Wymer Finance Scandal Raises Many Questions
Two Orange County companies have been linked to a nationwide financial scandal that has resulted in the freeze of $1.2 billion in money from investors in California, 12 other states and Micronesia. Newport Beach investment adviser Steven D. Wymer is in custody accused of securities fraud and mail fraud in connection with what authorities now say is $95 million missing from those clients’ accounts. Below are answers to some frequently asked questions about the case.
Question: What happened at Institutional Treasury Management?
Answer: The federal Securities and Exchange Commission alleges that as much as $95 million is missing from accounts controlled by ITM President Steven D. Wymer, who was supposed to invest the money in those accounts on behalf of clients--mostly city and county governments. The SEC alleges in a civil fraud suit, for instance, that Wymer used money in the account of Marshalltown, Iowa, to make investments without the town’s knowledge. When up to $10 million turned up missing from that account, Wymer shifted funds from other towns’ accounts into Marshalltown’s account to cover the discrepancies. The SEC alleges that Wymer then tried to cover the shortages in those accounts by buying Treasury notes in his own account at ITM and selling them to at least two other clients at inflated prices, which allegedly netted him more than $10 million.
Q: Does this sort of shifting of funds from one account to another happen often?
A: No. Towns and counties that use an outside investment manager usually scrutinize advisers closely before picking one. And ordinarily, as a safeguard, a third party, such as a broker or a trust company, actually holds the cash or securities being managed. Finally, small towns and counties usually don’t entrust sole discretion over their money to an outside adviser. But in the ITM case, officials say Wymer had sole control over the portfolios of 12 of his 64 local government clients. It is from these accounts that the government says the $95 million may be missing.
Q: Why would a town or county give total control of taxpayers’ money to an outside adviser?
A: “They may say, ‘Hey, our investment adviser’s a nice guy--we trust him,’ ” said Relmond P. Van Daniker, executive director of the National Assn. of State Auditors, Controllers and Treasurers, which is based in Lexington, Ky. “They don’t have an auditor mentality.” Cities and counties can also save a little money by skipping the use of a third-party broker or trust company. And finally, says Van Daniker, in cases of fraud there may be collusion between local officials and their investment adviser.
Q: How do local governments decide where to invest their money?
A: In California, as in most states, the government code spells out the kinds of investments governments can make. The rules are designed to produce interest for the investing agency but--more important--they’re intended to safeguard taxpayer cash. “You’re not out there trying to get top dollar,” said Orange County Auditor-Controller Steve E. Lewis. “It’s the safety that’s No. 1.” So the typical government investment tends to be conservative, often government securities such as Treasury bills and notes.
Q: Why would a government agency rely on a private fund manager?
A: Some governments, mostly smaller ones, turn to investment managers to oversee at least some of their funds because the agencies don’t have people with enough expertise to do it themselves. That can be a risky decision, however, because it often means turning over management of millions of taxpayer dollars to firms that are not directly accountable to the public.
Q: What safeguards exist to protect government investments?
A: The first step, treasurers and financial managers say, is to screen a prospective fund manager carefully. References and a long-term track record should be a prerequisite; scrupulous oversight should be demanded. At the county retirement board, for instance, investment managers need to show a verifiable track record of six or seven years’ length, said Orange County Treasurer-Tax Collector Robert L. Citron.
Q: Are there ways to sniff out a potentially risky manager?
A: Yes, say investment analysts, but no method is foolproof. In general, government treasurers say the best advice is to be wary of managers who offer too good a deal. Some of them are shaky, and experienced treasurers say they tread very warily with these investment managers. “An unusually high rate of return could indicate a snake-oil salesman,” says Van Daniker of the national auditors’ association. According to a court-appointed receiver, Wymer’s company sometimes promised returns of as much as 30%.
Q: Does the type of fraud attributed by the SEC to Institutional Treasury Management occur often?
A: Apparently not, at least according to Van Daniker. State regulations governing where local governments can invest--and the understandable conservatism of people entrusted with public funds--tend to make cases of chicanery moderately unusual. That could change, however. With interest rates low and tax collections down because of the recession, Van Daniker says local officials are under pressure to maximize revenues. The temptation is far stronger now for these officials to try and hold down taxes by investing in a deal that promises a fat yield.
Q: What happens next in the ITM case?
A: The receiver for ITM and another Wymer company, Denman & Co., goes to court Friday to report his progress on tracing millions of dollars in public funds missing from the company’s accounts. A federal judge appointed the receiver, lawyer Robert Carlson, a week ago and also froze all the assets of the two companies, which means the local governments that invested with Wymer--most of them in Iowa--can’t get at their money.
