Archive for January, 2009

Following a year of big financial losses in many of its bond funds, OppenheimerFunds has begun slashing jobs and laying off employees. The New York-based company’s bond funds lost an average of nearly 30% in 2008, as customers withdrew some $12 billion. That puts Oppenheimer in the bottom 11% of competitors, according to Bloomberg.

The combination of investment losses and a mass exodus of clients had a dramatic effect on the money-management firm’s bottom line. As of Dec. 31, Oppenheimer’s assets had fallen by 45%.

This week, OppenheimerFunds announced plans to immediately reduce its workforce by about 10%. The loss of 220-plus positions will affect offices in New York, Boston, Rochester and Denver.

Adding to OppenheimerFunds’ woes is the ongoing case involving Bernard (Bernie) Madoff and his alleged $50 billion Ponzi scheme. Tremont Group Holdings, which is owned by OppenheimerFunds, invested $3.4 billion with Madoff.

Oppenheimer’s biggest problems stem to ill-timed bets on subprime mortgage securities and risky credit-default swaps, which created a financial crisis for investors of the Oppenheimer Champion Income Fund (OCHCX). The fund plummeted by more than 80% in value last year, making it the worst-performing taxable high-yield bond fund of 2008. By comparison, similar bonds were down 30%.

The manager of the fund, Angelo Manioudakis, resigned from Oppenheimer last month. 

Other Oppenheimer funds have been on a losing streak, as well. The Oppenheimer Core Bond Fund (OPIGX), which is offered by 529 plans in Oregon, Texas, Maine and New Mexico, fell nearly 40% last year. By comparison, similar funds posted 4% gains.

Then there’s the Oppenheimer Rochester National Municipals Fund. Managed by Ronald Fielding, the fund dropped about 50% in 2008.

Meanwhile, investors of several Oppenheimer bond funds have filed claims with the Financial Industry Regulatory Authority (FINRA). Among their charges: Oppenheimer managers represented certain funds, including the Champion Income Fund and the Core Bond Fund, as ultra-safe and conservative when, in fact, they were tied to high-risk, speculative investments.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Hedge-fund firm Tremont Group Holdings, which is owned by OppenheimerFunds, could be forced to close its doors later this year after losing more than half of its assets to Bernard Madoff and his alleged $50 billion Ponzi scheme.

As reported Jan 27 by the New York Post, Tremont already has reduced its staff by some 40%, with the remaining employees told to prepare for potential severance packages this June.

Tremont’s Rye Investment Management shuttered its operations last month. The hedge fund group had retained Madoff as the sole manager of its funds, investing some $3.5 billion of client’s money with him.

The Tremont situation is another black mark against parent company OppenheimerFunds, which has faced a slew of problems over massive losses in several of its bond funds. The Oppenheimer Champion Income Fund (OCHCX) has plunged more than 80% in value in the past nine months, following wrong-way bets on subprime mortgage securities and risky credit-default swaps.

The Oppenheimer Core Bond Fund, which is offered by 529 plans in Illinois, Oregon, Texas, Maine and New Mexico, also has recorded big losses recently, falling by more than 40% in 2008. By comparison, similar funds posted 4% gains.

Both funds are the subject of investor lawsuits and state investigations over claims that the funds’ management misrepresented the funds as conservative and low risk when, in fact, they invested in some of the most risky and highly illiquid derivatives possible.   

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

“I’m sorry.” That’s what recently fired former Merrill Lynch CEO John Thain had to say about his spending $1.2 million on an office decorating project while his company was drowning in debt and slashing thousands of jobs.

In a Jan. 27 interview on CNBC, Thain said he “regretted” using corporate funds on such items as a $37,000 commode and two area rugs totaling $131,000 and, if he had it to do over again, he would pay for the expenses out of his own pocket.

Unfortunately for Thain, there won’t be any do-overs in his future. On Jan. 27, New York Attorney General Andrew Cuomo issued subpoenas to both Thain and Bank of America’s chief administrative officer, J. Steele Alphin, as part of an investigation into the $4.1 million worth of bonus checks that Merrill Lynch paid executives just days before its sale to Bank of America.

The attorney general’s investigation into the Merrill bonuses reportedly will focus on the timing of the payouts. The payouts were made as Merrill Lynch prepared to announce a $15 billion fourth-quarter loss and Bank of America was seeking a second financial bailout from the federal government.  

