SEC Disputes Claim that Commissioners Nixed Deal
A battle of words has broken out between the Securities and Exchange Commission and a Morgan Lewis & Bockius partner representing the Reserve Primary Fund, the $62 billion money market fund that failed in 2008. The defense lawyer claims in court filings that the SEC's commissioners vetoed a settlement, while an SEC lawyer has denied that claim, stating that the parties never reached a settlement.
In light of these conflicting reports, it's not clear if this case represents another example of the SEC taking a tougher stance in settlements under chairman Mary Jo White. In July, the SEC's commissioners rejected a proposed settlement the agency's staff negotiated with hedge fund mogul Phil Falcone. A tougher deal was later struck in which Falcone admitted wrongdoing, breaking with the SEC's tradition of allowing defendants to settle without such admissions.
RPF failed in September 2008 after its $780 million investment with Lehman Brothers Holdings Inc. went up in smoke. The SEC brought a civil fraud case against RPF in 2009, alleging it made false assurances to investors after Lehman's collapse. It also sued Bruce Bent and his son Bruce Bent II, who served as the fund's CEO and president, respectively. (We reported on the backstory here and here.)
In a 2012 trial the defendants beat the most serious fraud charges, but the SEC prevailed on some claims, including a negligence claim against Bent II. After the verdict the SEC sought money penalties and moved for a new trial. RPF tried to settle with the SEC, as well as with investors who brought a parallel class action. RPF announced a $55 million deal with shareholders this month, but hasn't been as successful with the SEC.
On September 5 SEC lawyer Nancy Brown informed Manhattan U.S. District Judge Paul Gardephe that the parties had reached a stalemate. That same day defense lawyer John Dellaportas of Morgan Lewis, who represents all the defendants, wrote to Gardephe to express his frustrations. He claimed that his partner Robert Romano, a former SEC official, worked out a final agreement with Brown. But she later called him to say that the SEC's commissioners rejected the settlement, and that the agency no longer had any interest in a deal, he wrote.
These letters weren't spotted by journalists until September 13, when Reuters and Bloomberg reported on Dellaportas's allegations. In the wake of that publicity, Brown sent a more detailed letter to the court September 14 to correct a "misstatement" by the defendants, she wrote. "Contrary to their contention that a settlement had been considered and rejected by the Commission, the parties' negotiations never reached the point at which a proposal was submitted to the Commission for its consideration." In another letter that day, Dellaportas accused the SEC of taking "ever-shifting" positions.
We asked Dellaportas to comment, but he referred us to this statement from the Bents's spokesperson: "We remain gratified by the jury verdict in the SEC action, which found Bruce Bent and Bruce Bent II committed no fraud. We were disappointed that we were not able to resolve the remaining issues in that case but in any event we do not believe the SEC's request for a new trial is warranted."
In a statement, SEC spokesperson Florence Harmon indicated that the agency wants to secure relief for shareholders that goes above what they would get under the proposed class action settlement. "We believe the SEC plan for distributing funds would put more money in the pockets of investors, which is why we have asked the court to decide how best to proceed," she said.