1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION 2 3 TRANSCRIPT OF RECORDED TELEPHONE CONVERSATIONS 4 FILE NAME: OSNATO Decl Ex 28 Ledford9-15-08808am-0 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2 1 MR. LEDFORD: This is Patrick. 2 BRUCE SENIOR: Yeah, okay, you got the 3 percentages? 4 MR. LEDFORD: No, not yet. We're still working 5 on them. Lentinello -- Lentinello wasn't in yet, and Pat's 6 in Chicago, but we should have them in about, probably, 15, 7 20 minutes at the -- at the longest. 8 BRUCE SENIOR: Okay. Let's go by the funds 9 then. The thing that you came up with the other day. 10 We've got 67 billion in the Primary Fund? 11 MR. LEDFORD: Yeah, that's correct, uh huh. 12 BRUCE SENIOR: Okay. And, the Primary Fund has 13 750 million in Lehman? 14 MR. LEDFORD: That -- hang on a minute. Let me 15 get my sheet out. That is correct. 16 BRUCE SENIOR: Okay. That's Primary. 17 MR. LEDFORD: It's like one point one eight 18 percent. 19 BRUCE SENIOR: Okay, fine. Next fund 20 [unintelligible] Lehman is what? 21 MR. LEDFORD: Hang on, hang on, hang on. Yield 22 Plus. 23 BRUCE SENIOR: Is that a '40 Act fund? 24 MR. LEDFORD: No. That is not. So, we don't 25 have to worry about that. 3 1 BRUCE SENIOR: How much money is in that? 2 What's the total? 3 MR. LEDFORD: The total is 30 million and -- 4 BRUCE SENIOR: Thirty million in Lehman paper? 5 MR. LEDFORD: Yeah, 30 million in Lehman paper. 6 Hang on a minute, let me get my sheet out. 7 BRUCE SENIOR: [unintelligible] the funds -- 8 MR. LEDFORD: Hang on, hang on, just a second, 9 Mr. Bent. Let me get this out here. Okay. Yeah, that's 10 Yield Plus, and Yield Plus is one point one billion, or two 11 point six percent. 12 BRUCE SENIOR: Okay, fine. 13 MR. LEDFORD: Okay. And then Offshore, again, 14 not a '40 Act fund, but a 125 million. 15 BRUCE SENIOR: That's total assets? 16 MR. LEDFORD: Yeah, total assets in Offshore, 17 Mr. Bent, is 3.5 billion. 18 BRUCE SENIOR: Okay. Next one? 19 MR. LEDFORD: And, that's it. 20 BRUCE SENIOR: Okay, so that -- I thought there 21 were four different funds that had it? 750, 850, 905, -- 22 MR. LEDFORD: No, Primary, Yield Plus, and 23 Offshore. 24 [Cell phone ringing] 25 BRUCE SENIOR: Okay. Hold on, one second. 4 1 [Bruce Senior speaking with another party] 2 BRUCE SENIOR: Okay. There's not four funds, 3 huh? 4 MR. LEDFORD: No, Mr. Bent. Primary, Yield 5 Plus, and -- and Offshore. 6 BRUCE SENIOR: Okay. Hold on. 7 [Dialing phone] 8 MR. LEDFORD: Are you still there? 9 BRUCE SENIOR: Yeah. 10 [Dialing phone] 11 MR. LEDFORD: Mr. Bent, hang on. I'm going to 12 put you on hold. Frank Bonanno is calling me. Hang on. 13 Yeah, Frank. 14 MR. BONANNO: Hey, do we got anything on 15 Merrill, or no? 16 MR. LEDFORD: Oh, yeah, yeah. Yeah. Merrill, 17 in Primary, 1.1 percent. 18 MR. BONANNO: Okay. 19 MR. LEDFORD: Okay. In Yield Plus, 4.6. 20 MR. BONANNO: Okay. 21 MR. LEDFORD: And then, in Enhanced Cash, 36.8 22 percent. 23 MR. BONANNO: Thirty-six point eight? 24 MR. LEDFORD: Yeah. 25 MR. BONANNO: Well, I won't talk about that, 5 1 because that's -- 2 MR. LEDFORD: Yeah, I wouldn't even talk about 3 Enhanced Cash, yeah. 4 MR. BONANNO: All right. It's not a public 5 fund, so I can't -- 6 MR. LEDFORD: No, -- 7 MR. BONANNO: [unintelligible] about it. 8 MR. LEDFORD: -- yeah. 9 MR. BONANNO: And, that's it? 10 MR. LEDFORD: That's it. 11 MR. BONANNO: Okay, man. 12 MR. LEDFORD: All right. 'Bye. 13 Mr. Bent, I'm back. 14 (silence) 15 BRUCE SENIOR: Okay. Conference this call in, 16 you and me. Conference us in to 866-527-5844. 