c kj ry - class actionsecurities.stanford.edu/filings-documents/1042/... · defendant mary ann...

1 BERMAN DEVALERIO C (kj ryNicole Lavallee (No. 165755) ORIGINAL

2 425 California Street, Suite 2100 FALE0San Francisco, California 94104

3 Telephone: (415) 433-3200MAR 3 I 200qFacsimile: (415) 433-6382

4 [email protected] -‘ RICHARD W. WIEKING

CLERK, U.S. DISTRICT COURT,5 Local Counsel for Plaintiff Kenneth Milhem NORTHERN DISTRICT OF CALIFORNIA

6 [Other counsel appear on signature page]

7PA4

8UNITED STATES DISTRICT COURT

9 NORTHERN DISTRICT OF CALIFORNIA

10 'aKENNETH MILHEM, Individually and on I iyCase . 1

11 Behalf of All Others Similarly Situated, fCLASS ACTION COMPLAINT FOR

12 Plaintiff, VIOLATION OF THE FEDERALSECURITIES LAWS

13 v.CLASS ACTION

14 OPPENHEIMER CALIFORNIA MUNICIPALFUND, OPPENHEIMERFUNDS, INC.,OPPENHEIMERFUNDS DISTRIBUTOR, INC.,BRIAN F. WRUBLE, DAVID K. DOWNES,

16 MATTHEW P. FINK, PHILLIP A. GRIFFITHS,MARY F. MILLER, JOEL W. MOTLEY,17 RUSSELL S. REYNOLDS, JR., MARY ANN

18 TYNAN, JOSEPH M. WIKLER, PETER LWOLD, BRIAN W. WIXTED, CLAYTON

19 K. YEUTER, JOHN V. MURPHY, ROBERT G.GALLI, KENNETH A. RANDALL, EDWARD

20 V. REGAN, RONALD H. FIELDING, DANIELG. LOUGHRAN, SCOTT COTTIER, TROY E.

21 WILLIS, RICHARD STEIN, and MARK S.VANDEHEY,

22Defendants.

23

24

25

26

27

28

CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS

Plaintiff Kenneth Milhem ("Plaintiff'), individually and on behalf of all other persons

2 similarly situated, by his undersigned attorneys, for his complaint against defendants, alleges the

3 following based upon personal knowledge as to himself and his own acts, and information and

4 belief as to all other matters, based upon, inter alia, the investigation conducted by and through his

5 attorneys, which included, among other things, a review of public documents, announcements

6 made by defendants, United States Securities and Exchange Commission ("SEC") filings, wire and

7 press releases published by and regarding Oppenheimer California Municipal Fund (the "Fund"),

8 advisories about the Fund, and information readily obtainable on the Internet.

9 Plaintiff believes that substantial evidentiary support will exist for the allegations set forth

10 herein after a reasonable opportunity for discovery.

11 NATURE OF THE ACTION

12 1. This is a class action on behalf of the purchasers of shares of Oppenheimer

13 California Municipal Fund.

14 2. Plaintiff brings this action pursuant to Rule 23(a) and (b)(3) of the Federal Rules of

15 Civil Procedure on behalf of a class consisting of all persons who purchased Class A shares, Class

16 B shares, and Class C shares of the Fund from September 27, 2006 through November 28, 2008,

17 inclusive (the "Class Period") and were damaged thereby, excluding defendants; the officers and

18 directors of the Fund; members of the defendants' immediate families and the defendants' legal

19 representatives, heirs, successors, and assigns; and any entity in which any of the defendants have

20 or had a controlling interest or unique contractual arrangement.

21 JURISDICTION AND VENUE

22 3. The claims asserted herein arise under and pursuant to Sections 11, 12(a)(2), and 15

23 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77k, 771(a)(2), and 77o, and Section

24 13(a) of the Investment Company Act of 1940 ("ICA"), 15 U.S.C. § 80a-13(a).

25 4. This Court has jurisdiction over the subject matter of this action pursuant to Section

26 22 of the Securities Act, 15 U.S.C. § 77v, and Section 44 of the ICA, 15 U.S.C. § 80a-43.

27 5. Venue is proper in this Judicial District pursuant to Section 22 of the Securities Act

28 and Section 44 of the ICA. Defendants maintain principal executive offices in this District and

CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS1

I many of the acts and transactions alleged herein, including the preparation and dissemination of

2 statements containing false information and omissions of material fact, occurred in substantial part

3 in this District.

4 6. In connection with the acts, conduct, and other wrongs alleged in this complaint,

5 defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,

6 including but not limited to the United States mails, interstate telephone communications, and the

7 facilities of the national securities exchanges.

8 THE PARTIES

9 7. Plaintiff, as set forth in the accompanying certification, incorporated by reference

10 herein, purchased shares of the Fund at artificially inflated prices during the Class Period and has

11 been damaged thereby.

12 8. Defendant Oppenheimer California Municipal Fund, located at 6803 South Tucson

13 Way, Centennial, Colorado 80112, is a non-diversified, open-ended mutual fund which seeks to

14 provide a high level of income exempt from federal income taxes as well as California state income

15 taxes.

16 9. Defendant Oppenheimer Funds, Inc. (the "Manager"), located at Two World

17 Financial Center, 225 Liberty Street, 11 th Floor, New York, New York 10281, is the Fund's

18 manager and is responsible for choosing the Fund's investments and handling its day-to-day

19 business. Oppenheimer earns an advisory fee calculated based on the net assets of the Fund.

