$1-Million Rupert Mortgage Deal Violated Torrance Criteria, City Told

An outside law firm this week informed Torrance officials that a $1-million investment made by embattled City Treasurer Thomas C. Rupert violated city guidelines and officials are concerned that it may now have to be sold at a substantial loss.

The news follows December’s jolting disclosure of the disappearance of $6.2 million of city funds entrusted to investment adviser Steven D. Wymer, who has pleaded not guilty to 30 counts of securities fraud and other charges.

Now city officials are facing more questions about the city’s problem-plagued, $68-million investment portfolio managed by Rupert, who took industrial leave for an undisclosed illness in February. A lawyer for Rupert, who has been treasurer for 28 years, said Rupert made the $1-million investment in 1988 only after reading a legal opinion concluding that the investment was legally defensible.

Rupert was not available for comment this week but he has repeatedly defended the legality of the investment.

After the $6.2 million disappeared, city officials began scrutinizing the remainder of Torrance’s investments and became concerned about $1 million in a program called American Insured Mortgage Investors-88. The money was invested in multifamily real estate mortgages in several states.

Torrance hired an outside law firm to study the matter, and the city released an opinion from the law firm Monday concluding that the mortgage program does not meet the criteria for Torrance investments as set forth in the City Charter, which follows state code.

“It is not a permitted investment,” City Atty. Kenneth L. Nelson said Monday.

The mortgage program did not meet state codes in several technical areas, including how the investment was insured, according to the opinion by the Los Angeles law firm of Buchalter, Nemer, Fields & Younger.

Nelson said the city is awaiting more legal advice about whether it must immediately sell the investment, which financial advisers estimate is now worth about $500,000. A full return on the long-term investment is not guaranteed until 2021.

City Councilman Bill Applegate said that if the holding is indeed illegal, the city should sell it--at a loss, if necessary. “ . . . If it is an illegal investment, we can’t stay in it,” Applegate said.

In fact, a 1988 legal opinion researching the investment for Integrated Resources, the company then sponsoring the mortgage program, concluded that though the investment is not “without doubt,” it could withstand a court challenge.

“I don’t know how the Torrance opinion was drawn, but I do know that the legal opinion I was exposed to in 1988 found that it was a legal investment for municipalities in California,” said Tim McDuffie, the Orange County investment broker who sold the AIM-88 units to Torrance.

Los Angeles attorney Richard Levy, who is representing Rupert, also said he has seen a legal opinion that the investment was legal for California cities.

“The important thing as far as we are concerned is that Tom Rupert, who was a leader in California putting together the law governing the municipal investment field, felt at the time that it was a proper investment (and) had materials at the time indicating that, regardless of how it looks in 20-20 hindsight,” said Levy, an attorney with Gibson, Dunn & Crutcher.

Torrance Mayor Katy Geissert said that the council has just received a copy of the 1988 opinion and that it will be reviewed by city attorneys.

After the Wymer scandal, the City Council became concerned that Rupert had too much authority over the city’s portfolio and instituted new measures to oversee how city funds are invested. Rupert has not been accused of any wrongdoing in connection with the missing $6.2 million, and an outside attorney for Torrance, George R. Hedges, said he knows of no connection between the AIM-88 holding and Wymer.

But in the wake of the controversy, one city councilman called for Rupert’s resignation and some civic activists suggested that the city treasurer post be changed from an elected to an appointed position so that the city could have greater oversight of investment decisions.

At least two other California cities and the South Bay Hospital District have invested in the mortgages, but the Torrance opinion may not be applicable to them because it refers specifically to the City Charter. Anaheim has $1 million invested, Barstow has $500,000 and the hospital district has $500,000.

The district, which owns and leases South Bay Hospital in Redondo Beach, is studying its investment in the program, Executive Director Philip Valera said. Anaheim and Barstow financial officials said they believe the investment is legal.

“It’s pretty much guaranteed. As long as you hold it to maturity, you shouldn’t have a loss on it,” Barstow City Treasurer Evelyn Radel said.

But other cities chose not to invest in AIM.

“It didn’t have the liquidity that we wanted,” said Conny Jamison, San Diego treasurer and president of the California Municipal Treasurers Assn.