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Oregon wins first round against college fund manager

Date: Tuesday, August 18, 2009
Author: Bill Graves, The Oregonian

Oregon won the first round in a $36 million court battle against the former investment manager of its college fund by keeping the lawsuit out of federal court.

U.S. District Judge Michael Hogan ruled that the case be remanded to the Marion County Circuit Court, rejecting an attempt by OppenheimerFunds to avoid the jurisdiction of an Oregon court.

Attorney General John Kroger and Treasurer Ben Westlund have sued OppenheimerFunds for $36 million, saying it falsely promoted a high-risk college investment plan as "conservative." OppenheimerFunds' Core Bond Fund, valued at $89 million in the state's College Savings Plan last September, caused big losses in eight of 15 Oregon college investment portfolios, including those labeled conservative or ultraconservative.

Oregon lawyers contend the fund became a hedge-fund like investment that took extreme speculative risks such as selling credit default swaps and other complex derivative instruments to Wall Street companies.

OppenheimerFunds wanted to try the case in federal court under federal rules, which are less stringent than Oregon's. A trial date has not yet been set in state court. OppenheimerFunds will keep fighting, said Jeaneen Pisarra, spokeswoman for the firm in New York City.

"The company maintains it acted appropriately in its role as program manger," she said. "The fund managers of the Core Bond Fund also acted appropriately in line with prospectus guidelines."

Oregon's $1 billion in college investments, including OppenheimerFunds' Core Bond Fund, plummeted to $744 million in less than a year. The share price of the Core Bond Fund dropped from $10.15 in May 2008 to $5.22 in November.

The Oregon network of college savings funds has since rebounded to $870 million as of June 30. Nearly 120,000 people save for college in Oregon's various plans, which offer tax incentives under Section 529 of the federal tax code.

State officials last month hired TIAA-CREF, which manages college savings plans in eight states, to replace OppenheimerFunds after its contract expires at the end of the year.

In March, the state replaced the Core Bond Fund and another OppenheimerFunds bond fund with the Dreyfus Total Bond Index Fund and the Vanguard Short Term Bond Index Fund.

Bill Graves; billgraves@news.oregonian.com