Category Archives: Oppenheimer Funds

Oppenheimer & Co., one of the most sanctioned and criticized brokerage firms on Wall Street, has been once again the subject of a massive regulatory fine (“FINRA Sanctions Oppenheimer & Co. $2.9 Million for Unsuitable Sales of Non-Traditional ETFs and Related Supervisory Failures”) according to a release issued by the Financial Regulatory Authority, Inc. (“FINRA”) on June 8, 2016.

This latest enforcement proceeding was the result of Oppenheimer having sold “leveraged, inverse and inverse-leveraged exchange-traded funds (non-traditional ETFs) to retail customers without reasonable supervision, and for recommending non-traditional ETFs that were not suitable.”

According to the FINRA release, notwithstanding the fact that “Oppenheimer’s procedures prohibited solicitation of non-traditional ETFs,” between August 2009 and September 30, 2013, “more than 760 Oppenheimer representatives executed more than 30,000 non-traditional ETF transactions totaling approximately $1.7 billion for customers.”

FINRA also found that “Oppenheimer failed to conduct adequate due diligence regarding the risks and features of non-traditional ETFs and, as a result, did not have a reasonable basis to recommend these ETFs to retail customers. Similarly, Oppenheimer representatives solicited and effected non-traditional ETF purchases that were unsuitable for specific customers.”

A complete copy of this latest regulatory enforcement proceeding can be accessed through the FINRA website at http://disciplinaryactions.finra.org/Search/ViewDocument/66217.

Moreover, a cursory review of the FINRA BrokerCheck report for Oppenheimer & Co. indicates that the firm has now been the subject of at least 83 regulatory enforcement proceedings and hundreds of customer-initiated arbitration proceedings.

Of equal and perhaps greater importance, a recent academic study (“The Market for Financial Adviser Misconduct”) found that more than one in seven financial advisers at Oppenheimer & Co. “have engaged in misconduct in their past” and that “almost one in five financial advisers at Oppenheimer & Co. have been disciplined for misconduct in the past.”

If you are an individual or institutional investor who has any concerns about your accounts and/or investments with Oppenheimer & Co., please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Oppenheimer & Co. has been charged by the SEC for violating federal securities laws while wrongly selling penny stocks in unregistered offerings on behalf of clients. Oppenheimer admitted their wrongdoing and will pay $10 million to settle the SEC’s charges, as well as another $10 million to settle a parallel action by the Treasury Department’s Financial Crimes Enforcement Network.

The SEC found Oppenheimer engaged in two courses of misconduct.  The first involved aiding and abetting illegal activity by a customer and ignoring red flags that business was being conducted without and valid exemption from the broker-dealer registration requirements of the federal securities laws. Oppenheimer failed to recognize the resulting liabilities and expenses in violation of the books-and-records requirements, and improperly recorded transactions for customers in Oppenheimer’s records. Oppenheimer also failed to file Suspicious Activity Reports as mandatory under the Bank Secrecy Act to report potential misconduct and its clients, and the firm failed to properly report, withhold, and remit more than $3 million in backup withholding taxes from sales profits. .

The second course of misconduct involved Oppenheimer again engaging on behalf of another client in unregistered sales of billions of shares of penny stocks. The firm’s liability stems from its failure to react to red flags and conduct a searching inquiry into whether the sales were exempt from registration requirements of the federal securities laws, and its failure reasonably to supervise with a view toward detecting and preventing violations of the registration provisions. The SEC’s investigation, which is continuing, discovered that the sales generated approximately $12 million in profits of which Oppenheimer was paid $588,400 in commissions.

The SEC’s order is requiring Oppenheimer to stop and abstain from committing or causing any violations and any future violations of Section 15(a) and 17(a) of the Securities Exchange Act of 1934 and Rules 17a-3 and 17a-8, and of Section 5 of the Securities Act of 1933.  In addition to the financial remedies, Oppenheimer agreed to be censured and undertake such corrective measures as retaining an independent consultant to review its policies and procedures over a five-year period.

Stock brokers and brokerage firms are being warned by the Financial Industry Regulatory Authority (FINRA) to rethink their selling strategies of 529 college savings plans.  At a recent compliance meeting in Florida, FINRA reportedly urged the brokerage community to step up its due diligence of 529 plans, as well as assume responsibility to watch over money managers associated with the plans.

In recent months, 529 plans across the country have faced increased scrutiny from state and federal regulators. In April, Oregon sued OppenheimerFunds, charging the money manager of understating the risks it took with a fund in Oregon’s college-savings plan. The fund was the Oppenheimer Core Bond Fund, and Oregon is suing OppenheimerFunds for losses totaling $36 million. 

The Oppenheimer Core Bond fund lost 36% in 2008, compared with the benchmark index, the Barclays Capital Aggregate Bond index, which rose 5.3%.

