OppenheimerFunds' 529 Settlement Could Lead to Others
The $20 million settlement of an Oregon 529 plan lawsuit could break a logjam preventing other states from recovering some of their lost college savings.
Fund Times
OppenheimerFunds' $20 million settlement of an Oregon 529 plan lawsuit could break a logjam preventing other states from recovering some of their lost college savings. The Oregon suit alleged that OppenheimerFunds' mismanagement of a bond fund led to severe losses in the state's 529 plan.
The $20 million that OppenheimerFunds recently said it would pay to Oregon to settle the case will be distributed among the 45,000 affected 529 accountholders in proportion to how much they had invested in Oppenheimer Core Bond (OPIGX). As its name implies, the fund was intended to serve as a core bond holding for the plan's popular age-based options or as a conservative fixed-income investment for college savers with kids close to college-age.
Unfortunately, and virtually unknown to investors, Oppenheimer Core Bond had substantial leverage and an outsized bet on commercial mortgages, or CMBS, largely via total-return swaps. These positions magnified the fund's trouble when the market sank in late 2008. The fund shed nearly 36% of its value that year, while the typical intermediate-term bond fund lost 4.7%.
This is a big settlement, but it won't be the biggest related to Oppenheimer's fixed-income troubles. This past summer, the Illinois State Treasurer's office announced a $77 million tentative settlement with OppenheimerFunds to recover 529 plan losses attributable to Oppenheimer Core Plus, a separately managed account managed nearly identically to Core Bond.
The process to finalize the Illinois settlement is taking longer than expected, but according to the Illinois Treasurer's office, the fact that Oregon has dropped a potentially resource-intensive and drawn-out lawsuit should allow OppenheimerFunds to focus on the Illinois Bright Start College Savings program settlement. While Illinois did threaten to sue OppenheimerFunds earlier this year, the state didn't pursue that costly avenue. Oregon currently is the only one of the five states affected by Core Bond that pursued litigation.