City Colleges of Chicago fired its treasurer Friday after discovering he had, without authorization, placed most of its nearly $100 million investment portfolio into extremely high-risk securities, officials said.
City Colleges, the body that runs Chicago’s seven community colleges, said Philip Luhmann, 62, invested $96 million in Principal Onlys, mortgage-backed securities that have generated growing concern nationally due to large losses associated with them.
The purchase of the 30-year securities not only was unauthorized but violated the district’s investment policy, officials said. That policy states that investments must be readily convertible to cash. The long-term securities are not.
Investments also cannot be highly sensitive to interest rate fluctuations, according to the policy. Principal Onlys are very susceptible to interest rate swings.
District officials were not sure how much, if any, of the money may have been lost because of the unauthorized transactions. Luhmann invested the money through Westcap Securities Inc. and Westcap Securities L.P., both based in Texas.
Although City Colleges officials said there is no immediate financial danger, some of its required reserves have been invested in the volatile securities. “At this juncture, to my knowledge, our reserves are not imperiled,” said Ronald Gidwitz, chairman of the City Colleges Board.
Gidwitz also said the district is optimistic it may be able to rescind the unauthorized transactions. “The real issue is we don’t think the transactions will stand,” said Gidwitz, who added that City Colleges will take whatever legal action it deems necessary to undo the transactions.
But Ira Green, chairman of Houston-based Westcap Securities L.P., said the firm “is in possession of the appropriate documents that authorize the transactions.”
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Reached at his Hyde Park home Friday afternoon, Luhmann declined to comment.
Illinois regulators said that in December 1993, Westcap Securities Inc. withdrew as a licensed securities dealer in Illinois and 45 other states.
Michael Morehead, an assistant director of enforcement with the Illinois secretary of state’s securities division, said it was unclear why it withdrew.
On Friday, City Colleges officials were clearly embarrassed and upset that Luhmann, a well-respected senior official, allegedly had violated their trust. Luhmann had been with City Colleges since 1966 and had long served as the treasurer.
At a meeting in January, Luhmann misrepresented the nature of the securities to the board, said Jackie Woods, a board spokeswoman. He never indicated they were the highly speculative investments that have been ruled unfit for public institutions, she said.
The transactions were made between July and November 1993, City Colleges officials said.
The questionable investments came to light when colleges officials realized they could not easily liquidate portions of their portfolio to meet certain obligations, officials said.
Luhmann told his boss, Leonard Sippel, the colleges’ chief financial officer since November, of the transactions on Feb. 3. According to a City Colleges official, Luhmann said, “I made a very big mistake.”
The disclosure pointed to a gaping flaw in the colleges’ financial checks and balances.
It also may significantly set back the image of increasing competency and fiscal responsibility that Gidwitz has tried to bring to the City Colleges over the last two years as chairman.
Although City Colleges said it had not pressed any charges against Luhmann as of Friday, it has informed the U.S. attorney’s office of the unauthorized transactions.
It also said it will move to fix the holes in its money management.
Luhmann, for instance, reported only to the board and not to an administration official. The board intends to place the chancellor in an oversight position over the treasurer’s post.
It also intends to find an outside firm to handle its investments.