Oregon has become the first state to take legal action against OppenheimerFunds, Inc. over an estimated $37 million in losses to 60,000 Oregon families who invested in the Oregon College Savings Plan. The suit, filed on April 13th in an Oregon state court, culminates a three-month investigation of complaints that Oppenheimer abandoned a conservative bond fund investing strategy in 2007 for a riskier portfolio that included credit default swaps and other high-risk derivatives. It’s alleged in the suit that the plan had become “a hedge-fund like investment fund that took extreme risks in a search for speculative large gains.” When filing the suit, John Kroger, Oregon’s Attorney General, observed:
I think they were hoping to get risky equity-like returns in a bond fund. If they succeeded, they look like superstars, but unfortunately the strategy did not work.
The plan was marketed to parents sending children to Oregon colleges as an “ultra-conservative” college portfolio that would protect principal and provide income. The plan made routine bond fund returns until 2008, when the Core Bond Fund lost nearly 36% of its value even though the benchmark index it was expected to use for investment decisions was up by 5%. The fund lost an additional 10% in the first quarter of 2009, according to the Attorney General. The plain included risky credit default swaps and other derivatives as part of a long-term investment plan. The fund was advertised as preserving capital for those close to sending children to college in a short number of years and it was not intended as a long-term strategy. The State Treasurer replaced the Core Bond Fund managed by Oppenheimer with a different fund on March 27th. The suit alleges negligence and breaches of contract and fiduciary duties. As expected, Oppenheimer denies any liability in this matter.
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