20 10. Defendant OppenheimerFunds Distributor, Inc. (the "Distributor"), located at Two

21 World Financial Center, 225 Liberty Street, 11th Floor, New York, New York 10281, is the Fund's

22 principal underwriter in the continuous public offering of the Fund's classes of shares.

23 11. Defendant Brian F. Wruble ("Wruble") is a Trustee of the Fund and Chairman of

24 the Board of Trustees of the Fund and signed the Registration Statements that became effective

25 September 27, 2006, March 8, 2007, October 31, 2007, and November 28, 2008.

26 12, Defendant David K. Downes ("Downes") is a Trustee of the Fund and signed the

27 Registration Statements that became effective October 31, 2007 and November 28, 2008.

28


1 13. Defendant Matthew P. Fink ("Fink") is a Trustee of the Fund and signed the

2 Registration Statements that became effective September 27, 2006, March 8, 2007, October 31,

3 2007, and November 28, 2008.

4 14. Defendant Phillip A. Griffiths ("Griffiths") is a Trustee of the Fund and signed the


6 2007, and November 28, 2008.

7 15. Defendant Mary F. Miller ("Miller") is a Trustee of the Fund and signed the


9 2007, and November 28, 2008.

10 16. Defendant Joel W. Motley ("Motley") is a Trustee of the Fund and signed the


12 2007, and November 28, 2008.

13 17. Defendant Russell S. Reynolds, Jr. ("Reynolds") is a Trustee of the Fund and signed

14 the Registration Statements that became effective September 27, 2006, March 8, 2007, October 31,

15 2007, and November 28, 2008.

16 18. Defendant Mary Ann Tynan ("Tynan") is a Trustee of the Fund and signed the

17 Registration Statement that became effective November 28, 2008.

18 19. Defendant Joseph M. Wikler ("Wikler") is a Trustee of the Fund and signed the


20 2007, and November 28, 2008.

21 20. Defendant Peter I. Wold ("Wold") is a Trustee of the Fund and signed the


23 2007, and November 28, 2008.

24 21. Defendant Brian W. Wixted ("Wixted") is the Treasurer and Principal Financial &

25 Accounting Officer of the Fund and a Senior Vice President and Treasurer of the Manager. He

26 signed the Registration Statements that became effective September 27, 2006, March 8, 2007,

27 October 31, 2007, and November 28, 2008.

28


1 22. Defendant Clayton K. Yeuter ("Yeuter") was a Trustee and the Chairman of the

2 Board of Trustees of the Fund through 2006. He signed the Registration Statement that became

3 effective September 27, 2006.

4 23. Defendant John V. Murphy ("Murphy") is the President, Principal Executive

5 Officer, and a Trustee of the Fund, and the Chairman, Chief Executive Officer, and Director of the

6 Manager. He signed the Registration Statements that became effective September 27, 2006, March

7 8, 2007, October 31, 2007, and November 28, 2008.

8 24. Defendant Robert G. Galli ("Galli") was a Trustee of the Fund through 2007. He

9 signed the Registration Statements that became effective September 27, 2006, March 8, 2007, and

10 October 31, 2007.

11 25. Defendant Kenneth A. Randall ("Randall") was a Trustee of the Fund until 2007.

12 He signed the Registration Statements that became effective September 27, 2006 and March 8,

13 2007.

14 26. Defendant Edward V. Regan ("Regan") was a Trustee of the Fund until 2007. He

15 signed the Registration Statements that became effective September 27, 2006 and March 8, 2007.

16 27. Defendant Ronald H. Fielding ("Fielding") is a Vice President and Senior Portfolio

17 Manager of the Fund, and a Senior Vice President of the Manager.

18 28. Defendant Daniel G. Loughran ("Loughran") is a Vice President and Senior

19 Portfolio Manager of the Fund, and was a Vice President and Senior Vice President of the Manager

20 during the Class Period,

21 29. Defendant Scott Cottier ("Cottier") is a Vice President and Senior Portfolio

22 Manager of the Fund, and a Vice President of the Manager.

23 30. Defendant Troy E. Willis ("Willis") is a Vice President and Senior Portfolio

24 Manager of the Fund, and an Assistant Vice President and Senior Portfolio Manager of the

25 Manager.

26 31. Defendant Richard Stein ("Stein") is a Vice President of the Fund, and throughout

27 the Class Period was a Vice President of the Manager.

28


1 32. Defendant Mark S. Vandehey ("Vandehey") is a Vice President and the Chief

2 Compliance Officer of the Fund, a Senior Vice President and the Chief Compliance Officer of the

3 Manager, and a Vice President of the Distributor.

4 33. Defendants Wruble, Downes, Fink, Griffiths, Miller, Motley, Reynolds, Tynan,

5 Wikler, Wold, Wixted, Yeuter, Murphy, Galli, Randall, and Regan are referred to collectively as

6 the "Trustee Defendants."

7 34. Defendants Murphy, Fielding, Loughran, Cottier, Willis, Stein, and Vandehey are

8 referred to collectively as the "Officer Defendants."

