State seals Bright Start deal
TERRY SAVAGE email@example.com Dec 22, 2009
Illinois Attorney General Lisa Madigan (left) and State Treasurer Alexi Giannoulias signed off on a $77.25 million settlement for losses in the state�s Bright Start 529 college savings plan.
Updated: May 3, 2013 12:15PM
State Treasurer Alexi Giannoulias and Illinois Attorney General Lisa Madigan have finally signed off on a $77.25 million settlement for losses in the state's Bright Start 529 college savings plan.
Families with money in the affected Core Plus bond fund in the period between Jan. 1, 2008, and Jan. 25, 2009, will recoup a substantial portion --but not all -- of their losses from OppenheimerFunds, Inc.
Giannoulias called the settlement gratifying, noting that Illinois led the way in investigating and confronting Oppenheimer, which managed plans for five other states.
"This landmark settlement holds Oppenheimer accountable for its actions," he said, "and provides a positive resolution for families who cannot wait to pay for college costs."
Overall losses for the plan's Core Bond fund during that one-year period are estimated at about $150 million. A subsequent market rebound recouped some value. But the settlement restores slightly more than half of the losses shareholders suffered in the mismanaged fund.
The money owed to Illinois and five other states is being set aside in a mandated escrow account, to be distributed by an independent administrator. Account owners will receive release forms in April 2010. Then they can elect to have the money deposited into their existing Bright Start account or sent in the form of a check, which still must be used for college expenses in order to avoid a tax penalty.
When the money is finally distributed, it will put an end to the anguish of many families who had been told they were investing in one of the most "conservative" funds in the Bright Start family. Many had counted on using that money last fall, as college tuition bills started arriving. For the past year, they have been scrambling to find the money to start, or stay in school.
The maddening story played out in the midst of the financial collapse in the fall of 2008. OppenheimerFunds' management team for the "Core Plus" bond fund had purchased risky derivatives, instead of the "investment grade bonds and U.S. government securities" promised in its prospectus. The Oppenheimer fund managers subsequently left the firm.
By year-end 2008, the Core Plus bond fund had lost 38 percent of its asset value -- while similar funds managed by other companies had actually eked out 5 percent gains for the period. U.S. government bonds had become an attractive investment in scary times, pushing their prices higher. But derivative bets made in the Core fund caused huge losses.
We first started tracking the fiasco in a Savage Truth column Jan. 14, 2009. Two weeks later, Illinois created a new lineup of conservative bond funds, designed to replace the Oppenheimer Core Plus bond fund. No new money has been invested in it since Jan. 26.
About 4,400 accounts -- or fewer than 3 percent of Bright Start account holders -- had all of their college money in Core Plus. But many other fund accounts were exposed to the losses through their investments in "age-based" funds. All will receive a proportionate return of their money, based on their exposure.
This settlement required nearly a year of hard work by state officials. But investors are getting back only a bit more than 50 cents on the dollar. The lawyers for the state say that's a good result, that pursing litigation could cost a fortune, take years, and might not get a better result.
But I still think it's a sad day when stellar names like OppenheimerFunds and its parent company, MassMutual, can get away with such egregious mismanagement, and only be required to reimburse half of the losses. And that's The Savage Truth.
Terry Savage is a registered investment adviser.