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.

It’s official. The Financial Accounting Standards Board (FASB) has approved relaxing fair value, or mark to market, accounting rules, a move that gives banks leeway to assign a value to investments based on their own internal model of what the assets might sell for in the future rather than in current market conditions.

Revising the accounting standard will be a boost to banks, which stand to see a 20% or more gain in their quarterly operating profits. 

The FASB voted on easing the mark to market rule on April 2. 

Critics of the rule change say it will lessen the transparency of a company’s fiscal health and may encourage some institutions to inappropriately raise the value of certain assets to give the appearance of rosier balance sheets.

As for investors, without the early warning signs created by mark to market accounting, they could very well find themselves left in the dark when it comes to detecting potential problems of a particular financial market. If problems do arise, it may be too late for them to do anything about it. 

Nontraded real estate investment trusts (REITs) apparently are a subject of interest by the Financial Industry Regulatory Authority (FINRA). A March 30 article in the Wall Street Journal reported that the independent regulator of the securities industry is seeking information from a number of broker-dealers about their sales and promotion practices of the entities. 

According to the Journal story, a letter dated March 20 was sent by FINRA to an “unknown number of brokerages” requesting details about nontraded REIT sales, as well as cash and non-cash incentives. Included in the letter was a request for detailed information regarding each nontraded REIT offered for sale, the number of shares sold to customers, the number of customers who each nontraded REIT and their age groups.  

The nontraded REITs in question include those that are registered with the Securities and Exchange Commission (SEC) but not on an exchange or over-the-counter market. They also include private REITs, which are sold using an exemption to registration.  

FINRA also wants information from broker dealers about payout schedules of registered representatives, blank customer applications, and risk monitoring reports that were used to track any activity in nontraded REITs, according to the Wall Street Journal. 

Broker dealers have until April 13 to respond to FINRA’s request for information about their dealings with nontraded REITs.

Proposed revisions to the fair value accounting standard known as FAS 157 have garnered harsh criticism from those who say the changes are ambiguous and undefined, lack substance and will create further inconsistencies as banks assign value to some assets. 

Under current FAS 157 rules, three different valuation levels exist for banks to price their mark-to-market holdings. Level 1 assets have readily observable prices and trade in active markets. Level 2 assets do not trade actively nor do they have easily obtainable prices. Level 3 assets include the most problematic holdings, such as collateralized debt obligations (CDOs), collateralized mortgage obligations (CMOs) and other exotic derivatives created by prime and subprime mortgages.  

Level 3 holdings are considered illiquid, with market prices so scarce that companies use internal models to gauge their value. In other words, placing a value on these assets is subjective and largely depends on assumptions or opinions. For this reason, Level 3 valuation is often referred to as “mark-to-myth” or “mark-to-imagination.” 

The new proposals for FAS 157 assume that “inactive” markets are the same as “distressed” markets. Moreover, the revisions essentially would allow banks to move more hard-to-value assets into Level 3. This means a company will be able to “handpick” the most appealing value for its assets, while casting aside any that might cause them financial turmoil. 

The bottom line: The proposed amendments to FAS 157 appear to squash the intended purpose of fair value accounting altogether. 

The Financial Accounting Standards Board plans to vote on the revisions to FAS 157 on April 2.

Dozens of retirees from Xerox Corp. and Eastman Kodak will soon share in a welcome pay-out after the Financial Industry Regulatory Authority (FINRA) ruled investment firm Morgan Stanley must pay $7.2 million to settle charges that two of its brokers wrongly persuaded 90 Rochester, New York, employees to take early retirement. Ultimately, the false promises of big profits and unsuitable investing strategies cost many of the investors their life savings. 

FINRA’s ruling breaks down to $3 million in fines and $4.2 million in restitution to the retirees. In addition, former Morgan Stanley broker Michael Kazacos is permanently barred from the securities industry. The second former Morgan Stanley broker, David Isabella, was charged with misconduct. His case must still go before a three-person FINRA hearing panel. Ira Miller, who managed both Kazacos and Isabella, has been suspended from acting as a supervisor for one year and fined $50,000. 

According to a March 25 statement issued by FINRA, from the years of 1998 to 2003, Kazacos allegedly solicited potential clients from Kodak and Xerox by promising them at least 10% annual returns on their investments with Morgan Stanley. He also reportedly told clients they would be able to keep up their current lifestyles by withdrawing 10% every year and not touch their principal.  