9 SUBSTANTIVE ALLEGATIONS

10 35. On September 27, 2006, the Fund filed a Registration Statement on Form N-1A, a

11 Prospectus, and a Statement of Additional Information (collectively the "September 2006

12 Prospectus") with the SEC. According to the September 2006 Prospectus, one of the Fund's

13 investment objectives was "preservation of capital."

14 36. The September 2006 Prospectus described the Fund as follows:

15 ABOUT THE FUND

16 The Fund's Investment Objective and Principal Investment Strategies

17 WHAT IS THE FUND'S INVESTMENT OBJECTIVE? The Fund seeks as high alevel of current interest income exempt from federal and California income taxes for

18 individual investors as is consistent with preservation of capital.

19 WHAT DOES THE FUND MAINLY INVEST IN? The Fund invests mainly in

20 California municipal securities that pay interest that in the opinion of counsel to theissuer of each security, is exempt from federal and California individual income

21 taxes. These primarily include municipal bonds (which are long-term obligations),municipal notes (short-term obligations), and interests in municipal leases. Most of

22 the securities the Fund buys must be "investment grade" (the four highest ratingcategories of national rating organizations, such as Moody' s). Under normal market

23 conditions, the Fund:

24 • attempts to invest 100% of its net assets in municipal securities,

25 • as a fundamental policy, invests at least 80% of its assets in municipalsecurities, and

26• as a fundamental policy, invests at least 80% of its net assets (plus borrowings

27 for investment purposes) in California municipal securities.

28


▪ [sic] the State of California and its political subdivisions (cities, towns and

1 counties, for example),

2 California municipal securities include municipal securities issued by:

3 • agencies, instrumentalities (which are state-chartered corporations) and

4public authorities of the State of California, and

• territories, commonwealths and possessions of the United States (for example,

5 Puerto Rico, Guam and the Virgin Islands).

6 Securities that generate income subject to alternative minimum tax (AMT) will count

7 towards the 80% California municipal securities requirement.

8 The Fund does not limit its investments to securities of a particular maturity range,and may hold both short- and long-term securities. However, it currently focuses on

9 longer-term securities to seek higher yields. These investments are more fullyexplained in "About the Fund's Investments," below.

10HOW DO THE PORTFOLIO MANAGERS DECIDE WHAT SECURITIES TO

11 BUY OR SELL? In selecting securities for the Fund, the portfolio managers lookprimarily throughout California for municipal securities using a variety of factors

12 which may change over time and may vary in particular cases. The portfoliomanagers currently look for:

13• Securities that provide high current income

14• A wide range of securities of different issuers within the state, including

15 different agencies and municipalities, to spread risk

16 • Securities having favorable credit characteristics

17 • Special situations that provide opportunities for value.

18 The portfolio managers may consider selling a security if any of these factors no

19longer applies to a security purchased for the Fund.

20WHO IS THE FUND DESIGNED FOR? The Fund is designed for individualinvestors who are seeking income exempt from federal and California income taxes.

21 The Fund does not seek capital gains or growth. Because it invests in tax-exemptsecurities, the Fund is not appropriate for retirement plan accounts or for investors

22 seeking capital growth. The Fund is not a complete investment program.

23 37. According to the September 2006 Prospectus, the Fund's "[f]undamental policies

24 cannot be changed without the approval of a majority of the Fund's outstanding voting shares. The

25 Fund's investment objective is a fundamental policy."

26 38. The September 2006 Prospectus further represented that "[t]he Manager tries to

27 reduce risks by selecting a wide variety of municipal investments and by carefully researching

28 securities before they are purchased." Indeed, although acknowledging risks, the September 2006


1 Prospectus emphasized the conservative nature of the Fund: "In the OppenheimerFunds spectrum,

2 the Fund is more conservative than some types of taxable bond funds, such as high yield bond

3 funds, but has greater risk than money market funds."

4 39. The September 2006 Prospectus also stated that the Fund had an industry

5 concentration policy which was a "fundamental policy of the Fund." Specifically, it stated that

6 "the Fund cannot invest 25% or more of its total assets in any one industry. That limit does not

7 apply to securities issued or guaranteed by the U.S. government or its agencies and

8 instrumentalities or securities issued by investment companies. Nor does that limit apply to

9 municipal securities in general or to California Municipal Securities."

10 40. On March 8, 2007, the Fund filed a Registration Statement on Form N-1A, a

11 Prospectus and a Statement of Additional Information (collectively the "March 2007 Prospectus")

12 with the SEC. The March 2007 Prospectus contained substantially the same statements contained

13 in 36-39 above.

14 41. On October 31, 2007, the Fund filed a Registration Statement on Form N-1A, a

15 Prospectus and a Statement of Additional Information (collectively the "October 2007 Prospectus")

16 with the SEC. The October 2007 Prospectus contained substantially the same statements contained

17 in TT 36-39 above.

18 42. The September 2006 Prospectus, the March 2007 Prospectus and the October 2007

19 Prospectus were negligently prepared, contained untrue statements of material fact, and/or omitted

20 to state other facts necessary to make the statements made not misleading. These Prospectuses

21 failed to disclose the following, among other things: (a) the Fund deviated from its investment

22 objective of seeking interest income consistent with the preservation of capital by over-

23 concentrating its holdings in higher-risk, lower-quality instruments and engaging in excessive

24 leverage and borrowing strategies; (b) the Fund increased its concentration of limited types of

25 investments, and in so doing failed to spread and reduce risk; and (c) the Fund violated its industry

26 concentration policy by investing more than 25% of its holdings in the real estate development

27 industry including, in particular, in so-called "dirt bonds" — land development bonds whose

28 proceeds are used to finance the infrastructure requirements of new real estate development.


