Thanks to OppenheimerFunds, Puerto Rico Municipal Bond Funds Continue to Cause Serious Investor Losses

            Recently, this blog reported on investigations into UBS’ sales practices concerning $10 billion worth of bond funds concentrated on Puerto Rico municipal debt.  Puerto Rico has been hit hard by serious economic problems, including slow economic growth as well as the unsustainable growth in its public pension obligations.  Any bond fund with sizeable holdings in the Puerto Rico municipal bonds can expect significant losses, as the S&O Municipal Bond Puerto Rico Index was down 21% year-to-date through October 10, 2013.

           OppenheimerFunds are the most recent example of municipal bond funds suffering large declines in NAV because of large bets on the same Puerto Rico municipal bonds that have afflicted UBS investors.  As reported by InvestmentNews, the Oppenheimer Rochester Virginia Municipal Bond Fund (ORVAX) held 33% of its assets in Puerto Rican debt as of the end of August 2013, which resulted in a decline in the fund’s value of 15% this year, nearly three times the average single-state municipal bond fund decline over the same time period. 

           While the Oppenheimer Virginia Fund had the largest holdings of Puerto Rico debt, several other Oppenheimer single-state municipal bond funds, including Oppenheimer Rochester North Carolina, Arizona, Massachusetts and Maryland funds, all hold more than one quarter of their assets in Puerto Rico bonds.  As a result, each of these bond funds is down more than 11%.

A Morningstar analyst quoted by InvestmentNews described Puerto Rico as “a risky credit. . .Taking on a lot of Puerto Rican bonds essentially turns a fund into a high-yield state municipal bond fund.  Investors need to be aware of that.” 

The problems with the various OppenheimerFunds harken back to 2008, when Oppenheimer Core Bond Fund plummeted 35% due to its concentration in mortgage-backed debt and which led to charges filed by the Securities and Exchange Commission. 

Oppenheimer & Co. Hit With FINRA Fine for Failing to Anti-Money Laundering Violations

            The Financial Industry Regulatory Authority (FINRA) continues a trend by securities regulators imposing affirmative duties on brokerage firms to detect certain illegal activities in their clients’ accounts.  FINRA’s latest action targets Oppenheimer & Co., Inc., for allowing nearly $1.5 million in unregistered penny stocks to be sold in customer accounts.  This is the second time Oppenheimer has been found to have violated its Anti-Money Laundering (AML) obligations.

            According to FINRA’s findings, between August 2008 and September 2010, several customers deposited large amounts of penny stocks shortly after opening Oppenheimer accounts, liquidated the holdings and then transferred the proceeds out of the accounts.  The penny stocks, which are low-priced, speculative securities, were not registered or otherwise exempt from registration.   During this time period, Oppenheimer sold more than one billion shares of the penny stocks.  FINRA determined that the sales occurred due to failures of the Oppenheimer AML program to focus on securities transactions and its failure to monitor patterns of suspicious activity associated with penny stock trades.  Among other problems, FINRA found that the firm’s procedures were inadequate and unable to determine whether stocks being sold were restricted or freely tradable. 

            AML requirements are necessary protections against a wide array of illicit securities transactions, many of which can directly harm unsuspecting investors.  The securities litigation attorneys at Block & Landsman investigate possible AML violations to determine whether an investor’s losses were caused by improper trading or a failure to supervise.