17 MR. LEDFORD: Okay. 18 BRUCE SENIOR: And the code number, after you 19 get into that, is 5232979. 20 MR. LEDFORD: Two nine seven nine? 21 BRUCE SENIOR: Yeah, 866-527-5844, -- 22 MR. LEDFORD: Um hmm. 23 BRUCE SENIOR: -- 5232979. 24 MR. LEDFORD: Okay. Hang on. 25 [Dial tone -- dialing] 6 1 ELECTRONIC VOICE: Welcome to the conference 2 calling center. 3 MR. LEDFORD: Mr. Bent, are you there? 4 ELECTRONIC VOICE: At any time during this call 5 -- 6 BRUCE SENIOR: Yeah. 7 MR. LEDFORD: All right. Hang on. 8 ELECTRONIC VOICE: Please enter your pass code, 9 followed by the pound -- 10 [Dialing] 11 ELECTRONIC VOICE: Your pass code has been 12 confirmed. If you need technical assistance during your 13 call, press star zero. 14 After the tone, please state your name, followed 15 by the pound sign. 16 [TONE] 17 BRUCE SENIOR: Bruce Bent. 18 ELECTRONIC VOICE: There are eight parties in 19 conference, including you. 20 BRUCE SENIOR: Bruce Bent. 21 MR. MONTGORIS: Good morning, Bruce. 22 BRUCE SENIOR: Good morning. Okay. I got 23 Patrick Ledford on the phone, too. 24 MR. MONTGORIS: Okay. 25 MR. LEDFORD: Good morning, everyone. 7 1 BRUCE SENIOR: Okay. What we're talking about 2 is the valuation of Lehman. Is Sean on the phone? 3 MR. McKEE: Yes. 4 MR. MONTGORIS: Can we -- Bruce, should we just 5 find out who all is on the phone? 6 BRUCE SENIOR: Good idea. Okay, Bruce Bent. 7 MR. MONTGORIS: Bill Montgoris. 8 MR. ARTINIAN: Ron Artinian. 9 MR. VIKLUND: Bill Viklund. 10 MR. STALZER: Frank Stalzer. 11 MS. CROWLEY: Kate Crowley. 12 MR. McKEE: Sean McKee. 13 MR. LEDFORD: Patrick Ledford. And Bruce. 14 MR. McKEE: Okay. So we don't have 15 [unintelligible] but we do have a quorum of the -- 16 UNIDENTIFIED: We've got a quorum, okay. 17 MR. McKEE: Okay. 18 BRUCE SENIOR: All right, Sean, why don't you go 19 ahead with it? That's probably the better thing to do. 20 MR. McKEE: Okay. What would you like me to 21 cover at this stage? 22 BRUCE SENIOR: Okay, the -- the half of one 23 percent, and the fair valuing. 24 MR. McKEE: Okay. 25 BRUCE SENIOR: Let me -- okay. I'll -- I'll 8 1 give you statistics. We have $67 billion in the Primary 2 Fund, a half of one percent of that would be $335 million. 3 We've got $750 million in Lehman in the Primary Fund. 4 If Lehman is set -- marked to market at 55 5 percent, then we're at the half of one percent level. Now, 6 I think the probabilities of that are zero. Nevertheless, 7 what we want to do, we get instructions from you people on 8 the -- you know, the ability to go to fair value 9 accounting. 10 MR. MONTGORIS: You see the possibility -- 11 BRUCE SENIOR: Okay, Sean, I -- 12 MR. MONTGORIS: -- of going to 55 percent is 13 zero? 14 BRUCE SENIOR: Yeah. 15 MR. MONTGORIS: So, you don't think it will go 16 that low? 17 BRUCE SENIOR: No. 18 MR. MONTGORIS: Okay. 19 BRUCE SENIOR: Sean? 20 MR. McKEE: Sure. 21 BRUCE SENIOR: Do you want to say anything? 22 MR. McKEE: No, I think that was good -- that 23 was great information. From a accounting standpoint, 24 obviously, what you need to do is, given the -- the 25 circumstances, is, you know, is look at what the -- the 9 1 fair value of these securities are -- and, you know, I'll 2 let the others deal with kind of some of the intricacies 3 [unintelligible] and Patrick is the -- as to how you would 4 do that. 5 But, obviously, what you're looking at is, 6 basically, fundamental credit analysis at this point, given 7 the information that's -- that's available to you, and 8 working you way through that, to determine what the value 9 of the commercial paper really is. But obviously, given 10 that they are planning on filing the bankruptcy filing, it 11 wouldn't seem that the amortized cost on those particular 12 securities would necessarily be appropriate. 