Oregon, Illinois investigate college savings plan losses

by Suzanne Pardington and Brent Hunsberger, The Oregonian

Thursday January 15, 2009, 9:48 PM

Illinois is pursuing a potential lawsuit against OppenheimerFunds to try to recoup some of the money lost in the same bond fund that caused the Oregon College Savings Plan to plunge in value last year.

Oregon officials have been in contact with Illinois, but the states are conducting separate investigations.

The Oregon board that oversees $750 million in college savings, which has known about the losses since October, will meet next week to decide what to do about the troubled fund.

The Illinois investigation follows swift action in that state to halt new contributions from the fund in December and redirect them to safer, short-term U.S. Treasuries. Existing investments were left in the fund to avoid locking in losses.

Ben Westlund, who became Oregon's treasurer last week, heads the five-member board that oversees Oregon's plan. He will discuss the state's options when the board meets Thursday, said spokesman James Sinks.

The House Education Committee also plans a hearing in Salem about the college savings plan Jan. 23.

In a letter to legislators Thursday, Westlund pledged to improve the $750 million plan, which lost about 25 percent of its value last year. Even the most conservative plans designed for students who are in college performed poorly.

About 70,000 investors are saving money for college for about 100,000 children, grandchildren and others in Oregon's plan.

Illinois' college savings plan is worth about $1.9 billion, down 17 percent from $2.3 billion at the beginning of last year, invested in 182,000 accounts. About $85 million of Illinois' losses were in the bond fund.

The OppenheimerFunds Core Bond Fund, which held about $89 million of Oregon's college investments as of Sept. 30, has dropped 41 percent in value in the past year. It closed Thursday at $6.02 a share, a 15 percent increase over its November low of $5.23.

The fund was heavily invested in commercial mortgage-backed securities, financial-sector corporate bonds and other securities, according to Morningstar, which evaluates mutual funds.

OppenheimerFunds' most conservative portfolios available to Oregon College Savings Plan investors regained a portion of their value in December. But they have declined so far this year.

Oregon Attorney General John Kroger also is looking into why the fund dropped so quickly and whether the reason violated OppenheimerFunds' contract or securities law, spokesman Tony Green said.

"If we find what we believe is wrongdoing, then we would have litigation," Green said. "But we aren't at the point where we can make that kind of decision yet."

Oregon is not working with Illinois, he said, but "if we feel that it's in the best interest of Oregonians and our investigation, we certainly would not hesitate to do so."

Illinois officials decided to pursue legal options because "we felt that we couldn't afford to wait around," said Scott Burnham, spokesman for Illinois Treasurer Alexi Giannoulias.
"Families need money to pay for tuition now."

OppenheimerFunds also faces legal action from individual investors.

Andrew Stoltmann, a Chicago attorney, said he represents 20 individuals filing legal actions to recover their losses from the Core Bond Fund and another fund. The losses, ranging from $30,000 to $600,000, came from investments made directly into the Core Bond Fund, outside any college savings program, he said.

"It's incredible they could take huge derivative risks and sector bets for what was supposed to be conservative funds," Stoltmann said. "There will be a tsunami of litigation against Oppenheimer for the destruction they brought on to a lot of investors."

Stoltmann called the supposedly conservative fund's investments in credit-default swaps "off-the-charts risky and speculative."

Credit-default swaps are a kind of insurance contract against default on debt, such as a bond, loan or mortgage. They were invented by Wall Street and are largely unregulated, and their market collapsed as homeowners began defaulting on mortgages.

OppenheimerFunds also manages college saving plans in New Mexico and Texas.

Some of New Mexico's investment portfolios had between 50 and 60 percent of their money in the Core Bond Fund. They performed even worse than Oregon's, losing 26 to 35 percent of their value last year. New Mexico's in-school portfolios lost about 19 percent.

January 14, 2009
Ill. wants Bright Start College Savings program's $85M back
Terry Savage

Thousands of Illinois families affected after Bright Start Savings program suffers huge losses amid questions over an investment strategy that could land fund's former chief in legal jam 

The State of Illinois' Bright Start College Savings program has been the victim of a gross mismanagement. That's the charge being made by Illinois state Treasurer Alexi Giannoulias as he prepares to file a lawsuit against Oppenheimer Funds, seeking to recover $85 million of losses in a bond fund that he alleges was imprudently managed. Thousands of Illinois families suffered huge losses as a result.

The charges stem from an incredible 38 percent loss of market value in the Bright Start "Core Plus" bond fund under the watch of then-Senior Vice President of Fixed Income Angelo Manioudakis. The fund was supposed to be invested in "investment grade bonds and U.S. government securities," the most conservative investment strategy -- used by parents who want to limit risk as their child approaches college age.

