It's every COO's nightmare: the redemption wires stop going out, the custodian's explanations don't add up, and the clients start going crazy.
To read the full, continuing saga of the collapse of the Reserve Primary Fund and the ensuing legal battle, see MFWire's living timeline.
That was the reality for Reserve Management Company's
) operations director David Gareis
on the Reserve Primary's
final days, right before the Lehman bankruptcy caused the fund to break the buck.
As the Bents'
fraud trial resumed Friday morning in the federal court for the Southern District of New York, Bruce Bent II's
nearly five days on the witness stand came to an exhausting close. Bent was followed by his brother-in-law Gareis, whose testimony focused on the frantic efforts to get State Street
, RMC's custodian, to make redemption payments to its clients as the fund melted down on September 15 and 16, 2008.
"'Your clients are going to get their funds' is what State Street was saying," Gareis said. "I trusted them. We talked to our counterparts and they gave us a consistent message, and, foolishly, now, I believed this message."
Gareis, the brother of Bent II's wife and now COO of Intermediary Financial
, said that the night before Lehman filed for bankruptcy, he sent his staff a clear message: "All hands on deck." They were expecting high redemptions the next morning -- about $5 billion, as Bent II estimated
that Sunday night -- due to the Reserve Primary fund's roughly $785 million of Lehman holdings.
Gareis also asked his contact at State Street if they could extend the Reserve's overdraft limit, which on a normal day could run from around $3 to $7 billion.
The next day, Gareis' contact at State Street emailed to notify him that outgoing wires would be delayed, and the fund's customers might not get their money until 3:00 PM or so. At around noon, Gareis noticed that all the wires had been sent out with no more than the usual delay.
"I was relieved," said Gareis.
But the next batch of wires didn't go out as quickly, and "there started to be an inconsistency between what State Street said and did," he said.
When just a "trickle" of the next round of redemption wires went out, Gareis started to get nervous.
"I tried to remain calm," he said, as he escalated the matter to his brother-in-law and boss, Bent II. Soon enough it was a full-court-press of everybody at RMC calling their State Street contacts to urge the custodian to release client money. Gareis said he ordered one of his subordinates to call every fifteen minutes.
In vain. By late afternoon, State Street had stopped sending redemptions entirely. After the wires had stopped, Gareis sent his brother-in-law an email reading, "Sorry I couldn't do more for you today. But tomorrow is a new day and I know that we'll get through this."
Gareis also testified that, having listened to recordings of all the sales calls for clients who bought into the fund on its last day, none of the investors discussed the email Bent II wrote on Monday or the promotional materials that mentioned a credit-support agreement between the fund and RMC -- two pieces of evidence central to the SEC's fraud charges
. And he said that the promotional brochure incorrectly alleging that the fund had entered a credit agreement that "ensure[s] the integrity of the $1 NAV" was only sent to six clients who later purchased into the fund.
Earlier, on the last day of Bent II's testimony, nearly everybody -- Bent II himself, the jury, and, at times, even Judge Paul Gardephe -- seemed to tire under the strain of nearly five days of testimony and the prosecutions' extensive questions into the minutia of the fund's last two days.
The only exception to the general weariness appeared to be Bruce Bent Sr., who sat through the entire procedure in his usual expression of rigid concentration: hand on chin, attention directed firmly toward the witness box. During the breaks, he, along with the rest of the Bent family observing the trial, appeared calm, at times even laughing and joking with each other.
Check back on MFWire
for ongoing coverage of the Bents' trial.
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