New Mexico College Savings Plan Class Action Lawsuit Moves Forward
Print This Post
Class action notices have gone out to families who invested in New Mexico’s poorly performing college savings plans. Thousands of New Mexicans trusted that the tax advantaged plans selected for them by the State of New Mexico could help with the increasing expense of a college education. But New Mexico’s college savings plans proved to be the worst in the country due to high costs and reckless management. Instead of seeing their savings grow, families experienced painful losses that dashed college hopes for many graduates.
This writer raised a red flag in 2009 about the horrible performance of New Mexico’s college savings plans in two op-ed pieces for the Albuquerque Journal. You can read them here and here (subscription required).
The class action lawsuit, Ping Lu, et al., v. The Education Trust Board of New Mexico and The Education Plan Trust of New Mexico, is pending in the First Judicial District Court of Santa Fe before Judge Stephen Pfeffer. Plaintiffs’ counsel are the Keller Rohrbach firm from Seattle, Washington and the Rothstein, Donatelli, Hughes, Dahlstrom, Schoenberg & Bienvenu firm of Santa Fe, New Mexico.
The complaint alleges that Education Trust Board of New Mexico mismanaged fixed income assets such as bonds in two college savings plans sponsored by the State of New Mexico–The Education Plan and the Scholar’s Edge Plan–by investing heavily in the Oppenheimer Core Bond Fund, the Oppenheimer Limited Term Government Fund, and the Oppenheimer Strategic Income Fund. These were supposed to be stable conservative income funds. Without notifying investors Oppenheimer sought higher returns through higher risk by dramatically increasing its use of leverage to purchase derivative instruments and highly volatile mortgage-related bonds. Plaintiffs allege that this risky strategy caused the college saving plans to lose more than $175 million.
The Education Trust Board governs New Mexico’s college savings plans, known also as 529 plans to reflect their tax advantages under that section of the Internal Revenue Code. Federal law allows investments in a 529 savings plan to grow tax-free. New Mexico residents can deduct their contributions to an approved 529 plan dollar-for-dollar from their taxable income. The Board is administratively attached to the New Mexico Higher Education Department. Its members are appointed by the Governor, the Senate President Pro Tempore, and the Speaker of the House of Representatives. The Board currently is chaired by Dr. Jose Garcia, Secretary of NMHED.
The Education Trust Board had given Oppenheimer Funds a total monopoly over its 529 plans. It relied completely on Oppenheimer to oversee investment of college savings plans. Parents saving for college who wanted to tap the tax benefits of a 529 college savings plan had to invest their funds in the limited selection of Oppenheimer funds mandated by the Board.
Supposedly “safe” Oppenheimer bond funds tanked. Supposedly stable bond funds suffered losses exceeding 40%. After writing the two op-ed pieces for the Albuquerque Journal, this writer received letters and e-mails from dozens of distressed parents and grandparents who had seen years of savings in what they though were prudent investments vetted by the State of New Mexico evaporate overnight. Some families wrote how their children had to leave college. Other children had to give up plans to start college immediately after high school.
The New Mexico Attorney General joined Maine, Nebraska, Illinois and Texas in seeking redress for investors. The AG reached a settlement with Oppenheimer Funds requiring the investment manager to pay $67.3 million in exchange for a release of liability from the State of New Mexico. The Education Trust Board claimed the settlement was fair and reasonable based on an evaluation by professors at the New York University Law School. The amount of the settlement, the Board said, was “in excess of” half the full amount of the losses. Counsel in the private class action argue the AG and the Education Trust Board settled too cheaply and quickly. The private class action seeks to recover the balance of losses not covered by the AG’s settlement.
The AG’s settlement has been competed. The final distribution of funds was made October 12, 2012.
Individual investors who opted into the AG’s settlement saw Oppenheimer invest new money into their depleted investment accounts. Individual investors were required to accept new investments in existing Oppenheimer accounts and did not have the option of receiving a cash payout. Persons who had closed their accounts received a check. Payments have now been sent to all investors in the Oppenheimer portfolios, regardless of whether they signed releases. If they do not cash their checks, the monies revert to the State’s unclaimed property funds.
The website for the class action is here.
Persons who signed releases in the AG settlement waived all other claims against Oppenheimer, but are not foreclosed from claims against The Education Trust Board. Persons who did not sign releases but still received checks in the final distribution can keep the money and pursue claims for the balance of their losses, says John Bienvenu, one of the plaintiff class’ attorneys.
Oppenheimer has settled claims brought by other states, including Oregon and Illinois. Some states have eliminated Oppenheimer investments from their approved portfolio of 529 plans. Despite the enormous problems with Oppenheimer funds, the outgoing Richardson administration extended Oppenheimer’s contract to continue management of New Mexico’s 529 college savings program. Mutual funds other than Oppenheimer products are now available within The Education Plan, though the majority are still Oppenheimer products. That plan ranked at number eleven in the country for its one year performance ending June 30, 2012, by the independent college savings authority Savingforcollege.com. That is a sharp turnaround from 2009 when Morningstar was advising parents to “steer clear” of the same college savings plan due to its high costs and abysmal returns. Over the past three years Savingforcollege.com ranks New Mexico’s Education Plan at #44 nationally, reflecting the continuing drag of its history of problems.
The claims brought by the New Mexico Attorney General sought recovery only from the Oppenheimer Funds and related entities. The private class action is pursuing Oppenheimer as well as seeking to hold the Education Trust Board accountable. Claims directly against the State of New Mexico itself were dismissed by Judge Pfeffer on grounds of sovereign immunity. Plaintiffs have appealed that ruling. A decision is pending from the New Mexico Court of Appeals.
[Disclosure: The author has an investment in The Education Plan to help cover the cost of a college education for his niece]
Posted under News.
Tags: 529 college savings plan, college savings, Dr. Jose Garcia, Education Trust Board of New Mexico, Gary King, Keller Rohrback, New Mexico Attorney General, New Mexico Higher Education Department, Oppenheimer Funds, Rothstein Donatelli, The Education Plan