Similar funds managed by other investment companies showed a positive return of about 5 percent last year, as short term bond prices moved up in response to lower interest rates.

Attempts to reach Manioudakis, who has since left Oppenheimer, for comment were unsuccessful.

Illinois isn't the only state to be victimized. The same Oppenheimer fund is included in 529 college savings plans of Oregon, Texas, Maine, and New Mexico.

But it appears that Illinois will be the first to pursue legal action. Giannoulias is working with Attorney General Lisa Madigan's office to determine the "appropriate legal action," in an attempt to help families recover losses in fund investments as college payments come due.

Morningstar analyst Eric Jacobson has done some digging into this Oppenheimer bond portfolio. In late December, just after Manioudakis left Oppenheimer as a portfolio manager, Jacobson reported that "something just didn't add up."

Even with the fund reporting a 20 percent investment in mortgage-backed securities, the large overall losses couldn't be explained.

Jacobson ties the losses to leverage used by fund managers. The fund had huge exposure to not only mortgage-backed securities, but credit default swaps. In effect, they had investment exposure equivalent to 180 percent of their assets. And when those markets collapsed at the end of September, the bad investment choices were compounded by the leverage, leading to outsized losses.

Morningstar said it couldn't find any disclosures in the funds' legal documents allowing them to use this kind of leverage. And "it was never brought up by the managers in their Morningstar interviews," said Jacobson in his report.

"It comes awfully close to dishonesty by omission," Jacobson said.

Reached Tuesday afternoon, Oppenheimer Funds' chief economist and former head of fixed income, Jerry Webman, said: "The fund was overwhelmingly invested in government bonds and top rated debt securities. In that regard we did just exactly what we were supposed to do. . . . But there was unprecedented volatility in these markets, and the securities we owned did not behave according to any historic precedent."

As to charges that Manioudakis is a "rogue fund manager," Webman responded: "These investment decisions were made by a team of portfolio managers. They took responsible positions, which were damaged by unprecedented market actions.

"It would be highly inaccurate to call Mr. Manioudakis a 'rogue fund manager.' "

But Giannoulias doesn't buy that argument.

He reassured Bright Start investors that his allegations relate to only one fund in the program, and noted that Bright Start Savings has been ranked one of the top 5 college savings programs in the country by Morningstar.

Giannoulias vows to pursue recovery of the losses, saying: "We're taking a proactive approach, fighting for these families that need money to cover college expenses now. . . . We want to hold this fund manager responsible for this reckless investment strategy."

In the end, it appears the courts will decide.

And that's The Savage Truth.

Oppenheimer bond fund losses hit college 529 savings plans
By Sandra Block, USA TODAY

Thousands of parents of college-age children who thought their college savings were sheltered in low-risk portfolios watched their accounts shrink last year after a bond fund offered by at least four state 529 plans lost more than a third of its value.

The Oppenheimer Core Bond fund, (OPIGX) offered by 529 plans in Oregon, Texas, Maine and New Mexico, fell 36% last year, vs. a loss of about 5% for the average intermediate-term bond fund, according to Morningstar, an investment research firm. The losses stemmed from the management team's decision to take big bets on mortgage-backed securities and credit default swaps, Morningstar said.

The Texas College Savings Plan's blended age-based portfolio for children 18 years and older has 50% of its assets in the fund. The portfolio fell 21% in 2008.

Kevin Deiters, director of educational opportunities for the state comptroller's office, says state officials are disappointed in the fund's performance but haven't made any decisions about whether to replace it.

Other examples:

•ScholarsEdge, a 529 plan offered by New Mexico, has 25% of its age-based portfolio for children 18 and older invested in the fund, according to the plan prospectus. That portfolio dropped 17% last year.

•Maine's NextGen College Investing Plan offers a balanced fund portfolio that has 40% of its assets in the fund. Through Nov. 28, the most recent information available, the portfolio was down more than 42%.

•Oregon's College Savings Plan has 20% of its ultra-conservative portfolio — aimed at parents of children who are in college — in the Core Bond fund. That portfolio fell 9% last year.

In August, Cameron Hyde, an architect in Portland, moved about $40,000 to the in-college portfolio to cover expenses for his son, Owen, a freshman at Lane Community College in Eugene. He's lost more than $4,000.

Hyde thought the portfolio was extremely safe. "It's like retiring," he says. "When you need the money, you need to take the risk out of it."

Oregon's College Savings Network has launched an investigation with the state attorney general's office to determine whether Oppenheimer misled investors, says Michael Parker, executive director of the network.

Oppenheimer has installed new leadership for the fund's management team, spokeswoman Jeaneen Pisarra said in an e-mail.

"Virtually every type of investment has felt the effects of extraordinary events in stock and bond markets around the world," Pisarra said. "Core Bond fund was not immune to those conditions."