1 43. The extent of the Fund's exposure to "dirt bonds" only began to become public on

2 June 12, 2008 when Bloomberg issued an article titled, 'Dirt Bonds' Soil Oppenheimer in

3 Gambits Gone Awry." This article reported comments by defendant Cottier:

4The $1.9 billion Oppenheimer California Municipal Fund owns more than $665

5 million of dirt bonds sold in California, including Elk Grove, said Scott Cottier, amoney manager at OppenheimerFunds, Inc. in Rochester, New York. The fund lost

6 about 14 percent the past year, compared with an average gain of 1.3 percent for the419 municipal bond mutual funds tracked by Bloomberg.

7Dirt bonds are a bargain because investors will eventually be paid, even if some

8 borrowers miss payments, Cottier said.

9 "The only people that lose money are the people who sell their bonds," Cottier said.

10 "Demand for real estate in California over the long-term is very high."

11 44. The September 2006 Prospectus, the March 2007 Prospectus and the October 2007

12 Prospectus failed to disclose that the Fund's investment strategies depended upon holding long-

13 term dirt bonds which may be at risk for non-payment of periodic interest and that any investment

14 in the Fund was subject to increased risk in a liquidity-challenged market, where the Fund would

15 be forced to sell illiquid securities at a loss in order to meet shareholder redemption requests.

16 However, the Fund engaged in riskier investment strategies at the expense of its stated investment

17 goal of "preservation of capital."

18 45. On September 22, 2008, the Fund published an Annual Report for the period ended

19 July 31, 2008 in which it acknowledged the extent of its investments in dirt bonds: "During this

20 reporting period, the Fund increased its diverse holdings in land development bonds ('dirt bonds'),

21 whose proceeds finance the infrastructure requirements of new real estate development. These

22 Special Tax and Special Assessment holdings represented about one-third of the Fund's market

23 value as of July 31, 2008." The Fund also acknowledged that its holdings of single-family housing

24 and multifamily housing represented 9.3% of the Fund's market value as of July 31, 2008. As a

25 result, the Fund's investments in the real estate development industry exceeded 40% of its total

26 assets in violation of the Fund's industry concentration policy.

27 46. The Fund also violated its primary investment objective of pursuing current

28 interest income in a manner consistent with preservation of capital by increasing its investment in


1 dirt bonds, other speculative bonds, and securities with high credit risk. According to a report

2 published by Morningstar on October 16, 2008:

3

4Oppenheimer California Municipal's volatility hasn't paid off in the long run.

This gutsy fund's performance has been hard to swallow lately. With a loss of 32.4%

5 through the year to date (as of Oct. 15, 2008), it's the worst-performing fund in themunicipal California long category and significantly trails its typical peer by nearly

6 21 percentage points.

7 Periods of extreme performance are not new for this fund given its unconventional

8 approach. Its experienced management team — managed on a day-to-day basis byScott Cottier — tries to take advantage of pricing inefficiencies in the bond market, as

9 many funds do, but pursues current income more aggressively than most. That meansthe fund has a bigger stake invested at the lower end of the credit spectrum, where

10 more-speculative bonds can compensate investors for their added risk by offeringhigher yields. Indeed, the fund had roughly 78% in bonds rated BBB and below

11 (including nonrated bonds) as of June 30, 2008, which is 5 times more than thecategory median. Such a large stake in low-quality fare makes the fund more volatile

12 in general and is particularly costly in times like these when there has been a flight tohigh-quality bonds. Of particular concern is the fund's investment in "dirt deals,"

13 which are contracts for land developments that have yet to be built. These bonds tendto be nonrated and are especially risky given the depressed housing market in

14 California.

1547. On October 21, 2008, the Fund filed a Prospectus Supplement ("October 2008

16Supplement") with the SEC. In the October 2008 Supplement, the Fund described additional

17risks of investing in the Fund that it had not previously disclosed. In a section titled "UNUSUAL

18VOLATILITY AND LACK OF LIQUIDITY IN THE MUNICIPAL BOND MARKETS IN

192008," the October 2008 Supplement stated:

20

21 Municipal bonds are traded in the "over-the-counter" market among dealers and otherlarge institutional investors. In the latter months of 2008 that market has been subject

22 to greater volatility than it has historically experienced. Liquidity in the municipalbond market (the ability to buy and sell bonds readily) has been reduced, as it has

23 been in other fixed income markets, in response to overall economic conditions andcredit tightening. During times of reduced market liquidity, such as at the present, the

24 Fund may not be able to sell bonds readily at prices reflecting the values at which thebonds are carried on the Fund's books. Sales of large blocks of bonds by market

25 participants, such as the Fund, that are seeking liquidity can further reduce bondprices in an illiquid market. The Fund may seek to make sales of large blocks of

26 bonds to meet shareholder redemption requests, or it may be required to raise cash to

27 re-collateralize, unwind or "collapse" trusts that issued inverse floaters to the Fund orto make payments to such trusts to enable them to pay for tenders of the short-term

28 securities they have issued, if the remarketing agents for those securities are unable to

CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS •

sell those short-term securities in the marketplace to other buyers (typically tax1 exempt money market funds).

