OppFunds’ Blunders Cost $35M

The Securities and Exchange Commission today charged 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.

Specifically, the SEC’s investigation found that Oppenheimer used derivative instruments known as total return swaps to add substantial commercial mortgage-backed securities 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. According to the SEC, 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.

In response, Oppenheimer agreed to pay more than $35 million to settle the SEC’s charges. The firm also said it "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."

In a statement, Bill Glavin, Chairman, President and Chief Executive Officer of OppenheimerFunds, said: "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."