E. F. Hutton Case: The Quiet Settlement That Exploded
WASHINGTON (AP) _ At the time, it seemed like the best deal for both sides.
E.F. Hutton & Co. would plead guilty to 2,000 counts of wire and mail fraud, pay its fine and get on with business as one of the nation’s most visible brokerage houses.
The Justice Department would be lauded for a precedent-setting victory that drew important new boundaries in a largely unexplored area of banking law.
Both sides were wrong in their perception of how things would turn out.
Hutton has become even more visible since its May 2 guilty plea - but, from a business standpoint, for all the wrong reasons.
Justice - rather than being praised for doing the best it could with a case complicated enough to threaten the patience of the most conscientious juror - has come under fire for not trying to put any Hutton official in jail.
Popularly tagged a ″check kiting scheme,″ the kind of corporate banking activity that led to Hutton’s legal troubles is so different from the average individual’s checking account as to defy comparison.
For example, no investigators have claimed that it was illegal on its face for Hutton to routinely overdraw certain of its checking accounts each day to keep the banks from earning interest on what Hutton considered its own money.
Pure and simple, the Hutton case revolves around what the Justice Department concluded was excess zeal in the rough and tumble world of high bank finance in which billions of dollars exchange hands overnight - every night.
Investigators said Hutton - rather than following an overdraft formula that could be justified as fair to both the bank and the brokerage house - overdrew its accounts by arbitrary amounts that enabled the firm, in effect, to extract interest-free loans from banks without their permission.
Hutton also pleaded guilty to a few instances of ″chaining″ - filtering checks through two or three intermediate banks enroute from branch offices to New York in an effort to increase the likelihood of check processing delays that might enable the firm to earn duplicate interest on some of the same money for a day or so.
All the practices were an outgrowth of Hutton’s determination to take maximum advantage of ″float″ - checks in the process of moving from one account to another.
The firm always stood ready to cover any actual overdrafts that occurred - sometimes with wire transfers that are as good as cash, sometimes with checks from replinishment accounts maintained for the purpose of covering daily overdrafts as they occurred.
Banks routinely use the float when they accept a check for deposit from an individual but do not make the money available to the depositor for a certain number of days.
With modern technology, it rarely takes more than a day or two for an individual’s check to clear the originating bank - call it Bank One - and be credited to the bank that takes the deposit - Bank Two.
If Bank Two has the funds credited to it the day after the deposit is made, but does not make that money available to the depositor for five days then it has had four days to earn interest on its customer’s money.
The E. F. Hutton case has been kept alive by a House crime subcommittee that has released scores of documents purporting to raise questions about whether the Justice Department botched up by failing to seek indictments against individual Hutton employees.
Some of those documents were not made available to the Justice Department during its investigation, causing the administration to contemplate an obstruction of justice investigation should it conclude that the omissions were deliberate and that the undisclosed documents would have made a difference in how Justice handled the case.
Those documents were surfaced by a Hutton-commissioned investigation being conducted by former Attorney General Griffin Bell. Like many of those already available to outside investigators, they make clear that top Hutton management encouraged its regional managers to milk every dollar of interest possible from the millions of dollars that flowed through company accounts each day.
What they have not made clear is whether top officials intended for Hutton’s cash managers to step across the line into illegality.
More subtly, it is unclear whether management may have looked the other way if there were hints some regional officials were being overly aggressive.
Bell’s report, scheduled for completion soon after Labor Day, is certain to generate its own share of attention. Hutton Chairman Robert M. Fomon, the man who hired Bell, has left little doubt the former Carter administration official’s findings will lead to a shakeup within the company.
Bell said in an interview with The Atlanta Constitution that his study indicates no more than 60 of Hutton’s 300 branch officers were involved.
Bell said ″maybe the Justice Department got more of a bargain″ than some people believe since the corporation has taken responsibility and the scheme did not seem to be systemwide.
He said it is ″unusual ... for large companies to be held responsible″ for corporate crimes that are the work of a few low-level employees.
WASHINGTON: low-level employees.
Then there is the pending business of a Securities and Exchange Commission examination of whether the activity that led to Hutton’s guilty plea warrants regulatory sanctions.
Three professionals who have followed the case with outsiders’ perspectives - two New York business analysts and a Washington economist - suggest it has not generated nearly the interest outside the journalistic-political cauldron as is has within.