When asked about Merrill Lynch’s huge losses during the CNBC interview, Thain blamed his former predecessor, Stanley O’Neal.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

The Bernie Madoff scandal is a classic tale of modern-day dysfunction - and a life lesson for codependents everywhere. For years, investors were quick to sing the praises of the now-disgraced 70-year-old hedge fund manager who is charged with running a $50 billion Ponzi scheme. It wasn’t just individual investors who revered Madoff; global financial institutions from as far away as Switzerland and Colombia, pension funds, banks, hedge funds and charities and foundations were caught up in the adulation, as well, with many holding Madoff in almost God-like status.

Closer inspection of Madoff’s fraud is focusing new attention on the role of certain investment firms - the so-called feeder funds - that funneled clients’ money to Madoff. In spite of constant red flags, including indecipherable accounting statements and double-digit returns that miraculously appeared even in a down market, the people in charge of these feeder funds apparently never thought to ask any questions of Madoff. They simply paid their fees for his investing acumen, and reaped the benefits. 

After all, Madoff was the former chairman of NASDAQ. In investing circles, colleagues referred to him as the King of Wall Street. As it turns out, the King was indeed fallible. 

When asked in interviews how he achieved such remarkable returns month after month and year after year, Madoff would remain coy. He said it was a “proprietary trading strategy.” Now we know that Madoff never did any actual trading at all.

Many people thought Madoff participated in what’s known as “front running,” or using knowledge of trades you are about to do for clients to make a profit. As reported Jan. 26 by Bloomberg, allegations of front running apparently have followed Madoff for years. In fact, many of the feeder funds that did business with Madoff had long suspected he was involved in the illegal activity.

Despite those suspicions, the feeder funds took an ‘ask no questions of Bernie stance.’ The cost of that enabling would be dear, however, with clients of those funds ultimately losing billions and billions of dollars.

Granted, no evidence has been uncovered - yet - to prove that any of the feeder funds connected to the Madoff scandal actually participated in front-running themselves.  Instead, they just ignored the obvious. Faced with returns that were too-good-to-be true, they chose to look the other way.  In other words, they enabled Madoff to conduct his scam. They were just like the parents of the 30-year-old child who is now an adult yet still lives at home, without a job and sponges off Mom and Dad. By obliging the child/adult, they are shrieking their responsibilities as parents because the child will never learn how the real world works.

According to the Bloomberg article, Madoff never could have pulled off his historic crime without the participation of this constant stream of feeder funds-turned-enablers. The premise of a Ponzi scam relies on the reputation of its participants. And Madoff had plenty of participants eager to profit. The feeder funds that funneled money to Madoff included the likes of respected firms like Access International Advisors LLC of New York and Geneva-based Banque Marcuard Cook & Co.

The job of a feeder fund is to thoroughly examine hedge funds for the wealthy clients it represents. Instead of practicing due diligence, however, the feeder funds tied to Madoff turned a blind eye when it came time to protect their clients’ money. In return for that codependency, they charged clients hundreds of millions of dollars in service fees.  

Federal regulators played the enabler card, as well. As far back as the 1970s, the Securities and Exchange Commission (SEC) received complaints about Madoff and his investment-advising business. Among the accusations: Madoff was running a large-scale Ponzi scheme. Despite the seriousness of the claims, regulators never charged Madoff with a crime.

The actions - and inactions - of the many enablers surrounding Madoff came to an abrupt end on Dec. 11, when federal agents formally arrested the hedge fund manager at his luxury $7 million Manhattan penthouse. Later, Madoff confessed to authorities that his business had “all been just one big lie.”  

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Unexpected and unexplained losses in the Oppenheimer Champion Income Fund (OCHCX), the Oppenheimer Core Bond Fund (OPIGX) and other funds owned and managed by OppenheimerFunds are causing a financial headache for investors, college savings plans and pension funds across the country. Now, as OppenheimerFunds prepares for what could be the first of a lengthy run of arbitration claims, a consortium of four nationally recognized law firms has launched an independent investigation into how Oppenheimer executives may have misrepresented the funds to investors.

The legal alliance behind the investigation into OppenheimerFunds includes Maddox Hargett & Caruso, Uhl & Bakhtiari, David P. Meyer & Associates, and Page Perry, LLC. It was in 2007, following the onset of the subprime mortgage crisis and the subsequent meltdown on Wall Street, that the group created their affiliation - SubprimeLosses.com - to help individual and institutional investors combat fraudulent actions on the part of dishonest investment firms and brokerages.

As it turns out, dishonesty and wrong-way bets on subprime mortgage securities and risky credit-default swaps are responsible for the fiscal nightmare now facing investors in the Oppenheimer Champion Income Fund and the Core Bond Fund. The funds, which initially had been presented as conservative and safe investments by Oppenheimer management, were instead tied to high-risk, speculative derivative deals.

