Oppenheimer reaches agreement with Illinois over 529 fund losses

The state of Illinois has reached a settlement in its lawsuit over losses in the Bright Start college savings program under which parents will get back $77.23 million — slightly more than half of what they lost in investments handled by Oppenheimer Funds Inc.

The state of Illinois has reached a settlement in its lawsuit over losses in the Bright Start college savings program under which parents will get back $77.23 million — slightly more than half of what they lost in investments handled by Oppenheimer Funds Inc.

Under terms of a deal being announced Tuesday, Oppenheimer will pay the money to partially cover losses in its Core Plus fund, in which many Bright Start families had invested, for the period Jan. 1, 2008, through Jan. 25, 2009.

Parents will get the settlement proceeds early in 2010, after they sign a release received by the settlement’s administrator.

The Bright Start program is run by Illinois Treasurer Alexi Giannoulias, who is a candidate for the Democratic nomination for President Barack Obama’s old Senate seat.

Mr. Giannoulias and Attorney General Lisa Madigan have contended that Oppenheimer exceeded its stated risk thresholds in Core Plus, putting money intended to pay college costs not into conservative investments but into subprime mortgage securities and other high-risk financial instruments.

Despite those contentions, which Mr. Giannoulias’ political foes reject, Illinois parents won’t get all their money back.

Sources say Illinois will get the same settlement that Oregon got when it cut a deal with Oppenheimer in November, in which the investment firm agreed to make good on $20 million of $35.5 million in losses — about 56%.

Earlier, Mr. Giannoulias’ office had said that Illinois families lost about $85 million in Core Plus. However, those losses apparently were over a shorter period than what’s covered in the suit.

Under the settlement, money will go to any participant who had losses of at least $20 as of Sept. 30. Oppenheimer reportedly has agreed to pay all administrative costs.

Mr. Giannoulias has argued that, overall, his handling of Bright Start has been a success, with Consumer Reports, for instance, rating the fund in the top five because of relatively low fees and decent investment returns.

Politically, the question is whether voters will view the settlement as a Christmas gift or a lump of coal.

Mr. Giannoulias says that even getting just over half of the money back was “very tough.” Though some of his critics won’t be happy, “they’d be upset if I got (only) 95% back.”

[This story first ran in Crain’s Chicago Business, a sister publication of InvestmentNews.]