Fallen money-market fund makes $1 billion distribution, with $3.5B remaining amid litigation

Fallen money-market fund makes $1B distribution

BOSTON — A money-market mutual fund that held more than $60 billion before it notoriously “broke the buck” a year ago said Wednesday it will hand out $1 billion in a fifth distribution to investors from the fund’s remaining assets.

The $1 billion distribution, the smallest of five partial payouts since the Reserve Primary Fund’s collapse, will be made to shareholders on or about Oct. 2, said New York-based Reserve Management Co., which ran the fund.

After that payout, the fund will hold about $3.5 billion. The final distribution and its timing is tied up in a pending civil fraud case brought by the Securities and Exchange Commission against Reserve Management and its two top executives.

At a hearing in New York on Wednesday, U.S. District Court Judge Paul Gardephe said he was inclined to set a Dec. 23 deadline by which the bulk of the remaining assets should be distributed to the fund’s thousands of shareholders.

The fund had held more than $64 billion shortly before Sept. 16, 2008, when its net asset value fell below the $1 level needed to ensure investors a dollar-for-dollar return of their principal put into the fund. The fund declared $785 million that it held in Lehman Brothers debt worthless after the investment bank’s bankruptcy filing. That sank the fund’s net asset value to 97 cents, leading to the fund’s collapse as institutional investors demanded cash back and fund managers were forced to sell assets at steep discounts amid plunging markets.

The episode was the first such investor exposure to money-market losses since 1994, and created fears about the safety of the more than $3 trillion in assets held in money-market funds that are normally considered nearly as safe as cash. The government responded with a temporary government guarantee program that expired last week.

Reserve Primary’s latest distribution is being paid out on a pro rata basis proportionate to how much each investor held in the fund, Reserve Management said. Once the new distribution is completed, about 92 percent of the assets the fund held before breaking the buck will have been returned to investors, Reserve Management said.

The fund held $4.5 billion as of Tuesday. The size of the final payout to investors depends in part on costs to cover ongoing litigation by shareholders over the fund’s collapse.

The SEC complaint filed in May accuses Reserve Management firm and two executives of withholding key facts from investors around the time of the fund’s collapse.

During Wednesday’s hearing, Gardephe considered the SEC’s proposed distribution plan for the remaining fund assets but did not grant final approval. One unresolved issue involves whether the government has authority to “claw back” some assets from investors who hurriedly pulled money out of the fund as it was collapsing, and managed to get a full return of their principal before the fund shut off further redemptions.

Massachusetts Secretary of State William Galvin objected to steps the SEC proposed that would potentially allow it to claw back such money, if a court-appointed monitor approved. Galvin said claw backs would unfairly penalize some investors who he said were “innocent” parties in the fund’s collapse.

Gardephe on Wednesday asked for more briefs on the claw back issue before he makes a decision.

An update that Reserve Management published on Sept. 17 said the fund had accrued expenses of nearly $20 million from various fund trustee and management fees during the fund’s liquidation. In addition, the fund has earned nearly $197 million in net income from its assets during the liquidation, an amount that remains undistributed to investors, and may decrease once final expenses are determined.

(This version CORRECTS to show that the $3.5 billion that will remain in the fund after the new distribution is not a separate amount from $3.5 billion created as a reserve to cover legal costs; UPDATES with court hearing, timeline for potential distribution of remaining assets, legal issues.)