By the end of December 2008, assets in the Champion Income Fund had plunged by more than 80% in value. The Oppenheimer Core Bond Fund, which is offered by 529 plans in Illinois, Oregon, Texas, Maine and New Mexico, fell by more than 40% last year. By comparison, similar funds posted 4% gains.

Both the Oppenheimer Champion Fund and the Core Bond fund were managed by Angelo Manioudakis. In December, Manioudakis abruptly resigned from his position at OppenheimerFunds.

Meanwhile, investors are left to inherit the repercussions of Manioudakis’ ill-informed management decisions. Far from safe or conservative, the Champion and Core Bond funds invested in extremely risky and highly illiquid derivatives. Not knowing about this critical detail has collectively cost investors - many of whom are retirees, living on a fixed income - millions of dollars. Yet, Oppenheimer management, company marketing materials, even information contained in the funds’ prospectus never revealed this important and vital fact.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Despite alarm bells ringing loud and clear, Citigroup apparently chose to look the other way when it came to selling auction-rate securities to unsuspecting investors. Internal email communications show that officials at the New York-based bank were well aware of pending trouble in the auction market, yet they continued to peddle the securities to both individual investors and municipalities.

One of those investors was New York’s Metropolitan Transportation Authority, which operates the Big Apple’s subway, bus and commuter rail systems. According to a Jan. 26 story in the New York Times, Citigroup convinced the Metropolitan Transportation Authority to issue more than $400 million worth of auction-rate bonds shortly before the market’s demise in February 2008.

The MTA deal took place on Nov. 7, 2007. Less than a month later, interest rates on the bonds began to climb. By early February, the rates had more than doubled to 8%. One week later, the auction-rate market collapsed entirely. Investors were unable to access their supposed “liquid” investments, while municipalities faced major penalties in the form of soaring interest rates. 

For New York’s Metropolitan Transportation Authority, the interest rate penalties totaled more than $550,000 a week. The added costs forced the authority to redeem their auction-rate securities in March. To do so, it issued a new round of bonds, outside the auction-rate system and at better interest rates, according to the New York Times article. But the move came with a price tag - and an expensive one at that. The authority spent $5.6 million in fees to bankers, lawyers and others, including the state of New York.

As for Citigroup, it earned more than $500,000 on the two bond sales. Goldman Sachs, which served as the Metropolitan Transportation Authority’s financial adviser, pocketed nearly a cool million dollars in the deal. Not surprisingly, Goldman - like Citigroup - had been in favor of MTA entering into the initial auction-rate sale in November.

Citigroup and its handling of auction-rate securities is cited in a complaint filed Dec. 11 by the Securities and Exchange Commission (SEC) against a Citigroup subsidiary, Citigroup Global Markets. In the complaint, the SEC contends Citigroup not only misled investors about the inherent risks of auction-rate securities but also continued to underwrite and sell the bonds when it knew the auction market was headed for disaster.

Supporting the SEC’s claims is an August 2007 email from a Citigroup executive to another colleague that warns of potential trouble in the $330 billion ARS market.

“There are definitely cracks forming in the market. Inventories are starting to creep higher in the market and failed auction frequency is at an all-time high,” reads the e-mail.

As reported in the New York Times, on the same day that the SEC filed its complaint against Citigroup Global Markets, a prearranged final settlement was announced with Citigroup.

Without admitting wrongdoing, Citigroup agreed to settle the SEC complaint and other cases brought by state regulators, including New York Attorney General Andrew Cuomo, and buy back more than $7 billion of ARS securities from investors. In addition, it agreed to pay a $100 million fine.

The Metropolitan Transportation Authority wasn’t mentioned in the SEC’s Dec. 11 complaint. But, as part of the settlement with the New York attorney general’s office, the authority’s underwriters must reimburse it for a portion of their fees from the second bond sale. As one of those underwriters, that includes Citigroup. Last week, it sent a reimbursement check of $97,650 to the authority.

That money will do little, however, to help the Metropolitan Transportation Authority address its $1.2 billion budget deficit. To make up for the shortfall, the authority is looking at double-digit fare hikes, severe service cuts and layoffs this year.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

A champion it’s not. Investments in high-risk mortgage-backed securities and credit-default swaps have pummeled the Oppenheimer Champion Income Fund (OPCHX). OppenheimerFunds’ flagship junk-bond mutual fund recorded one of the worst performances among its bond-fund peers in 2008, with assets losing more than 80% of their value. Only the Regions Morgan Keegan Select High Income Fund fared worse.

