a priority to tell the ratings agencies that the fund's NAV had dipped below .9975, which would trigger the loss of the fund's AAA rating.

The prosecutor disputed this recollection.

"Isn't it true that nobody on the board told you not to call the ratings agencies?" he asked.

"That is absolutely not true," Bent II retorted.

Bent II testified that, in any case, he was too swamped with other responsibilities to promptly tell the agencies about the dip in NAV.

"Did we miss repeating whether the NAV dipped below .9975? Maybe. I never really looked at that before," Bent II testified. "We were dealing with a world economic crisis. We were trying to get people their money back. Maybe that got missed."

Meanwhile, the younger Bent's testimony brought out new details of RMC's organizational disarray during the days of Lehman crisis. Bruce Bent Sr., the company's founder and CEO, had flown to Italy for vacation just days before Lehman went down; to reach him, his son had to call the hotel where his father was staying, and, speaking "really bad Italian," in the younger Bent's own words, try to get connected to his room.

And no BlackBerry for Bent Sr. He smiled when his son testified about how uninterested he was in technology at the time of the 2008 crisis -- though "he's learned a lot since then," Bent II said.

It was one of the only moments over several days of testimony when Bent Sr. cracked a smile. During trial proceedings he generally stares straight at the witness box, rarely showing any reaction to the testimony. But during the breaks he appears composed and at-ease, casually talking and joking with his family and several others among the ten or so press and audience at the trial.

The judge estimated yesterday that the trial could end late next week, earlier than expected. So check back with MFWire for ongoing coverage.  

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