13 MR. MONTGORIS: Well, Sean, I'm kind -- I'm kind 14 of confused with -- with knowing as little as we know right 15 now, -- 16 MR. McKEE: Um hmm. 17 MR. MONTGORIS: -- how -- how -- how could we 18 make any kind of a determination? 19 BRUCE SENIOR: You don't have to make any 20 determination. 21 MR. McKEE: Yeah. 22 BRUCE SENIOR: All you have to do is say to us 23 that we can use fair value accounting. We make the 24 determination, as far as pricing is concerned. We're not 25 asking you to price anything. 10 1 MR. MONTGORIS: Oh, I see. So, you're just 2 talking about going from the way we've been valuing the 3 stuff in the past to go to fair value accounting. 4 BRUCE SENIOR: Right, we'll -- 5 MR. McKEE: Right, to have management, right, 6 perform the -- you know, what they believe the fair value 7 is, and then they would use that as the valuation that 8 they're looking at, in terms of the analysis. Mr. Bent was 9 talking about, you know, where are we in the valuation, and 10 are we at the stage where I have any issues. 11 The second issue I guess you need to consider is 12 your current income on those securities. You need to 13 consider the likelihood of the receipt of that income in 14 full or partially, as well. And, what you do from a 15 distribution standpoint. Management needs to do that. 16 MR. MONTGORIS: And what -- so, from your point 17 of view, as -- as the auditor, and from our point of view 18 as the audit committee, -- 19 MR. McKEE: Um hmm. 20 MR. MONTGORIS: -- just -- just -- just what -- 21 what's the -- what's the bid and the ask here? If -- if 22 you were to assume that the stuff was worth zero, which is 23 ridiculous, but if you were to assume that this stuff was 24 worth zero, what would that require us to do, from an 25 accounting and from an audit standpoint? 11 1 MR. McKEE: Well, I'll let Kate describe some of 2 the specifics, but any time you move into a fair valuation, 3 management will -- you know, if you approve them to do so, 4 if you say, "Look, we're in a fair valuation model. We 5 want management to fair value this stuff." Obviously, the 6 board does need to -- to understand what management's done 7 and -- and assess the reasonableness of that on -- on a 8 periodic basis. And, I guess Kate can probably add more to 9 that than I. 10 MS. CROWLEY: And, not much more. Just on the 11 corporate governance side, you're correct. If we do take a 12 crack at doing the fair valuation, based on whatever 13 assumptions we use, and I think we'd go back to Bill, and 14 the board, and just tell them what we've done and why we're 15 there, and why we felt it was necessary to do so. 16 BRUCE SENIOR: Okay. The fair valuation, 17 obviously, will only apply to -- well. Who knows? 18 [Laughter] 19 MR. MONTGORIS: Good catch, Bruce. 20 BRUCE SENIOR: Yeah, right. [laugh] We've 21 never been here before. 22 MR. ARTINIAN: So, let's hope it only 23 applies to -- 24 BRUCE SENIOR: Yeah, right. If -- if it only 25 applies to Lehman, that represents a little -- 1.1 percent 12 1 of the fund. So, you know, we're down to relatively -- the 2 -- the interest becomes -- the discussion of the interest 3 and the -- and the calculation of the interest is moot. 4 The -- you know, the management company can cover that 5 easily. So, we will continue to go along and accrue that, 6 at the moment, based on the little -- the nothing that we 7 know. 8 So, I would eliminate that -- yeah, eliminate 9 that from the equation, and just, you know, we'll keep 10 every -- everyone posted. 