This is a securities class action filed on behalf of a class of persons and entities who purchased or acquired securities of the Reserve Primary Fund between September 28, 2006 and September 16, 2008 (the “Class Period”). On August 26, 2009, the Honorable Paul G. Gardephe appointed BLB&G client Third Avenue Institutional International Value Fund, L.P. as Lead Plaintiff and BLB&G as Lead Counsel for the Class.
On September 16, 2008, The Reserve announced that its premier money market fund – the $62 billion Primary Fund – had “broken the buck,” or fallen below the required $1.00 net asset value (“NAV”). Money market funds are designed to serve as an extremely safe, low-yield alternative to holding cash or investing money in short term instruments. Defendants repeatedly marketed the Primary Fund as the epitome of a “safe” and “conservative” money market fund, and emphasized the Primary Fund’s superiority over competitor funds that had purportedly “prostituted” the concept of money market funds “by putting garbage in the funds and reaching for yield.” Because of the Primary Fund’s exposure to risky commercial paper, including $785 million in commercial paper issued by Lehman Brothers Holdings, Inc. (“Lehman Brothers”), the Lehman Brothers bankruptcy announcement on September 15, 2008 caused the Primary Fund to suffer losses so severe that it became the first, and to this date only, retail money market fund to face liquidation.
Lead Plaintiff alleges that Defendants willfully and recklessly changed the investment objectives of the Primary Fund so drastically that they allowed the nation’s oldest market fund to fail, costing Lead Plaintiff and the Class hundreds of millions of dollars in losses. Although Defendants’ statements about the safety and liquidity of the Primary Fund may have been correct at one time, in March 2006 Defendants decided to lift the Primary Fund’s historical prohibition on exposure to commercial paper. These increased risks paid substantial dividends to Defendants, and by September 2008 the Primary Fund had the highest 12-month yield among the 2,100 money market funds tracked by Morningstar, Inc., resulting in hundreds of millions of dollars in additional management fees to Defendants. Although Defendants were obligated to inform investors of the fundamental shift towards a riskier investment policy, they chose instead to repeatedly make false and misleading statements emphasizing the Primary Fund’s “stable” policy of avoiding risk and focusing on liquidity and capital.
Within hours of Lehman Brothers’ bankruptcy announcement on September 15, Defendants commenced a pattern of deceitful conduct that included misleading the Board of Trustees about market pricing for Lehman Brothers paper; illegally tipping select larger investors about the gravity of the situation and then prioritizing these investor’ redemption requests; and distributing a press release that falsely stated that Defendants had taken steps to enter into a credit support agreement to protect the integrity of the Primary Fund’s NAV against the Lehman Brothers loss. Despite these deceits, by September 16, 2008, Defendants could no longer conceal the truth and were forced to disclose that the Lehman Brothers exposure had caused the Primary Fund to break the buck.
Defendants’ misconduct continued even after the September 16, 2008 announcement. After numerous unexplained delays in the announcement of the plan of liquidation, Defendants shocked investors by announcing the withholding of a “Special Reserve” of $3.5 billion to satisfy legal claims brought against them based on their own misconduct. Defendants continue to seek lucrative management fees in exchange for the work they have done to liquidate the same fund that they recklessly destroyed. Although the majority of the Primary Fund’s capital has been distributed, Defendants continue to hold billions of dollars of investors’ money. As a result of Defendants’ misconduct, Lead Plaintiff and the Class have suffered significant losses, totaling hundreds of millions of dollars.
On January 5, 2010, BLB&G filed the Consolidated Class Action Complaint on behalf of Lead Plaintiff and the Class. Defendants moved to dismiss on June 25, 2010, Lead Plaintiff filed its opposition brief on August 13, 2010, and Defendants' filed their reply on September 3, 2010. The motion is pending before the District Court.
