CHICAGO -- An alleged fraud scheme perpetrated by a California investment firm has led to the "biggest financial scandal in the state of Iowa's history," according to state Treasurer Michael Fitzgerald.
The Securities and Exchange Commission last Wednesday got the U.S. District Court for the Central District of California to freeze the $1.2 billion of assets managed by Irvine, Calif.-based Institutional Treasury Management after charging that the firm had committed fraud in the handling of $75.4 million of investors' funds, including $65 million from one account.
Mr. Fitzgerald said Iowa officials have since learned that this account was the Iowa Trust fund.
The treasurer added that 108 local governments in the state had a total of $100 million in the fund.
The immediate effect on the credit ratings of the local governments that invested in the Iowa Trust fund cannot be determined, according to Jamie Burr, vice president and assistant director for legal analysis at Moody's Investors Service.
"We don't know the extent of the exposure yet," he said.
Officials at Standard & Poor's Corp. said they could not comment on the matter until they had received more information.
None of the state's money was directly invested in the trust. Mr. Fitzgerald said. However, the state last Thursday did give an emergency $110,000 loan to the First Judicial District of Waterloo, which had money invested in the fund, so that an employee payroll could be made.
Mr. Fitzgerald explained that judicial districts in Iowa, unlike other state agencies, are allowed to manage the funds appropriated to them by the state.
A finance director for one Iowa city who asked not to be identified said he had been approached by a marketing agent for the Iowa Trust last year and was told he could received double-digit yields by investing in the fund.
"I just didn't feel good about it," the finance director said. "He was offering rates of return on government securities that didn't sound right."
He added that the marketing agent was Iowa Senate President Joseph Welsh, D-Dubuque. Sen. Welsh, D-Dubuque. Sen. Welsh could not be reached for comment, but he was quoted in last Friady's The Des Moines Register, saying that he no longer was affiliated with the trust.
Mr. Fitzgerald said the Iowa Trust was established in 1989 by Polk County Treasurer Mary Maloney, Dubuque County Treasurer Report Carr, and Marshalltown City Treasurer Elaine Gundacker as a way for local governments to pool their idle cash for investment purposes.
None of the directors of the trust could be reached for comment last Friday. Lee Duin, assistant director of the Polk County treasurer's office, said the directors were meeting all day with lawyers to determine what course of action could be taken at this point.
Mr. Dubin added that Polk County had $586,000 in the fund when Institutional Treasury Management's assets were frozen last Wednesday.
Moody's placed Polk County's As general obligation rating under review on Dec. 3 because of a default on $39 million of outstanding industrial revenue bonds the county had issued on behalf of a horse racetrack.
According to The Des Moines Register, the city of Dubuquehad $24 million in the trust, the most of any local government. Dubuque officials could not be reached for comment last Friday.
Bill Roach, a spokesman for state Attorney General Bonnie Campbell, said it is unclear what role, if any, state officials could have in an investigation into the alleged fraud.
"We're looking into it, but it appears to be a federal matter at this time," Mr. Roach said.
Mr. Fitzgerald said Iowa laws do not provide for the state to monitor the investments of local governments.
In its complaint, the SEC charged Institutional Treasury Management -- an investment adviser registered with the commission -- its predecessor firm Denman & Co., and their principal and sole owner Steven D. Wymer with defrauding clients. The SEC alleges that on Nov. 25 Mr. Wymer withdrew $65 million in Treasury notes from one wothout the client's consent, took possession of the cash proceeds, and funneled "at least some of these funds to his other advisory clients' accounts."
The complaint also alleges tha t "nearly all" of a $10 million portfolio the firm managed for an unnamed "small municipality" was missing, and "the defendants had effected numerous securities transactions in the client's account" without the client's knowledge. The SEC charged that once Mr. Wymer learned that the commission was looking for the money, "Mr. Wymer quickly transferred cash and securities to the client's account from other accounts."
In addition, the complaint said that Mr. Wymer allegedly defrauded other clients by purchasing Treasury notes in his own account and reselling them to "at least two advisory clients at inflated prices."
Besides freezing the firm's assets, the U.S. District Court also issued a temporary restraining order against further alleged violations of the law and appointed a temporary receiver for the firm. A court hearing on the matter has been scheduled for Friday. Mr. Wymer could not be reached for comment.
According to the SEC's complaint, Institutional Treasury Management had 64 clients who were mainly small municipalities counties as well as financial entities. A list of clients obtained by The Board Buyer included the states of Florida and Wyoming, several cities in California, the University of Utah, the Salt Lake City School District, pension funds, and other public and private entities.
In Florida, Deputy Comptroller Larry Fuchs said that Institutional Treasury Management had acted "strictly in an advisory capacity" to funds totaling about $180 million held by governmental units in the state. One of the funds, he said, was a state of Florida investment account totaling about $110 million, and the other,a Florida School Boards Association account totaling about $70 million.
"There is no evidence that any monies from these two funds were deposited with the firm," he said.