Orange’s Missing Millions Never Got to City Account

The $7 million that the city of Orange thought it was entrusting to a New York bank to be invested by Newport Beach money manager Steven D. Wymer was misappropriated before it ever arrived in a city bank account, an attorney for the city said Tuesday.

Instead, Wymer placed the money in a separate account controlled by his firm, Denman & Co. of Irvine, in 1989 and sent Orange a forged document that purported to confirm that an account had been opened in the city’s name, attorney Michael B. Jeffers said.

Denman & Co. then sent other fake statements--and interest payments--that duped the city and its auditors into believing for nearly two years that its money was safe with Security Pacific Trust Co. in New York, he said. Security Pacific Trust, a subsidiary of Security Pacific National Bank, is not accused of wrongdoing.

“Orange never had an account at Security Pacific,” Jeffers said. “The scheme was a fraud from the beginning.”

The allegations by Jeffers, who specializes in securities law at Phillips, Haglund, Haddan & Jeffers in Newport Beach, offer the first detailed explanation of what happened to the money that federal prosecutors say was misappropriated by Wymer. They are based on an independent review of documents obtained by Orange from banks and brokerages that handled the city’s funds, as all Denman & Co. documents have been seized by the SEC and the U.S. attorney’s office.

According to Jeffers, during the nearly two years that Wymer controlled Orange’s money, he never reported a single loss on his trades of U.S. government securities, though documents show that some of the trades were losers. Jeffers called Wymer’s activities “a Ponzi scheme” and said it was unclear how Wymer planned to make up the shortfall between the glowing results he reported to clients and the money they didn’t have in their accounts.

For example, one $9,000 loss was never reported to Orange at all, while a $5,000 trading loss was reported as a $5,000 gain, Jeffers said. Meanwhile, Denman collected a percentage commission on each purportedly profitable trade, he alleged.

Jeffers was hired after the Securities and Exchange Commission charged Wymer with fraud in what authorities now allege was a highly sophisticated swindle that bilked dozens of small cities out of at least $113 million. After a federal judge froze all of Wymer’s corporate assets in December, authorities found that only $4,032 remained of Orange’s $7.1-million investment.

The Orange City Council met late into the evening Tuesday to review Jeffers’ attempts to recover its money and to discuss how to deal with the $7.1-million loss in the face of a budget deficit of at least $4.6 million.

The council authorized a legal and financial audit of all of its investments “to ensure that all the money is safely invested as it’s supposed to be, as the city believes it to be,” Jeffers said. Earlier Tuesday, Orange City Manager Ron Thompson said the city is also conducting a sweeping review of its investment practices to ensure adequate safeguards are in place.

Wymer has pleaded not guilty to 30 counts of securities fraud, mail fraud, money laundering, lying to the Securities and Exchange Commission and other federal charges. He is also the target of a civil lawsuit by the SEC and a federal forfeiture action aimed at stripping him of his homes in Newport Beach, Florida, Idaho and New York, luxury cars and boats, and other allegedly ill-gotten gains. The 43-year-old money manager remained in the Metropolitan Detention Center in Los Angeles Tuesday while his family attempted to raise his $600,000 bail.

His attorneys had no immediate comment on Orange’s allegations.

“What we’re still trying to concentrate on, frankly, is getting him out so we can deal with these kinds of assertions,” said attorney Mark S. Roberts of Fullerton. Roberts said Wymer intends to contest the charges.

“The case against Steve Wymer just isn’t as bad as it’s portrayed,” Roberts said, adding, “Bottom line: Regardless of what people say, it’s just accusations, and this is still a defensible case.”

According to Jeffers, when Orange hired Denman in October, 1989, it was instructed to wire its investment to Security Pacific Trust in New York, into “what it believed to be a segregated custodial account.” The city sent $4 million on Oct. 25 and $3 million on Nov. 21, and received a “forged ledger sheet” of an account in its own name at the bank, Jeffers said.

“It looks like it was made up on a computer sheet, and then the (Security Pacific) letterhead was pasted across the top or something,” he said.

But the money was placed in a Denman account, and within a week it was transferred to another Denman account at Refco Securities, a New York brokerage, Jeffers said.

Orange was advised in late December, 1989, that its money had been transferred to Refco, and city officials “presumed” that the money was also in a custodial account in the city’s name, he said.

The city also received an April, 1990, letter from Refco saying that all its funds were held in segregated accounts that were insured up to $10 million, Jeffers said.

The city received monthly statements from Denman that showed its balance swelling nicely, interest payments and even confirmation tickets on securities trades made on its behalf by Refco and other brokerages. Some of the trades were legitimate, but other trades were apparently fake, and the confirmation tickets were forged, Jeffers alleged.

“Every transaction was a gain,” Jeffers said. Wymer, who has an undergraduate degree in mathematics from UC Irvine, “touted himself as being an expert trader with a mathematical background” that gave him special insight into securities trading, Jeffers said, adding: “He said he used a special method, but nobody I’ve talked to and none of the treatises I’ve consulted mention this theory.”

The documents suggest that Orange’s money may have been commingled with funds from other cities that are also alleged to have lost millions they thought were in Refco accounts, though that has not been confirmed, Jeffers said. Nine other California clients that lost money, including Torrance, Big Bear Lake and Palm Desert, also had accounts at Refco.

Orange Councilman William G. Steiner, in a statement released before the council meeting Tuesday, said he and Councilwoman Joanne Coontz believe that the city should cooperate with other cities to recover the lost money “to the point of initiating litigation, if necessary.”

Council members could not be reached for comment.