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Case 1:08-cv-1 0261 -PGG Document 63 Filed 11/20/2009 Page 1 of 68
UNITED STATES D1 TRICT COURTSOUTHERN DISTRICT OF NEW YORK
hay,+^C^ 9 1 11,
WILLIAM ROSS and DAWN ROSS, Individually Ci it ActicGAS `and On Behalf of All Others Similarly Situated, P
Plaintiffs, CLASS ACTIQN
Vs.
RESERVE MANAGEMENT COMPANY, INC.RESERVE MANAGEMENT CORPORATION,BRUCE R. BEAT, BRUCE R. BEAT Ti, ARTHUR T.BENT 111, JOSEPH H. MOGLI , FREDRIC J.TOI+,r1CZYK, WILLIAM J. GERBER, J. JOERI KETTS, TORONTO DOMINION BANK,RESRV PARTNERS, INC., AND TDAMERITRADE HOLDING CORPORATION,
Defendants.
x
RESERVE YIELD PLUS FUND INVESTOI GROUP'S . FIRST AMENDED GLASS ACTIONCOMPLAINT
Case 1:08-cv-1 0261 -PGG Document 63 Filed 11/20/2009 Page 2 of 68
I. NATURE OF THE ACTION
}. This is a class action braught by the Lead Plaintiff. the Reserve Yield Plus
Fund Investor Group, on behalf oFall persons or entities who purchased or geld shares of the
Reserve Yield Plus Fund ("Reserve Field Plus Fund" or the "fund"), which shares were
offered, sold or managed by The Deserve Family of affiliates, and TD Arneritr de during the
period froin July 27, 2007 to September 16, 2008, inclusive (the "Class Period") and who
were damaged thereby. 'Che action pursues remedies for purchasers and holders of the
Reserve Yield Plus Fund, including in ccnnection with its Jul} 27, 2007 offering (the
"OlTerinW), seeking to pursue remedies under the Securities Act o 1933 (the "1933 Act"),
the Securities Exchange Act of 1934 (the "1934 Act" ), the Investment Company Act of 1940
(the "1940 Act") and state law. The action does not seek to recover any monies from the
assets of the Fund.
I The Reserve Short-Term Investment Trust was organized as a Delaware
statutory trust on January 14, 2004. The Trust is an open-end, diversified management
investment company, registered with the Securities and Exchange Commission ("SEC') under
the 1940 Act.
3. 'Che Deserve field Plus Fund is a type of diversified mutual Fund or cash fund,
designed as a convenient complement to the investment of temporary cash balances in short-
term money market accounts or instruments. Investors place cash in this type of fund with the
expectation that returns will not he especial ly high but also with the expectation that managers
will manage the fund in a inanner that will inaintaiit a stable $1.00 net asset vaILIe ("NAV").
4. The Reserve Yield Plus fund was comprised of various Classes, each to be
managed with the stated intent of maintaining a stable $1.00 N AV. The Fund's Classes are as
follows: (i) Reserve `f ield Plus Fund Class Treasurer's Trust ('`g lass TT"), (i i) Reserve Yield
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Case 1:08-cv-1 0261 -PGG Document 63 Filed 11/20/2009 Page 3 of 68
Plus Fund Class R ("Class R"); (iii) Reserve Yield Plus Fund Liquidity Class 1; and (iv)
Reserve Yield Plus fund Liquidity Class lii, Liquidity Class I l and Treasurer's Trust
commenced operations c June 8, 2005, Liquidity Class 1 and Class R commenced
operations on August 31, 2005.
5_ TD Ameritrade Holding Corporation ('`TD Ameritrade") sold more than 97%
of Fund Class TT, more than 98% of Fund Class R, and nearly 85% of al l of the Fund's
Classes cornbined.
6. Reserve Management Corporation ("Tlie Reserve"), and its founder, Bruce
Bent Sr„ were long time advocates of the safety and stability of money market funds. Bent Sr.
and his Family own and control Defendants RMCI and Resry Partners, Inc, According to
RMty I, as of September 2008:
The Reserve is the world I s most experienced money fund managerand the largest asset management company dedicated solely tocash and liquidity management. With over 5125 billion in assets.representing the trust of hundreds of institutions and rnl II ion s of
individuals, The Reserve is recognized as the fastest growingmoney fund complex in 2005, 2006 and 2007 according toi ill oneyNct.
7. 0n July 27, 2007. Defendants caused the Reserve Short-Term Investment Trust
('`Reserve Short-'Perm investment Trust" or the "Trust") to file with the SEC a Registration
Statement nn Form N-1A, a Prospectus and Statement ofAdditionaI In formal icin (collectively
the "Prospectus"). The Prospectus ernphasiaed the Fund as having till of the Features ofa
money market fund. Tor example, the SEC defines a Money Market. Fund as follows on their
website:
A money market fund is a type of mutual fund that is required bylaw to invest in law-risk securities. These funds have relativelylaw risks compared to other mutual funds and pay dividends thatgenerally reflect short-term interest rates, , ..
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Case 1:08-cv-1 0261 -PGG Document 63 Filed 11/20/2009 Page 4 of 68
Money rnarket funds typically invest in government securities,certificates of deposit, commercial paper of companies, or otherhighly liquid and low-risk securities. They attempt to keep their netasset value (NAV) at a constant $1.00 per share — only the yieldgoes up mid down.
http;//www .sec.gov/answers/rnfrnmkt,htrn . The SEC website also points out that money
market funds are tightly regulated under the Investment Company Act of 1940 and the rules
adopted under that Act, pailioulariy Rule 2a-7 under the Act. #d. It is widely recognized that
individual investors use money market funds for a variety Df reasons they choose not to use a
regular mutual fund:
This combination of stability of principal and payment of short-term }Melds has made money market funds one or the most popularinvestment vehicles for man} different types of investors.Commonly offered features, .5uch as check-writing privileges.Exchange privileges, and near-immediate liquidity, havecontributed to the popularity of money market funds. More than750 money market funds are registered with the Commission, andcollectively they hold approximately $3.8 trillion oFassets. Moneymarket funds account for approximately 39 percent of allinvestment company assets.
Individual (or "retail") investors use money market funds for avariety or reasons. For example, they may invest in money marketfunds to hold cash temporarily or to take a temporary "defensivepositicrr" in anticipation of declining equity markets. Moneyinarket funds also pi ay an important mole in cash managementaccounts For banks, broker- dealers, variable insurance products,and retirement accounts. As of December 2008, about one-fifth ofU.S. households cash balances were lie Id in money market Funds.,,
Securities and Exchange Commission, 17 CFR Parts 270 and 274 . Similarly, the Prospectus
stated that the Reserve Yield Plus Fund's focus was to "seek as high a level of current income
as is consistent with the preservation of capital and liquidity" and a "stable $1.00 share price.'"
The Fund later issued reports that touted the Fund as being an "enhanced cash fund[J" ,
emphasized the Fund's focus an "safety oFprincipa1, liquidity and soundness of slacp" and
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Case 1:08-cv-1 0261 -PGG Document 63 Filed 11/20/2009 Page 5 of 68
represented that "The Fund is designed as an investment vehicle for short-term cash
management and is intender) to provide liquidity to shareholders."
8. Eighty-five to ninety-eight percent orthe Fund's purchasers were sold their
interests in the Fund by TD Areritrade and its employees. As a matter cf course, TD
Ameritrade steered investors who sought to invest in a rnoney market ILnd into the Fund as a
money market fund, or into the Fund as an investment option that was just like a money
market fund. TD Ameritrade routinely used the magic words deF'ining a money market fund,
highlighting that the Fund sought to maintain a 51.00 NAV, and that the Fund was a safe and
stable investment,
9. Due to defendants' actions, misrepresentations and omissions of maw rial facts,
and due to defendants' breaches of riduciary obligations as described herein, investors
purchased and/or continued to hold shares in the Fund.
10. On September 1, 2008, The Reserve Fund, an entity related to the Reserve
Short-Term Investment Trust, shocked the market when it issued a press release concerning
one of its money funds commonly known as the Primary Fund. The release announced in part
that: "The value of the debt securities issued by Lehman Brothers Holdings, Inc. (face value
$785 million) and held by the Primary Fund has been valued at zero a ffective as of 4:DOPM
New fork time today. As a result, the NAV of the primary Fund, e1Yective as of 4:OOPM, is
$0.97 per share.''
11, Further, on September 16, 2008, the NAV ol'the Reserve Yield Plus Fund also
collapsed from $1.00 per share to close at $4,97 clue to its investment in debt securities issued
by Lehman Brothers Holdings, Inc. ("Lehman").
1. Thereafter, the Reserve Short-Term Investment Trust suspended providing a
daily NAV on the Deserve Yield Plus Fund.
Case 1:08-cv-1 0261 -PGG Document 63 Filed 11/20/2009 Page 6 of 68
13. The true facts, which were oinitted from the Prospectus and other statements
made by defendants during the Class Period. were as follows:
(a) The Fund was no longer adhering to the stated objectives ofprescrving
capital, providing liquidity and stability, but in an effort to achieve greater yields was
pursuing riskier instruments;
(b) The Fund was purchasing significant amounts of Lehman commercial
paper between February and March 2008, when the financial community was concerned about
Lehman's financial solvency, especially after Bear Stearns coIIapsed in March 2008;
(c) The Fund was neither a money market fund, nor just like a m ney
market fund for purposes of maintaining a safe and stable $1.00 NAV;
(d) The Fund was not designed to protect the $1.00 NA V, as were
traditional money market funds, and was thus significantly riskier than money market funds;
fie) The Fund's internal controls were inadequate to prevent defendants
from taking on excessive risk;
{q TD Ameritrade failed to disclose the extent of its relationship with the
Trust and the Fund, and the otmpensation that it received by placing Class Mambers' assets
int4a the Reserve Yield Plus Fund;
(g) The Reserve entities did not have sufficient resources to support
maintenance of a stable $1.00 NAV; and
(h) TD Ameritmde had no intention to support the Fund or commit its
resources to maintenance of stable S1.'D0 NAV.
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Case 1:08-cv-1 0261 -PGG Document 63 Filed 11/20/2009 Page 7 of 68
H. JURISDICTION AND VENUE
14. The claims asserted herein arise under and pursuantto § 11, 12(a)(2) and 15
of the 1933 Act, §§ 10(b) and 20(a) of the 1934 A ,.t and SEC Rule 1 Ob-5, 13(a) of the 1940
Act and state law.
15. This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. § 1331, §22 of the 1933 Act, 27 of the 1934 Act and §44 c the 1940 Act.
16. Venue its proper in this District pursuant to 28 U.S.C. 1391(b), because many
ofthe acts and practices complained of herein occurred in substantial part in this District.
17. In connection with the acts alleged in this complaint, deFendants, directly or
indirectly, used the means and instrumentalities of interstate corn merce, including, but not
Iimited to, the mails, interstate telephone communications and electronic communications, and
the facilities of the national securities markets.
I11. PARTIES
19, The Lead Plaintiff, the Reserve Yield Plus Fund Investor Group C'Plaintiff" ar
"Plaintiffs") is comprised as Follows:
(a) Plaintiff David Clouse acquired shares of the, Fund through TD
meritrade, and has been damaged thereby.
(b) PIaintiffThomas Jolinston acquired shares c the Fund through TD
Ameritrade, and has been damaged thereby.
(c) Plaintiff David Krug acquired shares of the Fund through TD
Ameritrade, and has been damaged thereby.
(d) Plaintiff E. H. Levering acquired shares of the Fund through TD
Arneritrade, and leas been damaged thereby.
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Case 1:08-cv-1 0261 -PGG Document 63 Filed 11/20/2009 Page 8 of 68
(e) Plaintiff 1V1ark Chipman acquired shares of the Fund through TD
Ameritrade, and has been damaged thereby.
{f) Plaintiff Wayne Lehman acquired shares of the Fund through TD
Ameritrade, and has been darnaged thereby..
19, Non-Defendant Reserve Short-Term Investment Trust is an open-end
management investment company registered Linder the 1940 Act. The Trust and its officers
and trustees are responsible for ensuring that the Fund complies with its stated objectives_
The Trust was the registrant of the Offering. The Trust is based in ?slew York, New York.
The only business of the Trust was operation of the Reserve Yield Plus Fund C"Yield Plus
Fund" or "Fund"). The Fund, a diversified mutual fund, was managed and marketed by
RM CI and Resry Partners as a fund that sought to provide investors with a stable $1.00 NA V.
The Yield Plus Fund held $30 million in Lehman debt in its port Fnlio on September 15, 2005.
The Yield Pius Fund is governed by the same Board of Trustees as the Reserve's Primary
Fund.
0, The Yield Plus Fund was marketed and operated like a money market fund that
historically provided shareholdens with a 5 1. 00 per sliare NAV. Like most investors in money
market funds, investors in the Yield Plus Fund viewed it as a sane and stable option for
preservation of capital. For many investors seeking preservation of capital and virtually
immediate access to their funds, money market funds are an attractive regulated alternative to
bank deposits.
21. Defendant Reserve Mnnagemem Company, Inc. ("RMC1") acts as the Fund's
investment adviser, monitors a range of economic and financial factors and, based on that
analysis, the assets of the Fund are invested in a mix of U - S - dollar denominated securities that
are intended to provide ws high a return as possible without jeopardizing the stability of the
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Case 1:08-cv-1 0261 -PGG Document 63 Filed 11/20/2009 Page 9 of 68
Fund's share price and without violating its investment policy. R M C I furnishes continuous
investment advisory and other management and administrative services to the Fund, including
transfer agent services. For its Services, the Fund pays RMCI a comprehensive management
rec at an annual rate based on avffrage daily net assets of each outstanding class of the Fund's
shares. RM I has its principal place of business in New York. RMC1, which carries out its
business under the name "The Reserve," is a privately Held corporation owned and controlled
by Bruce Dent S r. and Isis family, including Defendant Bruce Bent 11, with its headquarters
and principal pi ace of business in Ncw York, New YcA. RMCI has been registered with the
Commission as an investment adviser since 1984. In 2008, RM I provided investment
advisory services to five registered, apen-end, investment companies set up as trusts, offering
a total of 22 open-end investment portfolios (collectively, the "Reserve Funds"). RMCI had
approximately $120 b111ion in assets under management as of September 12, 2008.