248. The October 2008 Supplement provided additional disclosures about (a) the Fund's

3reliance on borrowing and leverage "for investment-related purposes" and "to meet redemption

4obligations or for temporary and emergency purposes;" (b) the extent of the Fund's investment in

5derivative instruments called "inverse floaters" that are highly sensitive to interest-rate shifts; and

6(c) the additional risks associated with these techniques and investments.

749. On November 28, 2008, the Fund filed a Registration Statement on Form N-1A, a

8Prospectus, and a Statement of Additional Information (collectively the "November 2008

9Prospectus") with the SEC. The November 2008 Prospectus contained substantially similar

10statements about the Fund's investment objective and strategies, fundamental policies, efforts to

11reduce risks and industry concentration policy as contained in 11 36-39 above.

1250. The November 2008 Prospectus was negligently prepared, contained untrue

13statements of material fact, and/or omitted to state other facts necessary to make the statements

14made not misleading for the reasons in 42 above.

1551. The November 2008 Prospectus also disclosed certain risks associated with

16investing in dirt bonds, and acknowledged that the Fund had revised its industry concentration

17policy such that the Fund would not consider "dirt bonds" to be part of any industry. The

18November 2008 Prospectus stated:

19Municipal Sector Concentration. While the Fund's fundamental policies do not

20 allow it to concentrate its investments (that is, to invest more than 25% of its totalassets) in a single industry, certain types of municipal securities are not considered a

21 part of any "industry" under that policy. Examples of these types of municipalsecurities include: general obligation, general appropriation, municipal leases, special

22 assessment and special tax bonds. Therefore, the Fund may invest more than 25% of

23 its total assets in these types of municipal securities, which may finance similar typesof projects or from which the interest is paid from revenues of similar types of

24 projects. "Similar types of projects" are projects that are related in such a way thateconomic, business or political developments tend to have the same impact on each

25 similar project. For example, a change that affects one project, such as proposedlegislation on the financing of the project, a shortage of the materials needed for the

26 project, or a declining economic need for the project, would likely affect all similarprojects, thereby increasing market risk. Thus, market or economic changes that

27 affect a security issued in connection with one project also would affect securitiesissued in connection with similar types of projects.

28


Although these types of municipal securities may be related to certain industries,

1 because they are issued by governments or their political subdivisions, these types ofmunicipal securities are not considered a part of any industry for purposes of the

2 Fund's industry concentration policy.

3 Special Tax or Special Assessment Bonds (Land-Secured or "Dirt" Bonds). Asdiscussed above, the Fund can invest more than 25% of its total assets in municipal

4 securities for similar types of projects that are issued in connection with specialtaxing districts that are organized to plan and finance infrastructure development to

5 induce residential, commercial and industrial growth and redevelopment. The bonds

6 financed by these methods, such as tax assessment, special tax or tax incrementfinancing generally are payable solely from taxes or other revenues attributable to the

7 specific projects financed by the bonds without recourse to the credit or taxing powerof related or overlapping municipalities. These projects often are exposed to real

8 estate development-related risks and can have more taxpayer concentration risk thangeneral tax-supported bonds, such as general obligation bonds. Further, the fees,

9 special taxes, or tax allocations and other revenues that are established to secure suchfinancings generally are limited as to the rate or amount that may be levied or

10 assessed and are not subject to increase pursuant to rate covenants or municipal orcorporate guarantees. The bonds could default if development failed to progress as

11 anticipated or if larger taxpayers failed to pay the assessments, fees and taxes asprovided in the financing plans of the projects.

12In California, these special tax or special assessment bonds also are referred to as

13 Mello-Roos Bonds. The bonds are issued under the California Mello-RoosCommunity Facilities Act to finance the building of roads, sewage treatment plants

14 and other projects designed to improve the infrastructure of a community. Mello-Roos bonds are primarily secured by real estate taxes levied on property located in the

15 community. The timely payment of principal and interest on the bonds depends on theproperty owner's continuing ability to pay the real estate taxes. Various factors could

16 negatively affect this ability including a declining economy or real estate market in

17California.

18 52. The Fund had not sought or obtained shareholder approval before revising its

19 industry concentration policy as described in the November 2008 Prospectus.

20 53. A report for the period ended January 31, 2009 by Lipper Analytical Services

21 ("Lipper") disclosed that the Fund's holdings were far more concentrated in a limited set of

22 investments than were the holdings of similar mutual funds in the same peer group. According to

23 Lipper, "The Limited Tax Obligations, Miscellaneous Revenue Bonds, and Housing Revenue

24 Bonds represent the fund's three largest issue types. Allocation of the fund's assets indicates that

25 investments in these three largest types have a higher weighting than the corresponding holdings of

26 the California Municipal Debt Funds classification [an average of 124 similarly classified mutual

27 funds] by 52.8%. The fund's holdings in Limited Tax Obligations represent 40.2%, while the

28 average fund in this class holds 7.8%." As a result, the Fund's holdings were insufficiently


1 diversified to reduce risk in contrast to the representations in the September 2006 Prospectus, the

2 March 2007 Prospectus, the October 2007 Prospectus, and the November 2008 Prospectus.

3 54. The Fund's share price collapsed beginning in September 2008, when its investment

4 portfolio deteriorated as a result of risk-taking that placed the Fund's pursuit of interest income

5 ahead of its goal of preserving capital. The Fund's share price on September 10, 2008 was $9.20.

