Updated: May 3, 2013 12:15PM
One of the remaining obstacles to settling the losses and distributing restitution to Illinois Bright Start investors was removed late last week. The state of Oregon, one of six states that had college savings plan funds invested in the supposedly conservative Oppenheimer Core Bond fund, dropped its lawsuit against the fund management company and agreed to settle for a $20 million payment.
Now that all six states have agreed to participate in a settlement, it is hoped that the process of actually moving the money can proceed. Last summer, Illinois officials confirmed that they had reached agreement with Oppenheimer Funds Management to reimburse $77,230,000 in fund losses to the state program.
You may remember that the losses were triggered by an incredible 38 percent loss of market value in the Bright Start "Core Plus" bond fund in the fourth quarter of 2008. The fund was supposed to be invested in "investment grade bonds and U.S. government securities," but also used derivatives, which caused the losses.
This fund was used by parents who wanted to limit risk as their child approached college age. Similar funds managed by other investment companies showed a positive return of around 5 percent in 2008, as short-term bond prices moved up when the Fed pushed interest rates down.
Oppenheimer Management has steadily denied culpability. Yet, a series of "delicate negotiations" has dragged on for months, while many Illinois families had to resort to borrowing money in this tough economy to fund their children's college education. The news about Oregon's participation in the deal removes a critical obstacle that should make it easier to accelerate the process of distribution. Some observers say that the fund-management company has an incentive to take the write-off for this distribution before the end of the year.
Closer, but not the end
But individuals and families shouldn't get their hopes up about getting the money in time for spring tuition bills. The funds will be distributed to an escrow account, where they must remain for at least 90 days. That would ensure that no claims against Oppenheimer could be lodged against the distribution in the event of financial problems for the management company.
So even if the funds are moved to the escrow account by year-end, they could not be assigned back to the investment accounts before early April. And that process of directing which investment accounts receive what portion of the settlement is another tangled web. Each state can create its own formula for assigning its settlement funds.
But that's a story for a future date. In the meantime, hundreds of Illinois families may be one step closer to getting at least a portion of their investment returned.
This story won't be over until each family gets as much of its money back as possible. And this column will follow every twist and turn as the money wends its way back to fund shareholders. But it sure would make a nice "Christmas present" for many hopeful students and their parents. That's the Savage Truth!
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.