Communities in Iowa Ponder How to Pay Bills After Suspected Scam : Fraud: How were investors taken in? Officials in small towns tend to take other people at their word, the state’s treasurer says.

The finance director of Cerro Gordo County, Iowa, plans to spend the weekend in his office, figuring out how he’s going to pay the county’s 220 employees. And the city administrator of Marshalltown told the fire chief this week that he may not get that new fire engine.

All across the Hawkeye State--in some 86 small communities, counties, school districts and other local government entities that invested tens of millions of taxpayers’ dollars with Irvine investment adviser Steven D. Wymer--a cruel reality was slowly sinking in Friday.

“We’re in shock, which is turning to amazement and anger,” said Jay Gfell, Marshalltown’s city administrator.

The Securities and Exchange Commission has filed civil charges against Wymer, accusing him of defrauding trust funds in Iowa and Colorado of $75.4 million. A federal judge on Wednesday froze an estimated $1.2 billion of investments managed by two companies run by Wymer, Institutional Treasury Management (ITM) and Denman & Co.

Iowa communities each had invested anywhere from several thousand dollars to about $29 million in the Iowa Fund. The SEC alleges that Wymer took $65 million in Treasury securities from the fund without paying for them and used the money for other clients’ accounts.

Iowa financial managers say the ITM case may be the biggest public fund scandal ever to hit the state. It has shaken their communities and, for some, their trust. Representatives of the Irvine firm, they recalled, were personable and intelligent, and assured them that their investments in government securities would be safe.

“You have to understand,” said State Treasurer Michael Fitzgerald, “that we have a number of small towns here in Iowa, and people think a person is good for their word.”

Craig Hufford, finance manager of Scott County, said he invested $8.5 million of taxpayer money in the Iowa Fund. Wymer’s company promised “decent yields” on the county’s investments, Hufford said. “We were led to believe they were perfectly safe.”

He added that Wymer also offered a written agreement, saying that he would have no access to the money once it was in the bank.

Fitzgerald said was approached by representatives of Wymer’s firm last year but decided against doing business with the company for two reasons. First, the investment adviser did not relinquish control of the money to an outside party or custodian. Second, ITM provided its own financial reports; they were not prepared by an independent firm.

But reports on Friday credited Joan Fitzpatrick Bolin, Iowa’s deputy state treasurer and a former SEC lawyer, with the detective work. She told reporters that she notified the SEC in December, 1990, about her suspicions regarding Wymer’s investment program.

Bolin was fired Friday morning. In an interview, Fitzgerald contended that he fired her because of “personal differences within the office” unrelated to Iowa Trust. He said she was asked to resign on Dec. 5, but she refused.

Bolin could not be reached for comment.

Meantime, Iowa Gov. Terry Branstad has ordered state law enforcement and regulatory authorities to join the SEC’s investigation. A state senator from Dubuque acknowledged that he acted as an agent for the investment firm, the Des Moines Register reported, and state officials raised questions about the role of a Des Moines bank in the transactions.

The Iowa Trust was formed in 1989 when municipalities pooled their monies for investment to earn interest until bills came due. They sought advice from outside money managers and were attracted by ITM’s promised returns on their investments, which were about 1% higher than other financial institutions, Fitzgerald said.

Marshalltown, a city of 25,000 about 40 miles northeast of Des Moines, was one of the founders of the Iowa Trust. The city withdrew $11 million from the fund on Tuesday after learning that Wymer had quit ITM.

City officials’ suspicions also were aroused when the SEC began asking questions about the disappearance in October of $10 million from an account held by the city, Gfell, the city administrator, said. The account was replenished by investment company officials, the SEC said, but then the agency learned that ITM had taken the money from two other clients to do so.

Before learning of Wymer’s resignation, “all we’d get were glowing reports and requests for fees” from the Irvine company, Gfell said.

Cerro Gordo County invested $3.5 million in the Iowa Fund--about one-quarter of its annual operating budget, Finance Director Thomas Wishman said. “This money is obviously going to be tied up for a while,” he said. “We are covered for several weeks, but exactly how long, I don’t know.”

The hardest-hit city in Iowa could be Dubuque, which reportedly invested $29 million. State Treasurer Fitzgerald said the state is considering supplying emergency funds to some communities if that becomes necessary. “As a general rule,” he said, “you could say we don’t have any communities that can spare this money.”