With billions of dollars of client money at stake, Minneapolis broker-dealer Ameriprise Financial Inc. on Friday sued New York fund manager the Reserve Management Co., alleging it tipped off big institutional investors about its troubled money market fund, the Primary Fund, but not smaller investors.
The Primary Fund announced earlier this week that its net asset value fell below $1 to 97 cents, meaning clients lost money in a fund considered as safe as cash. It is only the second money market fund to fall below the $1-a-share paid by investors, known as "breaking the buck."
Ameriprise and its subsidiary Securities America said it filed the suit "to protect the interest of its retail investor clients," who have $3.2 billion invested in the Reserve Primary Fund.
The companies also have millions of their own capital invested.
With confidence in money funds undermined by losses at the $62 billion Primary Fund, the U.S. Treasury announced Friday that it will insure money market funds against losses for the next year as it seeks to prevent a run on the industry's $3.35 trillion of assets.
The U.S. Treasury will use an existing $50 billion emergency pool to offset any losses incurred by investors as fund managers cope with the worst financial crisis since the Great Depression.
"This came just in the nick of time," Peter Crane, president of Crane Data, told Bloomberg News in an interview. "We were likely going to see more funds halt redemptions" and break the buck.
The Ameriprise lawsuit states that on Monday, Reserve secretly notified institutional investors of the fund's $785 million exposure to Lehman Brothers, shortly after Lehman announced it would file for bankruptcy.
This caused what Ameriprise General Counsel John Junek described as a "landslide" of redemptions totaling approximately $41 billion. The fund has had $60 billion in redemption requests this week, according to the Reserve Fund.
"Only after the defendants' secret tipees submitted their massive redemption requests, did the defendants announce publicly the next afternoon -- and thus to the rest of shareholders -- the severe negative consequences of the Primary Fund's holdings of Lehman securities," according to the lawsuit.
"The fact that all the money went out before they went public makes it fairly clear there was some inappropriate sharing of nonpublic data," said Ameriprise spokesman Ben Pratt.
Primary Fund's press release gave speedy shareholders one hour to request their money at the $1 price. However, this left Ameriprise with its hands tied, said Pratt. "We could not get permission [from clients] to sell so quickly," leaving its clients stuck with the lower price.
The Primary Fund's drop was a surprise to clients and advisers alike. "This was supposed to be as close to a cash holding as possible," said Ameriprise adviser Anna Ibrahim, who has some clients with as much as $259,000 tied up in the fund. Some clients use the fund to pay their mortgage and other day-to-day expenses, but "we're not going to let checks bounce," she said.
Also Friday, Reserve Management asked the Securities and Exchange Commission (SEC) to suspend all rights of redemption from both its Primary Fund and U.S. Government Fund for a period longer than seven days. Ameriprise clients are also invested in the U.S. Government Fund, said Pratt. Reserve also closed all of its funds, and earlier announced that investors won't see cash from their redemption requests for their other funds for up to seven calendar days.
The SEC is expected to grant that request to halt redemptions from the funds and to oversee the redemption process to guarantee that it is fair for both retail and institutional investors.
In St. Paul Federal Court Friday, U.S. District Court Judge Paul Magnuson issued a temporary restraining order to prevent Reserve from processing redemption requests until the next court hearing on Tuesday.
Kara McGuire • 612-673-7293
Bloomberg contributed to this report.