Loma Linda, La Quinta Sue Adviser Wymer : Investments: Cities are seeking to recover $16.8 million in allegedly misappropriated funds. Officials in Orange, meanwhile, reassure residents regarding its financial reserves.

In the opening shots of what is sure to be an expensive legal war, the cities of Loma Linda and La Quinta have filed lawsuits against Newport Beach investment adviser Steven D. Wymer to recover about $16.8 million in allegedly misappropriated funds, the cities’ attorney said Wednesday.

Meanwhile, city officials in Orange, which lost $7 million, sought to reassure residents that the city has ample financial reserves and won’t have to cut staff or raise taxes despite a $5.75-million budget deficit.

“There was a lot of apprehension that Orange’s financial position is very precarious because of a double hit”--fraud plus a deficit, council member William G. Steiner said in a statement to the council Tuesday.

The city has $16.2 million in reserves and “is rather well-prepared to deal with these two issues,” Steiner said. Orange will consider $2.75 million in budget cuts to offset the deficit but isn’t contemplating layoffs, other officials said.

The missing funds represent about 6% of the city’s $115-million investment portfolio. Although their loss is not financially crippling, it could be politically embarrassing to the five City Council members, four of whom are up for reelection in November.

Steiner’s statement appeared in part aimed at soothing three citizens’ groups that had written a letter last week demanding “immediate disclosure of the true financial condition” of the city.

Orange has hired a legal adviser to find out what happened to the missing $7 million and to recover as much of it as possible. No decision has yet been made on whether to sue Wymer.

Ten California cities are believed to have lost a total of $45 million, money they had entrusted to Wymer for what they thought would be low-risk investments in U.S. government securities. Loma Linda and La Quinta are the first to sue, but they will soon have company.

Palm Desert said Wednesday that it intends to sue, and Torrance, Big Bear Lake and Indio are also seriously considering litigation, attorneys and city officials said. Representatives from all 10 cities, as well as the Coachella Valley Joint Powers Authority, met Tuesday at a Riverside law firm to discuss the situation.

If recent developments in Iowa provide any guide, however, the California cities may find themselves fighting not only Wymer, but also the Iowans and each other over who gets how much of whatever money is left.

All told, at least $113 million is missing from the accounts of 15 Wymer clients in California, Iowa and Colorado, prosecutors allege. Though federal authorities have seized up to $15 million in Wymer’s personal assets, his two Irvine companies--Institutional Treasury Management Inc. and Denman & Co.--have few assets and are likely to be placed into bankruptcy, the receiver said.

Wymer has pleaded not guilty to 30 counts of securities fraud, money laundering and other federal crimes. He is also the target of a civil suit by the Securities and Exchange Commission, which is seeking to recoup investors’ money.

Even if Wymer is convicted on all charges, it is unclear how much the cities could expect to recover.

Public agencies must consider whether Wymer would be “judgment-proof” before investing more tax dollars in legal fees, said attorney Edwin W. Duncan, who represents two trust pools for Colorado governments and agencies. Duncan’s clients did not lose their $260-million principal, but Wymer allegedly used their money for unauthorized securities trades, then misappropriated at least $4 million in profits. The trusts have not decided whether to sue Wymer.

“It becomes an economic decision,” Duncan said. “One of the questions is: Would it cost you more to sue than you could hope to recover?”

In the lawsuits filed Friday in San Bernardino and Indio Superior courts, La Quinta and Loma Linda charge Wymer with fraud, negligent misrepresentation and violation of state securities laws, said their lawyer, Kurt Yeager of Newport Beach.

Wymer attorney Mark S. Roberts did not return a telephone call for comment Wednesday.

Also named in the suits is Refco Securities Inc., a New York brokerage firm where all 11 of Wymer’s California clients had accounts. However, Yeager said the cities are “only seeking an accounting from Refco; we are not charging any wrongdoing.”

The La Quinta suit also names as a defendant Iowa Trust, an investment pool for Iowa public agencies, which claims that $75 million of its funds were misappropriated by Wymer. In what prosecutors allege was an attempt to hide shortfalls in the La Quinta bank account from SEC investigators, Wymer allegedly placed some of Iowa Trust’s money into the La Quinta bank account, and La Quinta then withdrew $10.7 million.

Now La Quinta has received a letter from Iowa Trust saying the money belongs to Iowa, Yeager said. The lawsuit asks the court to decide who should get the money.

“We are still investigating and learning the facts,” Yeager said. “Our real hope is to begin the legal discovery process so we can get to the bottom of what happened.”

The Wymer case has already snared Iowans in a mesh of interrelated legal squabbles.

Several cities that invested with Iowa Trust are unhappy with a court-appointed receiver’s plan for dividing the losses among them. Others are suing the trustees for alleged mismanagement, while the trustees have mounted a failed attempt to dump the receiver and divide up the spoils in bankruptcy court instead.

“If you have a pie that has shrunk, then when you redistribute the pieces there’s going to be someone that’s not happy,” said Bill Roach, spokesman for the U.S. attorney in Des Moines.