11 MS. CROWLEY: I'm -- I'm sorry. 12 MR. MONTGORIS: Do we -- do we know what the 13 maturity -- the average maturity [unintelligible] well, 14 what the average maturity of the paper is? 15 BRUCE SENIOR: Yeah. The -- we've got -- well 16 -- 17 MR. LEDFORD: The CPs, -- 18 BRUCE SENIOR: Yeah, you -- we -- we've got four 19 pieces. Go ahead, Patrick. 20 MR. LEDFORD: Yeah, the -- oh, hang on just a 21 second. Let me get it out in front of me. 22 The -- all the CP rolls off in mid to late 23 October. And then -- 24 BRUCE SENIOR: And that's how much? 25 MR. LEDFORD: That's -- let's see here. Yeah, 13 1 say, of right now. 2 BRUCE SENIOR: About 500. 3 MR. LEDFORD: Yeah. We're talking about 4 Primary, -- 5 MR. McKEE: You've got -- you've got 200 million 6 maturing -- I'm sorry. You've got 150 million maturing 7 October 10th. 8 MR. LEDFORD: Yeah. The total is 535 million in 9 Primary that's maturing in mid to late October. 10 MR. McKEE: Yeah, the -- 11 BRUCE SENIOR: Okay. Then the [unintelligible] 12 MR. LEDFORD: Then, there's a $250 million piece 13 that's a senior unsecured medium term note that matures on 14 March 20, '09. 15 MR. MONTGORIS: Hey, Kate, in a -- in a -- in a 16 normal -- if there is such a thing, in a normal kind of a 17 bankruptcy proceeding, how -- how -- where would -- where 18 would commercial paper fall in a ranking standpoint? 19 MS. CROWLEY: Oh, after the secured credit, for 20 sure. I haven't had a chance to look at the Lehman balance 21 sheet, but -- 22 MR. LEDFORD: The -- yeah, the CP is pari passu 23 with the senior debt. 24 MR. MONTGORIS: Oh, it is. 25 MR. LEDFORD: So, the CP would be in the same 14 1 pecking order as the -- the floating rate note, the medium 2 term note. Again, senior -- it's senior debt. 3 BRUCE SENIOR: Okay. The collateralized portion 4 of Lehman's outstanding debt is how much, -- 5 MR. LEDFORD: Just [inaudible] -- 6 BRUCE SENIOR: -- I'm sorry. Go ahead, Patrick. 7 MR. LEDFORD: Okay, hang one second. 8 MR. STALZER: Did somebody have a -- 9 MR. LEDFORD: Yeah, hang with me. 10 BRUCE SENIOR: Rose, did I hear your voice? 11 MS. DeMARTINO: Yeah, I'm sorry to -- 12 MR. STALZER: Good morning [unintelligible] 13 MS. DeMARTINO: Hi, everybody. 14 The -- if an event of insolvency occurs with 15 respect to a portfolio security, then the board is required 16 to make some determination, so the -- the full board. Not 17 the audit committee. And -- 18 MR. ARTINIAN: We have the majority of the board 19 present. 20 MS. DeMARTINO: Okay, great. So, we could deem 21 this to be a meeting of the full board. 22 The board has to decide whether -- and it's the 23 board's decision -- whether to dispose of the security, or 24 whether to hold onto the security because the disposal is 25 not considered to be in the best interests of the fund. 15 1 BRUCE SENIOR: Um hmm. 2 MS. DeMARTINO: So, it has to -- you know, it 3 has to make an affirmative -- an affirmative determination 4 based on the advice that the advisor is -- is giving it, as 5 to whether it's possible to dispose of the securities, 6 whether the security is likely to achieve, you know, its -- 7 its full return [unintelligible] maturity, whether there is 8 [unintelligible] market where you can actually dispose of 9 the investments or not. 10 BRUCE SENIOR: Um hmm. 11 MS. DeMARTINO: So -- so, the board has some 12 real, you know, real responsibility here, and it's not a 13 responsibility that could be delegated to any other party. 