We have completed our investigation into the Oppenheimer Champion
Income Fund (OCHBX, OPCHX and OCHCX) and the Oppenheimer Core Bond Fund (OPIGX) Fund and plan on filing FINRA arbitration
lawsuits to recover investment losses in the Funds for fraud and the failure to disclose the material risks of the Fund. Unknown
to most clients, the Funds were defacto hedge funds, investing in extraordinarily risky derivatives that were highly
illiquid.
Unfortunately, in the solicitation of the Funds, these
risks were not made known to investors. According to the findings of our investigation, the Funds were pitched to investors
either as a conservative high income fund (Champion) or conservative intermediate fund (Core) or at least a high
income or intermediate funds that were not dramatically riskier than the high income/intermediate fund peer group.
According to our investigation, investors at major brokerage firms like Wachovia, Merrill
Lynch, Linsco Private Ledger LPL, Citigroup Smith Barney, ING, UBS, Gunn Allen and Stifel were not informed of the true risks
of the Fund. As a result, many investors who thought they were receiving a high income fund with the standard risks associated
with it instead have suffered losses of approximately 80% in 2008 and 35% in the Core Bond Fund. The Champion Fund dropped
a stunning 55% in November of 2008 alone. For calendar year 2008, Champion Income has lost 79.1%, a record eclipsed only by
a high income fund of southern based Regions.
The verbal representations
made by financial advisors, the marketing material and even the prospectus portrayed the Oppenheimer Champion Income Fund
as either conservative or at least no riskier than the average high income fund. This was highly misleading. For example,
even the revised prospectus that was published in 2008, after the meltdown began, portrays the Fund as appropriate for clients
who were retired and makes no disclosures about the Fund being dramatically riskier than its peer group. The prospectus states
“In selecting securities for the Fund, the overall strategy is to build a broadly diversified portfolio to help moderate
the special risks of investing in high-yield debt instruments.”
Rather
than making meaningful, detailed disclosures about the risks of the Oppenheimer Champion Income Fund, instead, generic, boilerplate
disclosures were made. The disclosures were the same sorts of disclosures virtually every mutual fund made. The disclosures
did not provide the degree of clarity needed by investors to determine the true riskiness of these funds.
Summary of Wrongdoing: Undisclosed Bets In High Risk Derivatives
The Fund took a massive bet in high risk derivatives in the form of mortgage backed
securities and credit default swaps. The full risks of the Fund’s illiquid, speculative derivatives were not meaningfully
disclosed to investors. The Champion Income Fund was portrayed as a garden variety high income fund. Unfortunately, starting
in late 2006, Angelo Manioudakis, the 42 year old head of the firm's Core Plus team responsible for managing the Fund,
concentrated the Fund in total-return swaps.
These are highly illiquid,
speculative and complex agreements between parties to exchange cash flows in the future based on how a set of securities performs.
Specifically, the Fund was betting that top-rated commercial mortgage-backed securities would rally in 2008. The Fund gambled,
and lost, with money for investors that was not supposed to be gambled with.
Additionally, the Fund was also concentrated in credit-default swaps (CDSs). The CDSs declined $238 million through
September alone. CDSs are basically insurance contracts that protect investors against bond and loan defaults. In exchange
for being on the hook to pay out for such issues, CDS sellers receive a stream of interest payments.
This massive gamble by the Champion Income Fund led to a Fund implosion much worse than even the
NASDAQ. As the market for office buildings and other commercial properties deteriorated amid the slowing economy, the Fund’s
value cratered. The swaps were down $47 million by late September 2008. Numbers for October and November have not been released
yet but it is certain they will be as poor, if not worse.
Selling
CDSs is extremely risky and speculative when insuring companies are already struggling with credit problems. According to
our investigation, through at least September 2008, the Fund was selling CDSs on troubled companies including Lehman Brothers
Holdings Inc., American International Group Inc., General Motors Corp. and newspaper company Tribune Co. Many of those firms
have collapsed, filed for bankruptcy or otherwise had problems leaving holders of the Fund financially devastated.
According to our finding, while mutual funds can invest in derivatives, the Fund took
a massive bet in some of the riskiest derivatives available. These risks were not adequately disclosed to purchasers in any
other manner than cursory, boiler plate disclosures. The derivatives utilized added leverage to the Fund because they allowed
the Fund to bet on more securities than they actually hold in the portfolio. This exacerbated losses when the Fund was already
declining. The risks of the Fund made it much more similar to a hedge fund than the conservative high income fund it was portrayed
to clients in marketing material and sales pitches.
According to
our findings, the Champion Income Fund also increased its gamble, in effect doubling down, on falling mortgage related bonds
in 2008. For example, mortgage securities tied to Washington Mutual Inc. with a $9 million principal value were valued at
only $3 million at the end of September 2008. A set of five Freddie Mac mortgage-backed securities with a combined principal
amount of $20 million were valued at just $2.5 million. As defaults continued to rise, the mortgage related holdings plummeted.
While this sort of sector bet might be appropriate for a sector fund or hedge fund, the Champion Income Fund was not meant
to be a sector or hedge fund. Many conservative clients have been financially devastated.
Even more egregiously was the Fund’s sector bet in struggling Wall Street brokerage firms.
For example, the Fund purchased Lehman bonds between June 1, 2008 and September 30, 2008 with $29 million in principal value.
Lehman filed for Chapter 11 bankruptcy-court protection in mid-September, and those bonds fell to just $144,000. The fund
also added Morgan Stanley bonds with $13 million in principal during that period. The bonds were valued at approximately $8.3
million by the end of September.
The Fund spread pain beyond its
own immediate investors. More than 10% of the Fund also was recently held by other OppenheimerFunds offerings. This includes
several funds of funds that bundle various products from the firm and at least one target-date retirement offering.
Unfortunately, after the bell is rung and clients in the Fund have lost hundreds of
millions, Oppenheimer now takes window dressing steps to make it appear the firm is acting in the clients’ best interests.
For example, the firm, according to Bloomberg, brought on Geoffrey Craddock as the "new director of risk management and
asset allocation." His job is to monitor risk for OppenheimerFunds' stock and bond offerings. Oppenheimer Funds also
put $150 million in the Fund last month to help boost liquidity.
Evidencing
the belief by advisors (and even Oppenheimer) the Fund was to be conservative in its credit posture was the holdings by other
conservative Oppenheimer funds in the Champion Income Fund. For example, the $290 million Oppenheimer Conservative Investor
Fund had 4% of its holdings in the Champion Income fund through November 2008. The Oppenheimer Conservative Investor Fund
is down almost 40% this year, making it one of the worst-performing conservative allocation funds followed by fund tracker
Morningstar Inc.
Thousands of investors were pitched the Champion
Income Fund as a relatively conservative, high income bond fund. The holders of the fund utilized it as a place to place either
their conservative funds or at least funds that were not to be subject to a high degree of volatility. In reality, the fund
was leveraged with high risk derivatives and asset backed securities. Unfortunately, these risks were not made known to investors.
To determine if some or all of the investment losses in the Champion
Income Fund are recoverable through a FINRA securities arbitration lawsuit, please contact Stoltmann Law Offices in Chicago.
We work on a contingency fee basis for investors across the U.S.
Stoltmann
Law Offices PC
10 S. LaSalle, 35th Floor
Chicago, IL 60603
312.332.4200
www.InvestmentFraud.PRO
Andrew@stoltlaw.com
312.332.4200