2. Defendant Resry Partners, Inc. ("Resr y Partners'*) acted as the distributor of the
Fund and is an affi Bate of kM C 1. Resr y Partners acted as urn undenyriter in the sale of the
Fund in connection with the Offering, helping to draft and disseminate the Offering
documents. Resr y Partners is a broker-dealer registered with the Commission anti a member
of FINRA. Tlic Bents collectively own and control Resr y Partners. Resn, Partners has its
Headquarters and principal place of business in New York, New Mark.
23. Defendant Reserve Management Corporation (" -f he Reserve") is the parent
company to RMCI, and is based in New York, New fork. The Reserve controls R MC 1,
Rcsry Partners, and the Trust.
24, The Individual Reserve Defendants are-
a. Defendant Bruce R. Sent, Sr. ("B. Bent") is, and at all relevant times was,
Chairman, President, Treasurer and trustee or the Reserve Short-'Perm
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 10 of 68
Investment Trust and the Fund. lie was also Chairman of RMCI, President of
Reserve Management Corporation, Chairman and Director of Reserve
Management Corporation ( "RMU) and Chairman and Director of Resry
Partners, Inc. B. Bent controls RMC1, Resr y Partners, and the Trust. B. Bent
has been employed by The Reserve family ofcompanies since 1971; he resides
in Manhasset, New fork. B. Bent signed or authorized the signing of the ICI- I A
Registration Statement, Defendant B. Bent is sued herein in his individual
capacity and as an officer and control person of RMCI, Resr y Partners, and the
Trust, and as a signatory of the Registration Statements of the Trust.
b. Defendant B rue c R. Bent I1("B.R. Bent'`) is, and at all relevant times was, a-
Chief Executive Officer (`CEO"), Senior V i c c President and Assistant
Treasurer of the Reserve Short-Term Investment Trust and the Fund. He was
also Vice Chairman, President, Assistant Secretary and Assistant "freasur^ r,
Vice Chairman, President, Assistant Secretary, Assistant Treasurer and
Director of) eserve Management Corporation and Vice Chairman, Secretary,
Assistant Treasurer and Director of Resry Partners, Ine., both of which have
the same address as the Trust. B.R.Bent controls RMCI. Resr y Partners, and
the Trust. B. R. Bent is the Son of B. Beau. B. R. Bent has been employed by
RMCI since 1991. he resides in Manhasset, New York. B.R. Bent signed or
authorized the signing of the -IA Registration Statement. Defendant B. R.
Bent is sued herein in his individual capacity and as an officer and as a control
person of RMCI, Resry Partners, and the Trust, and as a signatcry of the
Registration 8taternents of the Trust.
Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 11 of 68
c. Defendant Arthur T. Bent 1l[ ("A. ]lent") is, and at all relevant times was, Co-
CEO, Senior Vice President and Assistant Secretary of the Reserve Short-Terra
Investment Trust and the Fund. A. Bent is the son of B, lent, lie was also
Vice Chairman, Sr. V ice President. COO/Treasurer and Assistant Secretary of
RMI; Vice Chairman, President, Treasurer Chief Operating Officer,
Treasurer and Director of Deserve Management Corporation and Assistant
Treasurer and Director of Resr y Partners, Ine., both of which have the same
address as the Trost. A. Bent controls RCI, Resry Partners, and the Trust. A.
Bent signed or authorized the signing of the N-1A Registration Statement.
Defendant A. Bent is sued herein in his capacity as an oFf icer of the Trust and
as a control person of RMC1. Resry p artners, and the Trust, and as a signatory
ofthe Registration Statements of the Trust.
5. Defendant TD Ameritrade Holdings Corporation (''TD Ameritrade" or
"TRAM"), is a Delaware Corporation which provides a balance of investment products and
services to retail investor and independent registered investment adviser clients. TD
Airedtrade offers investment services, including an active trader program, long-term
investment solutions and a national branch system. TD Ameritrade acted as an offeror and
seller in the sale of shares of the Fund. In so offering tend selling, TD Ameritrade also
engaged in a common sales program by which its sales agents were instructed to keep
investors from going to competitors by representing to investors that the Fund was a money
market fund or just Ii€ce a money market fund, or that the Fund was a money fund that would
not lose value beIow the 1.00 NAV.
6, The Individual TD Arneritrade Defendants are:
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 12 of 68
a. [defendant Joseph 11. Moglia ("Moglia") is presently the Chairman of the
Board of TD Ameritradc, and was formerly the Chief Executive Offi cr of TD
Ameritrade during the Glass Period until September 2008, and a control per^on
thereof.
b. Defendant Fredric J. Tomczyk ("Tomczyk") is the Chief`Executive Officer,
Director, and Principal Executive Officer ofTD Ameritrade, and has been the
Chief Executive Officer since at least September 28008. Tomczyk is a control
person of TDAM.
c. Defendant WiIIiam J. Gerber ("G erber") is, and at all relevant tirnes was, Chief
Financial 0 free r ("CFO"), Executive Vice President, and Principal Financial
and Accounting Officer of TD Arneritrade. Gerber is a control person of
TDAM.
d. Defendant J. Joe Ricketts ("Ricketts") owned or controlled over 22% of TD
Ameritrade, controlled three seats on the Board and is, and at all relevant times
was, a Director and controlling shareholder of TD Ameritrade, and a control
person thereof_
e. Defendant Toronto-Dominion funk {"Toronto-Dominion" , headquartered in
Toronto, Canada, is a major shareholder ofTD Ameritrade, and a control
person thereof. As of February 2008, Toronto - Dominion owned approximately
40"/o of TD Ameritrade shares.
27. By virtue of m Ameritrade ' s holding ofthe 95-98% of the, Reserve field Plus
Fund's shares for the benefit oF'rD Ameritrade's clients, TD Amcritrade and the Individual
TD Ameritrade Defendants' were controlling persons of the Trust and the Fund,
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 13 of 68
IV, CLASS ACTION ALT GrA'TIONS
28. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a class consisting of all persons or entities who
acquired shares of the Fund traceable to the false and misleading Prospectus for the Offering,
or purchased or lield the shares during the Class Period, and who were damaged thereby (the
"class'). Excluded from the Class are defendants, the officers and trustees of the Reserve
Short-Tenn Investment Trust, the Fund or any of the other defendants, at all relevant times,
members of their immediate families and their legal representatives, heirs, successors or
assigns, acid any entity in which defendants have or had a control ling interest.
29, The members of the Class are sc numerous that joinder o F a I I members is
impracticable. The Fund's shares were actively traded in an efficient market. While the exact
number of g lass members is unknown to Plaintiffs at this time and can only be ascertained
through appropriate discovery, Plaintiffs be ieve that there are hundreds of members in the
proposed Class. Record owners and otter members of the Class may be identified fte n
records maintained by the Reserve Short-Terin Investment Trust or its transfer agent and may
be notified of the pendency of this action by mail, using the form of notice similar to that
customarily used in wuritics class actions. The Fund has hundreds of millions of outstandirng
shares.
30. Plaintiffs' claims are typical of the claims of the members of the Glass as all
members of the Class are similarly affected by defendants' wrongful conduct in violations of
federal law and state law that is complained of herein. Plaintiffs will fairly and adequately
protect the interests c the members of the Glass and have retained counsel competent and
experienced in class and securities litigation.
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 14 of 68
31, 0ommon questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of'the Class. Among the
questions of law and fact common to the C lass are;
(a) whether the 1933 Act was violated by defendants' acts as allege herein;
(b) whether the 1934 Act was violated by defendants' acts as allege herein;
(c) whether the 1941 Act was violated by defendants' acts as allege herein;
(d) whether defendants breached their fiduciary duties to members of the
Class;
(e) whether statements made by defendants to the investing public in the
Prospectus misrepresented material facts about the business, operations
and management of the Deserve Short-'Germ Investment Trust or the
Fund;
(f) whether TD Arneritrade engaged in a common sales program by which
it and its agents misrp-presEnted to inve-5tors material facts about the
Fund; and
(g) to what extent the members of the Class have sustained damages and
the proper measure of damages.
32. A class action is superior to all other available methods for the fair and
efficient adjudication of this controversy since joinder of all members is impracticable.
Furth errnore, as the damages suffered by individual Class members may be relatively small,
the expense and burden of individual litigation make it impossible far members of the Class to
individually redress the wrongs done to them. There will be no difficulty in the rnanagernent
of this action as a class action.
Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 15 of 68
V. THE FALSE AND DEFECTIVE REGISTRATIONSTATEMENT AND PROSPECTUS MATERIALS
33. On July 27, 2007, and again on July 28, 2U08, the Reserve Short-Terin
Investment Trust filed with the SEC u Registration StalelnenI on Form N-IA, a Prospectus
and Slaternent of Additional Information (collectively the "Prospectus"}, Each ofthe
Prospectus documents emphasized the Fund's focus on "preservation of capita I and liquidity"
and stable "$1.00 share price."
34. At the time oft he 2007 Prospectus, the net assets of the Class TT and R shares
sold and held 98% by TD Ameritrade on behalfof its customers, were approximately S22
mil lion, and 85 million, respectively. Asa result of its aggressive sales, the July 28, 2008
Prospectus revealed that assets in those two classes had grown exponentially to $171 million
and $769 million, respectively.
35. The Prospectus contained untrue statements of material facts or omitted to state
other facts necessary to make the statements made not misleading and was not prepared in
accordance with the rules and regulations governing its preparation,
36_ The Prospectus contained statements that the Fund was not a money market
fund, but also represented the Fund's intention to maintain a $1.00 NAV, consistent with
representations by TD Ameritrade personnel that the Fund was just like a money market: fund.
37, The 2007 Prospectus represented the following about the Fund's business and
operations:
Investment Objective
The investment objective of the Fund is to seek as high a lave/ of currenti9sc a e as is cwItsh0elod with the preservadon of capital and f qu dity. T IS FUND
NOT A MONEY MARKET FUND. Investors can lose money by investing in (lieFund, They may also make money.
Principal Investment Strategies
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 16 of 68
The Fund is a diversified mutual fund, designed as a convenient complementto the investment of tern porsry cash balances in short-term money market accounts orinstruments. WHILE THE I= UND 1 S NOT A L4 ONEY MARKET FUND, IT SEEKSTO MAINTAIN A STABLE 51.00 SHARE PRI'C'E. The Fund seeks to providehigher returns than money market funds and other short-term investments. Whileserving as an effective cash maiw ernenl solution for investors, the Fund isstructured to reduce or eliminate the problems of direct investing, such as schedulingmaturities, reinvesting proceeds, evaluating the credit quality of issuers, investing inround lots, and the safeguarding, receipt and delivery of securities. The Fund willseek to limit share price volatility by maintaining a dollar weighted average maturityof 90 days or less and by limiting the maturity of individual instruments to 24 monthsor less, except in the case of adjustable rate government obligations, which may havea longer ultimate maturity. In calculating portfolio ma(urity, the maturity of aninvestment will be considered to be the earlier of the instrument's maturity date, putdate or the next interest reset date. Shares of money market funds wiI l be consideredto have a maturity of one day.
Reserve Management Company. Inc. ('RMCI" or "Adviser"), the Fund'sinvestment adviser, rnanitors a range of economic and financial factors and, based onthat analysis, the assets of the Fund are invested in amix of U.S. dollar-denominatedsecurities that are intended to provide as high a return as passible without)eopardiziag the stabUity of the Fnnd's share price and witho"t violating Usla veslmenl po/rcy.
Suitability. Different investors have different investment goals. The Fund isintended to provide professional managemeift for your cash and shorter-wrotassess. It mainly seeks current income, liquidity and stability, 'Che Fund is notintended to be a balanced investment program.
The investment objective cf the Fund is to seek as high a level of currentincome as is consistent wifli th e preFervadon of capital and liquidlly. Achievementof this objective is not guaranteed. This investment objective may not be changedwithout the vote of majority of the outstanding shares orthe Fund as defined in theInvestment Company Act. The Fund seeks to inainfaZu a stable ,$1.00 share price.THE FUND IS NOT A MONEY MARKET FUND.
lnvesun nt in the Fund is not insured or guaranteed by the U.S. Government,Federal Deposit Insurance CorpDration ("FDIC") or any other government agency.Although the Fund seeks to preserve the value cfyour investment at S ,00 per share,it is possible to lose money investing in the Fund.
The Fund is a diversified mutua[ fund, and as such, under Section 5(b) oFtheInvestment Company Act, must have 75% of the value of its total assets in cash andcash items (including receivables), U.S. government securities, securities of other
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 17 of 68
investment companies, and other securities for the purposes of this calculation limitedin respect of any one issuer to an amount not greater in value than 5%, of the value ofits total assets and to not more than 10% of the outstanding voting securities of suchissuer. The Fund may invest up to 25% of the value of its total assets without regardto this limitation. The board of Trustees may not change the Fund's diversificationstatus without a "Majority Vote" as defined below under "Investment Strategies andRisks," The Fund may invest more than 5% of its assets in securities issued byagencies and instrumentalities of the United States government. Up to 25% of theFund's assets may be invested in affiliated money market funds. The Fund intends toconcentrate, and normally invest at least 25 9 0 of its total assets, in commercial banks,savings institutions and foreign banks.
(Bold emphasis added; remaining emphasis in original)
38. On June 9, 2008, the Fund filed its Form N-CSR for the year ended March 31,
2008. It included a letter by B. Sent which stated in part:
The liquidity, mortgage and enhanced cash crisis knave provoked everyone —institutions, corporations and individuals — to question just how safe their cash reallyis, and it's about time.
They Reserve's invesimerrl philosophy of its money market and enhancedcash funds is counter-cultural to that of the vast majority of organizations thatspnnsorlrnanage virtually all these types of funds. They are not speclallsls in asstsrtmanagenrew, rather they primarily manage stook and bond funds, the focus of wh ichis the highest rate of return, not safety ofprincipal, liquidity and soundness of sleep,which has been the core of The Reserve since its inception nearly 40 years ago.
When we created the world's first money fund we clearly stipulated Ilse Ienelsdress define a money fend: sunclr'ly of principal, lrrraiediale liquidity, a reasonablerate of return — all while living minder life overarching rubric of Loring i<nweVorsirslo a sound sleep. TWs same Philosophy is applied to our Yield Plus Fund, an"enhanced cash" fund, which has eonfldendy weallsemd the dif rcall markelcondilions over flee past year. Enhanced cash funds are not rr one ffunds, rather theyare complements to money markei ,funds most ,suitable for an investors' mid leancash creeds.
