On November 12, 2012, a federal jury in the U.S. District Court for the Southern District of New York issued a mixed verdict in the case involving Bruce Bent Sr., the founder of the Reserve Primary Fund (the “Primary Fund”), his son, Bruce Bent II, and the registered investment adviser and the distributor of the Primary Fund (collectively, the “defendants”). SEC v. Reserve Management Co. Inc., No. 09 Civ. 4346 (S.D.N.Y. Nov. 12, 2012). The case stemmed from charges filed by the SEC in 2009 claiming that the defendants had misled the Primary Fund’s investors, board of trustees and rating agencies in September 2008 about the impact of the Lehman Brothers bankruptcy on the Primary Fund’s holdings. The Primary Fund, a money market fund, “broke the buck,” meaning that its net asset value fell below $1.00 per share, when the value of the $758 million of Lehman securities held by it plummeted upon Lehman’s bankruptcy filing in September 2008. According to the SEC, the defendants made a number of material misstatements and omissions, including that they misrepresented that the investment adviser would provide credit support to maintain the $1.00 net asset value. The SEC’s complaint in 2009 charged the defendants with violating certain provisions of the Securities Act, the Exchange Act and the Advisers Act for such misstatements and material omissions. For a further discussion of the SEC’s complaint, please see the May 8, 2009 Investment Management Regulatory Update.

The jury cleared Bruce Bent Sr. of all charges. The jury also cleared Bruce Bent II of all charges other than one count of negligently violating Section 17(a) of the Securities Act. The jury found the investment adviser and the distributor guilty of various charges, including that they had knowingly or recklessly violated Section 17(a) of the Securities Act and that the investment adviser had knowingly or recklessly violated Section 206(4) of the Advisers Act. The defendants were not found liable for other serious charges, including various aiding and abetting allegations. On December 12, 2012, the SEC filed a motion petitioning for judgment as a matter of law and a new trial on certain claims against the defendants. We will continue to monitor the developments in this area.