Oppenheimer's Role in Oregon 529 Plan's Losses

It now appears that Oregon state officials may also be to blame for the $35-million loss suffered by Oregon investors, despite having sued OppenheimerFunds in April of 2009 for the recovery of more than $35 million. According to state officials investors lost out because OppenheimerFund misrepresented the risk of its Oppenheimer Core Bond Fund. However, state officials may have also failed to reel in managers of OppenheimerFunds and stop the risky investments they were making in the Oregon College Savings Plan with money labeled as ‘conservative’ and ‘ultra-conservative’.

According to a May 6, 2009 article in The Oregonian, e-mails between the state treasurer’s office and OppenheimerFunds reveal state officials failed to closely monitor the Oppenheimer Core Bond Fund and didn’t take action to prevent additional losses until it was too late. Instead, documents show the state relied on information from OppenheimerFunds that the money was being wellmanaged. Even more troubling: E-mails point to a possible conflict of interest between OppenheimerFunds and Oregon state officials. In addition to OppenheimerFunds buying meals for state executives at expensive Portland restaurants, the Oregonian article reports that when problems surrounding the Oppenheimer Core Bond Fund were made public, OppenheimerFunds provided the state with a talking points document, and a state official gave the company a heads-up about a pending state investigation.

The central issue concerning the Oppenheimer Core Bond Fund focuses on the investing strategies used by Oppenheimer’s managers. According to a February 2008 filing with the Securities and Exchange Commission (SEC), OppenheimerFunds changed the investment focus of the fund in 2007 by dramatically increasing its holdings in the complex investing arena of derivatives. When the state initially hired OppenheimerFunds, the fund held three derivatives in the form of total-return swap contracts. By the end of 2007, the Core Bond Fund held 150 derivative contracts. At the close of 2008, the Oppenheimer Core Bond Fund - at one time a $1.4 billion fund - had lost 41% of its value. As reported in the May 6, 2009 Oregonian article, OppenheimerFunds first disclosed its exposure to the crisis on Wall Street in a Sept. 24, 2008 letter to Oregon 529 College Savings Network Executive Director Michael Parker. The letter, however, failed to accurately portray the amount of the Core Bond Fund’s exposure and lacked other important details. Moreover, OppenheimerFunds reportedly marked the letter as “not for public disclosure.”

An additional board meeting was held on Oct. 23, 2008 to discuss the financial status of the Oregon College Savings Plan. Randall Edwards, former Oregon State Treasurer, reportedly did not call for making any changes to the investments according to the Oregonian story, yet he did express concern about the deep losses in the Oppenheimer CoreBond Fund. Following this meeting in January 2009, Oregon voted to replace the Core Bond Fund from the Oregon College Savings Plan, it wasn’t until March, however, that the plan went into effect. Although Red flags were waving loud and clear when it came to OppenheimerFunds’ mismanagement of the Oregon College Savings Plan, Oregon’s state officials were slow in and ineffective when the time came to act on their concerns and ultimately failed to protect their investors.