Securities Law - College Fund Losses In Bright Start Plan

Do not assume that just because you invested in what you consider a conservative college fund for the education of your children that your investment is safe.

Lisa Madigan, the Illinois Attorney General, was a leader in obtaining a 77.2 Million dollar settlement from Oppenheimer Fund due to Oppenheimer’s alleged mismanagement of a fund with Illinois 529 College Savings Program. Lisa Madigan, the Illinois Attorney General, and the State Treasurer, Alexi Giannoulias, reached a settlement with Oppenheimer resolving an investigation into the firm’s mismanagement of the “Core Plus Fixed Income Strategy” fund. Illinois began to investigate Oppenheimer’s investment strategy after Core Plus lost about 38% of its value in the year 2008. The settlement means a recovery of about 50 cents on each dollar lost. Core Plus investors who incurred losses between January 1, 2008 and January 25, 2009 are eligible to participate in the recovery.

On December 22, 2009, Lisa Madigan stated “As a result of this agreement, Illinois families who invested in the funds will be able to recover substantial losses in their college savings account in a timely manner while avoiding the uncertainty of delay that would accompany lengthy and expensive litigation.” Five other states are negotiating settlement agreements with Oppenheimer. Those settlements so far range between 67 million and 20 million.

The Core Plus program was marketed as a conservative investment option for families with children near college age. However, suspicions emerged when Core Plus suffered losses of about 40% compared to the Bond Index used to benchmark the fund. The Bond Index showed gains of more than 5%.

Oppenheimer acknowledged the Illinois settlement but admitted no wrongdoing. It stated “Oppenheimer funds agreed to the settlement to resolve the investigation that commenced after the severe market volatility that impacted all investments in 2008, to enable the company to move ahead with its mission to provide high quality investment management services.” High quality management services! Why did they settle for $164 Million?

Investigators determined that Core Plus actually contained serious and risky investments and was leveraged by Oppenheimer’s management team. The risks were never disclosed to Illinois officials. Not surprising, the Investment Team at Oppenheimer responsible for the Core Plus strategy is no longer with Oppenheimer. Core Plus has been liquidated and replaced with alternate fixed-income investment options.
The lesson - monitor investment results frequently. Don’t wait for Lisa Madigan to bail you out.

Edward X. Clinton, Sr.
Copyright 2009