Bloomberg News

Oppenheimer to Pay $35 Million Over SEC Mutual Fund Claims

June 06, 2012

OppenheimerFunds Inc. will pay $35 million to resolve U.S. regulatory claims it misled mutual-fund investors about exposure to commercial mortgage-backed securities amid credit-market turmoil in late 2008.

Investment management and sales units at OppenheimerFunds, a unit of Massachusetts Mutual Life Insurance Co., inadequately disclosed two funds’ use of leverage that increased risk and made misleading statements about losses as markets froze, the Securities and Exchange Commission said today in an administrative order. The company agreed to settle the claims without admitting or denying wrongdoing.

“Mutual fund providers have an obligation to clearly and accurately convey the strategies and risks of the products they sell,” SEC Enforcement Director Robert Khuzami said in a statement. “Candor, not wishful thinking, should drive communication with investors, particularly during times of market stress.”

OppenheimerFunds used derivatives called total return swaps to gain exposure to commercial mortgages without buying actual bonds, the SEC said. By mid-September 2008, declines in the commercial mortgage market drove down the net asset values of the funds, forcing them to sell in an increasingly illiquid market to meet payments on the derivatives, according to the order.

While the funds disclosed that they invested in swaps and other derivatives, they didn’t reveal that they could do so to such an extent that the total exposure could far exceed the value of its portfolio securities, making investment returns dependent on performance of bonds they didn’t own, the SEC said.

“We continue to further enhance our fund disclosure, risk management and compliance controls and procedures to ensure those functions are best in class,” OppenheimerFunds Chairman and Chief Executive Officer Bill Glavin said in a statement. “We attach the utmost importance to our regulatory obligations and our fiduciary duties to our advisory clients, and we will continue working every day to create value for our investors while helping them to effectively manage risk.”

To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net


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