The Securities and Exchange Commission today charged investment management company Oppenheimer Funds‘ sales and distribution arm for misleading investors about the extent of the exposure of two of its mutual funds to CMBS in the midst of the credit crisis in late 2008.
OppenheimerFunds Inc agreed to pay the $35.4 million fine to settle the charges against it.
The SEC’s investigation found that Oppenheimer used derivative instruments known as total return swaps (TRS contracts) to add substantial commercial mortgage-backed securities exposure in a high-yield bond fund called the Oppenheimer Champion Income Fund and an intermediate-term, investment-grade fund called the Oppenheimer Core Bond Fund.
The SEC said in its investigation that the 2008 prospectus for the Champion fund didn’t adequately disclose the fund’s practice of assuming substantial leverage in using derivative instruments.
When declines in the CMBS market triggered large cash liabilities on the TRS contracts in both funds and forced Oppenheimer to reduce CMBS exposure, Oppenheimer disseminated misleading statements about the funds’ losses and their recovery prospects.
