Experts Say Risk Not a Factor in Torrance Investment Loss

When any city loses investment money, it sends a shudder of sympathy through California’s tightknit community of city treasurers.

Now, as Torrance tries to figure out where $6.2 million of its investment portfolio went, city finance experts say the loss was not a result of high-risk policies.

Torrance was just one of a number of government agencies, banks, thrifts and other cities caught up in a multimillion-dollar scandal involving Irvine-based investment adviser Steven D. Wymer.

Under state law, all California cities must limit their investments to conservative, low-risk, short-term purchases.

According to the California Municipal Treasurers Assn., for which Torrance Treasurer Thomas C. Rupert is legislative analyst, three key factors must be met when an investment is being considered: safety, liquidity and yield.

“Your No. 1 concern must be safety, then liquidity,” said Redlands City Treasurer Michael Reynolds, president-elect of the association. “Unfortunately, pressure is put on us to make higher and higher yields to help with overall finances. . . . Events like this (scandal) over the long haul are good for our industry because it reminds us to keep yield as a distant third-place concern.”

Torrance officials say they thought that is what they were doing.

As of Aug. 31, the most recent date for which data is available, all but $19 million of the city’s $77-million investment portfolio was invested in bank certificates of deposit.

Two different types of certificates are being used. A little more than $3 million was being held at 32 different banks in the most commonly recognized type of CD, the FDIC-insured variety available to any investor.

About $55 million more was being held in a second type of certificate, generally worth about $1 million each. Those certificates were not insured, but instead were backed by bank collateral, such as government securities and real estate mortgages, worth much more than the face-value of the certificate.

If the bank holding a Torrance certificate were to fail, the collateral would be turned over to the city to cover any loss, assistant city treasurer Linda Barnett said.

Of the $55 million invested in that type of certificate, $39.5 million was being held by Glendale Federal Bank, a struggling thrift whose short-term deposits were downgraded in late 1990 by Moody’s Investor Service from the top rating of “prime” to the secondary rating of “not prime.”

Rupert, an elected official who makes all investment decisions for the city, is on vacation this week and could not be reached for comment on why he placed more than half of Torrance’s investments in Glendale Federal. Rupert has been city treasurer for 17 years.

Barnett said she believes the thrift may have been one of the few with enough collateral to guarantee safety for the city’s money.

“I can tell you that we’ve been drawing down on some of those accounts and putting it elsewhere,” she said, although she was not able to provide specific amounts. “Other banks might not have . . . been willing to put up what’s required.”

Of the $19 million not invested in certificates, $10 million was in a state fund pool that follows the same conservative investment rules as individual cities must follow.

About $2 million was being held in extremely short-term deposits--those that could be withdrawn in a matter of days--at Bank of America.

One million dollars was invested in a limited partnership through Integrated Resources, a New York investment firm.

And just more than $6 million was being held by Denman & Co., Wymer’s investment firm.

Of Torrance’s holdings, the Denman & Co. account was returning the highest yield by far--nearly 10%. Other investments averaged about 6.5%.

When Torrance began investing with the firm in 1988, Rupert signed an agreement requiring Wymer to keep the city’s money only in U.S. government securities, considered to be rock-solid investments.

“There’s nothing the matter with the investment,” Redlands treasurer Reynolds said. “The investment didn’t go sour. It was the person who did the investment for Tom (Rupert) who did not do what he was supposed to do.”

Neither city officials nor the receiver appointed by the court to oversee Wymer’s finances could say what happened to Torrance’s money.

Some strongly suspect that Torrance was a victim of a high-stakes shell game, in which Wymer moved money from one account to another to cover trading shortfalls as they occurred.

There is evidence, receiver Robert Carlson said in a report to the court, that one of Wymer’s clients, an Iowa public agency investment pool, lost $65 million that way.

Torrance City Atty. Kenneth L. Nelson said he is beginning to suspect that Torrance’s money was transferred to other clients’ accounts.

“That is a very strong possibility, but I must stress I have no evidence of that yet,” Nelson said.

Carlson said there are three possible ways Torrance’s money disappeared.

“One is that the money was lost as a result of trading and then (Wymer) sort of covered that up,” Carlson said. “Another possibility is that he took that money out for his own purposes. And, of course, a third one is that the money went into other accounts to make up for shortages and shortfalls.”

Carlson is scheduled to file another report about the state of Wymer’s finances for a Jan. 10 federal court hearing in downtown Los Angeles.

BACKGROUND

Torrance’s investments are made by an elected treasurer, who must ensure that the city has enough liquid cash to meet its daily needs. A separate finance department tells the treasurer’s office what those needs are and handles bill payment, payroll and land management. The elected treasurer system, used by about half of California cities, was created so the treasurer can make independent investment decisions without being influenced by other city officials. There is little formal oversight of the treasurer’s decisions, although monthly investment reports must be made to the City Council. Only voters can remove an elected treasurer from office. In cities where the treasurer is appointed, the official serves at the pleasure of either the City Council or the city manager.