In re Oppenheimer Rochester Funds Grp. Sec. Litig.

• Decision Date: 20 January 2012
• Docket Number: MDL No. 2063.,No. 09–md–02063–JLK–KMT.,09–md–02063–JLK–KMT.
• Parties: In re OPPENHEIMER ROCHESTER FUNDS GROUP SECURITIES LITIGATION. This document relates to all of the MDL actions.
• Court: U.S. District Court — District of Colorado

838 F.Supp.2d 1148

In re OPPENHEIMER ROCHESTER FUNDS GROUP SECURITIES LITIGATION. This document relates to all of the MDL actions.

No. 09–md–02063–JLK–KMT.

MDL No. 2063.

United States District Court, D. Colorado.

Jan. 20, 2012.

AMENDED OPINION AND ORDER ON MOTIONS TO DISMISS

KANE, Senior District Judge.

I issued my initial memorandum Order in these MDL securities fraud class actions on October 24, 2011 (Doc. 312), denying a Motion to Dismiss filed by Defendant Massachusetts Mutual Life Insurance Company (“MassMutual”) (Doc. 284) and granting in part and denying in part Oppenheimer Defendants' Joint Motion to Dismiss Consolidated Complaints (Doc. 285). See In re Oppenheimer Rochester Funds Grp. Sec. Litig., 2011 WL 5042066 (D.Colo. October 24, 2011). The Joint Defendants and MassMutual moved for reconsideration, and on January 18, 2012, I granted those Motions in limited part to (1) correct the erroneous application in the October 24 Order of a superseded version of the Southern District of New York's decision in TCW/DW North American Govt. Income Trust Securities Litigation, 941 F.Supp. 326, 341 (S.D.N.Y.1996) (“Opinion on Reconsideration” appended to superseded opinion commencing at p. 341) and (2) clarify an error on page five of the Order that included Rochester National Fund in the list of Defendant Funds whose Prospectuses articulated “capital preservation” as part of their stated investment objective. SeeOrder re Mot. for Reconsideration (Doc. 348), 2012 WL 156763.

Finding neither correction altered the ultimate conclusion that Plaintiffs have stated viable claims for relief under §§ 11 and 12(a)(2) of the 1933 Act against each of the Defendant Funds, including National Fund, I denied the Joint Motion to the extent it sought reconsideration of the Order on its merits. SeeOrder (Doc. 348) at 3–5. Nevertheless, because the clarifications are substantive, I issue this Amended Opinion and Order nunc pro tunc to October 24, 2011, and WITHDRAW the original Order.

I.

Shareholders in seven different Oppenheimer municipal bond funds (the “Funds”) brought a total of thirty-two putative securities fraud class actions in federal courts throughout the country naming the individual Funds, Fund managers, and trustees as Defendants. Shareholders' principal claims are asserted under Sections 11, 12, and 15 of the Securities Act of 1933, 15 U.S.C. § 77k, l, and o, based on allegations that the Funds misrepresented or failed to disclose the nature and degree of risks associated with the extremely risky investment strategies relying on low quality, unrated, and/or illiquid bonds, or on highly-leveraged derivative instruments known as “inverse floaters.” All of the Funds pitched themselves as vehicles for generating high yields of tax-free interest income from municipal bond portfolios that would be carefully assessed and monitored, and six of the seven Funds articulated this objective in terms of generating as much income as is “consistent with preservation of capital.”

Plaintiffs contend Fund Prospectuses and offering statements were materially misleading and rendered investors' capital extremely vulnerable to changing market conditions. When the credit crisis of 2008 struck, Defendants' undisclosed high-risk strategies resulted in an extreme devaluation of the Funds' assets and loss for which Defendants are liable under the 1933 Act. Because the Funds' daily net asset value (NAV) declined more than similarly-rated municipal bond funds during the same period, Plaintiffs contend their losses resulted from Defendants' acts and not the credit crisis of 2008.

All thirty-two of the putative securities class actions were transferred to me by the Judicial Panel on Multidistrict Litigation in 2009. Co–Lead Plaintiffs and Lead and Liaison Counsel were appointed,¹ a mandamus petition to the Tenth Circuit challenging those appointments was denied,² and in January 2010, the Co–Lead Plaintiffs in seven groupings of the original thirty-two actions filed their Consolidated Class Action Complaints.³ The Complaints are before me now on separate Motions to Dismiss filed jointly by the Oppenheimer and Oppenheimer Trustee Defendants (Doc. 285) and by Defendant Massachusetts Mutual Life Insurance Company (Doc. 284), seeking the dismissal of claims Defendants contend are common to all seven of the Consolidated Class Action Complaints. The Oppenheimer and Oppenheimer Trustee Defendants address certain additional allegations unique to the California and Pennsylvania Complaints in a separate Joint Motion to Dismiss (Doc. 286), which I will address in a separate order.