The Yield Plus Fund, Class R shares had an average annual one-year netreturn of 4.86% for the period ending March 31, 2008 all the while maintaining its
1.00 NA V and provielr'erg dar'1y liquidity on demand without interruption. For thenet return for each of the Fund's share classes, please refer to the Financial Highlightsportion of the Notes to Financial Statements section of this report.
The cash enlrusled to as is your reserve resource* thatyou expect 10 be thereno maller what This is why we call ourselves The Reserve. Be you an individual,institution or a Fortune 500 company, this is your working capital to pay the rent, to
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finance inventory and receivables, to put food on the table, Tins is defoallely riotmoney to lake risks with, aly d rhal is exactly h ow if should he managed
We have been "accused" by some of asserting these tenets as if they weredogma to which The Reserve pleads: Gu i I ty as charged. If one focused on Me goalof e ec7ive cash management, the traths to accomplish It are sey,evident acrdunequivocal, and reaching for yield whi/e riskring principal, liquidity or peace ofmind is not among Iftem. Let us hope that this dance on the precipice will re-instillthe objectivity that is crucial to cash management in both the money managers andthe investors that have exhorted them to take a flyer. After all, how dangerous crkuldit be? It's only cash management.
Cash is the very lifeblood of every individual and organization, yet despite thecritical nature of cash, it is the least researched asset class, the results of which havecreated the current problems in the market place.
Thank you for your confidence in our Reserve. We never forget you haveentrusted us with your reserve(s).
(Bold emphasis added; remaining emphasis in original)
39. The 2008 Prospectus representations were substantial ly similar to those
in the 2007 Prospectus.
I. NATURE OFT HE FUND
40_ The Reserve Yield Plus Fund is one of series c^f funds that make up the
Reserve Short-Term Investment Trust. The Trust is registered under the 1940 Act as an open-
end management investment company. While the Fund is not technically classified as a
money market fund, it purportedly was designed to maintain a stable $1.00 share price, even
though the Prospectus notes there are no assurances a $1.00 share price will be maintained,
41. For purposes of daily operation and administration, The Trust treated the Fund
like other money funds. For example, the Fund was administered on a software platform
specifically designed for money market funds. The Reserve website characterized the Fund as
an enhanced cash fund.
42. The Reserve presented itself as being a money fund company. All public non-
SEC releases focused an its money market activities.
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43, in the universe of 400 or more short-terra bond funds, the Fund appears to be
the only one tv promote a policy of maintaining a stable $1.00 NAV.
44. Based on investor group self-reporting via the Internet, investors tended to
have more than half c their respective portfolios in the Reserve Yield Plus Fund, which is
consistent with the common understanding of this Fund as being just like a money market
Fund.
VII. DEVIATION FROM INVESTMENT POLICIES FOR THE FUND
45. in 2008, The Investment Advisors received tai€lions of dollars in Fees for their
services advising the Fund,
46. The Investment Advisors are responsible for adhering to the Fund's stated
investment policies.
47. "Breaking the buck" is a historical anomaly for money funds designed to
maintain a stable 51.00 A . It almost never happens, and should never happen when the
fund sticks to the objective of maintaining a $1.00 NAV,
48. Maintaining a stable $ LOG NAV was so fundamental to the Reserve Yield Plus
Fund that the Reserve's entire computer platform was built upon this foundation.
49. The Investment Advisors to the Fund deviated from the Fund's stated
i nvest=nt po I ic i es by sacrificing preservation oFcapital and liquidity its pursuit of higher
yields. This deviation was exemplifted by Defendants permitting the Fund to accumulate an
unreasonable concentration in commercial paper, including commercial paper issued by
Lehman.
50. The ability to maintain the NAV at $1.00 was unrealistic because of the undue
weight by the Fund in risky investments geared toward seeking higher yield.
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51. The Fund's loss of principal is a result of the Defendants' deviation from the
stated investment policies, whereby Defendants sacrificed preservation orcapital and Iiquidity
in pursuit of higher }Melds,
5. By investing in riskier securities like Lehman commercial paper during the
Class Period, in order to increase yield, Defendants were able to increase the yields on the
Fund to retain current investors and attract now investors.
53. Defendants failed to disclose that in an effort to boost the yields c the Fund,
they had abandoned the stated objective and investment strategy of the Fund and were willing
to risk principal and liquidity by investing in risk} and less conservative securities to increase
yields.
54. The investors in the Fund were never given the opportunity to vote on this
change of objective.
55. De Pendants also misrepresented that they had adequate internal controls,
Despite the purported internal controls, Defendants caused the Fund to purchase and remain
invested in Lehman securities during the Class Period, without adequately addressing
Lchman's precarious Financial status.
56. According to the Prospectus, RMCT "monitors a range of economic and
financial factors and, based on that analysis, the assets of the Fund arc invested in a mix of
U.S. dollar-denominated securities that are intended to provide as liigh a return as possible
without jeopardizing the stability of the Fund's share price and without violating its
investment policy."
7, Defendants fai led to disclose during the Class Period that RMCI was not
actively monitoring a range of economic and financial factors that might impact the Fund, nor
was Rig CI investing in sec uriities selected to avoid jeopardizing the Fund's share price.
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Rather, RMC[ continued to invest the Fund's assets in securities that were increasingly at risk
for default.
58. TD Ameritrade failed to provide the Prospectus to the Fund investors prior to
their purchase of the Fund.
VIII. FINANCIAL TURMOIL AT LEH MAN
59. From its inception in 1971, The Reserve and its Primary Fund historically
invested in very conservative assets such as government securities and bank certificates of
depcsit. The Fund also carried the highest possibie ratings from Moody s and "Standard
Poor's denoting safety and liquidity, a fact which RMCI highlighted in its promotional
materials. When the Reserve Yield Plus Fund was introduced in 2006, these same qualities
were Promoted by The reserve Defendants and the TD Ameritrade Defendants.
0. [n 2007 and 2008, however, the Bents began to purchase riskier commercial
paper issued by financial institutions, which were not suitable for "cash and snorter-term
assets ... intmded investors who seek...Iiquidity and stab ility+," including Lehman, Merrill
Lynch, and Washington Mutual. The higher yields paid by these securities, however,
generated attractive returns for f=und shareholders, and helped the Fund attract billions of new
dollars in investments, which in turn bolstered the management and advisory fees earned by
R CI and commission and transaction fees for TD Arneritrade.
61. The Reserve's and Reserve Yield Plus Fund's shining investment strategy, and
substantial increase in assets under management, had significant implications given R iCYS
status as a private famiiy-owned company. Unlike many other large mutual fund complexes,
RMC1, and the funds it advises, are not owned, or otherwise affiliated with, a large public
company or cornmercial bank with the resources to provide Financial support in the event a
portfolio security were to becoine impaired. To the contrary, in the event a Fund holding
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declined in value to the point where it threatened the Fund's $1.00 NA V, the Funid's ability to
maintain a stable 1,00 NAV depended exclusively on the Bent family's ability and
wi IIingness to provide or secure capital—either personal resources, those of RMC 1, or from
some third party--to support the NAV.
62. While an investment adviser such as RMCI is under no statutory obligation to
provide financial support to maintain the $ I,00 NAIL of a distressed money market fund (or
money market-like fund), breaking the buck is a catastrophic development for a money
market fund and its shareholders. Historically, the money market fund sponsors have stepped
in to support the $1.00 NAV when needed. Although agreements to protect a fund's $1.00
NAIL can be implemented in a variety of ways, they gene ralIy require a fund adviser or other
third party to com mit financial resources to protect a fund's $1.00 per share NAV, e.g., by
providing the I"und with capital to maintain the $1.00 NAV, by providing capital to offset the
decline in value in the impaired see urity+, or by purchasing the impaired see urity out of the
portfolio. The Deserve Defendants and the TD Ameritrade Defendants were Fully aware orthe
devastating rep utational and business damage that would arise if a fund managed by The
Reserve and F MCI, in particular, broke the buck. To avoid this very result, in 2007, R CI
and the Beata had agreed to provide millions of dollars in credit support to maintain the $1.00
per share NA V c The Reserve Enhanced Gash Strategics Portfolio, LLC. a smaller non-
nPoney nrarke? fund that sought to maintain a $1.00 NAV,
63. Beginning in the summer of 2007, as economic conditions worsened. some
money market funds began to experience declines in the value ofsecurities held in their
portfolios. Many of the funds impleirented credit support agreements that allowed the funds
to maintain a $1.00 pee share NAV to avoid breaking the buck.
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64. Defendants were aware that Lehman had been experiencing significant
operating difficulty due to its exposure to illiquid and significantly impaired assets, including
home mortgages and related derivatives.
S. For example, on August 22, 2007, Bloomberg reported as follows:
Aug. 22 (Bloomberg) -- The rising cost of credit tools its toll onLehman Brothers Holdings Inc., Accredited Home LendersHolding Co. and HSBC holdings Plc as the subprime mortgagefallout spreads through the economy.
Lehman, the biggest underwriter of U.S. bonds backed bymortgages, became the First Firm on Wall Street w shut itssubprime-lending unit and said 1,2D0 employees will lose theirjobs.
66. By January 2008, Lehman announced it would substantially reduce its
resources and capacity in the U.S. residential mortgage origination space.
67_ Throughout 2008, Lehman exhibited signs of financial distress that called into
question its ability to service its debt. ]n addition, Lehman's share price declined significantly
throughout 2048 and the firm's capital position weakened.
8. Faced with increasing difficulty raising capital, Lehman's commercial paper
paid increased yields reflecting irivestors' perception that such debt was riskier than other
assets of similar type and duration.
69, In effect, Lehman's debt obligations became high-risk securities that were
inappropriate for money funds seeking to preserve capital, Nonetheless, defendants held on to
them, during months when Lehman's precarious financial situation was front page news in
most major newspapers,
70. In f-arly M are h 2008, the price or Leh man common stock had plummeted
before the announcement of the meltdown at Bear Stearns.
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71. In the spring of 2008, after Saar Stearns had collapsed and while Lehman was
widely considered to be the next victim ofthe ongoing banking crisis, the Reserve Short Tarn
Trust substantially increased the amount of money that it had invested in Lehman commercial
paper, It did so because these securities were paying liigher returns than other comparable
securities, which reflected the increased risk of investing in Lehman at the tiine. One trustee
of the Fund, WiIIiam Montgoris, was particularly concerned that the Fund not be exposed to
Lehman paper as "there had been speculation in the press and in the financial markets about
Lehman's financial situation almost from the day after Bear Steam was acquired by J.P.
Morgan Chase..."
72. 1n April and May 2008, the estimates and ratings for Lehman continued to fal I.
73. On .Tune 9, 2008, Lehman announced a huge second quarter loss, massive
write-clowns, and borrowing of billions o dollars in additional capital.
74. On July 28, 2008, Bloomberg ;dews reported that "[tIhe cost to protect
Lehman's debt from default more than doubled this year" as measured by the cost of u credit
default swap used to protect Lehman bonds. These costs were skyrocketing on news that
Lehman was exposed to massive amounts of risky and impaired mortgage-backed debt,
75. On August 19, 2DD8, the New York Tirnes ran stn article stadng that Lehman
Brothers, the troubled investment bank, is considering the sale of all or pail of its prized
money management division to private equity firms to raise billions or do) Iars of capital and
ease the pressure caused by losses related to real estate:
Lehman sent letters last week to a number of financial companies, includingprivate equity firms like Kohlberg, Kravis & Rnberts, C. Flowers, the BlackstoneGroup, the Carlyle Group and Apollo Management, to test interest in its moneymanagement division, according to several people briefed on its contents.
* m m
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Lehman now faces the capital-raising problem that haunted Merrill Lynch lastmonth. As the third quarter draws to a close, it is looking more likely that Lohmanwill have to write down the value of its mortgage and other investments to a degreethat could wipe out all of the investment bank's earnings. In the last 12 months, thestock is down 74 percent, compared with a 33 percent decline in the Amex XBDbroker dealer index, Earlier this summer, analysts expected Lehman Brother's to earna small third-quarter profit, but now some expect a loss of S 1.8 billion.
That forces Lehman to consider selling some of its more valuable assets. Asidefrom the potential sale of its investment management unit, Lehman is looking tooffload assets, including a portfolio of up to S40 billion worth of troubled wrnmercial
real estate assets, according to investors involved in that sale.
76, On August 29, 2008, the New Fork Times rant another article, entitled "For
Lehman, More Cuts and Anxiety," which said:
On Wall Street, the ax keeps falling again and again. As the financial industrylimps from one bleak quarter to the neat, bankers and traders who dodged painfullayoffs in the past year wonder if their luck is running out.
The issue gained now urgency on Thursday, as Lehman Brothers Wail Street'smost troubled firm, prepared to layoff up to 1,500 peoPle in its fourth round ofcutbacks this year. Those layoffs, which world amount to about 6 percent ofLehman's work force, are likely to come before the firm reports third-quarter resultsin mid-September, according to a Person briefed on the plan. The grim news atLehman underscores not only the precarious state of that once-proud firm but also thepain afflicting the whole of Mall Street.
77. On September 10, 2008, the View York Times ran another bleak article about
Lehman;
Stocks tumbled Tuesday after fresh concerns about the stability of LehmanBrothers Holdings touched off renewed jitters about the overall financial sector.
But worries about Lehman regained investors' attention. Its sliares lost nearly halftheir value Tuesday as investors worried that the company was having trouble findingfresh sources of capital.
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78. On September 8 and 9, 2008, Lehman's stock price plurnrneted 52%. The next
day, September 10, 2008, Lehman announced a massive loss of $3.2 bi [lion for the 2008 fiscal
third quarter. On September 11, 2008, Lehman°s stock price plummeted another 42%.
79. By September 12, 2008, Lehman's financial situation had become desperate;
news sources were reporting that Lehman was undergoing a liquidity crisis and would need to
F1 either a willing buyer or a federal baitout to avoid bankruptcy.
