Regulators failed Monday to win a clear victory over the father-and-son team whose mutual fund failed in one of the signal events of the 2008 financial crisis. It was the latest setback in efforts by regulators to hold individuals responsible for the 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 Manhattan federal jury rejected claims by the Securities and Exchange Commission that Bruce Bent, the inventor of a popular investment vehicle called a money market fund, defrauded investors when his flagship fund collapsed in September 2008, sowing panic among ordinary investors.
The collapse was a turning point because the fund, the Reserve Primary Fund, run by Mr. Bent and his son, Bruce Bent II, was pitched to investors as a nearly risk-free alternative to a bank account. The fund ended up foundering under the weight of hundreds of millions of dollars of bonds issued by Lehman Brothers that became worthless with Lehman’s bankruptcy on Sept. 15, 2008.
The S.E.C.’s lawyers accused the men of misleading investors and the company’s trustees as the fund’s investments fell below a net asset value of $1 per share, an event known as “breaking the buck.” That guaranteed value had been the symbol to investors that they could recover every dollar they invested in such a fund.
The agency accused the pair in a 2009 civil suit of falsely providing assurances that they would plow money into the faltering fund. In fact, the agency contended, both men “secretly harbored” concerns that they could not shore up the fund and keep it from insolvency.
The jury’s decision to clear Mr. Bent and his son on civil fraud charges underscores the difficulty that prosecutors and regulators have had in going after the big bets taken by various individuals and major financial institutions in the years leading up to the financial crisis.
The gulf in prosecutions against individuals is a stark departure from the prosecutions secured after the failure of savings and loan institutions in the late 1980s, after which more than 800 bank officials went to jail. In the wake of the latest crisis, law enforcement officials have failed to secure any high-profile courtroom victories.
“The agency has lost again because they haven’t been able to secure an individual conviction, even in this banner case,” said William K. Black, a professor of law at University of Missouri, Kansas City, and the federal government’s director of litigation during the savings and loan crisis.
The jurors did find the younger Mr. Bent negligent, and two entities associated with the fund were found liable on some counts of fraud.
Robert Khuzami, the S.E.C.’s director of enforcement, emphasized the points on which the commission’s case was affirmed.
“Today’s verdict of liability sends the message that fund executives cannot withhold from investors and trustees key information about their fund’s vulnerability,” he said. “This case, along with our actions against more than 100 other entities and individuals, demonstrates our continuing commitment to pursuing cases arising out of the financial crisis.”
But critics of the agency said Monday’s decision was still a defeat.
Thomas Gorman, a partner at Dorsey & Whitney and formerly the senior counsel for the S.E.C.’s Division of Enforcement, noted that even with the negligence finding, “the complaint charged them with intentional fraud and went to great length to detail that, and the jury rejected those charges in each instance.”
Monday’s verdict came as regulators are still battling over rules to govern the money market fund industry.
In testimony at the trial, the elder Mr. Bent struck an unapologetic tone. “I thought Lehman was a good, worthwhile investment,” he said, adding in his testimony that the S.E.C. had made the same determination.
Mr. Bent’s fund had plowed roughly $785 million into the Lehman Brothers’ debt. That decision proved fatal when Lehman filed for bankruptcy and the debt, which made up about 1 percent of the fund’s assets, was suddenly worthless.
In the S.E.C.’s case, the agency accused the Bents of deceiving investors. Despite telling investors that they would avert the collapse of the fund by putting more money in, the agency alleged, the Bents never really had any intention of doing that.
Bruce Bent Sr. and Son Cleared of Fraud Charges
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