The Securities and Exchange Commission today charged investment management company OppenheimerFunds Inc. and its sales and distribution arm with making misleading statements about two of its mutual funds struggling in the midst of the credit crisis in late 2008.
The SEC’s investigation found that Oppenheimer used derivative instruments known as total return swaps to add substantial commercial mortgage-backed securities 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.
The 2008 prospectus for the Champion fund didn’t adequately disclose the fund’s practice of assuming substantial leverage in using derivative instruments. And when declines in the commercial mortgage-backed securities market triggered large cash liabilities on the total return swaps contracts in both funds and forced Oppenheimer to reduce its commercial mortgage-backed securities exposure, Oppenheimer disseminated misleading statements about the funds’ losses and their recovery prospects.
Oppenheimer agreed to pay more than $35 million to settle the SEC’s charges.
According to the SEC’s order instituting settled administrative proceedings against OppenheimerFunds and OppenheimerFunds Distributor Inc., the total return swaps contracts allowed the two funds to gain substantial exposure to commercial mortgages without purchasing actual bonds. But they also created large amounts of leverage in the funds.
Beginning in mid-September 2008, steep commercial mortgage-backed securities market declines drove down the net asset values (NAVs) of both funds. These losses forced Oppenheimer to raise cash for month-end total return swaps contract payments by selling securities into an increasingly illiquid market.
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) 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 and no doubt increased investors’ losses as investors held on to these funds based on these misrepresentations.
The SEC’s investigation also found that the Champion fund’s 2008 prospectus was materially misleading in describing the fund’s “main” investments in high-yield bonds without adequately disclosing the fund’s practice of assuming substantial leverage on top of those investments. While the prospectus disclosed that the fund “invested” in “swaps” and other derivatives “to try to enhance income or to try to manage investment risk,” it did not adequately disclose that the fund could use derivatives to such an extent that the fund’s total investment exposure could far exceed the value of its portfolio securities and, therefore, that its investment returns could depend primarily upon the performance of bonds that it did not own.
The White Law Group continues to investigate securities fraud claims involving the Oppenheimer Champions Income Fund and Oppenheimer Core Bond Fund. Investors in these two funds may be able to recover their losses through a FINRA arbitration against the brokerage firm or financial professional that recommended these two funds.
To speak with a securities attorney regarding your litigation options, please call The White Law Group at 312/238-9650 for a free consultation.
The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida.
For more information on The White Law Group visit https://www.whitesecuritieslaw.com.