I X. COLLAPSE OF THE FUND'S NAV
80, On September 16, 2008, The Reserve Fund, an entity related to the Deserve
Short-Term Trust, shocked the market when it issued a release concerning one of its money
market funds. The release announced in part:
The Board of Trustees of The Reserve Fund, after reviewing theunprecedented market events of the past several days and their impact on ThePrimary rund, a series of The Reserve Fund and taking into accountrecommendations made by Reserve Management Company, lnc,, the investmentmanager of The Primary Fund, approved the following actions with respect to ThePrimary Fund only:
The value of the debt securities issued by Lehman Brothers Hoidings, Inc.{face value $785 million) and held by the Primary Fund has been valued at zeroeffective as of 4:00PM Now York tirne today. As a result, the NAV of the PrimaryFund, effective as of 4:00PM, is 30,47 per share. All redemption requests receivedprior to 3:00PM today will be redeemed at a net asset value of $1.00 per share.
Effective today and until further noli , the proceeds of redemptions from ThePrimary Fund will not be transmitted to the redeeming investor for a period of up toseven calendar days after the redemption. The seven-day redemption delay will notapply to debit card transactions, ACH transactions or checks written against the assetsof the Primary Fund provided that any such transaction from an investor, individuallyor in the aggregate, does not exceed S 10,000.
SL Further, on September 16, 2048, the NA V of the Reserve Yield Plus Fund also
collapsed fro in $1,00 per share to close a[ $0.97 duc to its investment in debt securities issued
by Lehman.
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82. 'thereafter, the Reserve Short-Terin Investment Trust suspended providing a
daily NAV on the Reserve Yield Plus Fund.
83. On October 9, 2008, the Reserve Short-Term Investment Trust issued a release
entitled "IMPORTANT NOTICE REGARDING RESERVE YIELD PLUS FUND" which
stated in part:
The Board of Trustees of Reserve Short-Term Investment Trust (the "Trust")announced today that it voted last evening to liquidate the assets of Deserve YieldPlus Fund ("Fund").
The Fund has initiated discussions with the staff of the Securities andExchange Commission to permit the Fund to pay redemptions on a period longer thanseven days.
The Fund cannot currently estimate when distributions to investors will bemade. However, the Board and the f=und's adviser are acting as exp-ed itious I y asmarkets permit to restore Iiquidity to investors. The markets for short-term securitiesremain illiquid except for short-term U.S. Treasuries. The Fund will liquidate assetsas soon as it can, but the Fund does not believe that it is in the shareholders' intereststo sell assets at lire sale prices. As developments occur, we will cornmuni^.atc themto investors.
We post oat our website each day the holdings of the Fund as of the close ofbusiness at the and of the previous business dny, as well as the maturit y schedule ofthe assets of the Fund and the nature of the holdings of the Fund.
84, On October 17, 2008, the Reserve Short-Tenn Investment Trust issued a
release entitled "Statement About The Reserve Yield Plus Fund," which stated in part:
As announced on October 9, The Hoard of Trustees of Reserve Yield PlusFund (the "Fund") has voted to liquidate the Fund. The Fund owned LehmanBrothers Holdings Inc, paper that was marked down to zero on September 1, 2008,which brought the net asset value per share of the Fund down to $0.97 where itremained as of October 16. The Fund is not a money market fund but rather a cashplus fund (categorized as a short-term bond fund by Morningstar), The Board is
orking on a liquidation plan, which w i11 ensure that all investors are treated fairlyand receive their money in the shortest time consistent with the timeline to realize thefair value: of the securities. We expect ilia[ the liquidation will occur in stages withproceeds distributed as securities mature or are sold. Currently the Fund's assets areapproximately $ 1,2 billion including $31 6 iniIIion in cash. We intend to beginmaking payouts as soon as practical.
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In order to proceed, we must first move the Fund to a different computerplatform #Mat's able to account for a share price below $1.00. The need for thiscapability wasn't anticipated when the Fund was created. Flowever, the recentunprecedented events in the credit market require these changes.
We apologize for the delay in meeting redemption requests and will continueto provide periodic updates of our progress during this process.
Thank you for your patience.
85. On October 24, 2008, the Reserve Short-Term Investment Trust issued a
release entitled "SEC Grants Order to the Reserve Yield Plus Fund,,' which stated in part:
The U.S. Securities and Exchange Committee (S EQ today issued a temporaryorder (the "Order") permitting the Reserve Yield Plus Fund (the "Fund") totemporarily suspend all rights of redemption effective as of October 8, 2008, A copyof the Order is posted on The Reserve's website at The R.coin.
The Deserve sought the Order to ensure an orderly disposition of the securitiesof the Fund and to ensure that shareholders are protected during the period ofdisposition.
The Board of Trustees of the Fund announced plans to liquidate the Fund onOctober 9, 2008, after unprecedented events stemming from the bankruptcy ofLehman Brothers Holdings hic. led to an extraordinary number of redemptions. Thissituation was further exacerbated by the illiquidity in the credit markets due to theoverall crisis of confidence in the marketplace. The Fund held Lehman Brotherscvrn mere ial paper that was marked down to zero on September 16, 2008, whichlowered the net asset value per share to $0,97, where it remained as of October 23,2008.
The Board is working on a plan to affect [sic] an orderly liquidation, subjectto supervision by the SEC, which will ensure that all investors are treated fairly andreceive their money in the shortest time consistent with the timeline to realize the fairvalue of the securities.
We expect that the liquidation will occur in stages with proceeds distributed assecurities mature or are sold, We intend to begin making payouts as soon aspracticable. We will keep you informed of developments as they occur throughupdates pasted on our website.
The Reserve also wants to reassure investors that the Order won't affect theprogress and expected initial distributions for the Primary and U.S. GovernmentFunds.
four patience and understanding during these unprecedented times is greatlyappreciated.
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S& On November 2, 2008, the Chicago Tribune published an article entitled "f=und
losses fuel customers' anger — Revenue-sharing deal raises questions of conflict," which
stated in part:
When Kyle Halkola walked into the TD Ameritrade office in suburbanSchaumburg this summer lie had a certified check in his hand and one thing on hismind.
With the financial markets threatening to irnplode, he just wanted a safe placeto park $850,000 in cash.
Halkoia had made the money over 20 years, buying and selling three homes itsSan Diego. When he landed ajob near Chicago, he pulled out his equity and plannedto buy a dream house for his wife and two young cliiIdren in the Northwest suburbs.
"This was money I bui It by giving 5100 extra to the mortgage each monthinstead of going out to dinner," the 46-year-old engirteer said. "This was scratchedand-earned money i didn't want to lose a penny of. "
Today, Halkvla is one c hundreds of angry TD Ameritrade customers whosealmost 1 billion in assets are frozen in a short-term bond fund called Deserve YieldPlus, a mutual fund managed by The Reserve in New York but largely distributedunder a revenue sharing agreement with TD Ameritrade in Omaha.
11ents say TD Ameritrade rnisrepresented the fund as either an ultrasafemoney market fund or sornething just as secure. And they have cried foul over therelationship between Ameritrade and The Reserve, suggesting it created a conflict cinterest.
The episode presents yet another chiI Iing example of how an unprecedentedfinancial crisis has exposed vulnerabilities in even the sa fest corners of the investrnentworld. But it also raises questions about how the mutual fund industry sells itsproducts and highlights the pitfalls investors can face if they don't pay close attention.
The issue has drawn the notice of the securities commissions in Massachusettsand Pennsylvania, which have launched Forinal investigations, officials said.Complaints from angry Field Plus shareholders seem to show "some sort ofmisrepresentation, ,' said Richard Kiehl, a compliance examiner with the PennsylvaniaSecurities Commission, though he noted the investigation has yet to show anythingconclusive.
The Reserve, which operates the nation's oldest money market fund, gainedglobal notoriety in September when its $785 million exposure to the Lehman Brothersbankruptcy caused its nagship Reserve Primary money market fund to "break thebuck" — industry parlance for falling below the fund's purchase price of 1 a share.
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Money funds like Reserve Primary, which had about $60 billion in assetsbefore the crisis, are not supposed to lose money, and fund companies almost alwayspump in backup capita] if they do. But this time, The Reserve didn't have theresources to make up for its Lehman exposure, and the surprise failure touched off apanic in the money rmarkeI sector. That, in turn, contributed to a freeze in globalshort-term debt markets.
What got lost amid the broader fiasco, however, was that The Reserve's 1.1billion afield Plus fund also broke the buck and got locked down due to Lehman debtit bought in April. It dropped to a net asset value nf97 cents on Sept. 16, but TheReserve hasn't given out a daily net asset value figure since.
On Thursday, The Reserve finally announced a plan to distribute $26 billionto Deserve Primary investors, or about half their remaining principal. But after sevenweeps, Yield Plus investors are still waiting for a distribution plan and have no ideahow much they may have lost.
[n a statement Friday, The Reserve said a Yield Plus distribution plan is tieingreviewed by the Securities and Exchange Commission, But it also said "the timing ofdistributions is, of course, affected by market conditions and the maturity of securitiesin the Fund's portfolio,"
Asked why the firm has not calculated a of w net asset value for the fund, aspokeswoman said she could not comment.
TD Ameritrade has tried to help its clients with funds frozen in Reservemoney market funds like Primary and the International Liquidity fund by setting aside$36 million to backstop accounts.
Tn a telephone interview, TD Amer itrade Chief Executive Fredric Tomczyksaid these clients had a valid expectation that their principal would be preservedunder any circumstances, partly because of the nature ofa money market fund andpartly because the rtrrn `*sweeps" cash into these funds automatically betweentransactions,
Yield Plus investors, however, have received no such protections. Tomczykargued that those investors specifically chose the bond mutual fund because of itshigher yield and should have read the prospectus, which explained its higher riskprofile and provided no assurances against loss, unlike a money market fund.
The p rm has quietly extended some emergency low-interest loans to YieldP t u s clients secured by their principal in the fund. But, despite an outcry frominvestors like Halkola and Gray — near]y 500 of whom have organized on a Yahoomessage board — TD Arneritrade has held pat on extending any other aid,
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"it is clear in all the disclosures that it is not a money market mutual funk"Tornczyk said.
Investors, however, claim other communications From The Reserve and TDAreritrade suggested otherwise.
For starters, the Yield Plus fund had many of the signature characteristics of amoney market fund. It allowed investors to move money in and out quickly andsought to maintain a $ f share price, which is unusual for a short-term bond fund.Moreover, clients said, when TD Ameritrade representatives recommended the fund,they highlighted its money market-like qualities, not its added risks, suggesting itprovided safety at a higher yield,
In a letter accompanying the fund's March 2008 prospectus, RcscrveChairman Hruce Bent explained in italics that Yield Plus was not a honey marketfund. Hut then he wrote that the Fund shares the firm's money market philesophy "ofhiring investors into a sound sleep, "
"The cash entrusted to us," Bent added, "is your reserve resource that youexpect to be there no matter what ... this is your working capital to pay the rent ...and to put food on the table."
investors on the Yahoo message board, however, claim TD Ameritrade had areason to push them into Yield Plus: a distribution agreement between The Reserveand TD Ameritrade that earns Ameritrade an undisclosed siice of fee revenue.
The distribution agmernent clearly got the job done. Assets in Mass R sharessold almost exclusively to TD Ameritrade clients shot from almost nothing in 2006 to$770 mill ion by Mardi of this year, public docurnerits show. Another classdominated by the 0rnaha firm shot from $2 million to $171 million.
Tontc7yk said that as a discount broker, TD Ameritrade has never"manufactured" its own funds or provided commissions based on selling anyparticular product. The firm's incentive system, he said, was designed "to bringassets into the organ izatian and retain them, not to push one product over another."As for whether the distribution agreement presents a con fl ict between firm and eIieni,Tomczyk said the contract was a standard one and that "an investment firm has tomake money in some way."
Don Phillips, managing director of Chicago-Lased Morningstar Inc,, saidrevenue sharing agreements are, indeed, ubiquitous in the industry but sti IItroublesome when it comes to dividing the interests of the brokerage firm and itsclients.
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"It's kind of creepy but it's the way s the industry operates," Phillips said.That's why it is crucial for investors to look out for themselves by reading theprospectus and asking queslions, he said.
8T. Then, on November 3, 2008, the Reserve Short-Term Investment Trust issued
a release entitled "Reserve Funds Update," which stated in part:
As part ofour commitment to keep investors informed, below are updates onvarious Deserve funds,
Yield Pius Fund
The Reserve Yield Plus Fund will be Iiquidated and is in the process ofdeveloping a Plan of Liquidation, which is subject to review by the SEC. The finalPlan of Liquidation will be posted to the website as soon as it becomes available. Indeveloping the Plan, we are trying to ensure that ail investors are treated fairly. Wewill also try to make distributions as quickly as cash becomes available.
An investment in lhe , funds is real insured or guaranteed by the FederalDeposit Insurance Corporation or any other government ugency^ AIthou h the unds.seek to _preserve the value o your investment at V.00 per share, it is possible io losemoney by investing in the rods. Money market yields may vary.
(Emphasis in original)
88, In or about September 2009, in a Petition to the SEC, investors in the Reserve
`field Plus Fund wrote-
Pursuant to section 22(c)(3) of the act of 1940 "no registered investmentcompany shall suspend the right of redemption or postpone the date of payment uponredemption except For such periods as the Commission may by order permit for theprotection of security holders of the company."
At the time the SEC granted this order, it stated that the order would be inaffect until "the markets are liquid to a degree that enables the fund to I iquidateportfolio securities without impairing the net asset value of the fund",
The Reserve now holds a significant amount of cash, and refuses to redeemour requests for payment of such cash despito the rnct that such redemption ►vi I notarfoct the net asset value. Instead the Reserve continues to collcci fees on those fundswhile we (the investors) are being violated by the ta i lure of the SEC to rescind theirorder made on September 17, 2008.
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 33 of 68
We, the undersigned therefore demand that the order releasing The Deservefrom making redemptions now be rescinded as this order no longer protects theindividuals in the RYPQX fund but rather viaimizes us instead.
X. TD AMFRITRADE'S MARKETING OF THE FUND
89. TD Ameritrade is an aggressive discount broker. For example, it describes
itseIras follows in its most recent !Q- :
We are a leading provider oFsecurities brokerage services andtechnology-based financial services to retail investors and businesspartners. We. provide our services predominantly through theInternet, a national. branch network and relationships withindependent registered investment advisors ("RIAs'^. We believethat our services appeal to a broad market of independent, value-conscious retail investors, traders, financial planners andinstitutions.
