Standard investment industry warnings about reading the prospectus would have done little good to investors in two Oppenheimer bond mutual funds, whose misleading statements cost the fund company $35 million in SEC sanctions.
According to an SEC investigation, OppenheimerFunds got caught on the wrong side of a bet on commercial mortgage-backed securities (CMBS) in the depths of the credit crisis in late 2008.
In findings announced Wednesday, the SEC said Oppenheimer used total return swaps (TRS) to gain leveraged exposure to CMBS in two of the company’s funds: the Oppenheimer Champion Income Fund, a high-yield bond fund, and the Oppenheimer Core Bond Fund, an intermediate-term bond fund.
“When declines in the CMBS market triggered large cash liabilities on the TRS contracts in both funds and forced Oppenheimer to reduce CMBS exposure, Oppenheimer disseminated misleading statements about the funds’ losses and their recovery prospects,” the SEC said in a release.
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The release quotes SEC Associate Director Julie Lutz saying, “These Oppenheimer funds had to sell bonds at the worst possible time to raise cash for TRS contract payments and cut their CMBS exposure to limit future losses. Yet, the message that Oppenheimer conveyed to investors was that the funds were maintaining their positions and the losses were recoverable.”