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Compliance September 25, 2008
Lawsuits Spring up from Lehman Brothers Fall
Broker/dealer Ameriprise Financial Services Inc. is suing mutual fund manager the Reserve Fund.
Reported by Rebecca Moore
Ameriprise alleges that Reserve Fund personnel secretly and improperly alerted various institutional investors that it was holding almost $800 million of Lehman Brothers Holdings Inc. debt.
TheDeal.com reports that Ameriprise claims the tipoffs were made on September 15, the day Lehman filed for Chapter 11 protection, and resulted in par-value redemptions for tipped-off investors, while other investors got stuck for less. The Reserve Fund announced publicly its Lehman-related holdings the afternoon of September 16, along with news its net asset value had slipped to $0.97 cents, according to the news source.
Legal documents indicate Ameriprise believes investors sought to redeem on September 15 and 16 some $41 billion of the fund’s $64 billion under management.
The lawsuit was filed on September 19 in a U.S. District Court in Minneapolis, and Judge Paul Magnuson immediately issued a temporary restraining order that froze redemptions. However, on Wednesday, Magnuson lifted the order, following a Monday order by the Securities and Exchange Commission suspending redemption of Reserve Fund shares and postponing payment for shares submitted for redemption but not yet paid.
Time Warner Inc., Home Depot Inc., and Lazard, three institutions that placed redemption orders with the Reserve Fund on September 15, say there were no secret tipoffs, according to affidavits asking the judge to vacate the temporary restraining order. The companies claim they made decisions based on several factors, including the inability of the Reserve Fund to make requested partial redemptions on September 15.
However, Time Warner and Home Depot affidavits did indicate decisions to redeem holdings in full were made after asking the Reserve Fund about its exposure to Lehman.
A spokesperson said in the news report Ameriprise was not necessarily pointing a finger at Time Warner, Home Depot or Lazard. He said discovery is necessary to determine whether the Reserve Fund “simply sat back and responded to information or reached out and flagged the financial conditions of the fund to major institutional investors.”
TheDeal.com also reports that hedge fund Third Avenue Institutional International Value Fund LP filed suit as well September 19 against the Reserve Fund in the U.S. District Court for the Southern District of New York, questioning redemption practices.