90. TD Aineritrade's strategy during the class period was to grow its market share
and increase its share of its customers' assets under its control, as stated in its most recent 10-
K-
We intend to capitalize on the growth and consolidation of theretail brokerage industry in the United States and leverage our tow-cost infrastructure to grow our market share and profitability. Ourlong-term growth strategy is to increase our market share of totalassets in client accounts by providing superior offerings to long-term investors. RIAs and active traders.
91. TD Amcritrade earns commissions and transaction fees on clients' trades.
2. TD Ameritrade heavily promotes the products it sells to investors. As stated in
their most recent 10-K-
We intend to continue to grow and increase our market share byadvertising online, on television. in print and direct mail and onour own Web sites. We invest heavily in advertising programsdesigned to bring greater brand recognition to our services. Weintend to continue to aggresswely advertise our services. Fromtime to time, we may choose to increase our advertising tc targetspec ne groups of investors or t decrease advertising in responseto market conditions.
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 34 of 68
Advertising for retail clients is generally conducted through Web
sites, financial news networks and other television and cablenetworks. We also pace print advertisements in a broad range ofbusiness publications and use direct mail adveirtising. Advertisingfor institutional clients is significantly less than for retail clientsand is generally conducted through highly-targeted media. We alsoutilize third-party partners to market our investor educationofferings at live events.
To monitor the success of our various marketing efforts, we use adata gathering and tracking system. This system enables us todetermine the type of advertising that best appeals to our targetmarket so that we can invest in these programs in the future.Add it ion aliy, through the use o f o u r database tools, we are workingto more efficiently determine the needs of our various clientsegments and tailor our services to their individual needs. Weintend to utilize this system to strengthen our client relationshipsand support marketing campaigns to attract new clients. Ourmethods and uses of client information are disclosed in our privacystatement.
3. TD Ameritrade marketed and sold the majority of shares of the Deserve Yield
1)1us Fund. For certain classes of shares, Iike retail shares with no minimum investment
(CLASS R), TD Ameritrade offered mare than 8% of the Fund shares in the c lass.
94. TD Ameritrade, through its agents and employees, actively marketed the Fund
as being just like a money market fund for purposes of maintaining a stable $1.00 NAV.
Among other things. TD Aineritrade represented to investors—bath oral Iy and
electronically—that the Fund was a money market Fund, or just like a money market fund, and
that the Fund's value would not 1hl I below the S 1.00 NA V.
95_ When prospective investors asked about money market funds, TD Arneritrade
provided information about the Reserve Yield Plus Fund. TD Ameritrade also promoted the
Fund as being "same as cash" with near-immediate liquidity+.
96. Even well after The Reserve announced that the Fwid `°broke the bLick" and TIC
Ameritrade disavowed any responsibility, TO Ameritrade's agents and employees continued
to describe the Fund as a "money market fund" in responding to worried investors.
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 35 of 68
7. By way of example, and a.5 reported through individual investors and Yahoo
nvestor Group pasts, "TD Ameritrade representatives have exchanged the foIIOwi]I&
correspondence with actual and prospective investors regarding the Fund:
07/25/07 Correspondence From TD Ameritrade:
RE: TD Arneritmde
From: <XXXX tdarneritrade. ccim>To: <XXXX...>Date: Jul 25 2007 - 1 1:52arn
1-li XXXX,
We do have u highermuney market role at 5.31 a} however, youwould have to have a rninimum of100,000 cash to qualify forv!r/s money markef und. Are you open to having TD Ameritrade
assisting you with managing your investment portfolio.
Please let ine know if I can be of lie Ip to you.
Sincerely,
XXXX
Branch Manager/Vice- PresidentTDAMER] T DE400 S. E Camino heal, Suite 10 D
San Mateo, Oa 94402Tel: 650-340-XXXXFax: 650-340-X
04/15108 Correspondence From TD AmeritradeRepresentative:
Pro m:'I'D A M FRlTRADE Apex apexcIientservicestdarneritrade. com>To: XXXX<XXXX{rr, yahoo.com>Sent: Tuesday, April 15, 2008 12:12:55 ASubject: Re. Other (I MM504136441 7LOK }
-34-
Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 36 of 68
Dear XXXX,
Thank you for your e-mail. Before the Fed began cutting interestrates lrepeatedly the TDAM Class A was paying around 4.51/c,1fyou wish, 11fere is a money marker ,you can buy inia and sell outof with juv a 1 day settlement fr"me; it is also a no load, notransaction fee fund. The syrnbcl is RYPX; it is currentlyreceiving 3.81% interest. Please contact us by secured e-mail or byphone at $0-0-669-3900 if you need any further assistance.
To call us tall-free from outside the United States, please use theAT&T site, ww. .business. all.com/bt/ toIIfree, jsp, to locate youraccess number. Once you have an outside line, dint the AT8&Tdirect access number for your country. A prompt (or anAT&Toperator) will ask you to enter the toll-free number. Dial 500-368-36C8; there is no need to dial I to reach an Ameritrade ClientServices representative.
Sincerely,
Diehard L.Apex Client Services, TD AMERITlkADEDivision ofTD AMER1TRADE, Inc.
09/1710-8 Correspondence From TD AmeriIrade Represeutativeas Pasted on TDAhl board):
"R YP Xis u money market muYuaf ,fund. When a mutual fundtrade order is sent, the f 11 will not show in your account until [11hefollowing business day. When you place your trade, the order issubmitted to the fund company and will be executed after marketclose (if received before the order rule ff'tinar.). At that time, it willappear as fil I on the Order Status page For the current day, but inactuality it wi II be as of the day of the trade."
1vlike A of Apex Client Services at TD Arneritrade.
04115108 Correa ondence From TD AmeritradeRooresentative:
35-
Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 37 of 68
Frorn TD A M ERITRADE Client Services<clientserviccs atdameritrade.corn>To XXXXXX XXXXXX@gmaii.comgmail.comDate Fri, Sep 26, 2008 at 1.11 PSubject Re: Other (KMM586 18 71971..0KM)mailed-by tdameritrade.mm
Ms. XXXX,
YP Xr's a mntrey rtrarket multraf ,frutd. Goverriment reguiationslegally prohibit us from reimbursing market losses on this type ofproduct. As such, there is nothing we can do at this time. Pleaselet us know if you have any additional gtLestions.
Dustin E.Client Services, TD AMERITRADEDivision of TD AMER1TRADE. Inc.
10/13108 Correspondence From TD AmeritradeRepresentative.
From: TD AMER1TRADE Apex[mailto:apexclients services a tdaineritradc.com ]Sent: Monday, October 13, 2008 6:38 ATo: XXXXSubject; RE: Client services (KM M593975701 7LOKM )
Mr. XXXX;
Thank you for allowing me to assist you today. Mutual Fundshave different settlement periods. They can settle in one or threedays. RYP X was a money market mumaf fiend with a one daysettlement period. With any mutual fund, the proceeds are releasedFor trading upon entering the sell order. 1 f you need any otherinformation, you may respond to this email, contact ClientServices 24 hours a day at 800-669-3900 or request the MutualFund Dept (hours are from 8-530pm CST), We appreciate yourbusiness.
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 38 of 68
Debra B.Apex Mutual Tend InquiriesDivision of TD AMER1TRADE, Inc.
10/9/08 Correspondence From TD Amcritrade Representative:
Dear XXXX,
Thank you for your inquiry regarding the Reserve Yield P[us(RYP X) money market in your account. To discuss your moneymarket and xhe ongoing situation with the Reserve money markets,we request you please contact the Fixed Income Ouidance Croupat 1-500-934-4445. Also, you can visit the Reserve website atww.thcr.com.
Regards,Sheree T.Fixed Income Guidance groupA Division of TD Arneri trade, Inc.
10/14108 Correspondence From TD AmeritradeRepresentative:
From. TD AMER1TRADE Apex [rnaiIto:apexeIicntservicer c,@—]Sent: Tuesday, October 14, 2C0$ 5:26 PMTo: Charles J.Subject: > YP X Inquiry {KMM595712571 7LOKM)
Mr. J.,
I regret that we have no additional inlbrination concerningRYPQX other than what is listed in alerts on our Web site and thatof The Reserve. To date we have not been notified of any action tobe take [nI for individuals investing in Ails money market mutualfifad. As stated in the prospectus for the fund, all mutual funds arean investment and have the risk of loss oFprincipa1
Please watch our Web site and that of The Reserve(www.ther.com) for any new information concerning RYPX. TheReserve is not affiliated with TD AMERITRADE beyond being athird-party provider of investments.
Mark C,
Apex Client Services, TD AMER[TRADE
Division of TD AMERITRADE. Inc.- 37-
Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 39 of 68
(Emphasis added)
8. TD Ameritrade also offered a virtual client service portal ("TED"), which
characterized the Fund as a money market fund and referred clients to TD Ameritrade's
money market page. The standardized client service response follows (Emphasis added):
You Asked: What is the status of Rif PQX [The Reserve YieldPlus Fund]
Ted: To learn more about our woney market choices, pleasecontact a Client Services representative. We can answer anyquestions you may have aL ut products and services available.[View Page]
Here's More: Money Market Fan d Informadon
(Emphasis added)
99. TD Ameritrade actively encouraged investors with large cash balances to
invest in the Fund. TD Ameritrade also actively encouraged retirees and other investors who
wanted to move their investments to cash to invest in the Fund. The Fact that TD Ameritrade
clients had disproportionately large investments in the Fund indicates that TD Ameritrade was
steering clients to the Fund.
100. TD Ameritrade trained its representatives to self the Fund to clients as a
guaranteed and safe money market fund that could not lose value below the $1.04) NA V. TD
Ameritrade representatives were also trained to target clients such as those who were
considering; transferring money market funds to competitors. As or pe former TD Ameritrade
representative acknowledges in a posting to the Fund's investor Message [hoard on Yahoo-
From- XXXX o.yahoogroups.corn, XXXX ?C @,..
1 am new to this group and have been reading articles andstatements regarding how RYP X was sold to clients. I am aformer TD Ameritrade Investment Consultant. I can attest to their
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 40 of 68
statements. I was trained to recommend RYP X to my;fiettts itsguaranteed, safe, monq market frcl:d that will never- go doWis invalue and break the 1.00 NA V. Many clients were looking totransfer !heir accounts out of TD Amerilrade dire to very lowmoney rtrarket yields (05%). In order to keep their bissiness, ivewere told to prrl them in R YP X, whfclt was paying over 5%.This is in violation of SEC rules and is unethical. I even invested asignificant amount of my own IRA account in RYPQX believing itwas guaranteed, TD Ameritrade needs to be held responsible Formisieading its own employees and putting the interest of the firmbefore its own clients in order to get a kickback Froin the Reserve n1213-1 Fees. ^Einphasis added)
101. 7,D
Ameritrade made the same rnisrepre entations t:^ its investment advisor
clients. One investment advisor client explains this relationship in a posting to the Fund's
Investor Message Board on Yahoo:
From: X X X X <XXXX , yahoo.com>Subject: [RYPQX] Point of View from Investment AdvisorTo: rypgx@a yahooroups. camDate: Thursday, October 16, 2008, 2;11 I'M
[ am an investment advisor from the Northeast who uses TDAM asa custodain. 85 % of our clients (as well as all mcn}bers of my firm)have cxpQ5ure to RY?QX We used tfir's fund like a moneymarkel, as Hirtl is how It was also marketed to TDAHf v advisoryclientele. I wish l sti II had a copy of the presentation we sat in ongiven by the Reserve and TRAM soinetime in 2005 when RY?QXwas introduced.
[ certainly cannot say that we thought it was just like a moneymarket, as clearly, being investment advisors, "we should knavebetter". However, as someone }pointed out, the holdings ofRYPQX and the Primary were virtually identical. Additionally,the settlement for sales were less than a day; i.e., [ could sell aposition in RYPQX at 3 .59pm and have that cash avalable at9:30am the next day.
feel awful that l have put my clients in this situation; however,looking back, who would have thought this would have happened,
have used the Reserve's vehicles for years, and they alwaysprovided Ile ibie, cost efficient. above-average yields. My guess isthis will be the end or starting over point for them and it snakes mefeel sad. I really can't say that I ain not happy with the way they
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 41 of 68
have handled the situation. 1 have always been able to get throughto someone there, and they have always returned my calls, 1 do notreceive information any faster than anyone else, but 1 at least knowI have the same information as everyone else.
TDAM on the other hand, [ am very, very unhappy with. Likemany of you, once this settles, we will most likely be moving ourbusiness from them. They have done any and every thing they canto remove liability from themselves. Very cowardly. The onlyreason they are offering to cover $.03 on the dollar for the Primaryis because they used it as a sweep vehicle and know that theirhands are in the cookie jar on that one.
I would urge everyone, like I am my clients, family, andemployees, to remain cairn and patient. All the securites in thefund have value. La's let them mature and as such they candistribute the dollars. Dividends. I am guessing, will not be paidout. [ am Dk with that, as it is my assumption that they willremain in the fund.
At this point, t want to get a NA V back at closest to $1.00 as [ can.The results of the Primary fund distribution are critical to RYPQX.if its NA V ends up being lower than $1.00, RYPQ X will followworse, as not only did it have Leliman exposure, but Primary also.So, for RYPQX, double-domino exposure.
Lastly, I am sorry to hear that colleagues in my industry, if youcould call them that, sold or misrepresented this fund to individualinvestors. For that you surely have cause with TDAM, and i urgeyou to take it up with them!
(Emphasis added)
102. The Fund was also marketed as having same-day liquidity (i.e., Funds would be
available almost immediately after sell orders).
. TRUE FACTS
103. The true facts, which were omitted fro g the Prospectus, from TD Ameritrade's
sales program, and from other statements made by defendants during the Class Period, were
as follows:
(a) The Fund was no longer adhering to the stated objectives of preserving
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 42 of 68
capital, providing Iiquidity and stab ity, but in an effort to achieve greater yields was
pursuing riskier instruments;
) The Fund was purchasing sign f icant amounts of Lehman cominercial
paper between February and [March 2008. when the financial community was concerned about
Lehman's f inane ial solvency, aspeeially after Hear Steams collapsed in Match 24b8;
(c) The Fund was neither a money market fund nor just like a money
market fund for purposes of maintaining a safe and stable $1.00 NAV;
{d} The Fund was not designed to protect the $1.00 NAV, as were
traditional money market funds, and was thus significantly riskier than money market hands;
(e) The Fund's internal controls were inadequate to prevent defendants
from taking on excessive risk;
(f) TD Ameritrade fai led to disclose the extent c its relationship with the
Trust and the Fund, and the compensation that it received by placing CIass Meinbers' assets
into the Reserve Yield Plus Fund;
(g) The Reserve entities did not have sufficient resources to support
maintenance of a stable S 1.00 NAV; and
(h) TD Ameritrade had no intention to support the Fund or cominit its
resources to maintenance of a stable $1.D0 NAV.
