The Reusche family of Elburn invested in the most conservative option within the Illinois Bright Start college savings plan for their four children.
They were shocked to see a 38 percent loss of value at the end of 2008 since this government securities fund should not have been affected by the stock market decline.
After waiting months for an explanation from state officials, last week the family filed the first arbitration involving the Illinois plan.
Well-known consumer advocate and plaintiff's attorney Andrew Stoltman filed the claim on behalf of Tom and Leigh Ann Reusche, whose 19-year-old daughter, Nadya, will be a sophomore this fall at DePauw University in Indiana.
The Reusches had started early to save for college for their four children, explaining, "We were always savers because we valued and wanted a college education for our children, as our parents had done for us."
The Reusches were very risk-averse and chose the "Core Plus" bond fund for their initial investment of $50,000 for each child. By January 2008, they had accumulated a total of $515,000 for their four children.
In September 2008, they made their first withdrawal of $32,832 to pay for Nadya's first year of school.
But when they received their year-end statement for December 2008, they were shocked to find a balance of only $303,000 in their account. It wasn't the fault of the market because this was the safe, government securities fund that should have held its value and even gained as interest was added.
After reading our column in January and doing her own research, Leigh Ann Reusche contacted Bright Start in early February, demanding information. She says she received only a form letter.
At the same time, Stoltmann was also investigating the situation. He realized the only legal process available to Bright Start investors was binding arbitration, not a lawsuit.
Stoltmann created a Web site, recover529losses.com, to reach investors. He says the Reusche filing was the first of more than a dozen he has lined up, in an attempt to get investors' money back, plus damages and legal fees.
"I think this is extraordinarily egregious conduct, and I think the arbitrators will not look favorably on Oppenheimer. They created a derivatives-laced hedge-fund type of investment that was portrayed to the public as a conservative bond fund," he explained.
Told of the pending settlement over the weekend, Stoltman replied, "Let's see the final result. Nine out of 10 times, the ultimate recoveries by a state are much smaller than what I can settle for with my individual clients. ... If the state recovers all the money, I'd recommend she take the settlement. But if they can't get back all the money that was lost, then I'm going after them."
A risk to clients is that they receive only the amount of their losses from an arbitration proceeding and must pay their attorney one third of the recovery.
Another risk is that even in winning, the process could take time. The Web site for the Financial Industry Regulatory Authority (finra.org) shows that, through April, there have been 2,403 new arbitration cases filed, up 81 percent from a year ago. In 2008, the average "turn-around" from filing to resolution was 13.5 months.