Oppenheimer Pays $35 Million to SEC

By Michael P. Tremoglie | Jun 12, 2012

WASHINGTON (Legal Newsline) - The Securities and Exchange Commission on Wednesday charged Oppenheimer Funds with making misleading statements about two of its mutual funds during the financial crisis that caused near panic in the markets during late 2008.

Oppenheimer has agreed to pay more than $35 million because of the SEC's accusations. Although Oppenheimer neither admitted nor denied the SEC's findings, it agreed to pay a penalty of $24 million, disgorgement of $9,879,706, and prejudgment interest of $1,487,190.

An SEC investigation determined that Oppenheimer used derivative instruments known as total return swaps (TRS contracts) to add substantial commercial mortgage-backed securities exposure to some bond funds. The 2008 prospectus allegedly did not adequately disclose the fund's practice of assuming substantial leverage in using derivative instruments.

When the CMBS market declines triggered large cash liabilities on the TRS contracts, Oppenheimer disseminated misleading statements about the funds' losses and their recovery prospects, according to the SEC.

According to the SEC, 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 of both funds. These losses forced Oppenheimer to raise cash for month-end TRS contract payments by selling securities into an increasingly illiquid market, the SEC says.

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, the SEC said.

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, the SEC says.

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, the SEC says.

The money will be deposited into a fund for the benefit of investors. Oppenheimer Funds and Oppenheimer Funds 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.

"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."

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