Judge Consolidates Reserve Primary Fund Lawsuits

U.S. District Judge Paul Gardephe named Third Avenue Institutional International Value Fund LP, part of the Third Avenue fund family overseen by value investor Martin Whitman, lead plaintiff, according to Reuters. Gardephe said the Third Avenue fund’s financial stake in the case “dwarfs” that of any other proposed lead plaintiff.

The lawsuits sprang up after the Reserve Primary Fund, once worth $62 billion, announced it “broke the buck” following Lehman Brothers Holdings Inc’s bankruptcy (see “Lawsuits Spring up from Lehman Brothers Fall ”). The fund held about $785 million of Lehman debt when the bank filed for bankruptcy protection, triggering a shareholder run on the fund. The Reserve Fund announced publicly its Lehman-related holdings the afternoon of September 16, 2008, along with news its net asset value had slipped to $0.97 cents.

The fund paid investors one-third of their assets last October (see “Reserve Primary Fund Promises $20B in Shareholder Repayments”), and according to Reuters, on Tuesday, Reserve Primary said each unpaid investor in the fund could receive as much as 99 cents on the dollar, up from the 98.5 cents it had previously projected.

The news report said Gardephe ruled that because Reserve Primary has already distributed more than 85% of its assets, it would create “waste” and reduce shareholder recoveries to allow multiple lawsuits.

The Securities and Exchange Commission’s (SEC) Division of Enforcement has charged the two top executives of the Reserve Management Co. money-market fund with fraudulently keeping secret the true financial situation of their Primary Fund after Lehman Brothers filed for bankruptcy (see “Reserve Management Execs Accused of Fraud in Money Fund Debacle”). In June, the SEC asked a federal judge to block some investor lawsuits against the Reserve Primary Fund to ensure all shareholders get as much money as possible (see “SEC Will Move to Block Reserve Fund Suits”).

The consolidated case is In re The Reserve Primary Fund Securities & Derivative Class Action Litigation, U.S. District Court, Southern District of New York (Manhattan), No. 08-8060.