FINRA has charged Isabella with similar misconduct. As reported March 26 by 13WHAM-TV in Rochester, New York, Gerald Miller is one of the individuals who followed Isabella’s advice. Miller, who worked for Xerox, was told by the former Morgan Stanley broker that he would “make him a millionaire in 10 years.” Instead, three years after investing with Isabella, Miller learned that he and his wife needed to drop their 10 percent draw and that they were “going to run out of money in five years.” 

The Millers were later told by Isabella that they might need to sell the lakefront home they previously purchased for their retirement years, according to 13WHAM-TV. 

Other retirees are in the same predicament as the Millers. Some have financial issues, while others are headed toward bankruptcy because they retired too early. 

Morgan Stanley’s settlement with FINRA comes out to approximately $45,000 a person, far below the amount of money many retirees actually lost in the early retirement investment promotion.

Stung by huge financial losses in several Regions Morgan Keegan (RMK) bond funds, investors finally are getting some welcome news. Earlier this month, three separate FINRA arbitration panels announced awards in favor of investors who lost money in RMK mutual funds. 

In each of the arbitration claims, Morgan Keegan is accused of shrouding the true risks of the bond funds from investors. Instead, investors say Morgan Keegan and its management marketed and sold certain funds as relatively conservative investments, while in fact they were heavily exposed to subprime mortgage securities, collateral debt obligations (CDOs) and other risky debt instruments.  

Ultimately, several of the Morgan Keegan funds saw their value plummet as much as 90% because of the high concentration of risky and speculative debt. 

In early March 2009, two cases decided by Financial Institution Regulatory Authority (FINRA) panels returned six-figure awards to investors for their losses in Morgan Keegan funds. In one of the cases, the investors received more than the actual damages they claimed.  

Also in March, an Indiana FINRA panel awarded $18,000 to a Whitestown, Indiana, investor for losses she suffered in a Morgan Keegan bond fund. Mark E. Maddox of Maddox Hargett & Caruso served as the investor’s legal counsel. Maddox also was the attorney for the retired cattle farmer from York, Alabama, who won an earlier award from FINRA in March for losses in Morgan Keegan funds. 

In total, FINRA panels have awarded $604,000 to investors in their claims against Morgan Keegan. The Memphis-based brokerage firm also faces several class-action lawsuits from investors who say they were never made aware about the risks of certain Morgan Keegan investments.

Chaos in the world’s financial markets has wreaked havoc on corporate pension plans, with more people seeing their retirement savings slowly dwindle in value month after month. For retirees of bankrupt employers, the reality is especially grim.

David Jeanes, 60, is one of those individuals. Jeanes retired from Nortel Networks, North America’s biggest telephone equipment maker, in 2003 with a full pension benefit package. On Jan. 14, 2009, Nortel filed for bankruptcy protection. Now, Jeanes’ dreams of retirement, along with his pension plan, could be in jeopardy.

As reported March 25 in the Toronto Star, the future of corporate pension plans has become a huge question mark. With stock losses eating away at retirement earnings, many people who are close to retirement may either have to work longer than they initially planned or retire with far less income.

In less than six months, the amount of under funded pension plans in the United States has doubled to $373 billion. By law, when pension plans are under funded companies must infuse additional money into their plans each year to remedy the funding imbalance.

According to a March 23 article by Bloomberg, the decline in U.S. stock prices will saddle more than 50% of companies in the Standard & Poor’s 1500 Index with defined-benefit plans with about $70 billion in pension expenses this year.

Among the companies with ballooning pension deficits: Dow Chemical and Sears Holdings Corporation. Dow, whose pension plan was under funded by $4 billion at the end of 2008, anticipates doubling pension contributions to $376 million this year from $185 million in 2008.

Sears may need to nearly triple its pension contributions to $500 million in 2010.

Meanwhile, pension funds have become a hot issue in New Jersey, which recently sued former executives of Lehman Brothers over claims that fraud and misrepresentation caused the state’s public pension fund to suffer more than $118 million in losses.

According to a March 17 article in the New York Times, a “thirst for profit” and “simple greed” on the part of Lehman’s top executives, including former CEO Richard Fuld, were responsible for the investment firm misstating its financial position when New Jersey bought more than $180 million worth of Lehman shares in April and June 2008. 

The lawsuit also said that Lehman executives provided false and misleading statements about the firm’s liquidity, the value of its assets and its ability to hedge against risk.