6 Three months later, on December 17, 2008, the Fund had lost more than 38% of its value to close

7 at $5.64. At the time this complaint was filed, shares of the Fund were trading in the range of

8 $6.00 per share.

9 55. Overall, the Fund lost 41.87% in 2008, and Plaintiff and other Class members were

10 damaged as a result.

11 56. A report published by Morningstar on March 5, 2009 attributed the Fund's dismal

12 performance to its excessive risk-taking, over-reliance on leverage, and substantial investment in

13 poor quality bonds:

14Oppenheimer California Municipal's risk-taking has hurt it.

15Leverage was a 2008 buzzword as overlevered banks imploded and deepened the

16 financial crisis. But the concept is nothing new for this fund, which has used it togenerate extra income for years. The fund can both borrow to create leverage and

17 employ "internally leveraged" inverse floating-rate notes, which are highly sensitiveto interest-rate shifts. Manager Ron Fielding is drawn to the outsized tax-free income

18 these instruments generate, but that brings outsized volatility, too. As of July 31,2008, the fund was exposed to the market by a factor of 129% via both conventional

19 leverage and inverse floaters. While that magnifies gains in good times, it can alsoprove disastrous when the market is stressed, as it was in 2008. As liquidity dried up

20 and hedge funds began selling in earnest, long-dated munis got pummeled. Theleverage inherent in the fund's borrowing and inverse floaters meant the damage was

21 amplified.

22 The fund's huge stake in mid- and low-quality bonds also hurt in 2008 as investorsfled to high-quality fare. As of Jan. 31, 2009, the fund had 80% in bonds rated BBB

23 and below (including nonrated issues), a much larger dose than its typical peer (14%).

24 Throw in the fund's exposure to risky tobacco-settlement bonds and unsecured landdeals, and 2008 spelled disaster. Between its leverage and sector bets, the fund

25 suffered a gut-wrenching 41% loss for the year — 5 times worse than the categorymedian.

26

27 CLASS ACTION ALLEGATIONS

28


•

1 57. Plaintiff brings this action pursuant to Rule 23(a) and (b)(3) of the Federal Rules of

2 Civil Procedure on behalf of a class consisting of all persons who purchased Class A shares, Class

3 B shares, and Class C shares of the Fund from September 27, 2006 through November 28, 2008,

4 inclusive (the "Class Period") and were damaged thereby, excluding defendants; the officers and

5 directors of the Fund; members of the defendants' immediate families and the defendants' legal

6 representatives, heirs, successors, and assigns; and any entity in which any of the defendants have

7 or had a controlling interest or unique contractual arrangement.

8 58. The members of the Class are so numerous that joinder of all members is

9 impracticable. Although the exact number of Class members is unknown to Plaintiff at this time

10 and can only be ascertained through appropriate discovery, Plaintiff believes there are at least

11 thousands of members in the proposed Class based on the Fund being greater than $1.9 billion.

12 Members of the Class may be identified from records maintained by the Fund, Oppenheimer, or

13 their agents, and may be notified of the pendency of this action by mail, using a form of notice

14 customarily used in securities class actions.

15 59. Plaintiff's claims are typical of the claims of the members of the Class, as all

16 members of the Class are similarly affected by defendants' wrongful conduct in violation of federal

17 law that is complained of herein.

18 60. Plaintiff will fairly and adequately protect the interests of the members of the Class

19 and has retained counsel competent and experienced in class and securities litigation.

20 61. Common questions of law and fact exist as to all members of the Class and

21 predominate over any questions solely affecting individual members of the Class. Among the

22 questions of law and fact common to the Class are:

23 (a) Whether the federal securities laws were violated by defendants' acts as

24 alleged herein;

25 (b) whether statements made by defendants to the investing public during the

26 Class Period misrepresented material facts and/or omitted to state material facts; and

27 (c) to what extent the members of the Class have sustained damages and the

28 proper measure of damages.


1 62. A class action is superior to all other available methods for the fair and efficient

2 adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

3 the damages suffered by individual Class members may be relatively small, the expense and

4 burden of individual litigation make it impossible for members of the Class to individually

5 redress the wrongs done to them. There will be no difficulty in the management of this action as

6 a class action.

7 FIRST CLAIMViolation of Section 11 of the Securities Act

8 Against the Fund, the Manager, the Distributor, and the Trustee Defendants 9

63. Plaintiff repeats and realleges each and every allegation contained above as if fully10

set forth herein.11

64. The claim is brought pursuant to Section 11 of the Securities Act, 15 U.S.C. § 77k,12

against the Fund, the Manager, the Distributor, and the Trustee Defendants. This claim is not based13

and does not sound in fraud.14

65. This claim is brought by Plaintiff on his own behalf and on behalf of other members15

of the Class who acquired fund shares pursuant to the registration statements that became effective16

September 27, 2006, March 8, 2007, October 31, 2007, and November 28, 2008 (collectively the17

"Registration Statements").18

66. The Registration Statements were false and misleading, contained untrue statements19

of material facts, omitted to state other facts necessary to make the statements made not20

misleading, and omitted to state material facts required to be stated therein.21

67. The Fund is the registrant for the share offering. As issuer of the shares, the Fund is22

strictly liable to Plaintiff and members of the Class for the misstatements and omissions contained23

in the Registration Statements.24

68. The Manager was responsible for the contents and dissemination of the Registration25

Statements.26

69. The Distributor served as the principal underwriter of the Fund's shares, and was27

responsible for the contents and dissemination of the Registration Statements.28


1 70. The Trustee Defendants were responsible for the contents and dissemination of the

2 Registration Statements. Each of the Trustee Defendants signed or authorized the signing of the

3 Registration Statements and/or was identified in the Prospectuses.

4 71. None of the defendants made a reasonable investigation or possessed reasonable

5 grounds for the belief that the statements contained in the Registration Statements were true and

6 without omissions of any material facts and were not misleading.

