A San Francisco law firm filed a class-action lawsuit against Oppenheimer Funds last week, alleging the company's California municipal bond mutual fund misled investors into thinking its investment strategies were safer than they actually were.
The suit, filed Feb. 4 in U.S. District Court for the Northern District of California, accuses Oppenheimer's California Municipal Fund of false statements in its prospectus and other documents.
The fund advertised itself as a way to achieve high returns "consistent with preservation of capital."
The suit, filed by the firm Sparer Law Group, centers mainly on that phrase.
Sparer alleges the fund, which at one point had $2 billion in net assets, pursued investment strategies "virtually in complete disregard for preservation of capital."
The Centennial, Colo.-based fund, which has three classes of shares, employed leverage and loaded up on bonds with junk credit or quality on the low side of investment grade, the suit alleges.
The fund also concentrated too much on California real estate at a time when the property market in that state faced serious distress, the suit alleges.
A spokesperson for Oppenheimer said the company "believes those claims are without legal merit and we intend to defend ourselves vigorously."
Sparer filed the suit on behalf of Robert Rivera, an investor who bought shares in the fund.
Alan W. Sparer, lead counsel, said he does not know how many shareholders will participate in the suit. He believes thousands are eligible.
The suit was filed on behalf of anyone who bought shares between Sept. 27, 2006, and Nov. 28, 2008. The fund's net asset value tumbled 45% during that period.
The suit lists as defendants the fund, its parent company, the underwriter of its shares, its chairman and trustees, its executive, its portfolio managers, and its treasurer.
Sparer declined to specify what sort of redress his client is seeking. He did point out the fund incurred a loss four times greater than the loss of the median California municipal fund, according to Lipper Inc.
The fund had $929.2 million in assets at the end of 2008. Its Class A shares were valued yesterday at around $6.20, down from more than $11.50 at the end of 2006.
According to its prospectus, the fund could not invest more than 25% of its assets in junk bonds.
The fund, though, used its own rating system for the 60% of the bonds in its portfolio that were unrated. The lawsuit alleges that practice created a "significant risk" that the internal rating system allowed for more than 25% of the fund's bonds to be below investment grade.
The prospectus also prohibited the fund from concentrating more than 25% of its portfolio on one industry.
More than 30% of the fund's portfolio was in "dirt bonds," or bonds secured by undeveloped real estate, and an additional 10% was in housing bonds, the suit said.
That means, Sparer said, more than 40% of the fund's portfolio was focused on one industry - real estate.
