Losses In 529 College Savings Plans Spur Five State Probe Into OppenheimerFunds
Unexpected losses in 529 college savings plans containing investments in OppenheimerFunds are generating increased scrutiny by attorney generals in Maine, Illinois, New Mexico, Texas and Oregon, as regulators try to determine whether the asset management firm violated its fiduciary duty to investors.
As reported April 7 by Bloomberg, the inquiries apparently are zeroing in on 529 plans that invested in the Oppenheimer Champion Income Fund, which fell nearly 80% in 2008, and another poor performing fund, the Oppenheimer Core Bond Fund, which lost 41%. Two other OppenheimerFunds are the subject of the investigations, as well: the Oppenheimer Limited Term Government Fund and the U.S. Government Trust.
In Illinois alone, investors have lost $85 million in state-sponsored 529 college savings plans due to risky mortgage linked securities purchased by OppenheimerFunds management. For parents in the plans, the news is especially sobering because Oppenheimer managers reportedly failed to reveal details about the investments and the extra risks associated with them.
In the case of the Champion Income Fund, investors’ financial pain was further aggravated by Oppenheimer’s decision to buy complex total return swap contracts that created a leveraging effect and, ultimately, disastrous consequences. Instead of the prices on mortgage backed securities going up, as Oppenheimer managers predicted, the opposite outcome materialized. Prices plummeted, as did the Champion Income Fund, which fell in value by more than 70% in the fourth quarter of 2008.
Since then, Illinois, Oregon and Texas have pulled their money from OppenheimerFunds investments.
The financial havoc caused by Oppenheimer’s Champion Income Fund has resulted in a slew of lawsuits and arbitration claims by both investors in the troubled college savings plans and those outside of the plans. The common theme in their complaints: OppenheimerFunds marketed and sold the fund as a conservative, relatively low-risk high-income investment.
This past December, when it became apparent that several of Oppenheimer’s bond funds were tanking in value because of wrong-way bets on mortgage backed securities, portfolio manager Angelo Manioudakis abruptly resigned from his post at OppenheimerFunds.
Other executive changes soon followed. In early 2009, Bill Glavin, the newly appointed chief executive officer of OppenheimerFunds, announced plans to clean house, beginning with those who presided over his investment team and the troubled bond funds. Among the changes: Chief Investment Officer Kurt Wolfgruber, who is set to leave the firm on April 30.
Oppenheimer Funds also says it intends to step up its risk control measures and improve communication with clients. The move may, in part, be related to the company’s dismal performance last year. In 2008, Oppenheimer Funds’s bond funds lost an average of 29%. By comparison, the average decline for bond mutual funds was 7.9%, according to Morningstar.
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