104_ When the NAV fell below $1.00, the Trust had to changeover its entire
computer piatform to account for a share price below $1.00. According to the Trutt. the need
to account for an NAV below $1.00 was not anticipated before the Lehman ban kmptcy,
105. As or September 16, 2008, The Reserve: reported that the Fund's outstanding
shares were worth approximately $1.154 billion, and the Trust reported that the Fund°s
outstanding shares were worth approximately $1.158 billion. As of the filing of this first
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 43 of 68
amended complaint, the Fund made distributions of approx i mat ely the following amounts: (i)
$800 million on or about December 30, 2008; (ii) 5 18 5 iniI lion on or about February 26,
2009; and (iii) $60 rni11ion on or about Septernbcr 2-5, 2009.
Ij. LOSS CAUSATION
106. Defendants misrepresented that the Fund was a safe cash investment, that the
Fund was like a money market, and that the Fund focused c preserving capital and
maintaining a safe and stable S 1.00 NA, among other things. Furthermore, Defendants
concealed that the Fund was not adhering to its stated objectives of preserving capital and
maintaining a stable 51.00 NA V, that the Fund was investing in certain high-risk commercial
paper in order to boost yield and thereby retain current investors and attract new investors,
and that the Fund's internal controls were inadequate to prevent Defendants From taking on
excessive risk.
107. In truth, the Fund was not managed so as to protect and maintain a stable $1.00
NAV, as were money market Funds; thus, the Fund was significantly riskier than money
market funds. In controlling the Fund, Defendants were oat adhering to the stated objectives
of preserving capital and maintaining a safe and stable $1.00 N A V, but rather, 1n an effort to
achieve greater yields, they were pursuing riskier instruments. Moreover, the Fund's internal
controls were inadequate to prevent Defendants fain taking on excessive risk, In particular,
Plaintiffs' capital was subjected to substantial and unreasonable risks of loss from potential
debtor defaults on commercial paper obligations.
108. Those substantial and unreasonable risks of loss materialized when Lehman
filed For bankruptcy and the Fund wrote off the value cf its Lehman investments at the end of
the Class Period.
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 44 of 68
109. Asa result of the misrepresentations and oinissions alleged herein, Plaintiffs'
investments in the Fund suffered a material loss in value.
114. Defendants' unlawful conduct alleged herein directly caused the losses
incurred by Plaintiffs and the Class,
COUNT I
VIOLATIONS OF SECTION 11 OF THE 1933 ACTAGAINST RMCI, RESRV PARTNERS AND THE INDIVIDUAL RESERVE
DEFENDANTS
11 l . Except and unless otherwise indicated, Plaintiffs repeat and reallege each and
every allegation contained above. This Count is brought pursuarit to §11 of the 1933 Act, 15
U.S.C. 77k, on behalf of the Class, against the RM C I, Resr y Partners and the Individual
Reserve Defendants.
1 2, This Count does not sound iu fraud. All oFthe preceding allegations orfraud
or fraudulent conduct and/or raotive are specifically excluded From this Count. Plaintiffs do
not allege that the Individual )deserve Defendants or the other defendants had scienter or
fraudulent intent as to this Count, which are not elements of a 1 l claim.
113. The N-1A Registration Statement Far the Offering was inaccurate and
pin isleading, contained untrue statements of material facts, oinitted to state other facts
necessary to make the statements made not misleading, and orniued to state materinI facts
required to be stated therein.
114. The Reserve Short-Term Investment 'Trust is the registrant for the Offering.
The defendants narned herein were respvnsibIc for the contents and dissemination of the N -1 A
Registration Statement.
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 45 of 68
115. The Reserve and RMCI are the de facto issuers of the shares of the Reserve
Short-Term Trust, and are thus, strictly liable to plaintiffs and the Class ror the misstatements
and omissions. Resery Partners is the underwriter of the shares. 'rhe Individual Reserve
Defendants are the Officers of the, Trust and Issuer, acted in a similar Function as a director or
partner ofthe Trust and Issuer, or signed the Registration Statements. Dach of these
defendants were responsible for the contents and dissernination of the N-1 A registration
Statement_
116. None of the defendants named herein made a reasonable investigation or
possessed reasonable grounds for the belief that the statements contained in the N-I A
Reg istradon Statement were true and without omissions of any material facts and were not
misleading.
117. By reasons of the conduct herein alleged, each defendant violated, and/or
controlled a person who violated, 11 of the 1933 Act.
118. Plaintiffs acquired Fund shares pursuant or traceable to one of the N-1 A
Registration Statements for the Offerings.
119. Plaintiff's and the Class have sustained damages. The value of the Fund's
shares has declined subsequent to and due to defendants' violations,
IM At the time of their purchases of the Fund's shares, plaintiffs and other
members of the Olass were without knowledge of the facts concerning the wrongful conduct
alleged herein and could not have reasonably discovered those Facts prior to September 16,
0DS. Less than one year has elapsed from the time that p€aintiffs discovered or reasonably
could have discovered the facts upon which this complaint is based to the time that plaintiff's
filed their initial complaint. Loss than three years has elapsed between the time that the
-4-4-
Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 46 of 68
securities upon which this Cc unt is brought were offered to the public and the time plaintiffs
filed their initial complaint.
121. Yand to the extant that indemnification on this Count is permitted bylaw and
public policy, then with respect to the challenged conduct, Plaintiffs assert this Count againsI
Resry Partners based solely upon its actions which constitute wilIfuI misFeasance, bad faith,
gross negligence ancVcr reckless disregard of its ob] i gat ion s and/or duties to the Reserve Short
Term Trust and the Fund. Alternatively, if and to the extent that indernnificalion on this
Gaunt is permitted by law and public policy, then Plaintiffs hereby assert that the untrue
statements of material fact contained in the Prospectus, and the omissions to state other
material facts therein, were made in reliance upon, and in conformity with information
furnished to the Reserve Short Term Trust and the Fund by Resr y Partners or on its behalf.
122. if and to the extent that indemnification on this Count is permitted by law and
public policy, then with respect to the challenged conduct, Plaintiffs assert this Gaunt against
the Individual Reserve Defendants based solely upon their actions which constitute willful
misfeasance, bad faith, gross negligence. or reckless disregard of the duties involved in the
conduct of such person's oif lee.
COUNT II
VIOLATIONS OF SECTION 12(A)(2) OF THE 1933 ACTAGAINST THE RESERVE SHORT-TERM TRUST, RESRV PARTNERS,TD
AERITRADE, INDIVIDUAL TD AM ERIT RADE DEFENDANTS , AND THEINDIVIDUAL DEFENDANTS
123. Except and unless otherwise indicated, Plaintiffs repeat and real Iege each and
every allegation contained above.
124. This Count is Drought pursuant to § ] 2(a)(2) of the 1933 Acton bchalFof the
Class, against Resry Partners, TD Arneritrade, Individual TD Ameritrade Defendants, and the
Individual Defendants.
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 47 of 68
125. This Count does not sound in fraud. All of the preceding allegations of fraud
or fraudulent conduct and/or motive are speciFically excluded from this Count. PIaintiITS do
not allege that the I ndividual Reserve Defendants or the other defendants had scien ter or
fraudulent intent as to this Count, which are not elements of a 12 claim,
126. These defendants were sellers and offerors and/or solicitors of purchasers of
the shares offered pursuant to and/or traceable to the Prospectus.
127. The Prospectus contained untrue statements of material facts, omitted to state
other facts necessary to make the statements made not misleading, and omitted to stake
material facts required to be stated therein. The Individual Defendants' actions o r so I 1c 1 tatio n
included participating in the preparation ofthe false and misleading Prospectus and
participating in road shows to market the Fund to investors. Resr y Partners, as the distributor
of the shares in the Offering, essentially acted as an underwriter. TD Arnedtrade's actions of
solicitation, and Individual TD Ameritrade Defendants ` actions of solicitation, included
providing investors w4h copies of the false and misleading Prospectus, or causing the
Prospectus to be provided to investors.
128. These defendants owed to the purchasers of Reserve Yield Plus Fund shares,
including pInintiffs and other Class members. the duty to make a reasonable and di Iigent
investigation of the statements contained in the Prospectus, to ensure that such statements
were tree and that there was no omission to state a material Fact required to be stated in order
to make the statements contained therein not misleading. Defendants, in the exercise of
reasonable care, should have known of the misstatements and omissions contained in the
Prospectus materials as set forth above.
129. Plaintill's and other members of the Class purchased or otherwise acquired
Reserve Yield Plus Fund shares pursuant to andfor traceable to the Prospectus.
.46-
Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 48 of 68
130. By reason of the conduct alleged herein, those defendants violated, and/or
controlled a person who violated, 12(a){2} of the 1933 Act. Accordingly, Plaintiff's and
members of the Class who hold Reserve field Plus Fund shares purchased pursuant to and/or
traceable to the Prospectus materials have the right to rescind and recover the consideration
paid for their Fund shares.
131. Plaintiffs, individually and representatively, hereby offer to tender to
defendants those shares which plaintiffs and other Class members continue to own, on behalf
of all members of the Class who continue to own such shares, in return for the consideration
paid far those shares together with interest thereon, Class members who have sold their
Reserve Field Pius Fund shares are entitled to rescissory damages.
132. If and to the extent that indemnification on this Count is permitted by law and
public policy, then with respect to the challenged conduct, Plaintiffs assert this Count against
Resry Partners based solely upon its actions which constitute willful misfeasance, bad faith,
gross negligence and/or reckless disregard of its c 15 igat ion s and/or duties to the Reserve Short
Term Trust and the Fund. Alternatively, if and to the extent that indemnification on this
Count is permitted by law and public policy, then Plaintiffs hereby assert that the untrue
statements of material fact contained in the Prospectus, and the omissions to state other
material facts therein, were made in reliance upon, and in conlorrnity with information
furnished tc the Rcservc Short Term Trust and the Fund by Ri^:sr y Partners or on its behalf;
131 ]rand to the extent that indemnification on this Count is permitted bylaw and
public policy, then with respect to the challenged conduct, Plaintifl's assert this Courtt against
the Individual Reserve Defendants based solely upon their actions which constitute willful
inisfeasarnce, bad faith, gross negligence, or reckless disregard of the duties involved in the
conduct of such person's office,
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 49 of 68
COUNT" III
VIOLATIONS OF SECTION 12(A) (2) OF THE 1933 ACT AGAINST TD AMERITRADEAND THE INDIVIDUAL TD A ERITRADE DEFENDANTS FOR COMMON SALES
PROGRAM
134. Except and unless otherwise indicated, Plaintiffs repeat and mallege each and
every allegation contained above.
135. This Count is brought piusuant to 12(a)( ) of the 1933 Act on behalf of the
Class, against TD Ameritrade and the Individual TD Ameritrade Defendants.
136. This Count does not sound in fraud. All of the preceding allegations of fraud
or fraudulent conduct and/or motive arc specif icaIly excluded from this Count. Plaintiffs do
not allege that TD Aineritrade had scienter or fraudulent intent as to this Count, which are not
elements of § 12 claim.
137. TD Ameritrade and the Individual TD Ameritrade Defendants were sellers and
offerors andl^>r solicitors Df purchasers of the shares of the Fund,
138, TD Ameritrade made communications to investors, via telephone, a-mail,
and/or other means, in connection with the company's sale of shares of the Fund. Such
communications contained untrue statements of material facts, omitted to state other facts
necessary to make the statements made not misleading, and omitted to state material facts
required to be stated therein. The coma-tunications were part of a common sales program
designed to attract investors to invest in the Fund by representing the Fund as being just like a
money market fund with a safe and stable $1.00 N AV.
139. As part of the common sales program, TD Ameritrade agents and employees
were trained to target investors interested in money market funds, and they were trained to
coin municate, and did communicate, these common representations of the Fund as being jtist
like a money rnarket fund with a safe and stable $1.00 NAV.
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140, TD Arneritrade and the Individual TD Ameritrade Defendants owed to the
purchasers of Reserve Yield Plus Fund shares, including Plaintiffs and other Class members,
the duty to make a reasonable and diligent investigation of the statements communicated as
hart of the company's common sales program, to ensure that such statements were true and
that there was no ornission to state a material fact required to be stated in order to make the
statements contain d therein not misleading. 'These defendants, in the cxercise of reasonable
care, should have known of the untrue statements and material omissions communicated
through the common sales program as set forth above,
141. Plaintiffs and other members of the Class purchased or otherwise acquired
Reserve field Plus fund shares pursuant to and/or traceable to the common sales program.
142, By reason of the condLict alleged herein, TD Aineritrade and the Individual TD
Ameritrade Defendants violated. and/or control led a person who violated, 12(x)(2) of the
1933 Act. Accordingly, Plaintiffs and members of the Class who hold Reserve Yield Plus
Fund shares purchased pursuant to and/or traceable to the common sales program have the
right to rescind and recover the consideration paid for their Reserve field Plus Fund shares.
143. Plaintiffs, individually and representatively, hereby offer to tender to TD
Arneritrade those shares which Plaintiffs and oilier Class mernbers continue to own, on behalf
of a I I members of the Class who continue to own such shares, in return for the cons iderationt
paid for those shares together with interest thereon. Class members who have sold their
Reserve Yield Plus Fund shares are entitled to rescissory damages,
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COUNT IV
VIOLATIONS OF SECTION 15 OF THE 1933 ACT AGAINST RMCI, THE RESERVE,RESRV PARTNERS, TD A ERITRADE, THE riNDIVID UAL TD AMERITR,ADE
DEFENDANT , AND THE INDIVIDUAL RESERVE DEFENDANTS
144. Except and unless otherwise indicated, Plaintiffs repent and real lege each and
every allegation contained above.
