A top Justice Department official said that two E. F. Hutton & Co. employes were "primarily responsible" for the multibillion-dollar check-kiting scheme that cost banks tens of millions of dollars of interest, but neither employe was a senior official nor had been likely to become a top manager.
In a May 29 letter to Sen. Thomas Eagleton (D-Mo.) that was released yesterday, Assistant Attorney General Stephen S. Trott said the Justice Department decided not to prosecute the two individuals because it felt it unlikely they would be severely punished by a jury.
Trott declined to identify the Hutton employes, who he said worked in Hutton's so-called "back office," where the firm's paperwork and other day-to-day operations, such as cash management, are handled.
Early this month, E. F. Hutton pleaded guilty to 2,000 counts of mail and wire fraud and paid a $2 million fine. It agreed to repay the banks and consented to an injunction prohibiting it from a large number of questionable cash management practices, not only those to which it pleaded guilty.
Trott said the department was interested not only in compensating the banks wronged by Hutton, but also in protecting the entire banking system from similar practices, and that the guilty pleas and the injunction were a signal to cash managers at other companies "that these kinds of abuses are criminal and will be prosecuted."
Eagleton said he "still cannot comprehend how, with 2,000 felony counts returned in this case, no one is guilty of a crime. E. F. Hutton, the corporate entity, is guilty, but no one individual is guilty of anything. It simply won't fly."
Eagleton is one of 15 senators who have told the Justice Department they question the government's decision not to prosecute individuals in the Hutton fraud.
Trott, in his letter, said that at the beginning of the three-year investigation prosecutors "started from the proposition that individuals ought to be held personally responsible for their criminal misconduct. . . . Pursuing in court in this case the known individual authors of the swindle would have had some merit, but not at the expense of forgoing the opportunity" to dictate the key terms of the settlement.
Trott said Hutton's back office was separate from other areas of the firm and that back-office employes, no matter how responsible their jobs, never had a shot at top management. He said the sharp separation of the front office -- where the brokerage firm's sales activities are handled -- and the back office explains the "plausibility of a lack of high-level executive knowledge of the details of this activity."
Hutton officials, in an affidavit filed with the Securities and Exchange Commission May 2, said they did not learn of the scheme until December 1981 and ended it by the following February.
George Ball, who was president of Hutton during the 20 months the scheme ran and now is president of Prudential-Bache Securities Inc., said through a spokesman he had no knowledge of the activities.
Trott, in his letter to Eagleton, said based on who the two key employes were and "what they personally got out of the scheme," the department's trial lawyers felt that even if they were convicted they probably would have received a "minimal jail sentence," and "indeed a sentence of no jail time was not out of the picture."
The Securities and Exchange Commission must determine by November whether Hutton can continue as an investment adviser. A 1940 law says that convicted felons cannot serve as investment advisers, but allows the SEC to waive the prohibition for good cause.
In a related development, United Press International reported yesterday from Hartford, Conn., that Hutton could lose its right to do business in that state.
[Connecticut Banking Commissioner J. Brian Woolf said he will hold a hearing July 9 at which the firm will be asked to show why its state registration should not be suspended or revoked. Under state law, the banking commissioner can revoke or suspend the registration of a broker convicted of a felony.]