State initiates probe of OppenheimerFunds
Subpoenas issued after questions arise from sharp decline in college savings plan fund

January 26, 2009

Illinois has served subpoenas on OppenheimerFunds, Inc., the fund manager responsible for investing money in Illinois’ Bright Start Savings Program and other 529 plans nationwide that have recently suffered serious financial losses.

Illinois State Treasurer Alexi Giannoulias, whose office administers the Bright Start program, forwarded information to Attorney General Lisa Madigan’s office, which initiated an investigation. The Attorney General’s Office issued subpoenas last week to officials at OppenheimerFunds seeking documents related to the OFII Core Plus Fixed Income Strategy (“Core Plus”) as well as other funds.

As the state’s chief legal officer, the Attorney General’s Office issued the subpoenas under the Consumer Fraud Act to investigate OppenheimerFunds’ management of funds in Bright Start. The Attorney General is also working with the Illinois Secretary of State’s Securities Department on this matter.

Core Plus is one of the many funds within the 529 plan and was included in certain investment portfolios that are considered relatively conservative.

The Core Plus strategy offered by Bright Start fell by 38 percent in 2008, losing in excess of $85 million in market value. By comparison, the program’s benchmark grew by 5.24 percent.

Giannoulias noted there is also evidence that OppenheimerFunds created excessive leverage through the use of derivative instruments within the underlying investments of certain portfolios and is considered a higher risk strategy.

“Core Plus’ performance is unacceptable and even more staggering when you consider that families thought they were investing in relatively conservative portfolios as their children neared college age,” Giannoulias added. “They’re now astonished to learn that some of their investments declined by upwards of 40 percent of their value at the worst possible time.”

Similar declines occurred in other OppenheimerFunds-managed college savings plans, including those in Oregon and New Mexico.

In Illinois, about 2.5 percent of Bright Start portfolios sustained the 38 percent loss, as just 4,426 of the total 178,805 portfolios were entirely invested in the Core Plus strategy, but other portfolios had lesser degrees of exposure.

To stem the losses, the Treasurer’s Office directed OppenheimerFunds in November to eliminate investors’ exposure to Core Plus when making future contributions to Bright Start. Beginning on Dec. 4, all new contributions were re-directed from Core Plus and into short-term U.S. Treasuries. Replacement funds selected by the Treasurer’s Office featuring Vanguard Group and American Century investments will be rolled out today (Jan. 26).  No existing money will be cashed out of Core Plus to avoid locking in losses experienced in 2008.

“We have already taken steps to reallocate assets and direct new contributions away from Core Plus to avoid locking in losses for participants,” Giannoulias said. “Still, we need to fight on behalf of families to make up for those declines and make them whole for qualified expenses now.”

Giannoulias also noted that unlike many other states, Illinois Bright Start investors have the option of investing in age-based and choice-based Vanguard index portfolios, which have no exposure to Core Plus. In April, 2008, Morningstar, Inc. ranked Bright Start among the Top Five 529 programs in the nation based on its low fees and array of investment options.

Despite the stellar ranking, the Treasurer’s Office raised numerous questions after disappointing earnings reports and began requiring OppenheimerFunds to submit weekly performance updates. Subsequently, the state’s investment policy committee approved a plan to reallocate the funds in Core Plus in early 2009, but shortened the timeline around the time that reports surfaced that OppenheimerFunds created leverage in violation of the state’s contract. On Dec. 15, OppenheimerFunds announced that Core Plus Team Leader Angelo Manioudakis resigned.

OppenheimerFunds took over as program manager of Bright Start in July 2007. It ranks as one of the nation’s largest asset management companies with more than 45 years of financial industry experience. Bright Start, which was established in 2000, has approximately 180,000 portfolios and nearly $2 billion in assets.