145. This Count is brought pursuant to §15 of the 1933 Act against RMCI, The
Deserve, Resry Partners, TD Ameritrade, the Individual I'D Ameritrade Defendants, and the
Individual Defendants.
146. This Count does not sound in fraud. All of the preceding allegations of fraud
or fraudulent conduct and/or motive are specifically excluded from this Count. Plaintiffs do
not allege that the Individual Reserve Defendants or the other defendants had scienter or
fraudulent intent as to this Count, which are not elements of a § I l claim or a § 12 claim.
147. The Reserve controls RMCl. RMCI controls the Reserve Short-Terra
Investment Trust and/or the Individual Defendants.
148. TD Ameritrade, through its ownership of a substantial majority of (lie Fund
shares, and through its revenue sharing agreement with the Trust, control led the Trust and/or
the Individual Defendants,
149, Each of the Individual TD Arneritrado Defendants was a control person ol'TD
Ameritrade by virtue of his or her position as a senior officer c TD Amedtrade, The
Individual TD Ameritrade Defendants each had a series of direct and/or indirect business
ancVor personal relationships with the Individual Defendants.
150, Each of the Individual Ikcserve Defendants was a control person of The
Reserve, RMC1, and Resry Partners by virtue of his or her position as a senior officer of the
Reserve Short-Terra Investment Trust and a non-independent trustee of the Fund. The
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Individual Deserve Defendants each had a series ofdirect and/or indirect business and/or
personal relationships with other trustees and/or officers and/or major shareholders of the
Reserve Short-Term Investment Trust and the Fund. In addition, B. Bent, B. R. Bent, and A.
Bent are considered "controll i n g persons" c RMC I and Resr y Partners based on their direct
and indirect securities ownership.
151. RMCI, The Reserve, Resry Partners, TD Ameritrade, individual TD
Ameritirade Defendants, and the Individual Deserve Defendants are "control persons" within
the meaning of 15 of the 1933 Act.
152. Each of the individual Reserve Defendants was a culpable participant in the
viDiations of 11 and § 12 of the 1933 Act alleged in the Coijnt above, based on their having
signed or authorized the signing of the N-1 A Registration Statement, having sold or offered
far sale shares of the Fund, having caused distribution of the Prospectus materials, and/or
having otherwise participated in the process which allowed the Offering to be successfully
completed.
153. RM I, The Reserve, Resry Partners, TD Ameritrade, the Individual TD
Ameri trade Defendants, and the Individual Reserve Defendants knew or had reason to know
of the facts alleged herein giving rise to liability of the persons they controlled.
154. If and to the extent that indemnification on this Gaunt is permitted by law and
public policy, then with respect to the challenged conduct, Plaintiffs assert this Count against
Resry Partners based solely upon its actions which constitute wiIIfuI misfeasance, bad faith,
gross negligence and/or reckless disregard of its obligations andlor dutics to the Reserve Short
Term Trust and the Fund. Alternatively, if and to [lie extent that indemnification on this
Count is permitted by law and public policy, then Plaintiffs hereby assert that the untrue
statements of material fact contained in the Prospectus, and the omissions to state other
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material facts therein, were made in reliance upon, and in conformity with information
Furnished to the Reserve Short Term Trust and the Fund by Rcsry Partners or on its behalf.
155. if and to the extent that indernnification on this Count is permitted bylaw and
public policy, then with respect to the challenged conduct, Plaintiffs assert this Count against
the Individuai Reserve Defendants based solely upon their actions which constitute willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the
conduct of such person's office.
CDI1N'T V
VIOLATIONS OF § 10(8) OF THE 1934 ACT AGAINST DEFENDANTSRMCI, RESRV PARTNERS,
THE RESERVE, AND THE INDIVIDUAL RESERVE DEFENDANTS
156. Except and unless otherwise indicated., Plaintiffs retreat and rcallege each of
the allegations set forth above a5 if Fu ly set forth herein,
157. This Count is asserted against RMCI, Resry Partners, The Deserve, and the
[individual Deserve Defendants for violations of § 10(b) of the 1934 Act, 15 U.S.C. §78j(4),
and Mule IOb-5, 17 C.F.R. §240.10b-5, promulgated thereunder.
158. Prior to and throughout the Class Period, RMCI, Resry Partners, 'fhe Deserve
and the Individual Reserve Defendants, individually and in concert with others, directly and
indirectly, by the use of means or i n st rurnenta I itics of interstate commerce and/or of the rnai Is
and a national securities exchange, engaged and participated in a continuous course of conduct
that operated as a fraud and deceit upon plaintiffs and the Class; made various untrua and/or
mWeading statements of material facts and omitted to state material facts necessary in order
to make the statements made. in light of the c i re urn sta nces under which they were made, not
misleading; made the above statements with a reckless disregard for the truth; and employed
devices and artifices to defraud in connection with the purchasc and sale of Fund shares,
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which were intended to, and, during the Class Period, did: (i) deceive the investing public,
including Plaintiffs and other Class members, regarding, among other things, the f=und's
cc m p] iance w ith its stated investment po 1 i cies;, and (ii) cause plaintiffs and the Class to
purchase Fund shares that were impaired by concealed and unreasonable risks of loss for this
type of investment.
159. The Individual Reserve Defendants are liable as direct participants in the
wrongs complained or herein. Through their positions ol'contro1 and authority as officers of
the Fund and the Reserve short-Tenn Trust, the Individual Reserve Defendants named in this
Count were able to control and did control the content of the pubI is statements contained
herein and, with knowledge or in reckless disregard, they caused the above complained of
publ is statements to contain misstatements and omissions of material Facts as alleged herein.
160. Defendants RMCI, Resr y Partners, and The Reserve are liable for each orthe
materially false and misleading representations set forth therein, and for each omission of`
material fact, including each of the representations or material ornission5 of the Individual
Defendants, under the principles of respondew stspc3rior.
161. Plaintiffs' investments in the Fund lost vaIuc as a result ofthe defendants'
representations being untrue and as a result of the true facts being omitted by the defendants.
162. Plaintiffs and the Class have suffered damages in that Plaintiffs did not
purchase a true money market Fund, or even a cash Iund rn anaged to preserve capital, but a
much more risky Fund. As a result orthat added risk, the Fund value declined below S 1 _00
NAV, causing Plaintiffs' losses.
163. Tile, Individual Reserve Defendants acted with scicnter in that they k tic w that
the public documents and statements issued or dissenninatud in the naine of the Fund were
materially false and misleading; knew that Fiuch statements or documents would be issued or
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disseminated to the investing public; and knowingly and substantial ly participated or
acquiesced in the issuance or dissemination of such statements or documents as primary
violations of the federal securities law.
COUNT VI
VIDI.ATIONS OF 5 10 (B) OF THE 1934 ACS' AGAINST TD AMERI"TRADE AND THEINDIVIDUAL TD AM ERITRADI- DEFENDANTS
164, Except and unless otherwise indicated, Plaintiffs repeat and reallege each or
the allegations set forth above as if fully set forth herein.
165. This Count is asserted against. TD Ameritrade and the individual TD
Ameritrade Defendartts for violations of 1 0(b) of the 1934 Act, 15 U.S.C. §78i(b), and Rule
IOb-5, 17 C.F.R. §240. 10 b-S, prornuIgated thereunder.
166. Prior to and throughout the Class Period, TD Ameritrade, individually and in
ccncert with others, directly and indirectly, by the use of mcans or instrumentalities of
interstate commerce and/or of the mails and a national securities exchange, engaged and
participated in a continuous Course of conduct that operated as a fraud and deceit upon
plaintiffs and the Class; made various untrue and/or misleading statements of material facts
and omitted to state material facts necessary in order to make the statements made, in light of
the circumstances under which they were made, not inisleading; made the above statements
with a reckless disregard for the truth; and empioyed devices and artifices to de Fraud in
connection with the purchase and sale of Fund shares, which were intended to, and, during the
Class Period, did: (i) deceive i'laintifl"s and the Class regarding, among other things, the nature
of investments in the Fund; and (ii) cause Plaintiffs and the Class to purchase Fund shares that
were impaired by concealed and unreasonable risks of loss.
167. The 7'D Ameritrade Defendants are liable as direct participants in the wrongs
complained of herein. Through their positions of control and authority as officers of TD
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Ameritrade, the Individual TD Ameritrade Defendants named in this Count were able to
control and did control the content of the public representations contained herein and, with
knowledge or in reckless disregard, they caused the above complained of public
representations to contain misstatements and omissions of material Facts as alleged hep6n.
168, Defendant TD Amed trade is liable as a direct participant of the wrong
complained of Herein. Through its position of control and authority and distribution of the
Fund, TD Ameritrade was able to control and did control the content of the public
representations and the coin mon sales prograwn desixibed herein and, with knowledge or in
reckless disregard, caused the dissemination of misrepresentations and omissions of material
facts as alleged herein.
169. Plaintiffs' investments in the fund lost value as a result of TD Arneritrade's
representations about the nature o the Fund being untrue, and as a further result of the true
risks vFinvesting in the, Fund being omitted from TD Aincritrade's common sales program.
170. Plaintiffs and the Class have suffered dainages in that Plaintiffs did not
purchase a true money market fund, or even a cash fund managed to preserve capital, but a
much more risky fund. As a result of that added risk, the Fund value declined below $1.00
NAV, causing Plaintiffs' losses.'
171. TD Ameritrade and the individual 'rD Aineritrade Defendants acted with
scienter in that it that the public documents and statements issued or disseininaled in the name
of the, Fund were materially false and misleading; knew that such statements or documents
would be issued cr disserninated to the investing public; and knowingly and substantially
participated or acquiesced in the issuance or dissemination of such statements 0 doe urnfnts as
primary violations oFthe federal securities law. TD Ameritinde and the Individual TD
Ameritrade Defendants Further acted with scienter in that it knowingly targeted potential
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investors interested in money market accounts for investments in the Fund, and trained its
agents and employees to market the Fund just like a money market fund that would not lose
value below a safe and stable $ I .GD NA V,
COUNT VII
VIOLATIONS OF X20 OF THE 1934 ACT AGAINST RMCI, RESRV PARTNERS, TDAMERITRADE, THE INDIVIDUAL TD AMERITRADE DEFENDANTS,
AND THE INDIVIDUAL RESERVE DEFENDANTS
172. Except and unless otherwise indicaited, Plaintiffs repeat and real lege each of
the allegations set forth above as if Fu ly set forth heroin. This Count is asserted against
RM 1, Resry Partners, TD Ameritrade, the Individual TD Ameritrade Defendants, and the
Individual Reserve Defendants for violations of 20(a) of the 1934 Act.
173. The Reserve directly or indirectly controls RMC1. RMCI directly or indirectly
controls the Deserve Short-Term Investment Trust and/or the Individual Reservc Defendants.
In addition, B. Bent, Q. R. Bent, and A, Sent are control Iing persons ofRMCI and Resry
Partners based on their direct and indirect securities ownership.
174. 3'D Ameritrade, through its ownership o F a substantial majority of the Fund
shares, and through its revenue sharing agreement with the Trust, controlled the Trust and/or
the Individual Reserve Defendants.
175. Each of the Individual TD Ameritrade Defendants controlled I'D Ameritrade
by virtue of his or her position as a senior officer, director or controlling shareholder of TD
Ameritrade.
176. By reason of'their status as senior off leers of the Trust and non-independent
trustees ofthe Fund during the Class Period, the Individual Reserve Defendants controlled the
Trust.
177. The Reserve, RMC1. I'D Ameritrade_ Individual TD Ameritrade Defendants.
and the Individual Reserve Defendants are- "control persons" within the meaning of 20(a) of
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the 1934 Act. Because of their positions of control, these defendants were able to, and did,
directly or indirectly, control the conduct oFthe persons direct]y Iiable for primary violations
of § l O(b) of the 1934 Act, 15 U.S.C. §78j(b), and Rule 10-5, 17 C.F.R. §240,1 Db-5,
prornulgatcd thereunder,
178. At the time that the defendants made false and misleading statements and
omissions of malerial facts alleged above in violation of § 10(b) and Rule I Ob-5. the
defendants named in this Count either knew of, or recklessly disregarded, their falsity.
179. Each of the defendants in this Count had the power to control or influence the
particular transactions giving rise to the primary violations of § I O(b) and Rule I Ob-5 as
alleged herein, and exercised the same. Each of the defendants in this Count either directly or
indirectly induced the primary violations of I aw complained of herein.
180. By virtue of their positions as "controlling persons," the defendants in this
Count are liable pursuant to §20(a) ol'the 1934 Act.
181. Asa direct and proximate cause of the wrongful conduct set forth in this
Count, Plaintiffs and other members of the Class suffered damages in connection with their
purchases of Fund shares during the Class Period.
182, if and to the cxtent that indemnification on t1lis Count is permitted bylaw and
public policy, then with respect to the clhatlenged conduct, PlaintiW e, assert this Court against
Resry Partners based solely upon its actions which constitute willful misfeasance, lead faith,
gross negligence and/or reckless disregard of its obligations and/or duties to the Reserve Short
Term Trust and the Fund. Alternatively, if and to the extent that indcntnificatian on this
Count is permitted by law and public policy, then Plaintiffs hereby aSSert that the untrue
statements of material fact contained in the Prospectus, and the omissions to state other
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material facts therein, were made in reliance upon, and in conformity with information
furnished to the Reserve Short Term Trust and the Fund by Resr y Partners or an its behalf.
f83. if and to the extent that indemnification on this Count is perm fitted bylaw and
public policy, then with respect to the challenged conduct. Plaintiffs assert this Count against
the Individual Deserve Defendants based solely upon their actions which constitute willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the
conduct of such persnn's office.
COUNT VIII
VI0LA'TION S OF S 13(A) OF THE IM0 AC's' AGAINST ALL DEFENDANT
184. Except and unless otherwise indicated, Plaintiffs repeat and reallege each of
the aI[egalicns set forth above as if fully set forth herein.
185. This Count is asserted against all defendants for violations of 13(a) ofthe
1940 Act.
186, The stated investment objective ol'the Reserve Yield Plus Fund wwi primarily
to preserve capital and liquidity and then to obi ain a higher yield when consistent with
preserving capital.
