Manager of buck-breaking fund is accused of fraud

Massachusetts Secretary of State William F. Galvin today charged a New York investment manager with fraud for making false statements about its plans to support a money market fund after its holdings in Lehman Brothers Holding Co. plunged in value in September.

Galvin filed the charges against Reserve Management Co., its president and several affiliated entities after their handling of the Lehman's bankruptcy resulted in Reserve's Primary Fund "breaking the buck," or have its net value to shareholders fall below $1 a share, the first time in years that occurred in a money market fund.

Reserve had insisted the fund's value would be maintained, Galvin said, even as billions of dollars of redemption requests from worried investors drained the company's ability to keep the net asset value at $1. At the time more than one percent of Primary Fund's holdings were in Lehman securities, Galvin said.

But his administrative complaint states at the direction of managers, Reserve sales personnel made many statements that "contained outright falsities'' that company leaders knew knew weren't true. For instance, the complaint states Reserve misled investors about the status of its talks with the regulators to support the fund. It also states Reserve favored some larger clients over others in processing redemptions.

Reserve spokeswoman Ming Lee Hatch declined to comment.
(ROSS KERBER)