The Commission began trial this week in one of its highest profile market crisis cases, SEC v. Reserve Management Company, Inc., Case No. 1:09 CV 4346 (S.D.N.Y. Filed May 5, 2009). The action centers on the collapse of the Primary Reserve Fund and its principals as the market crisis unfolded. The Fund became the first to “break the buck,” precipitating wide spread panic in the already shaky financial markets. It also touched off a debate which continues today over the regulation of money market funds.

The case named as defendants Reserve Management Company or RMC, a registered investment advisor owned by defendant Bruce Bent Sr. and his family; Resrv Partners, a registered broker dealer which is the distributor for the funds managed by RMC and which is also controlled by the Bent defendants; Bruce Bent Sr., the Chairman of RMC and president, treasurer and trustee of the Fund; and Bruce Bent II, also an owner of RMC and a vice chairman and the vice president and assistant treasurer of the Fund.

The Fund held $785 million of Lehman Brothers bonds on September 15, 2008 when the investment banking firm collapsed into bankruptcy. By mid-morning on September 15 the Fund was overwhelmed with redemption demands. The Fund’s custodian bank halted redemptions. In an effort to reassure investors and others the defendants made a series of misrepresentations regarding the financial resources available, according to the complaint, to essentially prevent the Fund from breaking the buck. Later that day a flawed process was used to strike the NAV. This was advantageous to some investors but not to others. By the end of next day the Fund was forced to admit it had broken the buck. The Commission’s complaint alleges violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2).

Following the collapse of the Fund, the government stepped in and guaranteed money market funds to stem the growing public panic. The action was successful and prevented the possible collapse of an industry.

During the next few days and perhaps weeks the trial of Reserve Management will continue. The stakes for the SEC as well as the defendants are high. This is one of the few high profile market crisis cases to proceed to trial. It seeks to hold accountable for fraud prominent members of the money market industry. The trial is a “must win” for each side.

Perhaps more importantly however, the confidence of the investing public and the fate of an industry may hand in the balance. What happened in Reserve Management and the subsequent actions of the government in backstopping the industry is central to the call for increased regulation of the funds. Proposals have circulated in the years since the Fund collapsed. Some call for the NAV to float. Others suggest that the funds be required to maintain reserves to avoid the kind of potential catastrophe which caused the U.S. government to step in on a “too big to fail” theory and use its full faith and credit to save an industry. The industry has fought hard to preserve the status quo.

Despite the landmark Dodd-Frank legislation which was designed to address many market crisis issues, the question of money market funds was left to the SEC. For two an one half years the Commission staff has diligently studied the issues, preparing and refining proposals. Despite the efforts of Chairman Schapiro and significant pressure from the Treasury Department and others those, proposals have not seen the light of day.

At the end of August the Commission considered but declined to issue proposed money fund regulations for comment. The Chairman along with Commissioner Walter tried in vain not to adopt final regulations but only to issue proposals under development for months and years for comment. Two Commissioners opposed the action while a third suggested a “concept release,” which should be read and understood as “more study.” The action – or more appropriately the inaction – must have left the investing public on Main Street wondering if the gang that couldn’t shoot straight had been a mentor to the SEC.

The Reserve Management trial will recall for all the events of September 2008 when the nation watched as money funds and the savings of millions were about to dissolve in the market crisis abyss. As the events surrounding the collapse of what was once one of the nation’s oldest and most respected funds play out in a New York court room perhaps it will serve as a reminder that this case is about more than the parties involved. Winning is important to each side to be sure. But the real question is whether the lessons from this drama will finally be learned so that in the end the investing public can become a winner.