Oregon State Officials Could Be In Hot Water Over OppenheimerFunds, Oregon College Savings Plan
Last month, the state of Oregon sued OppenheimerFunds in an effort to recover more than $35 million that officials say investors lost because Oppenheimer misrepresented the risk of its Oppenheimer Core Bond Fund. Now it appears Oregon state officials may share in some of the blame by failing to reel in managers of OppenheimerFunds and stop the risky investments they were making in the Oregon College Savings Plan with money labeled as conservative and ultra-conservative.
According to a May 6 article in The Oregonian, e-mails between the state treasurer’s office and OppenheimerFunds reveal state officials failed to closely monitor the Oppenheimer Core Bond Fund and didn’t take action to prevent additional losses until it was too late. Instead, documents show the state relied on information from OppenheimerFunds that the money was being well-managed.
Even more troubling: E-mails point to a possible conflict of interest between OppenheimerFunds and Oregon state officials. In addition to OppenheimerFunds buying meals for state executives at expensive Portland restaurants, the Oregonian article reports that when problems surrounding the Oppenheimer Core Bond Fund were made public, OppenheimerFunds provided the state with a talking points document, and a state official gave the company a heads-up about a pending state investigation.
The central issue concerning the Oppenheimer Core Bond Fund focuses on the investing strategies used by Oppenheimer’s managers. According to a February 2008 filing with the Securities and Exchange Commission (SEC), OppenheimerFunds changed the investment focus of the fund in 2007 by dramatically increasing its holdings in the complex investing arena of derivatives. When the state initially hired OppenheimerFunds, the fund held three derivatives in the form of total-return swap contracts. By the end of 2007, the Core Bond Fund held 150 derivative contracts.
At the close of 2008, the Oppenheimer Core Bond Fund - at one time a $1.4 billion fund - had lost 41% of its value.
As reported in the May 6 Oregonian article, OppenheimerFunds first disclosed its exposure to the crisis on Wall Street in a Sept. 24 letter to Oregon 529 College Savings Network Executive Director Michael Parker. The letter, however, failed to accurately portray the amount of the Core Bond Fund’s exposure and lacked other important details. Moreover, OppenheimerFunds reportedly marked the letter as “not for public disclosure.”
On Oct. 23, at a board meeting to discuss the financial status of the Oregon College Savings Plan, Former Oregon State Treasurer Randall Edwards reportedly expressed concern about the deep losses in the Oppenheimer Core Bond Fund yet did not call for making any changes to the investments, according to the Oregonian story.
In January 2009, Oregon voted to replace the Core Bond Fund from the Oregon College Savings Plan; it wasn’t until March, however, that any action occurred.
The bottom line: Red flags were waving loud and clear when it came to OppenheimerFunds’ mismanagement of the Oregon College Savings Plan and the Core Bond Fund. Meanwhile, state officials apparently chose to remain asleep at the wheel as OppenheimerFunds and its managers took on more and more risks with investors’ money.
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