Corporate & Securities Law

SNSFE Investigating Losses At Reserve Primary Fund

By James Eccleston

Attorneys at SNSFE are investigating the Reserve Primary Fund.  According to Wall Street Journal reports, more than a year before the Reserve Primary Fund "broke the buck" with losses that spread chaos through the financial system last week, the fund began loading up on a type of short-term debt that the money-market fund had long shunned.

Even as Bruce Bent, the fund's founder, told shareholders in a July 2008 letter that the fund had "unwavering discipline focused on protecting your principal," Reserve was gobbling up commercial paper.  By May of this year, 54% of the fund's holdings were in commercial paper compared to 0.9% about a year earlier.  Exposure to drab but safe certificates of deposit plunged.

When Lehman filed for bankruptcy, Reserve owned Lehman debt securities with a face value of $785 million.  It had to write that down to zero, which prompted the Reserve fund to break the buck, meaning losses pulled the fund's share price below the hallowed $1-a-share standard.

The fund had previously disclosed that it held Lehman paper, but investors paid little attention until the New York investment bank crumbled.

The Lehman holdings were part of a bigger push by the fund into commercial paper, which is short-term debt companies issue to finance their operations. 

In 2006, the fund changed its prospectus to allow investments in commercial paper, but queried whether adequate disclosure was made, especially in light of the comments made in July of this year.

Right now, those left in the Primary fund can't withdraw, according to postings on the firm's Web site.  The fund has frozen redemptions for an indefinite period.  Those trapped there include many individual investors, according to people familiar with the fund.

SNSFE welcomes information regarding this fund.  Feel free to contact attorneys at SNSFE.  

Source:  Wall Street Journal

Full post as published by FinancialCounsel on September 25, 2008 (boomark / email).