See below for my latest views on Champion Income Fund...

http://www.mpbn.net/News/MaineNews/tabid/181/ctl/ViewItem/mid/1858/ItemId/9643/Default.aspx
State's College Savings Fund Suffers Losses
March 10, 2009     Reported By: Irwin Gratz

The state's college savings fund known as NextGen has stopped offering a series of investment portfolios from mutual fund company Oppenheimer.  The Finance Authority of Maine, which runs NextGen, says some of the funds in those portfolios have suffered "unusual" losses and it's asking the Maine Attorney General's office to investigate. 

It's been a bad few months for many stock and bond funds, but for the Oppenheimer Champion Income Fund, it's been a near wipe out, with fund shares losing 80 percent of their value last year.

"It's really tragic because these funds were portrayed as conservative investments," says Andrew Stoltmann, a Chicago attorney who is representing some Oppenheimer clients who've filed arbitration claims against the company. "In reality, the fund was much more similar to that of a hedge fund, than the conservative bond fund that it was portrayed as."

The Champion fund prospectus says it seeks high current income by investing mainly in high-yield, lower-rated fixed income securities, what are often called "junk bonds." It also says it may invest in other debt securities.

But Finance Authority of Maine acting Chief Executive Elizabeth Bordowitz says as Champion Fund's numbers tanked late last fall, FAME reviewed Oppenheimer's investments and was disturbed at what it found. "There's certainly an article in Morningstar that they've put out publicly that suggested these funds had particularly high leverage.  And, so that was, of course, one of the points that we were looking at:  how the fund invested and whether they may or may not be over-leveraged."

According to that article by Eric Jacobson of Morningstar, the securities rating company, some of that leverage was in "derivative" investments that Oppenheimer didn't list on its balance sheet, meaning even the fund's managers may not have been aware how much risk they'd assumed.  

But attorney Stoltman says that only contributed to the basic problem. "Every state has a state securities act that mandates all risks must be fully disclosed and must be detailed to the individual client.  All 50 states have a state securities act and under each act there's a specific misrepresentation and omissions section that would trigger liability if it's violated."

The Finance Authority has asked the Attorney General's office to review the operation of the Champion Fund and two others:  the Core Bond Fund, which fell 35 percent while similar funds posted small gains, and the limited term government fund, which also lost money in a sector where most other funds registered small gains.

People who open NextGen accounts get to choose from a menu of "portfolios" to invest their money.  Acting Chief Executive Elizabeth Bordowitz says FAME has removed the Oppenheimer portfolios from that menu. 

But she says people already with such accounts can, for now, continue hold them and even make new contributions.  "People chose to be in this portfolio and Oppenheimer Funds have performed, really very well for most of the time we have had them in the NextGen portfolios.  And so I think investors need to consider their options.  I think they should take a look at this and they should determine whether they still have an interest in investing in Oppenheimer Funds.  I think it's prudent for investors to review their investments regularly."

One factor for those people to consider is closing an existing Oppenheimer portfolio account would lock-in any losses already suffered.  Attorney Stoltmann is pursuing 10 arbitration cases against Oppenheimer and expects to file another 15 to 25.   Stoltmann also says he's heard rumors that other states attorneys general are considering possible legal action against Oppenheimer.  

The Maine Attorney General's office confirms it has launched an investigation at FAME's request, but because it's an on-going investigation, a spokeswoman had nothing else to say about it.   A spokeswoman for Oppenheimer Funds also said it has no comment on the matter.