If it wasn't for the SEC, the state of Texas might never have gotten involved in the Reserve fraud case.

To read the full, continuing saga of the collapse of the Reserve Primary Fund and the ensuing legal battle, see MFWire's living timeline.

That tidbit came out this morning in downtown Manhattan at the U.S. District Court for the Southern District of New York, as two Reserve Primary Fund investors testified in the case against Reserve, its affiliated distributor, and the father and son duo at the top, Bruce Bent Sr. and Bruce Bent II.

First on the stand today was Eduardo "Lalo" Torres, an Austin, Texas-based credit analyst for the Texas Treasury Safekeeping Trust. Before Lehman Brothers collapsed on September 15, 2008, that trust had $1.294 billion of its $26 billion invested in the Primary Fund.

Torres testified about communications from Reserve and its sales force, who claimed that the company "unequivocally" stood behind the $1 NAV of the Primary Fund, even with its $785 million in Lehman paper in jeopardy.

"They [the Bents] have assured us that they will be standing behind the NAV of the fund unequivocally," Mark Rothwell, a Reserve sales exec, told Torres in a phone call on September 15, 2008 -- a recording of that called was played back this morning. "We just want to help you guys sleep a little easier."

Yet on cross examination by a defense attorney, Torres admitted that he only remembered that conversation and a subsequent written communication when prompted by the SEC, in May 2012.

"They told me that I was on phone recordings," Torres said.

Also testifying today was Steven Glenn Haussler, the chief financial officer of Cincinnati-based payroll company Paycorp and an alum of Salomon Brothers. Paycorp had $155.4 million in client funds in the Primary Fund on September 15, 2008, the day before the fund broke the buck, and, coincidentally, the day after a big power failure in Haussler's neighborhood.

Haussler and his team tried to pull $58 million out of the fund that day and another $50 million on the next, to fund client payrolls and the like, but was told by another Reserve sales executive that the wire transfer desk at Reserve was "overworked and overlogged."

"The NAV's upheld," Reserve sales executive Rob Reese told Haussler in a phone call on September 15, 2008, a recording of which was played in court today. Reese insisted that the Primary Fund's NAV would not fall below $1. "If it did, we would step in and support it."

When the fund broke the buck on September 16, 2008, Haussler said, he felt sick to his stomach.

Reserve scion Bruce Bent II is slated to resume his testimony this afternoon. 

Stay ahead of the news ... Sign up for our email alerts now
CLICK HERE