CHICAGO - Representatives for the Iowa Trust late Wednesday took legal action against Marshalltown, Iowa, claiming that its former city treasurer failed to adequately monitor the activities of the trust's investment adviser.

David Lyons, receiver for the Iowa Trust, said he filed a petition in Polk County District Court to add Marshalltown to a lawsuit originally filed in December 1991 against former trustees and the trust's legal counsel. Those named in the original suit included former Marshalltown Treasurer Elaine Gundacker and the trust's legal counsel, Davis, Hockenberg, Wine, Brown, Koehn & Shors of Des Moines.

Iowa Deputy Attorney General John Perkins said the addition of Marshalltown to the suit shows that the city is "also responsible for the actions of Elaine Gundacker."

The suit claims that Gundacker among other things, engaged in "numerous fictitious transactions using the [Iowa Trust's] assets."

It also alleges that Gundacker had a conflict of interest between her dealings with Steven Wymer, the investment adviser who handled the account, and her position as a trustee for the Iowa Trust. Gundacker was fired from her post as city treasurer shortly after the Iowa Trust scandal broke last year.

In addition to participating with the Iowa Trust, Marshalltown had a separate account with Institutional Treasury Management, Wymer's investment firm, Lyons said.

The suit says that Wymer gave the city "secret discounted performance fees" of 30% on its account because Gundacker helped set up the Iowa Trust.

Marshalltown Manager Jay Gsell referred questions regarding the suit to City Attorney Pat Brooks, who did not return phone calls.

Tom Riley, an attorney for Gundacker and two other Iowa Trust trustees, said his clients did nothing wrong.

In addition, he said the Iowa Trust and its legal counsel were aware of Marshalltown's separate account with Institutional Treasury Management before the Iowa Trust was created.

Attorneys for the remaining Iowa Trust trustee and for Davis Hockenberg did not return phone calls.

While the suit seeks monetary damages from the defendants, including Marshalltown, it does not specify an amount. The state attorney general's first priority, Lyons said, is to recover $75 million of lost funds allegedly belonging to the Iowa Trust. The state has filed suits against four California cities and a Colorado bank in pursuit of those moneys.

Late Wednesday, the Iowa Trust officials announced that they have retrieved $7.1 million of that sum.

Once those suits are settled, Lyons said the lawsuit against the trustees, law firm, and Marshalltown will seek to recoup any remaining missing funds that are not awarded to the Iowa Trust from the other lawsuits.

Marshalltown was a founding member of the Iowa Trust, which was created to allow 88 communities to pool their cash in an investment account. In December 1991, the Securities and Exchange Commission charged the firm with fraud after determining that $75 million was missing from the Iowa Trust's account.

In February, Moody's Investors Service lowered the city's rating to A from Aa on $12 million of general obligation debt - the only rating action taken against the government due to its involvement with Wymer's firm. Moody's said it was premature to assess the impact the litigation could have on Marshalltown's finances or credit rating.

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