14 It's one of the few parts of 2(a)7 where the board cannot 15 delegate the decision to the advisor to -- to make. 16 BRUCE SENIOR: Fine. We'll find out, when we 17 get the pricing on it, and whether or not there is a valid 18 market for it, and what our opinion is as to whether or not 19 the market, indeed, is indicative of true value of the 20 security, and that -- that -- when that happens, we will 21 keep the board posted on it, and what our recommendations 22 are. And, whether or not the board wants to go along with 23 our recommendations. 24 MS. DeMARTINO: And, in the -- 25 BRUCE SENIOR: Does that sound appropriate? 16 1 MS. DeMARTINO: Yes. And, if it -- if it turns 2 out, and maybe it's not the case -- but if these securities 3 represent more than one-half of one percent of a fund's 4 total assets, then we need to advise the SEC staff that the 5 -- you know, I'm sure they're going to be getting calls 6 from, you know, funds all over the place today about this. 7 But, you know, they need to be -- they need to be 8 advised that -- that this has -- has occurred. 9 BRUCE SENIOR: That what has occurred? 10 MS. DeMARTINO: That -- that the fund has to 11 notify them that they hold the security, that where there's 12 an event of insolvency that represented one-half of one 13 percent of the fund's total assets. And, we have to tell 14 the SEC what action the fund intends to take, in response 15 to that situation. 16 BRUCE SENIOR: Not that the diminution in value 17 of the security represents a half of one percent, -- 18 MS. DeMARTINO: Um hmm. 19 BRUCE SENIOR: -- but that the face amount 20 represents more than a half of one percent? 21 MS. DeMARTINO: That is correct. 22 BRUCE SENIOR: So, in other words, we have to 23 call them today. 24 MS. DeMARTINO: You more than -- 25 MS. CROWLEY: It's more than a half of one 17 1 percent? Is that what we had determined? I thought it was 2 a little below that. 3 MR. LEDFORD: Primary, it's 1.18 percent in 4 Lehman. Yield Plus is 2.57 percent Lehman. 5 BRUCE SENIOR: But those are not 2(a)7 funds. 6 MS. DeMARTINO: Notification shall be made 7 telephonically, or by means of a fax or an e-mail, followed 8 by a letter sent by first class mail -- 9 BRUCE SENIOR: Okay. 10 MS. DeMARTINO: -- directly to the attention of 11 [unintelligible] Donohue, the Director the Division of 12 Investment Management. 13 MR. McKEE: Is this just for money funds? 14 MS. DeMARTINO: Just for money funds. 15 MR. McKEE: Okay. So then, Primary, 1.18 16 percent. 17 MS. CROWLEY: Okay. 18 MR. MONTGORIS: When we send that notification, 19 Rose, do we have to say, besides the fact that we have it, 20 that it represents more than one-half of one percent, what 21 action we're taking? 22 MS. DeMARTINO: And you have to say what action 23 the fund intends to take. 24 MR. McKEE: Okay. So, they can't do that until 25 -- until they -- 18 1 MS. DeMARTINO: Until we know what action 2 they're going to take. 3 MR. McKEE: -- they sit down and figure 4 everything out, right? 5 MS. DeMARTINO: Correct. 6 MR. McKEE: Okay. 7 BRUCE SENIOR: Okay. So, this is not some sort 8 of peremptory call. This is something we find out after 9 the market opens. 10 MS. DeMARTINO: Yes, I would expect so. 11 BRUCE SENIOR: Okay. That's what I understood. 