Manager of College Investment Fund Sued in Oregon

Here is an interesting development that should be followed by investment fund managers — public and private — across the country. From The Oregonian:

Oregon is suing OppenheimerFunds, Inc., the manager of the state’s college savings plan, today in Marion County Court seeking repayment of at least $36.2 million participants have lost in the plan.

The suit claims Oppenheimer violated Oregon securities law, breached its contract and fiduciary duty and misrepresented the savings plan in a negligent manner, state Treasurer Ben Westlund and Attorney General John Kroger announced this morning.

The key distinction, per the Complaint (pdf), between this fund and many other investment funds is that “the state alleges that in late 2007 and early 2008, OppenheimerFunds began selling credit default swaps and other high risk derivatives to Wall Street firms.”  Well, that is an interesting development.

Although other funds might have invested in companies whose investment portfolio included credit default swaps, this actual CDS sale element seems quite unusual — at least for a public, state-initiated savings vehicle — and much more likely to lead to the type of lawsuit brought today by Oregon A.G. Kroger.

Per the Complaint:

Over time, however, and without discussion with the Board, the Core Bond Fund underwent a radical transformation.  By late 2007 or early 2008, the Core Bond Fund was no longer a plain bond fund that sought to protect principal, obtain income and minimal growth through corporate and government debt securities.  It had become a hedge-fund like investment fund that took extreme risks in a search for speculative large returns.

Compl. at para. 5.  These “extreme risks” included selling credit default swaps to Wall Street.  As late as October 2008, OppenheimerFunds, Inc., was “reassur[ing]” the state and “advis[ing] it to remain invested in the Core Bond Fund.”  Compl., at para. 8.

The fund also, per the Complaint, “began to take unnecessary risks by significantly increasing its use of leverage.”  Compl. at para. 54.  Shockingly, the Complaint alleges that the Fund:

sometimes actually sold protection on the issuers of bonds that it also owned in the Fund, thereby doubling or tripling its bet with respect to the credit-worthiness of those issuers.  For example, as of June 30, 2008, the Core Bond Fund held bonds issued by AIG, Lehman Brothers, Merrill Lynch, Citigroup, General Motors, and Ford Motors.  At the same time, the Core Bond Fund was selling protection, credit default swaps, on bonds by these very issuers.

Compl. at para. 60.  The Complaint alleges violations of Oregon securities law, breach of contract, breach of fiduciary duty, negligence and negligent misrepresentation.  The AG’s news release can be found here.

[UPDATE: Bloomberg covers the suit here and adds:

Illinois, Maine, New Mexico and Texas are investigating OppenheimerFunds over college-savings plan investments. Illinois investors lost $85 million last year in accounts managed by OppenheimerFunds, according to the office of State Treasurer Alexi Giannoulias. The other three states have not published estimates of their losses.

Oregon, Illinois and Texas have pulled college-savings money from OppenheimerFunds.

Sorta makes you wonder why Maine and New Mexico haven't pulled their money yet.

Also, I clarified in the headline that the college investment fund's manager was sued, not the college investment fund itself.]

Popularity: 1% [?]