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Reserve Fund Accused of Securities Fraud in Giant Money Market Fund.

Recent events show the breadth of the financial crisis rocking this country, with concerns of fraud impacting nearly every financial sector.  News reports today indicate that the FBI is investigating possible mortgage fraud involving collapsed financial giants Fannie Mae, Freddie Mac, Lehman Brothers and AIG.  The FBI says it is currently investigating 26 firms as part of its corporate fraud investigation involving sub prime lenders, with 1,400 mortgage-fraud cases being pursued nation-wide. 

Even money market funds are finding themselves embroiled in claims of securities fraud abuses.  Yesterday Minnesota federal judge Paul A. Magnuson extended a temporary restraining order issued last Friday against mutual fund manager Reserve Fund, restraining it from honoring redemption requests from its giant money market fund, the Primary Fund.  The Order stems from a lawsuit filed last week by Ameriprise Financial against Reserve Fund,alleging that it violated federal securities laws and breached fiduciary duties owed to investors by "tipping" certain large institutional investors last Monday that The Primary Fund was exposed to significant debt issued by Lehman Brothers. That was the same day Lehman Brothers filed for bankruptcy. 

According to Ameriprise's complaint, agents of Reserve Fund secretly warned select major institutional investors that the fund was at risk of "breaking the buck", or dropping below $1 per share.  Ameriprise argues that prior to the notification, the fund contained $64 billion in assets, which dropped virtually overnight to $23 billion, purportedly due to redemptions by institutional investors who were tipped to the problem. By alerting the institutional investors prior to public disclosure, the institutional investors were able to avoid losses, leaving retail brokers and their customers -- who were in the dark -- holding the bag.   In issuing the temporary restraining order, Judge Magnuson determined,  "Although financial markets should be left as free as possible from judicial intervention, temporary injunctive relief is warranted here.  The practice of 'tipping' undermines the free market and decreases investor confidence. . .”  

The Reserve Fund case may cause investors to question whether the public securities markets are in fact a level playing field, and create heightened investor concern not only for the economic stability of their investments, but also for the impact of corporate wrongdoing on the value of their investments.  During these difficult financial times, investor confidence in the markets is more critical than ever.  Allegations such as those lodged against Reserve Fund, if true, will surely shake that confidence and cause investors to question whether their financial future is really in good hands. 

Perhaps illustrative of the urgency of today's market, the case is on a fast-track:  today, U.S. Magistrate Judge Jeffrey J. Keyes granted Amerprise's motion for expedited discovery, requiring Reserve Fund to produce by this Friday documents involving named executives, institutional salespersons and any institutional investors regarding the financial difficulty of the fund, and requiring certain depositions to take place on October 1, 2008.  

Full post as published by OverRegd - Securities Regulation and Litigation Blog on September 24, 2008 (boomark / email).