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Oppenheimer Settles SEC Charges for $35 Million

Plus, Hennessy buys FBR, Miller takes another step toward retirement, and more. 

Morningstar Fund Analysts, 06/07/2012

The Securities and Exchange Commission this week charged OppenheimerFunds with making misleading statements about two of its mutual funds during the 2008 financial crisis. Oppenheimer agreed to pay $35 million to settle the charges. According to the SEC's order, Oppenheimer made misleading statements in the 2008 prospectus for Oppenheimer Champion Income OPCHX by not disclosing that the fund could use derivatives to such an extent that they could be the primary influence on the fund's returns. The SEC also found that Oppenheimer disseminated misleading statements to shareholders about Champion Income and Oppenheimer Core Bond OPIGX amid the financial crisis. According to the order, Oppenheimer communicated to shareholders that the funds had not suffered permanent impairments, when in fact the funds had been forced to sell bond holdings that resulted in realized investment losses.

Leading up to 2008, the management team running the two funds made overly aggressive bets on mortgage-related securities. Specifically, the managers increased the funds' exposure to commercial mortgage-backed securities by entering into derivative contracts known as total return swaps. These swaps allowed the funds to add market exposure on top of the assets on their balance sheets. Those bets unraveled in 2008, and by the end of the year, Champion Income had lost 78.5% and Core Bond had dropped 35.8%.

The horrid performance prompted Oppenheimer to sack the funds' management team and address shortfalls in its compliance and risk-management teams. Oppenheimer also announced in May that Champion Income will merge into Neutral-rated Oppenheimer Global Strategic Income OPSIX later this year.

BlackRock Manager Set to Retire
Robert Doll, one of BlackRock's BLK higher-profile portfolio managers, has decided to retire, leaving the turnaround of his struggling funds in the hands of more-recent BlackRock hires. 

Christopher Leavy, who joined BlackRock in 2010 as chief investment officer of U.S. fundamental equity, has assumed lead management of all Doll's charges. Since 1999, Doll has been managing BlackRock Large Cap Value MDLVX, BlackRock Large Cap Growth MDLHXBlackRock Large Cap Core MDLRX, and BlackRock Large Cap Core Plus BALPX. Considering that Doll's strategies have about $23 billion in total assets, it would make sense that Leavy, as CIO, would want to have a direct role in ensuring the funds' success.

However, Leavy will not be giving up his CIO position as he tackles the considerable challenge of improving the funds' performance. This is a concern. Doll's energies were also divided as he had the added time-consuming role of BlackRock's very public chief equity strategist. The large, core, and growth funds either lag or barely beat their peers over the trailing three-, five-, and 10-year periods.

Morningstar fund analysts cover more than 1,700 mutual funds and write regular commentary covering fund industry news, fund investing trends, picks, portfolio planning, international investing, and more.
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