Problems for Oppenheimer’s Champion Income Fund first came to light in 2006, when fund manager Angelo Manioudakis started to focus on a risky - and, some say questionable - investing strategy that involved total-return swaps. A total return swap is a financial contact that transfers both the credit risk and market risk of an underlying asset from one party to another.

In the case of the Champion Income Fund, the underlying assets were tied to securities on commercial mortgages. Following the burst of the housing bubble in the summer of 2007 and the subsequent onset of the subprime debacle, Manioudakis’ gamble that the securities would increase in value never saw the light of day.

Making matters even worse for the Champion Income Fund: credit-default swaps. Through at least September 2008, the fund sold credit-default swaps on companies that already were in deep financial trouble - companies like Lehman Brothers Holdings, which filed for bankruptcy protection on Sept. 15, and American International Group (AIG), which has required two emergency bailouts from the government in order to stay afloat.

The financial devastation caused by wrong-way bets placed on derivatives goes far beyond just investors of the Champion Income Fund. At least 10% or more of the fund is held by other Oppenheimer funds, as well.

Unfortunately, investors never realized the level of risks they were taking on with the Champion Income Fund. That’s because Oppenheimer’s financial advisors marketed the fund as a conservative, high-income bond fund, one that presented only minimal degrees of risk. Even the fund’s own prospectus - as well as a revised version that was created after the fund began to lose vast amounts of money - described the Champion Income Fund as an appropriate investment for retirees, with an overall investment strategy that focused on building a broad and diversified portfolio to help moderate the special risks of investing in high-yield debt instruments.

Investors who’ve lost millions of dollars because of Oppenheimer’s irresponsible gamble on some of the riskiest and most toxic derivatives possible know otherwise.

In related OppenheimerFunds news, thousands of Illinois families are up in arms over unexpected and dramatic losses in the state’s Bright Start College Savings program and what they say is the mismanagement of the Oppenheimer Core Plus Bond Fund (OPIGX).

The fund, which was supposed to be invested in conservative investment-grade bonds and U.S. government securities but instead took on assets in risky mortgage-backed securities, credit default swaps and other toxic investments, lost more than 40% of its market value last year. By comparison, similar funds managed by other investment firms posted positive returns of about 5%.

Illinois State Treasurer Alexi Giannoulias is preparing to sue OppenheimerFunds in an attempt to recover the $85 million that the Bright Start College Savings program has lost thus far.  

Like Oppenheimer’s Champion Income Fund, the Core Plus Bond Fund was managed under the not-so-watchful eye of Angelo Manioudakis.  Besides Illinois, the Oppenheimer Core Plus Fund is included in 529 college savings plans in Oregon, Texas, Maine, and New Mexico.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

The year of 2008 may go down in history as a year of scandals gone wild. From Bernie Madoff’s $50 billion Ponzi scheme to the collapse of the auction-rate securities market, individual and institutional investors alike have found themselves entangled in a financial nightmare that seems to go from bad to worse.

For investors who’ve been stuck holding illiquid auction-rate securities since February 2008, the likelihood that regulators will find a solution to their dilemma anytime soon is remote. Even though some of Wall Street’s biggest firms have bought back more than $60 billion of their clients’ securities, another $135 billion of the bonds still remain frozen.

As reported Dec. 31 by the Boston.com, the illiquidity status of auction-rate securities is hitting small businesses especially hard. Vicor Corp., which makes power systems for electronics, is one of those businesses. The company invested nearly $40 million in auction-rate securities before the market’s collapse in February. At the time, the company’s management thought the bonds were safe and liquid investments. Now, the earliest that Vicor can expect to see some of its auction-rate money is 2010.

UBS is one of the firms that sold Vicor the auction bonds, and it has pledged to buy back about $18 million worth of the securities beginning in June 2010. However, Vicor also bought another $20 million of auction securities from Bank of America, which has yet to offer any kind of buy-back program to Vicor and other large institutional and corporate holders of auction-rate securities.

Another company with a huge chunk of its money tied up in illiquid auction-rate securities is Tufts Health Plan. The Massachusetts-based health care provider has nearly half of its total cash holdings - approximately $30 million - in auction-rate securities at Citigroup. So far, Citigroup hasn’t announced any plans to help Tufts get its money back.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

At the very moment Merrill Lynch’s CEO John Thain was pleading for an emergency bailout from the U.S. federal government to the tune of billions of dollars in taxpayer money, the brokerage giant already had begun to dole out $4 million in bonus checks to executives. A few days later, with the help of government funds, Merrill Lynch was acquired by Bank of America (BofA).

