Last week, the Oregon’s Attorney General sued OppenheimerFunds Inc. for allegedly mismanaging the state’s 529 College Savings Plan when it recommended a bond that took risks that were not in alignment with the Plan’s conservative investment objectives. The 529 College Savings Plan allows investors to avail of tax benefits while they save for their children’s college education.
According to the $36 million securities fraud lawsuit, the defendants had signed a contract agreeing to recommend only funds that were consistent with the Oregon 529 College Savings Board’s investment policy and would let the board know about any fund changes. Also, as an investment adviser, OppenheimerFunds had fiduciary duties it owed the board. The complaint contends that the defendants breached their fiduciary and contractual duties by continuing to recommend the Oppenheimer Core Bond Fund even after it took part in risky leverage and speculative bets with derivatives.
According to the lawsuit, the Oregon College Savings Plan Trust retained the services of OppenheimerFunds to put together, manage, and make recommendations for its portfolios. All recommendations had to be compatible with each portfolio’s objectives.
When OppenheimerFunds initially recommended the Core Bond Fund, the bond was a “straightforward” bond fund that was primarily invested in high quality corporate bonds. That is, until sometime between 2007 and 2008 when fund managers allegedly began taking part in credit default swaps and total return swaps. This, says the lawsuit, dramatically changed the risk profile of the fund.
Yet OppenheimerFunds failed to let the board know about this change until January 22. The fund lost more than 35% of its value in 2008 and another 10% during the first three months of 2009. The complaint says that rather than moderate the degree of risk, OppenheimerFunds increased the risks.
OppenheimerFunds maintains that significant losses occurred as a result of market volatility and not due to dramatic changes in investment strategies and that the Board was notified of all changes. The investment adviser says it is extremely disappointed with the lawsuit and expressed concern that an outside lawyer, and not the state, conducted the probe into the case.
However, Keith S. Dubanevich, the special counsel in the Oregon attorney general’s office, says it is their common practice to retain outside help when dealing with certain areas of law, including securities fraud, and that Oregon’s Justice Department did lead the investigation.