Regulators failed on Monday to win a clear victory over the father-and-son team whose mutual fund collapsed in one of the central blowups of the 2008 financial crisis. It was the latest setback in efforts by regulators to go after individuals responsible for risk-taking that nearly brought down the American economy.
Louis Lanzano/Associated Press
Bruce Bent, right, and his son, Bruce Bent II, in October. The two were accused of defrauding investors when their flagship money market fund collapsed in September 2008.
Andrew Kelly/Reuters
Bruce Bent is credited with inventing a popular type of mutual fund.
A federal jury in Manhattan rejected the Securities and Exchange Commission’s claim that Bruce Bent, the man credited with inventing a popular investment vehicle known as a money market fund, defrauded investors when his flagship fund failed in September 2008, sowing panic among ordinary investors.
The collapse was a significant turning point because the fund, the Reserve Primary Fund, was pitched to investors as a nearly risk-free alternative to a bank account. The S.E.C.’s lawyers accused Mr. Bent and his son, Bruce Bent II, of falsely assuring investors that the fund could be rescued as it foundered under the weight of hundreds of millions of dollars of bonds issued by Lehman Brothers, which went bankrupt on Sept. 15, 2008. The Reserve Primary Fund ceased operation two days later.
The S.E.C. did convince the jury that the younger Mr. Bent’s statements were negligent, and that the parent company had made fraudulent statements. But the decision clearing the Bents of fraud accusations underscored the difficulty prosecutors and regulators have had in holding financiers accountable for precipitating the financial crisis.
“There is no other way to read this than as a significant loss for the S.E.C.,” said Thomas O. Gorman, a partner at Dorsey & Whitney and formerly the senior counsel for the S.E.C.’s Division of Enforcement.
Regulators are continuing efforts to shore up the money market fund industry against the problems revealed by the collapse of the Reserve Primary Fund. A council of top regulators was set to meet on Tuesday to determine how to impose new rules on the industry after a few S.E.C. commissioners scuttled a previous push to improve the safety and transparency of the funds.
While the S.E.C. imposed some new rules on the industry soon after the crisis, Treasury Secretary Timothy F. Geithner and the Federal Reserve chairman, Ben S. Bernanke, have said that money market funds are still vulnerable to the type of runs that nearly brought the industry down in 2008.
The elder Mr. Bent is widely hailed as the creator of the world’s first money market mutual funds, which since the 1970s have been marketed to small investors as a low-risk investment with an unchanging share value of $1 and the potential to earn a more attractive yield than a bank savings account.
“He did for money market funds what mutual funds did for small investors, bringing Wall Street to Main Street by allowing individuals to participate in what had been the playground of institutions,” said Peter G. Crane, president of Crane Data, which tracks money market mutual funds.
Before the financial crisis, the flagship fund run by the Reserve Management Company loaded up on $785 million of debt issued by Lehman Brothers. The debt, which made up about 1 percent of the fund’s assets, was suddenly worthless after Lehman Brothers declared bankruptcy, and led to the fund’s “breaking the buck,” which is when the value of the assets falls below $1 a share.
During the trial, lawyers for the S.E.C. faulted Mr. Bent for not describing the true extent of the fund’s perilous state during an emergency meeting called on the day that Lehman filed for bankruptcy protection.
In closing arguments, a lawyer for the S.E.C. claimed that the Bents tried to soothe investors’ fears while knowing that they would be unable to avert disaster for the fund.
Hurricane Sandy delayed the jury’s verdict when the courthouse in Manhattan was shuttered for a week.
After the jury announced its verdict, a spokesman for the Bents, Mark Arena, said that the men were “gratified that the jury found” that the men “committed no fraud.” Mr. Arena said that the Bents planned to appeal the jury’s findings that the younger Mr. Bent was liable for negligence.
Bruce Bent Sr. and Son Cleared of Fraud Charges
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