12 MS. DeMARTINO: But, you know, there's -- there 13 is a kind of a -- there is a promptness aspect to it, but, 14 you know, we can't make the call. They want to hear what 15 the board has decided on this. And so, they don't want a 16 call saying, "Gee, we just have the security, and so we're 17 going to think about what to do." 18 So, they -- they want to hear the answer, but 19 they want to know that the full board has been convened, 20 and has made some conclusion with regard to disposing of 21 the investment or not. 22 BRUCE SENIOR: Fine. So, what we have to do is 23 see what happens in the marketplace. When we find out what 24 happens in the marketplace, then we will re-convene the 25 board meeting, and then we will discuss with the board what 19 1 -- what we think is the best course of action at that point 2 in time. 3 MS. DeMARTINO: Um hmm. 4 BRUCE SENIOR: And, let's assume that the best 5 course of -- let's assume there's a price in the 6 marketplace of 90, which is my bet is what somebody's going 7 to price it at. They might try 80, but it will probably 8 move to 90. 9 Let's assume it's a price of -- in any event, the 10 price is -- is less than -- excuse me, that it is more than 11 55 percent. Then -- which -- which does not entail a half 12 of one percent of the assets of the fund. Okay? 13 We just simply call them up and tell them that, 14 right? 15 MS. DeMARTINO: No, I mean, you know, I mean, 16 you -- you would call the board and the board -- and you 17 say to the board that -- you'd make a recommendation as to 18 whether the fund should hold onto the security, or try -- 19 BRUCE SENIOR: Right. 20 MS. DeMARTINO: -- to dispose it, based on what 21 you find out about the liquidity of the security in the 22 market. 23 BRUCE SENIOR: Fine, okay. We're done. 24 MS. DeMARTINO: And you could say "We think it's 25 going to pay off," you know, -- 20 1 BRUCE SENIOR: Right, okay. That's it. That's 2 [unintelligible] -- 3 MS. DeMARTINO: -- as [unintelligible] because 4 we now know it's secured, it's -- you know, it's ranked 5 with all the top secured debt and, you know, blah, blah, 6 blah. 7 BRUCE SENIOR: No, no, it's obviously not ranked 8 with the top secured debt, -- 9 MR. McKEE: No, no, [unintelligible] 10 BRUCE SENIOR: -- because it's not secured. 11 MR. McKEE: -- yeah, she's just giving you 12 rationale, potential what you would say if you decided you 13 wanted to keep it. 14 BRUCE SENIOR: Okay, fine. Go ahead back to 15 Patrick. Patrick, what is the total amount of secured debt 16 that they have outstanding? 17 MR. LEDFORD: Oh, it's -- 18 MS. DeMARTINO: It's filed with the petition -- 19 MR. LEDFORD: -- yeah -- 20 MS. DeMARTINO: -- in bankruptcy, and it's, you 21 know, it's pretty significant, obviously. 22 MR. LEDFORD: Yeah. The -- well, short-term 23 borrowings, the secured is 660 million. The -- they've 24 got, on the other side of the balance sheet, they've -- as 25 of Friday, it's about 42 billion in cash and marketable 21 1 securities. 2 But, their total -- total short-term borrowings 3 in short-term liabilities are -- is 35.3 billion. 4 BRUCE SENIOR: Okay. I'm -- 5 [END OF RECORDING] 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 22 1 2 3 4 C E R T I F I C A T E 5 6 I, June Accornero, hereby certify that the 7 foregoing transcript consisting of 22 pages is a complete, 8 true and accurate transcript of the recorded conversations 9 contained in the recording labeled "OSNATO Decl Ex 28 10 Ledford9-15-08808am-0." 11 The foregoing transcript has been typed and 12 proofread by me. 13 14 ______________________________ _________________ 15 Typist/Proofreader Date 16 17 18 19 20 21 22 23 24 25 23 1