On Jan. 22, Thain abruptly resigned from his post at BofA. Now, both Thain and Bank of America, which has received $45 billion in bailout funds, face harsh criticism for what many are calling an outlandish misuse of taxpayer money.

Adding to Thain’s PR troubles is news of a lavish spending spree totaling $1.2 million to decorate his corporate office during a time when Merrill Lynch was drowning in financial losses and slashing jobs. Among his purchases:

• $800,0000 for the services of interior designer Michael Smith
• $35,115 for a commode
• $1,400 for a trash can
• $37,000 for six dining room chairs
• $131,000 on two area rugs
• $68,000 on a credenza

In addition to Thain’s over-the-top decorating, he reportedly paid his driver a salary, including bonuses and overtime, of $230,000 for one year’s worth of work. Drivers for executives of Thain’s stature are usually paid about half that amount.

Thain also at one time had tried to secure a big bonus for himself before the sale of Merrill Lynch to Bank of America. In October, the 53-year-old suggested a sum of between $30 million and $40 million. Later, it was reduced to $10 million. In the end, he received no bonus at all.

Thain’s departure from Bank of America comes less than a month after being named head of the firm’s global banking, securities and wealth management division. Apparently, BofA CEO Ken Lewis flew to New York on the morning of Jan. 22 to meet with Thain and call for his resignation.

Lewis’ disappointment with Thain no doubt has something to do with Merrill’s unexpected $15.4 billion fourth-quarter loss, which forced BofA to seek an additional $20 billion of funding from the government last week.

As for Thain’s ill-timed gamble of paying $4 million in bonuses to Merrill Lynch executives, that matter is now under investigation by New York State Attorney General Andrew Cuomo. 

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Investors in the Oppenheimer Champion Income Fund (OCHBX, OPCHX and OCHCX) have lost millions of dollars because of decisions by the fund’s management to gamble on illiquid mortgage securities and credit-default swaps. Now, some investors - many of whom are retirees and have lost their entire life savings - are taking legal action. The first of what may be many arbitration claims to come has just been filed with the Financial Industry Regulatory Authority (FINRA).

Among the charges in the complaint: OppenheimerFunds and the former manager of the Oppenheimer Champion Income Fund, Angelo Manioudakis, intentionally withheld critical information about the fund’s risks and its concentration in toxic derivatives and other risky securities. 

As of Dec. 31, 2008, the Oppenheimer Champion Income Fund has seen the value of its assets plunge by more than 80%. The reason: Massive bets on subprime mortgage securities and total-return swaps. Total-return swaps are extremely complex agreements between parties to exchange cash flows in the future based on the performance of a set of underlying securities in the fund.

The Oppenheimer Champion Income Fund also contained credit-default swaps, another complicated and highly speculative derivative product. Credit-default swaps are like an insurance policy; they protect investors in the event a bond or loan defaults. In return for this guarantee, buyers agree to pay - much like an insurance premium - a fixed percentage fee to the seller of the contract.

There is a downside to this kind of speculative leveraging, however. Billionaire investor Warren Buffet spoke out against credit-default swaps as early as 2002, calling them “financial weapons of mass destruction.”

The $50-plus trillion market for credit-default swaps is unregulated. That means contracts are regularly traded without any oversight to ensure buyers actually can cover possible losses. When the mortgage-backed securities that many credit-default swaps were supporting began to plummet in value in 2007, investors quickly discovered their credit-default swaps to be a liability, rather than a guarantee, against risk. 

For sellers of credit-default swaps, the outcome can be equally grim. This is especially true in instances where the seller has provided insurance on companies that go bankrupt or experience severe financial problems. Oppenheimer’s Champion Income Fund found this out after selling credit-default swaps on Lehman Brothers Holdings, American International Group (AIG) and General Motors Corp.

At issue for investors in the Oppenheimer Champion Income Fund is the fact that the fund’s management, as well as various literature and materials on the fund, touted its investment strategy as “building a broad and diversified portfolio to help moderate the special risks of investing in high-yield debt instruments.”  Investors also claim the fund was advertised as far less risky than the typical high-income fund.

In reality, the Oppenheimer Champion Income Fund achieved neither. Instead, it invested in some of the most dangerous and toxic securities on the market.

For retirees and other conservative, risk-adverse investors who were in the Champion Income Fund, this strategy was a disaster waiting to happen.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.