OppenheimerFunds [profile] is about to pay more than $35 million to settle charges brought by the Securities and Exchange Commission (SEC).
Today Robert Khuzami, director of the SEC"s division of enforcement, revealed the regulatory agency's charges that OpFunds made "misleading statements" and failed to make adequate disclosures about two mutual funds. In a company statement, OppFunds stressed that the company "neither admitted nor denied the SEC's allegations."
"We are pleased to have reached a settlement that we believe is in the best interests of the company and those investors that experienced losses during the period of unprecedented volatility and uncertainty that defined the global financial crisis," stated Bill Glavin, chairman, president and CEO of OpFunds.
The statements involved the Oppenheimer Champion Income Fund and the Oppenheimer Core Bond Fund [settlement] and the two bond funds' use of total return swaps and exposure to commercial mortgage-backed securities.
A spokeswoman for Dechert, the law firm defending OpFunds, declined to comment.
According to the settlement, OpFunds will pay out $24 million as a penalty, disgorge another $9,879,706 and pay prejudgment interest of $1,487,190.
A source familiar with the situation noted that, unlike in some SEC cases, this settlement does not name any specific OpFunds executives.
SEC Press Release
OPPENHEIMERFUNDS TO PAY $35 MILLION TO SETTLE SEC CHARGES FOR MISLEADING STATEMENTS DURING FINANCIAL CRISIS
Washington, D.C., June 6, 2012 – 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 (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. 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 CMBS market triggered large cash liabilities on the TRS contracts in both funds and forced Oppenheimer to reduce CMBS 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.
“Mutual fund providers have an obligation to clearly and accurately convey the strategies and risks of the products they sell,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Candor, not wishful thinking, should drive communications with investors, particularly during times of market stress.”
Julie Lutz, Associate Director of the SEC’s Denver Regional Office, added, “These Oppenheimer funds had to sell bonds at the worst possible time to raise cash for TRS contract payments and cut their CMBS exposure to limit future losses. Yet, the message that Oppenheimer conveyed to investors was that the funds were maintaining their positions and the losses were recoverable.”
According to the SEC’s 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. But they also created large amounts of leverage in the funds. Beginning in mid-September 2008, steep 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.
According to the SEC’s order, the funds’ portfolio managers under instruction from senior management began executing a plan in mid-November to reduce CMBS exposure. Just as they began to do so, however, the CMBS market collapse accelerated, creating staggering cash liabilities for the funds and driving their NAVs even lower.
The SEC’s order found that continued CMBS declines forced the funds to sell more portfolio securities in order to raise cash for anticipated TRS contract payments. This task became increasingly difficult for the Champion fund, ultimately prompting Oppenheimer to make a $150 million cash infusion into the fund on November 21. Over the next two weeks, the funds continued to reduce their CMBS exposure to avoid further losses.
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’s investigation 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 SEC’s order finds that OppenheimerFunds violated Section 34(b) of the Investment Company Act of 1940, Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 (Securities Act), and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 promulgated thereunder. The order finds that OppenheimerFunds Distributor violated Sections 17(a)(2) and 17(a)(3) of the Securities Act.
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. OppenheimerFunds and OppenheimerFunds Distributor also agreed to provisions in the order censuring them and directing them to cease and desist from committing or causing any violations or future violations of these statutes and rules.
The SEC’s investigation was conducted by Coates Lear, Jeffrey E. Oraker, Hugh C. Beck, Patricia E. Foley, and Mary S. Brady in the Denver Regional Office. The related examination of Oppenheimer was conducted by Francesco Spinella, Tracy O’Sullivan, C. Michael Hooper, Kathleen A. Raimondi, and Paula S. Weisz under the supervision of branch chief Kenneth O’Connor and assistant director Dawn Blankenship in the New York Regional Office.
OppenheimerFunds Press Release
OppenheimerFunds Announces Resolution of SEC Inquiry
NEW YORK (June 6, 2012) – OppenheimerFunds, Inc. (OFI) and OppenheimerFunds Distributor, Inc. (OFDI) today announced the settlement of an administrative proceeding with the U.S. Securities and Exchange Commission (SEC) to resolve the agency’s investigation into the 2008 performance of the Oppenheimer Champion Income Fund and Oppenheimer Core Bond Fund.
In reaching these settlements, OFI and OFDI have neither admitted nor denied the SEC’s allegations.
As the SEC noted in its administrative order, OFI and OFDI fully cooperated with the SEC from the outset of its investigation. OFI and OFDI voluntarily implemented a variety of remedial measures in the wake of the 2008 financial crisis, including replacing the portfolio management team responsible for Champion Income Fund and Core Bond Fund.
“We are pleased to have reached a settlement that we believe is in the best interests of the company and those investors that experienced losses during the period of unprecedented volatility and uncertainty that defined the global financial crisis,” said Bill Glavin, Chairman, President and Chief Executive Officer of OppenheimerFunds. “As a firm we continue to further enhance our fund disclosure, risk management and compliance controls and procedures to ensure those functions are best in class. We attach the utmost importance to our regulatory obligations and our fiduciary duties to our advisory clients, and we will continue working every day to create value for our investors while helping them to effectively manage risk.”
Under the terms of the settlement, OFI has agreed to pay approximately $35 million to the SEC, which the SEC will use to establish a fund for investors in the funds.
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About OppenheimerFunds, Inc.
OppenheimerFunds, Inc. is one of the nation’s largest and most respected investment management companies. As of March 31, 2012, OppenheimerFunds, Inc., including subsidiaries, managed more than $183 billion in assets, including mutual funds having more than 11 million shareholder accounts, including sub-accounts. Known for its tagline The Right Way to Invest, OppenheimerFunds, Inc. has been helping investors reach their financial goals since 1960. The Company and its divisions and subsidiaries offer a broad range of products and services to individuals, corporations and institutions, including mutual funds, separately managed accounts, qualified retirement plans and sub-advisory investment management services.
Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested.
Before investing in any of the Oppenheimer funds, investors should carefully consider a fund's investment objectives, risks, charges and expenses. Fund prospectuses and summary prospectuses contain this and other information about the funds. You may download and view a prospectus now, or to obtain one, ask your financial advisor or call OppenheimerFunds Distributor, Inc. at 1.800.CALL OPP (225.5677). Read prospectuses and summary prospectuses carefully before investing.
Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc. Two World Financial Center, 225 Liberty Street, New York, NY 10281-1008
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