7 72. By reason of the conduct herein alleged, each defendant violated, and/or controlled

8 a person who violated, Section 11 of the Securities Act.

9 73. Plaintiff and other members of the Class sustained damages. At the times they

10 obtained their shares of the Fund, Plaintiff and members of the Class did so without knowledge

11 of the facts concerning the misstatements or omissions alleged herein.

12 74. This action is brought within one year after discovery in this or a related action of

13 the untrue statements and omissions in and from the Registration Statements that should have

14 been made through the exercise of reasonable diligence, and within three years of the time that

15 the securities upon which this claim is brought were offered to the public.

16 75. By virtue of the foregoing, Plaintiff and the other members of the Class are

17 entitled to damages under Section 11 as measured by the provisions of Section 11(e), from the

18 defendants and each of them, jointly and severally.

19 SECOND CLAIMViolation of Section 12(0(2) of the Securities Act

20 Against the Fund, the Manager, the Distributor, and the Trustee Defendants

21 76. Plaintiff repeats and realleges each and every allegation contained above as if fully

22 set forth herein.

23 77. This claim is brought for violations of Section 12(a)(2) of the Securities Act, 15

24 U.S.C. § 771(a)(2), against the Fund, the Manager, the Distributor, and the Trustee Defendants.

25 78. Defendants assisted in the sale of shares of the Fund to Plaintiff and other members

26 of the Class by means of the defective September 2006 Prospectus, March 2007 Prospectus,

27 October 2007 Prospectus, and November 2008 Prospectus (collectively the "Prospectuses").

28


1 79. As set forth above, the Prospectuses failed to disclose material facts necessary in

2 order to make the statements, in light of the circumstances in which they were made, not

3 misleading.

4 80. Defendants named in this claim were obligated to make a reasonable and diligent

5 investigation of the statements contained in the Prospectuses to ensure that such statements were

6 true and that there was no omission of material fact required to be stated in order to make the

7 statements contained therein not misleading. None of the defendants named in this claim made a

8 reasonable investigation nor possessed reasonable grounds for the belief that the statements

9 contained in the Prospectuses were accurate and complete in all material respects.

10 81. Plaintiff and other members of the Class did not know, nor could they have known,

11 of the untruths and omissions contained in the Prospectuses, including that the price of the Fund's

12 shares was not properly determined.

13 82. This claim was brought within one year after discovery in this or a related action of

14 the untrue statements and omissions in and from the Prospectuses that should have been made

15 through the exercise of reasonable diligence, and within three years of the time that the securities

16 upon which this claim is brought were offered to the public by way of the Prospectuses.

17 83. By reason of the misconduct alleged herein, the defendants named in this claim

18 violated Section 12(a)(2) of the Securities Act and are liable to Plaintiff and other members of the

19 Class who purchased or acquired the Fund's shares by way of the Prospectuses, each of whom has

20 been damaged as a result of such violations.

21 84. Plaintiff and the other members of the Class who purchased the Fund's shares

22 pursuant to the Prospectuses hereby seek rescission of their purchases and hereby tender to the

23 defendants named in this claim those shares which Plaintiff and other members of the Class

24 continue to own, in return for the consideration paid for those securities, together with interest

25 thereon. Class members who have sold their shares seek damages to the extent permitted by law.

26 THIRD CLAIMViolation of Section 15 of the Securities Act

27 Against the Manager, the Trustee Defendants, and the Officer Defendants 28

CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS1.

1 85. Plaintiff repeats and realleges each and every allegation contained above as if fully

2 set forth herein.

3 86. This claim is brought pursuant to Section 15 of the Securities Act, 15 U.S.C. § 770,

4 against the Manager, the Trustee Defendants, and the Officer Defendants.

5 87. The Manager was a control person of the Fund by virtue of its responsibilities for

6 choosing the Fund's investments and handling its day-to-day business.

7 88. Each of the Trustee Defendants and the Officer Defendants was a control person of

8 the Fund by virtue of his position as a trustee, director, and/or senior officer of the Fund and/or the

9 Manager, which allowed each of these defendants to exercise control over the Fund, the Manager,

10 and their operations.

11 89. The Manager and each of the Trustee Defendants and the Officer Defendants was

12 a culpable participant in the violations of Sections 11 and 12(a)(2) of the Securities Act alleged

, 13 above, based on having signed or authorized the signing of the Registration Statements, drafted

14 the contents of the Registration Statements and/or the Prospectuses, and having otherwise

15 participated in the process by which shares of the Fund were issued pursuant to the Registration

16 Statements and Prospectuses.

17 90. This claim was brought within one year after the discovery of the untrue

18 statements and omissions in the Registration Statements and Prospectuses and within three years

19 after the Fund's shares were sold to the Class.

