Wymer Charges Shock City Money Managers : Investment: All over Orange County, financial officers recheck safety of municipal revenue.

To those charged with protecting the multimillion-dollar treasuries of Orange County cities, the case of indicted investment counselor Steven D. Wymer and his alleged swindle involving the city of Orange is an alarm that has them checking the locks on their bulging portfolios.

In San Clemente, Wymer’s alleged role in defrauding Orange of $7 million in taxpayer money has motivated city treasury assistant Jennifer Stone to look for even more security than the triple-level clearance needed daily to transfer city money.

Santa Ana Treasury Manager Christine Calderon said the Wymer case has become the “talk of the industry” and has caused the city to reinforce its policy that gives staff members exclusive control over city accounts and excludes contracts with outside investment counselors.

And in Newport Beach, where roughly one-third of the city’s portfolio--about $16 million--is partly administered by outside counselors, the city’s entire investment policy has been the subject of a recent City Council review.

“We’ve looked at this thing over and over again,” Newport Beach Finance Director Dennis C. Danner said. “When something like this happens, you ask yourself how can you protect yourself at one more level? We’ve sat here all day wondering how could a city lose money like that?”

But even Orange City Manager Ronald L. Thompson and Finance Director Ted L. Schoettger admit that they are far from piecing together what happened. According to the most recent allegations, the answers may be at the end of a trail of phony paper that passed through repeated audits and swept away about 7% of the city’s $114-million portfolio.

“When we found out,” Schoettger said, “I immediately called Ron and told him, ‘Hold on to your seat, it’s gone.’ ”

Thompson said in a recent interview: “I am shocked, angered and dismayed, and I could do physical harm to Steven Wymer. I would love to be on his jury.”

The Securities and Exchange Commission has charged Wymer with fraud in what authorities now allege was a sophisticated scheme that bilked about a dozen small cities out of at least $113 million. Wymer has pleaded not guilty to 30 counts of fraud, mail fraud, money laundering, lying to the SEC and other federal charges.

Last month, a federal judge froze all of Wymer’s corporate assets. Orange has embarked on a sweeping audit of its investments.

“We want to make sure there isn’t a sleeping dog lying in there or someplace else,” Thompson said.

What happened to Orange, and to the other cities that did business with Wymer, is very nearly the most chilling prospect imaginable for local municipal treasurers who collectively have been entrusted with more than $1.5 billion of the public’s money.

“The emphasis has to be on the importance of safety,” said Mission Viejo Treasurer Irwin Bornstein, who stands guard over the city’s $32.5 million. “All it takes is one mistake and you’re dead.”

Emphasis on investment security causes most city finance officials, including the few who use outside investment counselors, to place the largest amounts in the state-administered Local Agency Investment Fund and the Orange County Treasurer’s Pool.

Because of the large amounts invested in the two money pools, cities can generally rely on a good rate of return and quickly convert their investments to cash when the need arises without suffering interest losses.

Investing in these funds, most municipal finance officials say, also keeps cities from straying too far from what is universally regarded as the creed governing transactions made by city treasurers. “It’s safety, liquidity and yield, in that order,” Bornstein said. “People in this business should know that you can’t beat the market.”

Possible threats to that security, some local finance officials say, arise when cities give outside investment counselors such as Wymer some discretion over where the money goes.

Calderon, who makes the investment decisions in Santa Ana, said cities risk losing control when decisions are made outside of city halls, unless sufficient security measures govern such transactions.

“Here, I receive all the confirmations” on transactions, Calderon said. “I know for a fact that certain money is going to be placed in a security. I get monthly confirmation reports of safekeeping, and there is no question in my mind.”

Calderon said her in-house movements of money are checked by the city’s budget manager and finance director, and monthly investment reports are checked against daily reports.

When wiring funds out of or among city accounts, Calderon said, the city has imposed a $1-million limit, which requires direct approval from the finance director before the money is moved.

Counselors “are out there, and some people use them,” she said. “If you choose to use them, you should be aware of the pitfalls.”

In Newport Beach, where counselors are used, Danner said the Wymer incident has caused the city to review its policies, though he said sufficient controls are in place for the city’s protection.

Typically, when making transactions through a counselor, the outside agent would telephone the city with a proposed deal and await the decision, Danner said. If approved, the counselor would then make the purchase and present the security in the city’s name to its bank or financial institution for payment.

“You should have to have a good feeling that you are not dealing with a fly-by-night operation,” Danner said. “Perhaps you do lose some control, but it’s like any individual going to a stockbroker for advice. They (counselors) do not have access to city funds.”

In Orange, according to Schoettger, city officials believed that similar controls were in place, but they said the possible use of fraudulent investment confirmations each quarter and the timely receipt of interest payments on the $7-million investment fostered a sense of security.

Schoettger said that the first investment arrangement was made in October, 1989, by former city Treasurer Lorraine Shade and that he had never contacted Wymer or his associates.

Schoettger also said he could not recall the details of how the first agreement was made.

“I looked at the confirmation,” Schoettger said, referring to the proof-of-purchase documents provided by Wymer, “and on the face of it, it looks beautiful and signed by this lady. The interest payments were coming in as they should be, but we didn’t know that meanwhile, back at the ranch . . . “

Schoettger said the city had placed “some reliance on the person (Wymer) who was doing the representing,” although he was not familiar with Wymer’s operation.