Perrin Long of Lipper Analytical in New York said, ″The average American thinks Hutton did a good job. The average American thinks banks have been taking the average customer to the cleaners for years, which they have.″
He suggested Foman ″probably got some lousy outside legal advice or he wouldn’t have taken the guilty plea. ... They didn’t anticipate that the House of Representatives would get up on its hind horse and try to find somebody that they can put in jail.″
Long predicts a sweeping Hutton shakeup once the dust settles, as much in response to the way the case was handled after it got to the Justice Department as to the practices that led to the investigation.
For one thing, there is a widely held view that the cash management tactics Hutton now acknowledges were applied with excess zeal by some of its employees are widely practiced - or at least were widely practiced - by other major corporations that handle a lot of cash.
The question is whether those other firms also engaged in excesses. Absent a Hutton-like investigation of other firms’ banking records - or the unlikely scenario of those firms stepping forward to volunteer that they, too, broke the law - it is a question that may never be answered.
″That will be hard to ever quantify because Hutton was the only one that got caught,″ said Long. ″Most of the banks look favorably upon their major corporate customers. We all make accommodations, particularly in the business world. A number of bankers I’ve talked to wish this thing would blow over quickly because they’re afraid the average customer is going to start screaming about float.″
Elaine Durso, a brokerage house analyst for Value Line Investment Survey in New York, said Hutton does not seem to have been harmed from a business standpoint.
″As much as one can tell from the outside, it doesn’t seem to have affected them,″ she said. ″Their earnings have been coming in on target ... at a good healthy level.″
Ms. Durso said Hutton customers, particularly their institutional clients like pensions funds, don’t seem very excited about the firm’s current troubles.
″They didn’t tamper with any customer funds,″ she said. ″They didn’t do anything dishonest in terms of how they handle customers’ money or how they gave advice.″
Ms. Durso agreed with Long that ″I wouldn’t be surprised to see some kind of overhaul come out of it. The basic question is about accountability ... whether Foman was in touch with what was really going on.″
She noted that the major brokerage houses have moved only in recent years from partnerships to publicly held corporations and that Hutton was one that retained a collegial management style that does not lend itself to strict accountability.
″Maybe I’m being overly provincial, but I think New York business people just aren’t taking this as seriously as the Washington political people.″
A Wall Street investment analyst with a background in commercial banking said in a recent interview: ″I cannot help wondering whether Hutton simply happened to get caught and whether it is being used as a scapegoat for what, in the past at least, had been widespread practice.″
The analyst, willing to discuss the issue only on grounds of not being identified by name, continued: ″One of the things I have found curious is there simply has not been any hue and cry from the banking community about this. I think the float issue is a loaded issue and since the Hutton case is basically about float, that is a word that hasn’t been raised too much.″
David Ernst, an economist with Evans Economics Inc. of Washington, said, ″While E.F. Hutton comes out poorly, the banks come out not smelling like a rose either.
″What is illegal for E.F. Hutton is legal and proper for banks and that raises some questions about whether it should be. Banks play float all the time and make a tremendous amount of money by not crediting depositors accounts even when they have received the funds. In this day and age there’s no way it takes five or 10 days to acertain that funds are available for payment in a nearby bank.″
Federal Reserve Chairman Paul A. Volcker, at a recent briefing for reporters on money supply targets, volunteered some intriguing speculation that the Hutton case may have played a role in a torrid spurt in money supply growth.
Volcker said other corporations may have looked at their own cash- management practices and become more conservative, leaving more funds in their checking accounts, the main component of the closely watched M-1 money measure.
He said the Hutton case may have made executives examine their own practices and say ″if we have been cutting corners, we will stop cutting corners.″
An internal Bank of America memo dated five days after the Hutton plea and released by the House crime subcommittee has one bank executive telling another: ″I think that we are now in a position to dictate how we expect their accounts to be managed, especially in view of the fact that Hutton was convicted for certain practices which have been common in the industry.″
Unless some new facts surface about what Hutton actually did during the 1980-81 period in question, the subcommittee’s inquiry seems destined to focus increasingly on Justice Department handling of the case.
Attorney General Edwin Meese III professes comfort with such a prospect.
″Here was a case that were it not for very good prosecutorial work would never even have been handled as a criminal case,″ he told reporters recently. ″E.F. Hutton or other outfits would still be getting away with that kind of conduct.″
Meese said it was necessary to grant immunity to a lot of middle-level managers just to get to the bottom of the case.
″As a result of this, the decision of the prosecutors was such that they thought it was more important to get the corporation which had benefitted from the crime, or a series of crimes, rather than to go in and have to try each case individually, in the absence of such a plea of guilty, which they would have to do, and probably would not have won the cases.″