Bruce R Bent liked to tell interviewers that his business career began when he was nine as a delivery boy for the local daily newspaper in Nassau County, just east of New York City. By his own account, his first job on Wall Street was as a "flunky".
But in 1970, he went into business with a partner, Henry Brown, and the two men came up with a revolutionary idea: the money-market mutual fund.
Money market funds are supposed to be as safe as money in the bank, investing in low-risk, short-term securities that guarantee investors a secure principal and a yield that beats what banks offer for plain old money. It's been a very successful concept, giving birth to a $3 trillion industry, including $120 billion at Bent's Reserve Management.
But disaster struck last September. When the US federal government decided not to bail out Lehman Brothers, driving the investment bank into bankruptcy, it left Reserve's $62 billion Primary Fund with a $785 million exposure in Lehman securities. As soon as Lehman filed for bankruptcy on 15 September, billions of dollars in redemptions began draining money from the Primary Fund.
The patriarch was, oddly, vacationing in Italy just at this time. That left it to his son, senior vice president Bruce R Bent II, to call the SEC and discuss what it could do to support the Primary Fund. In the US, a mutual fund is a separate legal entity from the group that manages the fund, and it requires approval from the SEC for the management company to inject money into the fund. Bent told the SEC he would submit the appropriate paperwork later in the day.
This is where it appears that the younger Bent began to make some bad choices. According to a civil complaint filed by Massachusetts state authorities, Bent II got off the phone with the SEC at 1:15pm, and at 1:19pm sent an e-mail to his sales force telling it to calm investors with the news that SEC approval for a capital support arrangement was imminent.
And yet, according to the Massachusetts complaint, Reserve never submitted an application to support the fund. As the situation deteriorated, and the fund realised it would have to write off much of its Lehman exposure, Reserve saw that it would not have the wherewithal to support the fund.
But, says the complaint, Bent II never informed his sales force of the change in plans, and they never corrected the impression they were giving investors. And that constitutes fraud, according to the complaint, which names the company entities and Bent II as respondents.
By the close of business the following day, Reserve had to announce that the Primary Fund had "broken the buck" – that is, its net asset value had fallen below the $1 par value per share. Maintaining this par value was the guarantee that made money market funds so successful, ensuring that investors would not lose any principal. Reserve's funds were frozen, so that investors do not have access to their money and face losses when they do finally recover it.
The complaint also alleges other false statements by Reserve's top management as it tried to stop the inundation of redemptions. According to the complaint, Reserve said the Lehman securities would be valued at par even though they had already decided to write off part of their exposure and they said the delay in getting redemption funds out was due to State Street, the custodial bank, which was not the case.
More trouble is in store. The SEC said in December it was readying its own complaint against the company, Bent, Bent II and other son Arthur Bent III.
While the elder Bent has been feted as one of the patriarchs of Wall Street, Bent II, who is named in the Massachusetts complaint, sports a goatee and shoulder-length hair and likes to move in somewhat more fashionable circles.
He and his wife Rebecca live in a penthouse apartment in Greenwich Village. A 2004 party to launch Rebecca Bent's cookbook of hamburger recipes numbered "Sopranos" star James Gandolfini among its guests and was written up in Variety, Hollywood's trade paper. Just before Christmas, the couple put their 4,500-square-foot apartment up for sale for $16.2 million.
Possible outcomes of the Massachusetts and SEC complaints include Bent II receiving a heavy fine and getting barred from the securities industry, but more galling would be the fall from grace of the business his father created.