Having thoroughly considered the issues raised and arguments presented in support of and in opposition to these Motions, I GRANT the Joint Motion to Dismiss the Rochester Fund Group Complaints (Doc. 285) in limited part and DENY it in all other respects. I DENY Defendant MassMutual's Motion to Dismiss in its entirety.

I. BACKGROUND.⁴

Investors in seven Oppenheimer municipal bond funds bring these actions against various fund distributors, managers, and trustees, alleging the Funds' Prospectuses misrepresented their investment strategies and failed to disclose the nature and magnitude of the risks attendant their heavy emphasis on bond derivatives and other highly volatile and illiquid holdings.

According to Plaintiffs, the Funds' Prospectuses were materially misleading because their stated investment objectives and disclosures belied, and at times affirmatively misrepresented, the true nature and scope of the high-risk, high-return investment strategy they employed. For example, Prospectuses represented portfolio holdings would not exceed a certain minimal percentage of illiquid securities at any given time when in fact illiquid holdings regularly and significantly exceeded those caps. Plaintiffs contend Prospectuses also understated, or omitted, information that misled investors into believing the Funds' investment strategies were much more conservative in the long term than they actually were. Omitted information included just how leveraged and vulnerable the Funds' inverse floater holdings renderedthe long-term municipal bonds backing them, and how, in a time of rising interest rates, those holdings could trigger fire-sales of Fund assets causing a substantial loss of equity and declines in NAV.

In the midst of the credit market downturn in October 2008, Defendants issued Prospectus Supplements that Plaintiffs contend suddenly and for the first time disclosed the true risks their investment strategies posed to investors' value and capital. According to Plaintiffs, these previously withheld risk disclosures were material and by themselves support an action under the 1933 Act. Defendants demur, stating it was public knowledge that “Rochester-style” municipal bond Funds employed a “no guts, no glory” aggressive investment strategy and that the 2008 Supplements added nothing new to the mix of information previously disclosed in the Funds' offering documents. According to Defendants, the 2008 Supplements were sent out merely as a courtesy given the unprecedented downturn in the credit markets to highlight risks that had already been adequately disclosed.

The parties devote considerable time in their briefs to the complex workings of inverse floaters and Plaintiffs' ultimate ability, or inability, to prove loss causation under the 1933 Act. I find both discussions distracting at this stage of the proceedings. At issue on the Motions to Dismiss are the statements and disclosures in the various Funds' offering statements—including ongoing Prospectuses and supplements—and whether Plaintiffs' factual allegations plausibly establish that those documents included affirmatively misleading statements and disclosures, omitted information that would render the statements and disclosures made materially misleading, or both. While developments in the law suggest Plaintiffs will have to address certain analytical and evidentiary impediments to proving that losses suffered during the relevant class period were actually caused by the misrepresentations and omissions alleged rather than the credit market downturn, I find the issue inappropriate for resolution on motions to dismiss.

A. The Parties and the Various Oppenheimer Municipal Funds.

Lead Plaintiffs represent investors in seven Oppenheimer municipal bond-based mutual funds whose overall investment objectives were to generate high levels of tax-exempt income through investment primarily in under-appreciated or undervalued municipal bond portfolios. Six of the seven Funds tempered this investment objective with specific reference to seeking high yields “consistent with the preservation of capital.” The seventh, Rochester National Fund, stated it would seek high yields by investing in a “diversified portfolio,” which it would “carefully assess” and “monitor” for liquidity and other risk.

Shares in each of the seven Funds were offered for sale by OppenheimerFunds, Inc. (“OFI” or “Manager”), which also served as the Funds' manager and investment advisor, and OppenheimerFunds Distributor (“Distributor”), pursuant to the various registration statements, prospectuses, statements of additional information (SAIs), and supplements issued without material change from late 2005 through late 2007. The Consolidated Class Action Complaints for each of these Funds name OFI and Distributor as Defendants, as well as various Fund officers and trustees individually. Massachusetts Mutual Life Insurance Company (“MassMutual”), OFI's parent company, is also named as a Defendant in each of the actions.

B. Plaintiffs' Substantive Allegations.

According to Plaintiffs, there were four categories of materially misleading representations or omissions in Fund offering statements common to all seven Funds: (1) those related to Fund investment objectives; (2) the true value of Fund assets and liabilities and resulting NAVs; (3) the level of exposure and...