Shade is “devastated” by the Wymer revelations and “feels like a woman who has been raped,” Schoettger said.

Further clouding investment matters, and threatening the security of virtually all city treasuries, is the decline in city revenue caused by the recession.

Municipal governments that once depended on streams of cash from local shopping centers to pay for street repairs and more police are looking at budget shortfalls. As a result, some governments are placing even more pressure on treasury officials to help make up the difference by enhancing returns on their investments.

Although she said she has not felt such pressure, Anaheim Treasurer Mary E. Turner said she hears the complaints from her colleagues.

“They go into staff meetings, and they are asked how they can improve their yields,” she said. “To me, you can’t listen to that. You have to be true to your convictions.”

Turner said such instructions from city managers can leave finance officials vulnerable to “somebody with a hotshot idea.”

“As a treasurer . . . you’ve got to learn to say no,” she said. “Everybody likes a profit, but you can’t lose sight of your responsibilities.”

During periods of declining city revenue, Mission Viejo’s Bornstein said, it is “extremely difficult” to hang on to the governing investment principals that emphasize safety.

“People can appear very legitimate, the accounts can balance, they can be double-checked--and there can still be a problem,” he said.

Bornstein, whose city does not use counselors to direct its investments, said Wymer called Mission Viejo in 1989 looking for business.

“I have a policy that I don’t invest in anything that I don’t understand,” Bornstein said, unable to recall the details of Wymer’s proposal.

“I didn’t understand how he could make such returns. . . . I’m sure glad I made the right decision back in 1989,” he said. “I’m very thankful.”

Checks and Balances

The case of indicted investment counselor Steven D. Wymer has rekindled a discussion among city finance officials over the discretion given to outside investment counselors to handle taxpayer funds. Some cities have strict policies prohibiting the use of such counselors; others depend on them to safeguard accounts and earn a good return on investments.

Here’s how investment counselors typically interact with city officials during a proposed transaction: 1. Investment counselor, generally by telephone or fax, communicates an investment proposal to city officials. 2. City officials decide whether to approve purchase and authorize release of city funds. Proposed investment judged primarily for its safety, liquidity and yield. 3. If not approved, deal stops. If approved, investment counselor is instructed to make purchase. 4. Record of purchase is presented to city’s financial institution; investment counselor accepts payment for his purchase. Municipal Money: A survey of 25 Orange County cities shows four use outside investment counselors. The four cities and the size of their portfolios: Cypress: $22.5 M Newport Beach: $40.7 M Orange: $114 M Yorba Linda: $38.7 M What They’re Saying Newport Beach (Uses outside counselors): “You should have to have a good feeling that you are not dealing with a fly-by-night operation. Perhaps you do lose some control, but it’s like any individual going to a stockbroker.”

Finance Director Dennis C. Danner

Santa Ana (Does not use outside counselors): Investment counselors “are out there, and some people use them. If you choose to use them, you should be aware of the pitfalls.”

Treasury Manager Christine Calderon

Portfolio Parade

A survey of 25 cities reveals that their portfolios are heavily invested in two major funds, the Local Agency Investment Fund (LAIF) and the Orange County Treasurer’s Pool. LAIF is a fund in the state treasury. It has no minimum investment period, and funds may be converted to cash in 24 hours without loss of interest. Pooling money with other agencies allows for greater return on investments and generally higher yields when interest rates are low. The Treasurer’s Fund is similar to LAIF in that funds are pooled with other agencies. Liquidity provisions are 24 to 48 hours longer.

Amount City (in millions) Anaheim $250.1 Brea $72.0 Buena Park $40.0 Costa Mesa $59.1 Cypress $22.5 Dana Point $11.0 Fountain Valley $51.5 Garden Grove $41.5 Huntington Beach $86.8 Irvine $169.0 Laguna Beach $9.0 Laguna Niguel $15.1 La Palma $15.0 Los Alamitos $1.1 Mission Viejo $32.4 Newport Beach $40.7 Orange $114.0 Placentia $13.8 San Clemente $47.0 San Juan Capistrano $7.2 Santa Ana $106.0 Tustin $54.6 Villa Park $1.0 Westminster $16.7 Yorba Linda $38.7

City Investments Anaheim Federal agency issues * Brea Federal agency issues Buena Park LAIF, Orange County Treasurer’s Pool Costa Mesa LAIF, Orange County Treasurer’s Pool Cypress LAIF, certificates of deposit Dana Point LAIF, Orange County Treasurer’s Pool Fountain Valley LAIF, federal agency issues, corporate notes Garden Grove Federal agency issues, certificates of deposits Huntington Beach LAIF, Orange County Treasurer’s Pool Irvine LAIF, Orange County Treasurer’s Pool Laguna Beach LAIF, Orange County Treasurer’s Pool Laguna Niguel LAIF, Orange County Treasurer’s Pool La Palma LAIF, Orange County Treasurer’s Pool Los Alamitos LAIF Mission Viejo LAIF, Orange County Treasurer’s Pool Newport Beach LAIF, Orange County Treasurer’s Pool Orange Federal agency issues Placentia LAIF, Orange County Treasurer’s Pool San Clemente LAIF San Juan Capistrano LAIF Santa Ana LAIF, Orange County Treasurer’s Pool Tustin LAIF Villa Park LAIF Westminster LAIF Yorba Linda LAIF

*Investments are in bonds issued by federal government agencies such as the Federal National Mortgage Assn.

Source: Various cities