E. F. Hutton employes were able to kite billions of dollars of checks between 1980 and 1982 because some banks did not have sophisticated enough accounting systems to determine that the brokerage firm was overdrawing its accounts.

An official of one bank that was victimized by the scheme said he knew for a while what was going on but could not believe that a well-known brokerage firm was purposely withdrawing deposits that it knew were not yet available to it.

"We complained and they told us it was a problem with their system," the banker said. "We believed them for a while." Eventually the banker, who asked for anonymity, said his institution stopped doing business with Hutton.

The banker said that the Hutton situation appeared to be an isolated one in the brokerage industry. He said his bank, like many others, has had problems with individual check kiters, but nothing like the broad scheme in which a large number of Hutton employes engaged.

But one brokerage industry analyst said he believed the practices were more widespread. Joel Rosenthal, of Jesup & Lamont Securities Co. Inc., said he would be "surprised if abuses did not occur at other companies as well" during the period of 1980-82, when short-term interest rates hit 20 percent.

Hutton pleaded guilty to felony fraud charges in federal court Thursday, paid a $2 million fine and agreed to set up an $8 million fund to recompense banks which, by paying Hutton checks drawn on uncollected funds, were in effect making interest-free loans to the brokerage firm.

The Hutton scheme, which apparently involved more than 25 employes and a number of its offices around the country, took advantage of the lack of sophistication of many smaller banks with which its local branches did business.

Hutton, like many businesses with a far-flung network, needed a system to move cash from local offices to the main office so the company could use the cash it generated to pay bills or make investments. When interest rates were very high, as they were between 1980 and 1982 when the violations took place, idle dollars were expensive luxuries for businesses.

The funds could be invested overnight by the main office at high rates. Or, if the company needed the funds in New York but they were still in a branch office in Pennsylvania, the company might have to borrow overnight to meet its obligations and pay a high rate for the privilege. The faster the funds got from the local branch to the main office, the more profit the local branch would be credited with. Branch officials shared in those profits, Hutton said.

Every local office of Hutton deposited customer checks and cash in a local bank. The cash and any checks written on the bank in which the funds were deposited were considered immediately available to Hutton -- or "collected funds" in banking parlance. But checks drawn on other banks had to be presented to those banks for payment; until those checks were collected, they were theoretically unavailable to Hutton. Nevertheless, Hutton transferred those uncollected funds, apparently without most banks' knowledge.

Hutton moved the funds from the local offices to two main corporate accounts -- one in New York, the other in Los Angeles -- using a two-stage procedure.

The funds would first be transferred to one of nine regional Hutton banks, and, later in the day, to the main banks. To effect the transfers, Hutton financial officials would write what are called "depository transfer checks."

An official in the Rochester region, for example, would write depository checks on accounts maintained by each of the local Hutton offices in the region, then deposit them in a Rochester account. Later in the day a Hutton official in New York would write a check on the Rochester account and deposit it in Manufacturers Hanover Trust Co.

Often, however, Hutton officials would write checks that exceeded the amount of collected funds in the local account. In some cases, they would write checks that exceeded the total amount of funds -- collected or uncollected -- and then would cover the amount with a check drawn on a special Hutton account in New York.

Many banks paid these checks, even though Hutton did not have the funds available to cover them. In many cases, bankers said, the banks in question knew only the total amount of funds that had been deposited in the Hutton account and were not aware that many of the funds were still uncollected.