Local governments that invested with a California-based investment advisory firm facing fraud charges by the Securities and Exchange Commission were attracted by promised high rates of return.

Public finance officials who declined the firm's advisory services said they were skeptical of the promises made by representatives of Irvine, Calif.-based Institutional Treasury Management.

One source said it was over "the last year or so" that Institutional Treasury Management trageted public funds business. According to the SEC's complaint, the firm had 64 clients, some of whom were trusts or pooled funds involving numerous governments.

Officials from governments that declined to invest with Institutional Treasury Management said the firm appeared to promise more that it could deliver.

"I thought it was all too good to be true," said Brad Loscher, investment manager for Springfield, Ill. "They were offering rates of return two percentage points over what we were getting elsewhere."

Mr. Loscher added that the salesman for the firm, John Tice of Salt Lake City, said the city's money would be invested only in U.S. Treasury securities, with maturities of no more than 10 years.

Mr. Loscher was suspicious of the yield claims, and he became particularly leery when the salesman suggested that he allow the firm to buy and sell securities using the city's funds without first notifying him.

Alabama's assistant treasurer, Robert A. Stabler, said yesterday that "about a year ago" Wayne Stough, a salesman for Denman & Co., Institutional Treasury Management's predecessor, approached his office about investing state funds. Mr. Stabler said he remembers promotional literature suggesting "double-digit" yields.

Mr. Stabler also recalled the firm wanted to get an endorsement from the treasurer's office in exchange for the firm's participation in a scholarship program targeting Alabamans. "We didn't pursue their idea," Mr. Stabler said. "First of all, we don't do endorsements. Also, we couldn't take the yields seriously--they seemed entirely too good to be true," he said.

Mr. Stough, a regional vice president at Institutional Treasury Management, confirmed yesterday that the accounts included in the Alabama U.S. Treasury Advisory Program had been frozen. "But I have made sure that every penny is accounted for in those accounts, and that all the money is available in cash," he said.

Mr. Stough refused further comment, including details on the number or size of the accounts Institutional Treasury has under management in Alabama accounts.

At least 16 California cities and four agencies had transactions with Institutional Treasury Management, but rumors in the marketplace and gut feelings by some officials prompted at least two cities -- Newport Beach and Holtville -- to withdraw their funds only days before the firm's assets were frozen.

After calling the company last Tuesday and getting no answer in the middle of the day, Holtville City Manager Dennis Halloway said "red lights came on," so he asked a fund custodian to draw out all $900,000 of city bond proceeds remaining with the firm.

In 1989, HOltville used the company to invest proceeds from a $3.5 million bond issue for a new water plant. "A that time they had an excellent track record," said Mr. Halloway.

Mr. Halloway sits on the Coachella Valley Joint Powers Insurance Authority board and alerted that agency to his concerns, but Coachella was not able to get out its money, he said. The agency has "several million" dollars now frozen in the investment firm, according to a source. Agency officials could not be reached for comment.

Mr. Halloway said the returns promised by the company spread by word of mouth. "One city that used [Institutional Treasury Management] and got good returns called another. It was networking."

The company's California networking may have been boosted by its sales staff. For example, the company hired former Riverside city Finance Director Hal Brewer as a salesman, according to Riverside's current Finance Director Barbara Steckel.

Ms. Steckel said she became concerned early this year when the company sent reports with mistakes in them. She terminated the company's relationship with Riverside in February. "It was one of those gut feelings," she said. "Anyone offering returns like that." Ms. Steckel said those returns were in the 15% range.

A Newport Beach official said he terminated the city's $7 million relationship with Institutional Treasury Management early last week after a fund custodian tipped the city off to a possible investigation of the company.

Several California city officials disputed reports calling the company 'high-flying.' Torrance city Treasurer Tom Rupert, for example, termed the company "professional."

"They did a very good job for us until this happened," Mr. Rupert said. Torrance, with population of 140,000, now has $6.2 million of municipal funds frozen in the company. Mr. Rupert said he did not know what would happen to the money.

Glenn A. Shaffer, deputy state treasurer of Wyoming, said his state protected its investment by having a safekeeping bank hold its securities. In addition, the state had to authorize any trades, which blocked the investment adviser from being "free to wheel and deal" with Wyoming's funds, he added.

Such separate custodial agreements were of "tantamount importance" in protecting the state's $8 million investment, Mr. Shaffer said.

He said he was unclear how his state developed a realtionship with Institutional Treasury Management, because the tie was established before he worked in the treasurer's office. The scandal "was kind of a surprise to all of us," he said.

In Texas, officials of the Texas Public Funds Investment Pool, a private pool that is outside the purview of the Texas treasurer's office, said they were confident the pool would get its $20 million back.

Richard Kirkpatrick, treasurer of Galveston County, Tex., one of the seven governmental units that invested in the pool, said Institutional Treasury Management was shosen by the pool because it was "highly rated" by the Nelson Directory of Investment Managers.

Mr. Fox said that since July, when Institutional Treasury Management became the pool's adviser, the yield on its investment has been around 7.07%.

The fallout from the fraud investigation has been greatest in Iowa, where 108 local governments had a total of $100 million in the Iowa Trust that employed Institutional Treasury Management as its adviser.

State officials said $65 million of the $75.4 million of client funds that were the target of the fraud complaint came from the Iowa Trust.

On Monday, Gov. Terry Branstad appointed a commission headed by former state Supreme Court Justice Mark McCormick to review the investment practices of local governments and to make recommendations by February, according to Richard Vohs, the governor's spokesman.

Iowa laws do not provide for the state to monitor the investmens of local governments, but the governor has asked the state Department of Criminal Investigation to determine whether or not any state laws might have been broken.

Meanwhile, an Iowa state senator has come under scrutniny because of his work as a marketing agent for Iowa Trust. Finace difectors of local governments in Iowa said last week that Senate President Joseph Welsh, D-Dubuque, had approached them about investing their idle funds in the trust.

Senate Minority Leader Jack Rife, R-Moscow, called on the state Senate Ethics Committee Monday to investigate whether Sen. Welsh used his position as Senate president to benefit the firm, according to Caril Carson, Senate Republican staff director.

In its compalint, the SEC charged the investment adviser, its predecessor firm, Denman & Co., and owner Steven D. Wymer with defrauding clients. The charges concern alleged fraud concerning the withdrawal and sale of $65 million in Treasury notes from one client's account without the client's consent, and the funneling of the cash proceeds into other client accounts.

Also listed among "missing" funds by the SEC was "nearly all" of a $10 million portfolio the firm managed for an unnamed "small municipality." That account had allegedly been tapped by the defensants for "numerous securities transactions" without the client's knowledge. Iowa Tresurer Michael Fitzgerald said the account apparently belonged to Marshalltown, Iowa.

The complaint also said 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."

Over the weekend, investigators reportedly found $65 million they thought was missing from clients accounts. The money was reportedly transferred from Refco Securities to Shearson Lehman Brothers two to five days before the Dec. 11 court order freezing the firm's assets. Officials from the SEC and Robert Carlson, the form's receiver, did not return calls.

The U.S. District Court, which also forze $1.2 billion of assets managed by the firm and issued a temporary restraining order against the firm and Mr. Wymer from further violations of the law, has scheduled a hearing for Friday.

Michael Perlis, Mr. Wymer's attorney, said Monday that his client had agreed to the consent judgment at last Wednesday's court hearing without admitting or denying the allegations contained in the complaint.

"He promised to obey the law," Mr. Perlis said. "Mr. Wymer also contended, and the commission has not alleged to the contrary, that he did not pocket any money that is allegedly unaccounted for."

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