A year of financial losses and investor lawsuits is about to go from bad to worse for Oppenheimer Funds. In February 2009, the company received an “F” from a Morningstar analyst for its failure to explain investing strategy changes regarding several of its bond funds. Now those funds, some of which have lost nearly 80% of their value, are the subject of probes by attorney generals in five states, as regulators investigate whether Oppenheimer Funds violated its fiduciary duty to investors.
The focus of the inquiries apparently is on 529 college-savings plans that invested in the Oppenheimer Champion Income Fund (OPCHX), which fell nearly 80% in 2008, and the Oppenheimer Core Bond Fund (OPIGX), which lost 41% of its value. Also on the states’ investigation list: the Oppenheimer Limited Term Government Fund (OPGVX) and the U.S. Government Trust (OUSNX).
Beginning late last year, Oppenheimer Funds, which is a unit of Massachusetts Mutual Life Insurance Company, became the subject of several state investigations, including those in Illinois, Maine, New Mexico, Oregon and Texas, over huge losses in state sponsored college savings plans.
As reported April 7 by Bloomberg, investors have seen $85 million vanish in just Illinois’ state sponsored 529 college savings plan because of investments made by Oppenheimer Funds in risky mortgage linked securities. Making the situation even worse: Parents were never told by Oppenheimer management about the investments nor the added risks they were unknowingly subjected to.
Ultimately, however, it was more than just toxic securities that contributed to the financial losses in the Oppenheimer bond funds. Specifically, Oppenheimer managers also bought complex, off balance sheet swap contracts that, in turn, produced a leveraging effect on the funds. Those added risks, which again were never apparent nor communicated to investors, translated into additional financial losses for investors.
Illinois has now stopped all new bond investments with Oppenheimer Funds, according to the Bloomberg article. As for Oregon’s 529 plan, two Oppenheimer Funds’ offerings have been eliminated. Oregon also is taking steps to replace OppenheimerFunds as the plan’s manager when the firm’s contract expires on Dec. 31.
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.
Meanwhile, investors both in and outside college savings plans are taking their frustration regarding Oppenheimer Funds to court, filing class action lawsuits and arbitration claims. The common theme in their complaints: OppenheimerFunds marketed and sold several of its bond funds as conservative, relatively low risk, high income investments. In reality, that was never the case.