Oppenheimer Funds, one of the bigger players of 529 college savings plans with $4 billion under management, has been sued by the state of Oregon for gambling on exotic derivatives in the Oregon 529 College Savings Network. Oppenheimer’s ill-fated bets eventually resulted in $36 million in losses.
In the complaint filed April 13, Oregon contends that Oppenheimer Funds made aggressive and inappropriate investments with the Oppenheimer Core Bond, yet described the fund as a “conservative” and “ultraconservative” plan. In filing the lawsuit against Oppenheimer, Oregon becomes the first state in the nation to sue the money manager on behalf of investors in its 529 college savings plan.
According to an April 14 article in the Wall Street Journal, the Oppenheimer Core Bond fund made significantly riskier investments beginning in late 2007 or early 2008. Ultimately, those risks translated into the fund losing more than 35% of its value in 2008, plus another 10% in the first three months of 2009. By comparison, the fund’s benchmark, the Barclays Capital Aggregate Bond Index, gained 5% in 2008 and has held even this year, according to the complaint.
The investments that Oppenheimer Funds gambled on included exotic instruments and high risk debt, all of which would be considered unsuitable for individuals saving for college, says the complaint.
Total return swaps and credit default swaps further added to the massive financial losses experienced by the Oppenheimer Core Bond Fund. Specifically, the Core Bond Fund entered into agreements with companies such as Lehman Brothers, American Insurance Group (AIG), Merrill Lynch, Citigroup and General Motors, agreeing to cover losses if they defaulted on their bonds. When those companies began to experience financial difficulties, with some, like Lehman Brothers, forced to file bankruptcy, the Oppenheimer Core Fund’s liability, and losses, became huge.
Four other states: Illinois, Texas, New Mexico and Maine, have sustained similar losses in their Oppenheimer Funds managed college savings plans. They also are considering lawsuits.