20 FOURTH CLAIM

21Violation of Section 13(a) of the Investment Company Act Against the Fund

22

91. Plaintiff repeats and realleges each and every allegation contained above as if fully

set forth herein.23

24

92. Plaintiff brings this claim pursuant to Section 13(a) of the ICA, 15 U.S.C. § 80a-

2513(a), against the Fund.

2693. The Fund is a registered investment company pursuant to the ICA.

27

28


1 94. The Prospectuses described the Fund's investment objective as a "fundamental

2 policy" that could not be changed without the vote of a majority of the outstanding shares of the

3 Fund in accordance with the ICA.

4 95. The Fund deviated from its investment objective by investing in securities that

5 sought high levels of current interest income, but exposed investors to increased risks that capital

6 would not be preserved, and did so without obtaining a vote of a majority of the outstanding shares

7 of the Fund.

8 96. The Prospectuses also described the Fund's industry concentration policy as a

9 "fundamental policy" that could not be changed without the vote of a majority of the outstanding

10 shares of the Fund in accordance with the ICA.

11 97. In the November 2008 Prospectus, the Fund reclassified "dirt bonds" as not

12 constituting a part of any "industry" under the Fund's industry concentration policy. By doing so,

13 the Fund was able to invest more than 25% of its total assets in the real estate development industry

14 without seeking shareholder approval to modify the Fund's industry concentration policy.

15 98. The Fund's investments in securities that violated its investment objective and its

16 industry concentration policy caused the Fund to lose capital. As a direct and proximate result of

17 the Fund's deviation from its investment objective and its industry concentration policy, Plaintiff

18 and other Class members sustained substantial losses 'when the value of the assets of the Fund

19 depreciated.

20 PRAYER FOR RELIEF

21 WHEREFORE, Plaintiff prays for relief and judgment, as follows:

22 (a) Determining that this action is a proper class action, designating Plaintiff as

23 Lead Plaintiff and certifying Plaintiff as a class representative under Rule 23 of the Federal Rules

24 of Civil Procedure and Plaintiff's counsel as Lead Counsel;

25 (b) Awarding damages in favor of Plaintiff and the other Class members against

26 all defendants, jointly and severally, for all damages sustained as a result of Defendants'

27 wrongdoing, in an amount to be proven at trial, including interest thereon;

28


1 (c) Awarding Plaintiff and the other members of the Class rescission on Claim

2 II to the extent they still hold Fund shares, or if sold, awarding rescissory damages in accordance

3 with Section 12(a)(2) of the Securities Act from the defendants named in that Claim;

4 (d) Awarding Plaintiff and the other members of the Class their costs and

5 expenses of this litigation, including reasonable attorneys' fees, accountants' fees and experts' fees,

6 and other costs and disbursements; and

7 (e) Such other and further relief as the Court may deem just and proper.

8 JURY TRIAL DEMANDED

9 Plaintiff hereby demands a trial by jury.

10

11

12

13Dated: March 31, 2009 Respectfully submitted,

BER1VIAN DEVALE 014

15

16 N. oie La arlee (No. 165755)425 California Street, Suite 2100

17 San Francisco, California 94104Telephone: (415) 433-3200

18 Facsimile: (415) 433-6382

19 - and -

20 Steven J. TollS. Douglas Bunch

21 COHEN MILSTEIN SELLERS

22 & TOLL PLLC1100 New York Avenue N.W.

23 Suite 500, West TowerWashington, D.C. 20005

24 Telephone: (202) 408-4600Facsimile: (202) 408-4699

25Counsel for Plaintiff

26

27

28

CLASS ACTION COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS1'

EXHIBIT A

CERTIFICATION OF PLAINTIFFPURSUANT TO FEDERAL SECURITIES LAWS

I, 4- /141ffi /49/1 , ("Plaintiff") declare, as to the claims assertedunder the ederal securities laws, that:

1. I have reviewed a class action complaint asserting securities claims against OppenheimerCalifornia Municipal Fund (OPCAX), and wish to join as a plaintiff retaining Cohen Milstein Sellers &Toll, PLLC as my counsel.

2. Plaintiff did not purchase the security that is the subject of this action at the direction ofplaintiffs counsel or in order to participate in this private action.

3, Plaintiff is willing to serve as a representative party on behalf of the class, includingproviding testimony at deposition and trial, if necessary.

4. My transactions in the Oppenheimer California Municipal Fund (OPCAX) during theClass Period of September 27, 2006 through November 28, 2008 were as follows:

DATE TRANSACTION (buy/sell) NO. OF SHARES PRICE PER SHARE

4)//4 4_211:221/ 60 ""'

5. During the three years prior to the date of this Certificate, Plaintiff has not sought to serveor served as a representative party for a class in any action under the federal securities laws except asfollows:

6. Plaintiff will not accept any payment for serving as a representative party on behalf of theclass beyond plaintiffs pro rata share of any recovery, except such reasonable costs and expenses(including lost wages) directly relating to the representation of the class as ordered or approved by thecourt.

I declare under penalty of perjury that the foregoing true and correct.

Executed this / 17 Day of Mira , 2009.

#1/14ffgf /

c kj ry - class actionsecurities.stanford.edu/filings-documents/1042/... · defendant mary ann...

Documents