The SEC charged OppenheimerFunds Inc. with making misleading statements about two of its mutual funds’ losses and recovery prospects. According to the SEC, in the midst of the financial crisis, two fixed income retail mutual funds managed by Oppenheimer suffered losses greater than those experienced by similar funds. The underperformance was mainly caused by the funds’ exposure to AAA-rated commercial mortgage-backed securities (“CMBS’) and total return swaps (“TRS”) contracts, which created substantial leverage in both funds. When the CMBS market crashed, in late 2008, the funds’ net asset values plunged to unexpected levels, creating staggering cash liabilities for the funds.
The SEC alleged that Oppenheimer was forced to liquidate large portions of their portfolio to meet TRS contract payments and was diligently trying to reduce their CMBS exposure. As the CMBS market continued to decline, Oppenheimer had to make a $150 million cash infusion into the funds to keep them from collapsing. When Oppenheimer was questioned by financial advisors and shareholders about the funds’ condition, Oppenheimer represented that the funds had only incurred paper losses that could be reversed once the credit markets returned to normal. These communications were materially misleading because the funds were committed to substantially reducing their CMBS exposure, which in turned diminished the possibility of recovering CMBS-induced losses. Additionally, the funds were forced to sell significant portions of their holdings to raise cash to meet their TRS liabilities, resulting in realized investment losses and loss of future income from the bonds. The SEC investigation also found that through 2008, Oppenheimer distributed a prospectus highlighting the funds’ cash investments without disclosing the funds’ practice of assuming substantial leverage through its use of derivatives.
Without admitting or denying the SEC’s findings, OppenheimerFunds agreed to pay a penalty of $24 million, disgorgement of $9,879,706, and pre-judgment interest of $1,487,190. This money will be deposited into a fund for the benefit of investors.
It is unclear at this time whether the FINRA Arbitration process will be appropriate for Oppenheimer investors. Any investor interested in speaking with a securities attorney may contact David A. Weintraub, P.A., 7805 SW 6th Court, Plantation, FL 33324. By phone: 954.693.7577 or 800.718.1422.