OppenheimerFunds Penalized More Than $35 Million for Misrepresenting Bond Funds


OppenheimerFunds has agreed to pay more than $35 million to settle SEC charges the investment management company and its sales and distribution arm made misleading statements about two of its mutual funds in the midst of the credit crisis in late 2008. The settlement payments consist of a penalty of $24 million, disgorgement of $9,879,706, and prejudgment interest of $1,487,190.

The Oppenheimer Champion Income Fund lost 78 percent in 2008, which is 52 percent more than the average junk bond fund. The Oppenheimer Core Bond Fund lost 36 percent in 2008 compared with a 5 percent loss for the average intermediate term bond fund.

The Oppenheimer Core Bond Fund has settled a number of lawsuits flowing from its use by 529 college savings plans, according to InvestmentNews (“OppenheimerFunds misled investors about souped-up funds: SEC”).

According to the SEC, Oppenheimer exposed investors in the Oppenheimer Champion Income Fund (a high-yield bond fund) the Oppenheimer Core Bond Fund (an intermediate-term, investment-grade fund) to commercial mortgage-backed securities (CMBS) by means of derivative instruments known as total return swaps (TRS), which allowed the funds to create exposure to commercial mortgages without purchasing actual bonds.

The TRS contracts also created large amounts of leverage in the funds. In the latter part of 2008, sharp CMBS market declines drove down the net asset values of both funds. Oppenheimer was forced to raise cash to meet TRS contract payment obligations by selling securities into an increasingly illiquid market.

Oppenheimer made misleading statements about the funds’ losses and the prospects of a rebound, according to the SEC. For example, Oppenheimer told financial advisers and fund shareholders that the funds had only suffered paper losses, and that the portfolio holdings were intact and would continue paying interest as they waited for markets to recover. In fact, however, the funds had substantially reduced their portfolio holdings to raise cash, resulting in realized investment losses and lost future income from the bonds.

Robert Khuzami, Director of the SEC’s Division of Enforcement, was quoted as saying: “Mutual fund providers have an obligation to clearly and accurately convey the strategies and risks of the products they sell. Candor, not wishful thinking, should drive communications with investors, particularly during times of market stress.”

Julie Lutz, Associate Director of the SEC’s Denver Regional Office, said, added: “These Oppenheimer funds had to sell bonds at the worst possible time to raise cash for TRS contract payments and cut their CMBS exposure to limit future losses. Yet, the message that Oppenheimer conveyed to investors was that the funds were maintaining their positions and the losses were recoverable.”

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.