Andy Whiteman recently concluded a case involving the Oppenheimer Champion Income Fund. On May 4, 2010, a panel of arbitrators appointed by FINRA awarded damages, interest, costs and attorney’s fees to a North Carolina couple whose broker recommend the Fund in July 2008.

[Click here to view the arbitration award in Carey v. Genworth Financial Securities Corp., FINRA Case No. 09-01924]

In the Carey v. Genworth case, the broker recommended that the claimants invest most of their retirement savings in the Champion Income Fund. The broker shifted 100% of husband’s IRA account to the Fund in July 2008, after his wife requested that her husband’s assets be moved from equity mutual funds to a safer investment.

The value of the Fund immediately plummeted.

Oppenheimer Champion Income Fund price chart
(January 1, 2006-April 9, 2010)

The Champion Income Fund was not a safe investment

The Champion Income Fund owned a highly risky collection of lower-grade corporate bonds, foreign corporate and government bonds, derivatives, swaps and other exotic investments. Oppenheimer’s prospectus dated January 28, 2008, contains the following disclosures:

WHO IS THE FUND DESIGNED FOR? The Fund is designed primarily for investors seeking high current income from a fund that invests mainly in lower-grade domestic and foreign fixed-income securities. Those investors should be willing to assume the greater risks of short-term share price fluctuations and the special credit risks of short-term share price fluctuations and the special credit risks that are typical for a fund that invests mainly in lower-grade domestic and foreign fixed-income securities. Since the Fund’s income level will fluctuate, it is not designed for investors needing an assured level of current income. The Fund is intended to be a long-term investment and may be part of a retirement plan portfolio. The Fund is not a complete investment program. (emphasis added)

Beginning in late 2006 or early 2007, the Champion Income Fund altered its investment policies and began making large purchases of high risk derivatives involving mortgage-backed securities and credit default swaps. The Champion Income Fund no longer invested mainly in a diversified portfolio of high-yield, lower-grade, fixed income securities, but instead bet heavily on risky derivatives, including total return swaps and credit default swaps that cost Fund shareholders hundreds of millions of dollars in losses. The Fund also made substantial gambles on volatile mortgage-backed securities and on the bonds of troubled companies such as Lehman Brothers, AIG and General Motors, at a time when those companies were in deep financial crisis.

Credit default swaps are essentially insurance contracts that protect investors against bond or loan defaults. Through September 2008, the Fund was selling credit default swaps on troubled companies such as Lehman Brothers, AIG, General Motors, and Tribune Company, all of which later failed, filed for bankruptcy, or received massive government bailout money. The Fund took bets on some of the riskiest derivatives available. The Fund also made large investments in mortgage-backed bonds issued by companies such as Washington Mutual, Fannie Mae, Freddie Mac, Lehman Brothers and Morgan Stanley.

As a result, the Champion Income Fund experienced an 82% drop in net asset value in 2008, one of the worst showings among roughly 150 U.S. high-yield debt funds. In contrast, the average high-yield debt fund was down about 32% in 2008 and has recovered substantially since then. The Champion Income Fund is currently trading at $1.89 per share.

What are the Responsibilities of a Selling Broker-Dealer

FINRA regulatory pronouncements spell out the duties of a broker-dealer to its customer when recommending the purchase of a bond fund. Two of those notices – Notice to Members 04-30 and Regulatory Notice 08-81 – remind members of their duties when selling high-yield bond funds. Those duties include:

• The duty to perform a reasonable-basis suitability analysis in order to understand the terms, conditions, risk, and rewards of bonds and bond funds before permitting them to be sold to customers.
• The duty to perform a customer-specific suitability analysis before a broker recommends it to that customer.
• The duty to provide a balanced disclosure of the risks, costs, and rewards associated with a particular bond fund and to provide a copy of the current prospectus.
• The duty to provide adequate training and supervision of brokers who sell bonds and bond funds.
• The duty to implement adequate supervisory controls to ensure compliance with NASD and SEC sales practice rules

[Click here to view Notice to Members 04-30 and Regulatory Notice 08-81]

In the Carey case, claimants’ evidence showed that Genworth failed to comply with its duties under the two FINRA notices.

Contact us if you have Questions

If your broker sold you or your client the Oppenheimer Champion Income Fund in 2008, we would be pleased to review your case and its prospects for a lawsuit or arbitration. Hartzell & Whiteman attorneys have significant experience litigating cases involving securities issues. We represent individuals and businesses who have suffered significant financial losses resulting from fraudulent investment schemes or violation of securities laws and regulations.

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