Oppenheimer Champion Fund Arbitration

Oppenheimer Champion Income Fund (OCHBX, OPCHX and OCHCX) and the Oppenheimer Core Bond Fund (OPIGX) Fund have been the recent subject of investor arbitraitons.

The recomendation of the Oppenheimer Champion funds was typically pitched to investors either as a conservative high income fund (Champion) or conservative intermediate fund (Core) or at least a high income or intermediate funds that were not significantly riskier than it's peers.

The Champion Fund dropped a stunning 55% in November of 2008 alone. For calendar year 2008, Champion Income has lost 79.1%, a record eclipsed only by a high income fund of southern based Regions.

The representations made by financial advisors, the marketing material and even the prospectus portrayed the Oppenheimer Champion Income Fund as conservative. This was very misleading. For example, even the revised prospectus that was published in 2008, after the meltdown began, portrays the Champion fund as appropriate for clients who were retired and makes no disclosures about the Champion fund being dramatically riskier than its peer group.

Rather than making meaningful, detailed disclosures about the risks of the Oppenheimer Champion Income Fund, instead, generic, boilerplate disclosures were made. The disclosures were the same sorts of disclosures virtually every mutual fund made. The disclosures did not provide the degree of clarity needed by investors to determine the true riskiness of these funds.

The Champion fund took a massive bet in high risk derivatives in the form of mortgage backed securities and credit default swaps. The full risks of the Fund’s illiquid, speculative derivatives were not meaningfully disclosed to investors. The Champion Income Fund was portrayed as a garden variety high income fund. Unfortunately, starting in late 2006, Angelo Manioudakis, the 42 year old head of the firm's Core Plus team responsible for managing the Fund, concentrated the Fund in total-return swaps.

These are highly illiquid, speculative and complex agreements between parties to exchange cash flows in the future based on how a set of securities performs. Specifically, the Fund was betting that top-rated commercial mortgage-backed securities would rally in 2008. The Fund gambled, and lost, with money for investors that was not supposed to be gambled with.

Additionally, the Fund was also concentrated in credit-default swaps (CDSs). The CDSs declined $238 million through September alone. CDSs are basically insurance contracts that protect investors against bond and loan defaults. In exchange for being on the hook to pay out for such issues, CDS sellers receive a stream of interest payments.