187_ Defendants did not obtain authorization from a majority of the Fund's
outstanding voting sharco hers prior to deviating From the Fund's invf stment policy with
respect to its objective. This deviation exposed investors to increased risk.
188. This deviation ultimately led to losses by Fund investors.
189, if and io the extent that indemnification on this Count is permitted by law and
public poi icy, then with respect to the challenged conduct, P lain tiM assert this Count agaIns[
Resry Partners based solely upon its actions which constitute willful misfeasance, bad faith,
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gross negligence and/or reckless disregard of its obligations and/or duties to the reser ve Short
Term Trust and the Fund. Alternatively, iFand to the extent that indemnification an this
Count is permitted by lave and public poI icy, then Plaintiffs hereby assert that the untrue
statements of material fact contained in the Prospectus, and the omissions to state other
material Facts therein, were made in reliance upon, and in conformity with information
furnished to the Reserve Short Term Trust and the Fund by Resry Partners or on its belialf.
190. If and to the extent that indeFnnification on this Count is permitted bylaw and
public policy, then with respect to the chat len gad conduct, Plaintiffs assert this Count against
the Individual Reserve Defendants based solely upon their actions which constitute willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the
conduct of such person's office.
C0tTN T IX
CLAIM FOP, BREACH OF FIDUCIARY DUTIES AND/ OR AIDING ARID ABETTINGBREACH OF FIDUCIARY DUTY UNDER DELAWARE LAW AGAINST ALL
DEFENDANTS
191. Except and unless otherwise indicated, Plaintiffs repeat and reaIlege each of
the a legations set forth above as if fully set fortlt lie rein.
192. This Count does not sound In fraud. All of the preceding allegations of Fraud
or fraudulent conduct and/or motive are specifically excIudcd from this Count. Plaintiffs do
not allege that these defendants had fraudulent intent as to this Count, which is not an element
oribis breach offidueiary duty claim being alleged ltcrein.
193. In particular, this Count is not based upon any untrue statement or omission of
materiai fact in connection with the purchase or sale ol'the Fund's securities, nor is it based on
any manipulative or deceptive device or contrivance in connection with the purchase or sale of
the fund's securities.
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194. Defendants have violated the fiduciary duties of care, loyalty, good faith and
independence owed to the members of the Deserve Yield Plus Fund, and have acted to put
their personal interests ahead of the interests of the Reserve Yield Plus Fund's members.
and/or have aided and abetted other delendants therein.
195. By the acts. transactions and course of conduct alleged herein, the Defendants
failed to exercise the care required, and breached tlieir duties of loyalty, good faith, and
independence owed to the inembers of the Reserve Field Plus Fund, and/or aided and abetted
other defendants therein. 'Phese Defendants breached their fiduciary duties by failing to
properly preserve the assets of the Deserve Yield Pius Fund and failing to invest the assets in a
manner that met with the FLind's investment objective,
196. By reason of the foregoing acts, practices and common course of conduct, the
defendants identified in this Count have failed to exercise ordinary care and diligence in the
exercise of their fiduciary obligations toward plaintiffs and the other members of the Class,
and/or have aided and abetted therein.
197. Asa result of the actions of defendants, Plaintiffs and the Class have been and
will be irreparably harmed in that they have not and will not receive their fair portion ofthe
value of the Reserve Yield Plus Fund's assets and have been and will be prevented from
obtaiiiing a fair prig for Choir shares.
198. With respect to the challenged conduct, this claim against Resr y Partners is
solely based upon its actions which constitute willful misfeasance, bad faith, gross negligence
and/or reckless disregard of its obligations and/nr duties to the Reserve Short Term Trust and
the Fund. Alternatively, the untrue statements of material fact contained in the Prospectus,
and the omissions to state other material facts therein, were made in rel iance upon, and in
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conformity with information furnished to the Reserve Short Torn Trust and the Fund by
Resm Partners or on its behalf.
199. With respect to the challenged conduct, this claim against the Individual
Reserve Defendants is solely based upon their actions which constitute willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of such
person's office.
COUNT X
CLAIM FOR BREACH OF FIDUCIARY DUTIES AND/OR AIDING AND ABETTrN C,BREACH OF FIDUCIARY DUTY UNDER DELAWARE LAW
AGAINST TD AMERITRADE AND THE INDIVIDUAL TI] AMERITRADEDEFENDANTS
200. Except and unlesF, otherwise indicated, Plaintiffs repeat and reallege each of
the al legations set forth above as if fully set forth herein.
201. This Count does not sound in fraud. All of the preceding allegations Df fraud
or fraudulent conduct and/or motive are specifically excluded from this Count. Plaintiffs do
not a]lege that these defendants had fraudulent intent as to th is Count, which is not an element.
of this breach of fiduciary duty claim being alleged herein.
202. In particular, this Count is not bused upon any untrue statement or omission of
material fact in ccnnection with the purchase or sale of the Fund's securities, nor is it based on
any manipulative or deceptive device or contrivance in connection with the purchase or safe of
the Fund's securities.
203. By the acts, transactions and course, of conduct alleged herein, Defendant TD
Ameritrade and the Individual TD Ameritrade Defendam have violated the fiduciary duties
of care, loyalty, good faith and independence owed to the members of the Reserve Field Plus
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Fund and have acted to }gut their personal interests ahead of the interests of the Reserve Yield
Plus Fund's inembers, and/or gave aided and abetted other defendants therein.
204. These defendants breached their fiduciary duties by putting'I'D Amerltmde's
own interests under the revenue sharing agrecrnent with the Trust, on the one hand, ahead of
the interests of TD Arneritrade clients in maintaining the sanctity of their working capital, ors
the other hand.
205, These defendants also breached their fiduciary duties by permitting The
Reserve Defendants' to invest in assets that were inappropriate for the investment objectives
of Class Members who purchased through TD Aineritrade, as well as inappropriate for the
Fund.
206. By reason of the foregoing acts, practices and common course of conduct, the
Defendants identified in this Count have failed to exercise ordinary care and diligence in the
exercise of their Fiduciary obligations toward Plaintiffs and the other members of the Class,
and/or have aided and abetted other Defendants therein.
207. As it result of the actions of Defendants, Plaintiffs and the Class have been and
will be irreparably harmed in that they have not and will not receive their fair portion of the
value of the Deserve Yield Plus Fund's assets and have been and wiII be prevented from
obtaining a fair price for their shares.
208. While investors have lost a material part of their investment,'CD Ameritrade
earned revenue from its involvement in the Deserve Yield Plus Fund under a revenue-sharing
agreement that it had with the Trust.
209. With respect to the challenged conduct, Defendant "I'll Amcritrade and the
IndividuaI TD Aineritrade Defendants also acted with willful misfeasance, bad faith, gross
negligence and/or reckless disregard of their fiduciary duties to the Reserve Short Term Trust,
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the Fund, and the clients to whore they sold shares of the Fund. Such misconduct warrants an
award of exemplary damages.
COUNT XI
CLAIM FOR UNJUST ENRICHMENT UNDER D>E:LAWARE LAWAGAINST ALL DEFENDANTS
210, Except and unless otherwise indicated, Plaintiffs repeat and reallege each of
the allegations set forth above as if fully set forth heivin.
211_ This Counl does not sound in fraud. All of the preceding allegations of fraud
or fraudulent conduct and/or motive arc specifically excluded from this Count, Plaintiffs do
not allege that Defendants had fraudulent intent as to this Count, which is not an element of
this unjust enrichment claim being alleged herein,
212. in particular, this Count is not based upon any untrue statement or omission of
material fact in connection with the purchase or sale of the Fund's securities, nor is it based on
any manipulative or deceptive device or contrivance in connection with the purchase or sale of
the Fund's securities.
213. Defendants received money and financial benefits from Plaintiffs and the Class
in the form of invested capital and payment of professional fees and expenses. Defendants
have retained such money and financial benefits to the detriment of Plaintiff`s and the Class.
214_ Defendants' retention or money and financial benefits from Plaintiffs and the
Class was unjust by virtue ofthe acts, transactions and course of conduct alleged herein, In
exercising their professional obligations %vith respecl to members aF the Reserve YieId Plus
Fund, Defendants failed to exercise ordinary care and diligence, and breached their duties of
loyalty, good faith, and independence, and/or aided and abetted other Defendants therein.
Moreover. Defendants failed to properly preserve the assets of the Fund and failed to invest
the assets in a manner that rnet with the Fund's investment objective.
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215. Asa result of the Defendants' actions, Ilaintiffs and the Class have been and
wilk be. irreparably harmed absent the requested relief, since Plaintiffs and the Clnss have not
and will not receive their lair portion oFthe value of the Deserve Yield Plus Fund's assets and
have been and will be prevented from obtaining a fair price for their shares. Thus,
Defendants' unjust retention of money and financial benefits from Plaintiffs and the Class
goes against the fundamental principles of justice, equ ity, and good conscience.
2I. With respect to the challenged conduct, this claim against Resr y Partners is
solely based upon its actions which constitute willful misfeasance, bad faith, gross negligence
and/or reckless disregard of its ob] i gad ons and/or duties to the Reserve Short Term Trust and
the Fund. Alternatively, the untrue statements of material fact contained in the Prospectus,
and the ornissions to state other raterial Facts therein, were made in reliance upon, and in
conformity with infotmation furnished to the Reserve Short Term Trust anti the Fund by
Resry Partners or on its behalf.
217. With respect to the challenged conduct, this claim against the Individual
Reserve Defendants is solely based upon their actions which constitute willful misfeasance,
bad faith, gross nesIigencc, c reckless disregard of the duties involved in the conduct 0Fsuch
person's office.
COUNT X11
CLAIM FOR UNJUST ENRICHMENT UNDER DELAWARE LAW AGAINSTTD AMERITRADE AND THE INDMDUAL TD AM ERITRADE DEFENDANTS
218. Except and unless otherwise indicated, Plaintiffs repeat and reallege each of
the allegations set forth above as if PuIly set forth herein.
219_ This Count does not sound in fraud. A II of the preceding allegations of fraud
or Fraudulent conduct and/or motive are specifically excluded from this Count. Plaintiffs Flo
nol allege that Defendant TD Ameritrade or the Individual TD Arneritrade Defendants had
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fraudulent intent as to this Count, which is not an element of this unjust end climent claim
being alleged herein.
220. 1a particular, this Court is not based upon any untrue statement or omission of
material fact in connection with the purchase or sale of the Fund°s securities, nor is it based on
any manipulative or deceptive device or contrivance in connection with the purchase cr sale of`
the Fund's securities.
221. Defendant TD Ameritrade and the Individual TD Ameritrade Defendants
received money and financial benefits from Plaintiffs and the Class in the form of invested
capital and payment of professional tees and expenses. Defendants have retained such money
and financial benefits to the detrimant of Plaintiffs and the Class.
222. Defendants' retention of money and financial benefits from Plaintiffs and the
Class was unjust by virtue of the acts, transactions and course of conduct alleged herein. [n
exercising their professional obligations with respect to members of the Reserve `f ield Plus
Fund, these Defendants failed to exercise ordinary dare and diligence, and breached their
duties of loyalty, good faith, and independence, and/or aided and abetted other De Pendants
therein.
223. These Defendants were able to retain unjustly money and financial benefits
taken from Plaintiffs and the Class by putting TD Amerilrade's own interests under the
revenue sharing agreement with the Trust, on the one hand, ahead of the interests of TD
Aineritrade clients in maintaining the sanctity of their working capital, on the other hand.
??4. [n addition, these Defendants were able to retain unjustly money and financial
benefits taken from Plaintiffs and the Class by perrnitt1ng The Reserve Defendants' to invest
in assets that were inappropriate for the investment objectives of Class Members who
purchased through TD Arneritrade, as well as inappropriate for the Fund.
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 67 of 68
225. While investors have last a material part ofthear investrnent, and access to their
funds far over a year, TD Ameritrade earned revenue from its involvement in the Reserve
Yield Plus Fund under a revenue-sharing agreement that it had with the Trust.
226. As a result of the Defendants' actions, Plaintiffs and the Class have been and
will be irreparably harmed absent the requested relief, since Plaintiffs and the Class have not
had access to their hands For aver one year, and will not receive their Fair portion of the value
of the Reserve Yield Plus Fund's assets and have been and will be prevented from obtaining a
rair price for their shares. Thus, Defendants' unjust retention of money and financial benefits
from Plaintiffs and the Class goes against the fundamental principles oFjustice, equity, and
good conscience.
PRAYER FOR RELIEF
W1-1 ERE FO E, plaintiffs pray for rcIieFand judgment, as follows;
A. Determining that this action is a proper class action and certifying plaintiff's as
Class representatives tinder Rule 23 of the Federal Rules of Civil Procedure;
B^ Awarding compensatory damages in Favor of plaind ffs and the other Class
members against all defendants, jointly and severally, For a I I damages sustained as a result of
defendants' wrongdoing, in an amount to be proven at trial, including interest thereon,
C. Awarding plaintiffs and the Class their reasonable costs and expenses incurred
in this action, including counsel fees and expert Fees;
D. Awarding rescission or a rescissory measure of damages-,
E. Awarding exemplary damages against defendants TD Ameritrade and the
Individual TD Ameritrade Defendants; and
F. Such equitable/injunctive or other relief as deemed appropriate by the Court.
JURY DEMAND
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Case 1:08-cv-10261-PGG Document 63 Filed 11/20/2009 Page 68 of 68
DATED. Novernber 20, 2009 Respectfully submitted,
HA ENS BERMAN SOBOL SHAPIRO LLP
REED R. ICATHREIN (admitted pro hae vice)
Peter E. Borkon715 Hca.rst Avenue, Suite 202Berkeley, CA 94710Telephone: (510)725-300DFacsimile: (510) 725-3001
Steve W. Berman14A ENS BERIVIAN SOBOL SHAPIRO LLP1301 Fifth Avenue, Suite 2900Seattle, WA 98101
Lee M_ GordonHAGENS BERMAN SOBOL SHAPIRO LLP700 South Flower St., Suite 2940Los Angeles, CA 90017
Lead Counsel for the Reserve Yield Plus FundInvestor Group
Cl"i0E1* GOLD & SPORN, P.
1 ETRO 'VOLPI JR. C`D-4627)
Jay P. Saltzman (JS-7335)19 Fulton Street, Suite 406N York, NY 10038
Liasan Counsel for the Reserve Yield Plus FundInvestor Group
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