Five other states – Illinois, Maine, Nebraska, New Mexico and Texas – currently are investigating whether OppenheimerFunds breached its fiduciary duty to investors in state-sponsored 529 plans when it failed to disclose the fund’s exposure to risky mortgage-backed securities and derivatives.  In June, the Illinois treasurer’s office announced a tentative agreement to recoup $77 million from OppenheimerFunds. All five states are in talks with the company, according to a July 9 story in Pensions & Investments

Oppenheimer Funds, one of the bigger players of 529 college savings plans with $4 billion under management, has been sued by the state of Oregon for gambling on exotic derivatives in the Oregon 529 College Savings Network. Oppenheimer’s ill-fated bets eventually resulted in $36 million in losses. 

In the complaint filed April 13, Oregon contends that Oppenheimer Funds made aggressive and inappropriate investments with the Oppenheimer Core Bond, yet described the fund as a “conservative” and “ultraconservative” plan. In filing the lawsuit against Oppenheimer, Oregon becomes the first state in the nation to sue the money manager on behalf of investors in its 529 college savings plan.

According to an April 14 article in the Wall Street Journal, the Oppenheimer Core Bond fund made significantly riskier investments beginning in late 2007 or early 2008. Ultimately, those risks translated into the fund losing more than 35% of its value in 2008, plus another 10% in the first three months of 2009. By comparison, the fund’s benchmark, the Barclays Capital Aggregate Bond Index, gained 5% in 2008 and has held even this year, according to the complaint.

The investments that Oppenheimer Funds gambled on included exotic instruments and high risk debt, all of which would be considered unsuitable for individuals saving for college, says the complaint.

Total return swaps and credit default swaps further added to the massive financial losses experienced by the Oppenheimer Core Bond Fund. Specifically, the Core Bond Fund entered into agreements with companies such as Lehman Brothers, American Insurance Group (AIG), Merrill Lynch, Citigroup and General Motors, agreeing to cover losses if they defaulted on their bonds. When those companies began to experience financial difficulties, with some, like Lehman Brothers, forced to file bankruptcy, the Oppenheimer Core Fund’s liability, and losses, became huge.

Four other states: Illinois, Texas, New Mexico and Maine, have sustained similar losses in their Oppenheimer Funds managed college savings plans. They also are considering lawsuits.

A year of financial losses and investor lawsuits is about to go from bad to worse for Oppenheimer Funds. In February 2009, the company received an “F” from a Morningstar analyst for its failure to explain investing strategy changes regarding several of its bond funds. Now those funds, some of which have lost nearly 80% of their value, are the subject of probes by attorney generals in five states, as regulators investigate whether Oppenheimer Funds violated its fiduciary duty to investors.

The focus of the inquiries apparently is on 529 college-savings plans that invested in the Oppenheimer Champion Income Fund (OPCHX), which fell nearly 80% in 2008, and the Oppenheimer Core Bond Fund (OPIGX), which lost 41% of its value. Also on the states’ investigation list: the Oppenheimer Limited Term Government Fund (OPGVX) and the U.S. Government Trust (OUSNX).

Beginning late last year, Oppenheimer Funds, which is a unit of Massachusetts Mutual Life Insurance Company, became the subject of several state investigations, including those in Illinois, Maine, New Mexico, Oregon and Texas, over huge losses in state sponsored college savings plans.

As reported April 7 by Bloomberg, investors have seen $85 million vanish in just Illinois’ state sponsored 529 college savings plan because of investments made by Oppenheimer Funds in risky mortgage linked securities. Making the situation even worse: Parents were never told by Oppenheimer management about the investments nor the added risks they were unknowingly subjected to.

Ultimately, however, it was more than just toxic securities that contributed to the financial losses in the Oppenheimer bond funds. Specifically, Oppenheimer managers also bought complex, off balance sheet swap contracts that, in turn, produced a leveraging effect on the funds. Those added risks, which again were never apparent nor communicated to investors, translated into additional financial losses for investors.

Illinois has now stopped all new bond investments with Oppenheimer Funds, according to the Bloomberg article. As for Oregon’s 529 plan, two Oppenheimer Funds’ offerings have been eliminated. Oregon also is taking steps to replace OppenheimerFunds as the plan’s manager when the firm’s contract expires on Dec. 31.

In 2008, Oppenheimer Funds’s bond funds lost an average of 29%. By comparison, the average decline for bond mutual funds was 7.9%, according to Morningstar.

Meanwhile, investors both in and outside college savings plans are taking their frustration regarding Oppenheimer Funds to court, filing class action lawsuits and arbitration claims. The common theme in their complaints: OppenheimerFunds marketed and sold several of its bond funds as conservative, relatively low risk, high income investments. In reality, that was never the case.