This is the second lawsuit filed by a government entity that names former Lehman executives as defendants. In November 2008, San Mateo County, Calif., accused Fuld and other Lehman executives of making false statements that ultimately led to a $150 million loss in the county’s investment pool. 

As the recipient of $25 billion in funds from the government’s Troubled Asset Relief Program (TARP), JPMorgan Chase should be focusing on how and when it will pay back taxpayers’ money. Instead, ABC News reports that the bank plans to spend nearly $140 million on two new luxury Gulfstream jets and embark on a lavish renovation of a hangar at the Westchester Airport to house them.

The news comes on the heels of recent public outrage over TARP recipients allocating money to buy luxury items or pay corporate bonuses. Last week, criticism reached a boiling point after it was learned that American International Group (AIG), which has received more than $180 billion in bailout money from the U.S. government, handed out $165 million in employee bonuses.

In January, a firestorm of criticism forced Citigroup, also a recipient of billions in TARP funds, to abandon plans to purchase a $50 million French-made corporate jet for executives.

A downturn in the economy, coupled with bad investments in auction rate securities and other risky financial instruments has left many foundations, universities and nonprofits with record low endowments. A March 2009 study from the Commonfund Institute showed that endowments at colleges, universities and independent schools saw their worst performance ever at the end of 2008, losing an average of 24.1%. Previously, endowments had their worst year in 1974, with an average loss of 11%.

The Commonfund survey included 235 institutions that lost $28 billion in asset value from July 1 to Dec. 31, bringing their endowments to $87 billion. About 51% of endowment assets were allocated to alternative investments, such as hedge funds and buyout funds as of Dec. 31, which is an increase from 46% six months earlier.

The collapse of the auction rate securities market in particular has created a firestorm of trouble for many foundations and nonprofit organizations. ARS buy back programs, which were announced last summer by some of Wall Street’s biggest investment firms and banks did not cover institutional investors, only retail investors and small businesses. 

As result, many foundations and nonprofits have been stuck with investment portfolios of hard to value and difficult to sell assets. Among these investments are mortgage related securities and collateralized debt obligations (CDOs), high risk products that are not trading on viable secondary markets.

For some entities, the plunging asset value of their endowments has forced them to close their doors. Others have reduced services or cut staff.

A March 20 article in the News and Observer offers another grim reality for universities, nonprofit organizations and foundations: The value of their endowments is being pulled so far down that they’re now worth less than the original donations. In other words, they’re under water. Adding to their financial woes are state laws that prevent nonprofits from tapping into their principal.

No one can say exactly how many foundations and nonprofits are struggling with under water endowments but, by all accounts, it is grave. Says Harvey Dale, director of the National Center on Philanthropy and the Law at New York University, in the News and Observer article: “Anecdotally, it is a serious problem. And if the current financial downturn continues, the problem will only get worse.”

In a page out of David and Goliath, a church secretary from Whitestown, Indiana, emerged victorious in her FINRA arbitration claim that investment firm Morgan Keegan failed to disclose the risks of a certain bond fund that was heavily invested toxic collateralized debt obligations (CDOs) and other asset-backed securities. Ultimately, fallout from the collapse of the subprime mortgage market caused the fund to plummet in value.

As reported in a March 19 story in the Indianapolis Star, Jo L. Wright was awarded $18,000 on March 12 by a Financial Industry Regulatory Authority (FINRA) panel for her losses in the Morgan Keegan Select Intermediate Bond Fund.

Wright initially got into the Morgan Keegan fund because of a recommendation from her local Indiana Regions bank branch manager. Before moving her money, Wright’s investments had been in a certificate of deposit (CD) and a savings account.

When she transferred her money into the Morgan Keegan Select Intermediate Bond, she says the fund was described as a “safe, conservative but higher-yielding investment.”

According to the Wright’s complaint with FINRA, representatives of Morgan Keegan never told her about the risks of the fund nor did they reveal the high concentration of asset-backed securities that it contained. Because she never received a prospectus about the fund, she had no way to determine its asset make-up or the risks it presented.

Memphis based Morgan Keegan continues to be the subject of ongoing investor complaints and investigations for its management of a group of open end and closed end bond funds that collapsed in value because of their massive investments in risky asset-backed securities.  So far, investors have sustained more than $2 billion in losses from the funds.

Wright, who lost $11,000 in the Morgan Keegan Select Intermediate Bond, is the first Indiana case to go to an arbitration hearing over the Morgan Keegan bond funds, said her lawyer, Mark E. Maddox of Maddox Hargett & Caruso, in the Indianapolis Star article.