OppenheimerFunds Inc. agreed Friday to pay more than $35 million to settle charges levelled by the SEC.

The investment management company and its sales and distribution arm were charged with making misleading statements about its struggling Champion Income and Core Bond mutual funds.

The 2008 prospectus for the Champion fund didn’t adequately disclose the fund’s practice of assuming substantial leverage in using derivative instruments called total return swaps (TRS contracts), the Commission charged.

It said the instruments were used to create significant exposure in the commercial mortgage-backed securities market – and when that market declined, Oppenheimer faced large cash liabilities and the company made misleading statements about their funds’ losses and likelihood of recovery.

“Candor, not wishful thinking, should drive communications with investors, particularly during times of market stress,” said Robert Khuzami, director of SEC’s enforcement division.

The company was forced to sell bonds in the same terrible market that caused their huge losses. “Yet, the message that Oppenheimer conveyed to investors was that the funds were maintaining their positions and the losses were recoverable,” said Julie Lutz, Associate Director of SEC’s Denver Regional Office.

According to the SEC’s order, the company started to reduce mortgage securities exposure in November, just as that market was collapsing.

While this was happening, the company communicated to their investors’ advisors that they had only suffered paper losses. Also they assured clients the funds would continue to collect payments on bonds, when in fact it had sold many of them to raise cash for anticipated TRS contract payments.

The Champion fund’s 2008 prospectus describes these high-yield bonds as the funds “main” investment and continued to make projections which included the future earnings for bonds it did not own.

OppenheimerFunds does not admit to or deny these findings, but has agreed to pay a penalty of $24 million, disgorgement of $9,879,706, and prejudgment interest of $1,487,190.

The fine will go toward recompensing the investors for losses.