City Held Responsible for Fraud Case Losses : Law: Jury rejects Torrance’s claim that auditing firm could have prevented investment loss of $6.2 million.

A jury rejected the city of Torrance’s claim that its auditors could have prevented the city’s loss of $6.2 million to investment adviser Steven D. Wymer, making it much less likely that the city will ever fully recover its losses.

A Torrance Superior Court jury voted 11 to 1 last week that Deloitte & Touche should not have to repay the city’s losses plus interest, even though the accounting firm served as the city’s auditors from 1989 to 1991, when Wymer was a Torrance investment adviser.

Wymer, now bankrupt and serving a 14 1/2-year sentence for securities fraud, admitted that after he lost money through bad investments, he disguised the losses to clients and regulators by forging documents and promising high returns. Torrance and dozens of other cities in California and Iowa lost about $100 million in the scheme.

The jury “said this is the client’s responsibility and not the auditors’,” said Aulana Peters, Deloitte’s attorney in the trial. “That is critical. I think too frequently auditors have been pegged with the responsibility they should not have.”

City officials have not decided if they will appeal the decision. The jury ordered the city to pay Deloitte & Touche $11,900 for the final year of the audit. And Deloitte will try to get the city to pay its court costs, such as deposition fees and expert witness salaries.

“We haven’t finished adding it up,” Peters said, noting that the amount could reach “six figures.”

The city, which has spent about $600,000 trying to recover the Wymer losses, reached an agreement recently with one of the financial institutions involved to recover about $700,000.

“We’ve got a couple of other cases still going, dribs and drabs,” said Torrance Mayor Dee Hardison. “But it doesn’t add up to $6.2 million by a long shot.”

Torrance’s attorney Christopher Caldwell had argued that Deloitte & Touche’s accounting team was inexperienced and failed to fully examine the records of the city’s investments with Wymer. City officials also said that the accounting firm could have warned the city because another Deloitte & Touche office served as auditors for Wymer’s investment firm, Denman & Co.

In late 1991, Torrance officials learned through newspaper accounts that Wymer’s assets were frozen by the Securities and Exchange Commission. Instead of $6 million that city officials thought was in the account, there was only $92.

“I came away with a little bit of disillusionment about the audit system,” Hardison said of the jury’s decision. “It certainly gives me a different outlook on what we pay auditors to do. . . . I guess if they find (a suspicious investment), they take credit. But they don’t look for it.”

Peters said that the firm’s Denman auditors were bound by client confidentiality and could not inform other Deloitte & Touche clients of Wymer’s activity. The Denman auditors dropped Wymer as a client and took their suspicions about his investment practices to the SEC.

“That is a fairly unusual step for a public accounting firm to take,” Peters said.