Oppenheimer Champion Income Fund Costs Investors Millions
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.
