Several securities class actions have been filed against Reserve Management Co.’s Primary Fund, which reportedly became the first money-market mutual fund to ever expose retail clients to losses by “breaking the buck.” Although not guaranteed, money-market mutual funds shares historically remain at $1.00 per share.
The Primary Fund’s problems reportedly resulted from its holdings of $785 million in unsecured debt of Lehman Brothers, which were written down to zero after the investment bank filed for bankruptcy on September 15, Business Week reports. The $64 billion fund was quickly swamped by investors wanting to pull out their money, and its assets dropped to $23 billion. On Sept. 16 the fund announced that its asset value had dropped to 97 cents for each investor dollar, and only investors who redeemed before a mid-afternoon cutoff time on Sept. 16 were guaranteed a dollar-for-dollar return.
In addition, Ameriprise Financial filed a lawsuit on Friday alleging that The Primary Fund “secretly notified a number of major institutional investors” about the Lehman exposure on the morning of the bankruptcy filing, and also advised of the risk of breaking the buck. Ameriprise had invested more than $3 billion in the Primary Fund on behalf of more than 300,000 client accounts through brokerage subsidiaries, as well as $128 million of its own money in the fund.
As discussed in the Business Week article, although it is extraordinary, the fact that the fund’s net asset value fell below $1.00 should not be enough to prevail in a lawsuit. Rather, “investors likely will have to show misconduct on the part of a fund’s managers, such as favoring certain clients over others, or making riskier investments than were allowed under the fund’s criteria.”