Did You Invest in Oppenheimer Funds?

The Securities and Exchange Commission (SEC) charged investment management company OppenheimerFunds Inc. and its sales and distribution division on June 6th., 2012, with making misleading statements about two of its mutual funds  that struggled in the credit crisis in late 2008.

The investigation found that Oppenheimer used derivative instruments known as total return swaps (TRS contracts) to add substantial commercial mortgage-backed securities (CMBS) exposure in a high-yield bond fund called the Oppenheimer Champion Income Fund and an intermediate-term, investment-grade fund called the Oppenheimer Core Bond Fund according to the SEC's website. In 2008, the prospectus for the Champion fund didn’t properly disclose the fund’s practice of assuming substantial leverage in using derivative instruments. When declines in the CMBS market triggered large cash liabilities on the TRS contracts in both funds and forced Oppenheimer to reduce CMBS exposure, Oppenheimer allegedly made misleading statements about the funds’ losses and their recovery prospects. Oppenheimer agreed to a more than $35 million payment to settle the SEC’s charges.

According to the SEC’s website, the SEC issued an order instituting settled administrative proceedings against OppenheimerFunds and OppenheimerFunds Distributor Inc. The TRS contracts allowed the two funds to gain substantial exposure to commercial mortgages without purchasing actual bonds. They created large amounts of leverage in the funds. Startomg in September 2008, CMBS market declines drove down the net asset values (NAVs) of both funds. These losses forced Oppenheimer to raise cash for month-end TRS contract payments by selling securities into an increasingly illiquid market. Then the CMBS market collapse began, creating huge cash liabilities for the funds and driving their NAVs even lower.

According to the SEC’s order, Oppenheimer advanced several misleading messages when responding to questions in the midst of these events. For instance, Oppenheimer communicated to financial advisers (whose clients were invested in the funds) and fund shareholders directly that the funds had only suffered paper losses and their holdings and strategies remained intact. Oppenheimer also stressed that absent actual defaults, the funds would continue collecting payments on the funds’ bonds as they waited for markets to recover. These communications were materially misleading because the funds were committed to substantially reducing their CMBS exposure, which dampened their prospects for recovering CMBS-induced losses. Moreover, the funds had been forced to sell significant portions of their bond holdings to raise cash for anticipated TRS contract payments, resulting in realized investment losses and lost future income from the bonds.

The SEC said, without admitting or denying the SEC’s findings, OppenheimerFunds agreed to pay a penalty of $24 million, disgorgement of $9,879,706, and prejudgment interest of $1,487,190. This money will be deposited into a fund for the benefit of investors.