How a Muni Bond Fund Lost 45% of Investor Assets in One Year

Sparer Law Group filed the first class-action suit involving the Oppenheimer California Municipal Fund (Symbols: OPCAX, OCABX, OCACX) on February 4, 2009. The lawsuit alleges that the Fund, its manager, OppenheimerFunds, Inc., and its trustees deceived investors about the Fund’s risks in all of its offering documents from September 2006 through November 2008.

The Fund was marketed as a conservative municipal bond fund that would attempt to seek to obtain the highest level of tax-free income consistent with the preservation of investors’ capital. In fact, the Fund was focused almost entirely on yield without regard to the risks to investors’ principal. The Fund lost approximately 45% of its net asset value ("NAV") in 2008, which is the worst one-year performance by any single state municipal bond fund in history. No other fund in the Lipper peer group that Oppenheimer described as an “appropriate benchmark” for the Fund lost nearly as much and the peer group as a whole lost only 15% over the same timeframe.

The Fund’s dismal performance during the class period stemmed from its abandonment of its “preservation of capital” investment objective and its concentration in risky investments in violation of the Fund’s specific investment limits. Despite promising to focus on protecting investors’ capital, Oppenheimer totally ignored the Fund’s increasing NAV volatility in its search for high yield. The managers invested more than they disclosed, and more than was allowed by the Fund’s offering documents, in junk bonds and bonds exposed to the fortunes of California’s real estate market.

Although the managers were not permitted to invest more than 25% of the Fund’s assets in a single industry, they concentrated its investments in unrated and risky “dirt bonds.” The dirt bonds were largely dependent on small, undeveloped pieces of land that were especially vulnerable to declines in California's real estate market. Together with other real estate-dependent bonds, the Fund invested nearly half of its assets in securities that faced the same primary economic risk—a collapse in California’s real estate. When this occurred in 2007 and 2008, the Fund’s share price likewise plummeted. The managers also exceeded the 25% limit on investments in bonds that were below investment grade (known as “junk bonds”). The managers accomplished this feat by assigning false investment grade ratings to bonds that had not been rated by any independent rating agency. Although the Fund’s public offering documents filed with the SEC promised to internally rate bonds using rating criteria similar to those used by the rating agencies, nearly all of the dirt bonds rated as investment grade by the Fund’s managers would have been rated as junk using rating agency criteria. Had the managers used rating agency criteria, they would have been required to report that during the class period, as much as 39% of the Fund’s assets were invested in junk bonds.

The Fund compounded its excessive risk taking by investing more than it disclosed in inverse floaters, complex and highly speculative securities that the Fund used in order to leverage the Fund’s assets. Not only were the inverse floaters themselves highly volatile, but the Fund’s use of leverage magnified the Fund’s NAV volatility, greatly increasing the losses suffered by shareholders. The Fund did not warn investors of the magnitude of the risks it had undertaken through investing in these risky securities.