Tuesday, December 22, 2009

OppenheimerFunds Agree to Pay $77 Million for Mismanagement of 529 College Savings Plan But Damaged Caused May Be Irreparable

During the pre-Christmas hustle and bustle of gift buying and bargain shopping, it is not unusual for many parents and God-parents to forego temporal gifts such as toys, clothing, electronics (especially cell phones), and to give more substantive gifts to their children (and God-children) by establishing 529 college savings plans for the benefit of the children. Imagine my surprise when I discovered while researching 529 college savings plans for my God-children that OppenheimerFunds Inc. had agreed to pay Illinois residents $77.2 million, to resolve a one year investigation into OppenheimerFunds’ mismanagement of the State of Illinois’ 529 college savings plan, known as the Bright Start Fund.

At first I did not understand how parent-investors in a theoretically long-term, conservative investment for the benefit their children could have a viable cause of action against OppenheimerFunds for losses that the Bright Start Fund had incurred. After all investments by definition carry a certain level of risk; returns are not guaranteed, and losses can very possibly occur. As I continued deciphering the various articles that was hitting the news wire, press releases, and the complaint itself, I realized that it was not the losses that the parent-investors were incensed about, but the inability to send their children to college, as a result of the Bright Start Funds’ unexpected losses. It was the lack of adequate disclosure to parent-investors regarding the Bright Start Funds’ aggressive management strategy and risky investment philosophy, which contradicted the language in Bright Start Fund program brochures and prospectus that described the investment style as conservative, and focused on capital preservation for college bound students. The parent-investors relied on the disclosure language contained in the prospectus, to the detriment of their children’s future.

Within approximately one year the Bright Start Funds’ underlying fund, Core Plus Fixed Income Strategy Fund, lost approximately $150 million (so much for capital preservation). The approximately $150 million loss seemed excessive in comparison to the bond index that Bright Start Fund used as its benchmark. The discrepancy was discovered by Illinois Treasurer Alexi Giannoulias and he encouraged Illinois Attorney General Lisa Madigan to begin an investigation. OppenheimerFunds had marketed Bright Start Fund as a conservative investment vehicle “appropriate for beneficiaries who were at or near college age.” However, Core Plus Fixed Income Strategy Fund, an underlying fund within the Bright Start Fund, contained very risky investment exposure in highly leveraged mortgage derivatives. It was the underlying fund which resulted in excessive losses for Bright Start Fund and for parent-investors. This fund within a fund investment strategy is why I do not recommend mutual funds as a primary investment vehicle. It is never clear to what degree investments in the underlying funds will impact the main fund, nor whether the investment strategy of the fund managers within the underlying fund is in sync with the investment strategy of the main fund.

The Bright Start Fund was marketed to numerous states to be operated as a particular state’s own 529 college savings program. The lack of adequate disclosure in the prospectus vis-a-vis the Core Plus Fixed Income Strategy Funds’ highly leveraged risky investment strategy was the same for every state in which Bright Start Fund was marketed as the particular states' 529 college saving program. Oppenheimer spokeswoman Jeaneen Pisarra stated that “the firm has also reached a tentative $67 million settlement with New Mexico… and agreed to pay $20 million to settle a lawsuit filed by the state of Oregon.” Additionally, the OppenheimerFunds is in talks with Maine, Nebraska and Texas regarding tentative settlements. I am sure that there will be many more states which permitted OpenheimerFunds to operate the Bright Start Fund as the state’s 529 college savings program, with which OppenheimerFunds will be “in talks” regarding tentative settlements. Nevertheless, OppenheimerFunds maintained that it "acted lawfully and in good faith in managing the investments in the Bright Start program."

However, some parent-investors don’t believe that the settlement is adequate. Joseph Sinopoli stated, "I think it's a lousy deal." Mr. Sinopoli invested in the Illinois' 529 college savings plan, Bright Start program, to help pay for his children’s' college tuition. He specifically wanted a fund with very little risk. However, the OppenheimerFunds’ managers "did something that they were not permitted to do under the mandate of the fund. They took very risky bets and lost half the money…It was fraud. I think they stole the money." It is clear that Sinopoli was not happy that Illinois Attorney General Lisa Madigan and State Treasurer Alexi Giannoulias settled for $77 million, when OppenheimerFunds lost $150 million. The settlement only requires OppenheimerFunds to repay half of what was lost. However, Giannoulias stated that they wanted to “…get as much money as quickly as possible for families that would be the best thing for the state of Illinois."

I have a basic question-- what about the children? What is in their best interest? For many parent-investors OppenheimerFunds’ conduct will undoubtedly result in their inability to pay for their children’s college. What is the market price for a dream deferred to borrow the language of prophetic American poet Langston Hughes? The sad reality is that there are times when there is no adequate legal remedy for the harm that is suffered, as a result of corporate misconduct. As Mr. Sinopoli astutely points out, "if this was the sole source of funding for some families for college, they're probably in trouble. I'm sure there's a lot of pain because of these losses."

Lydie Nadia Cabrera Pierre-Louis


  1. I saw in the WSJ earlier this week that household wealth declined 13% in the last decade. 10 years ago the S&P 500 was at 1469, today its at 1120. That is a 25% decline.

    That is many, many deferred dreams. The American Dream is under siege.

  2. I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.



  3. Lydie Nadia Cabrera Pierre-LouisJanuary 2, 2010 at 6:40 PM


    Thank you for your comment. It is much appreciated. The corporate justice blog provides a critique of our current corporate paradigm. We believe that corporate manifesto of profit maximization to the exclusion of all is not a sound corporate policy. We need only look to the suffering of our neighbors and or families for confirmation. We will keep blogging. Please keep reading.

  4. This is deeply saddening, especially with the state of our economy being what it is. Some of these families could now be unable to come up with the money needed for college because of unemployment and the settlement will not cover what they invested. I thought and am sure these families thought that 529s were safe investment options. It is situations like this that make people that were already skeptical of investing even more so.

  5. Given the issue at stake in the article, basically the future education of children, it should be alarming to the average parent that this mismanagement occurred with a "fixed income" type of fund. Investing in average mutual funds is one thing, but when someone invests in "fixed income" securities for their child's college fund, they expect, and rightfully so, that the principal will be intact when the money needs to be withdrawn. 529 plans are special investments, and, accordingly, the legislature should make every attempt to strengthen the severity of civil and criminal penalties for corporate malfeasance in administering these plans. After all, is there really any difference between the trustee of a child's trust fund, and the entity that is supposed to be investing a 529 plan in accordance with an investor's desire for risk? Good topic...