Northfield is scrambling to track down nearly $4 million that may have gone missing after the city entrusted the money to a broker now embroiled in a federal investigation.

The money was supposed to have been invested in certificates of deposit by Rate Search, a St. Louis firm the city has worked with for 20 years. But now Rate Search can't account for certificates belonging to about 40 clients nationwide, including a religious order, cities, retirees and business associations, said Albert Watkins, an attorney representing the company and its president, Scott Luster. The missing money totals about $4 million, out of about $25 million the company invested for all its clients, he said.

The City Council took emergency action last week on the advice of the city's finance director, Kathleen McBride, terminating its relationship with Rate Search at its Sept. 17 meeting to regain direct control of its money.

Northfield had been having problems with the company's reports for months when, on Sept. 14, a call about Rate Search from an attorney representing another of its clients prompted McBride to add a last-minute item to the City Council's agenda. "The details of their reporting leave a lot to be desired," she said, adding that Rate Search's out-of-state offices and the city's desire to invest less money in certificates of deposit had already prompted her to begin transferring funds held by Rate Search.

As of last week, Northfield's holdings with Rate Search totaled just under $3.8 million in 39 certificates, down from about $10 million when McBride started working for the city in April 2006.

At least two clients have filed suit against Rate Search and Clayton Analytical Services, a St. Louis consultant that Watkins said was responsible for tasks such as handling money, tracking certificates and providing monthly financial statements to Rate Search. The American Society of Appraisers sued in July, and the State Bar of Nevada followed suit last week, claiming that $300,000 of $3.2 million it invested with Rate Search may have been embezzled.

Both companies deny wrongdoing, with Rate Search blaming Clayton for the fiasco.

In early 2007, Clayton principal Clark Schultz abruptly terminated his 14-year relationship with Rate Search, Watkins said. "Virtually immediately, there were accounting irregularities that could not be reconciled," he said. Customers would call asking for certificates they knew had matured, and "Rate Search would go and look for the money and couldn't find the money," Watkins said. In some cases, the company would find money in a client's name at a different bank, in a different amount than records indicated. In at least one case, he added, a matured certificate worth six figures has returned to Rate Search, but the company can't identify its owner.

An attorney for Clayton Analytical Services disputed Rate Search's account of the two firms' relationship, and declined comment on behalf of Schultz.

Luster also declined to comment.

Northfield city staff members refused to say whether any public money had disappeared, but Watkins said Rate Search sent a letter in June to all of its clients that were adversely affected by the debacle, and Northfield received one of those letters.

Rate Search contacted the Federal Bureau of Investigation and the United States Postal Inspection Service this summer. The company also filed suit against Clayton but dropped the case "once it recognized that the scope of the federal investigation would be far wider and far more effective" than an independent audit initiated by Rate Search, Watkins said.

Northfield has also contacted the FBI and is contacting banks to locate its certificates and tell them that Rate Search is no longer authorized to handle the money. City staff should complete that task this week, McBride said.

Northfield operates on an annual budget of about $25 million. The missing money isn't causing problems in other city departments, said City Administrator Al Roder.

"It never helps anybody to lose money, but it does not put us into dire financial straits," Roder said.

Sarah Lemagie • 612-673-7557

Sarah Lemagie • slemagie@startribune.com