E. F. Hutton & Co.'s check-kiting scheme caused a bitter rivalry between the two Hutton offices in Washington, according to documents released by a House Judiciary subcommittee.
In early 1982 -- just as E. F. Hutton officials said they learned of the overdraft scheme that forced Hutton to pay the government a $2 million fine last month -- a manager of the Hutton office at 1050 Connecticut Ave. NW complained bitterly to the manager of the 1825 I St. NW office about the latter office's use of overdrafts at the First American Bank in the District.
The dispute was revealed in correspondence submitted to the subcommittee as part of its investigation of the overdrafts by Hutton. A hearing was held earlier this week.
While the Connecticut Avenue branch had an account average daily balance of $27,000 throughout 1981, the account of the I Street office had overdrafts that exceeded $2 million in each of the last four months of the year, wrote Steve Bralove, manager of the Connecticut Avenue branch.
"Your excessive overdrafting shows a blatant disregard for the consequences of your actions," Bralove wrote to Perry Bacon, manager of the I Street office. "Our institutional relationship has been severely strained and our banking relationship basically destroyed."
In a four-page memorandum sent to Bralove six weeks later, Bacon defended the overdrafts, noting that he believed these "activities are encouraged by the firm and are, in fact, identical to what the firm practices on a national basis. Specifically, we will from time to time draw down not only deposits plus anticipated deposits, but also bogus deposits. . . . I know of at least a dozen managers at E. F. Hutton -- managers who along with . . . Tom Morley one of Hutton's primary cash management officials at the time and currently senior vice president , who . . . taught me the system -- who do precisely the same thing. Presumably, any manager who was willing to take the time to learn the system would want to use the system."
The subcommittee documents show that E. F. Hutton solved its problems with First American with a "most generous" settlement. Hutton officials said they did not know the amount of the settlement, and First American officials were unavailable for comment.
However, Hutton did not resolve its problems with Riggs National Bank. After noting that Hutton's conduct "has become unsatisfactory," Riggs ordered Hutton to close its account in a letter to Morley in April 1982.
The House judiciary subcommittee says the dispute calls into question Hutton's assertion that high-level Hutton officials did not learn of the scheme until early 1982.
Subcommittee members noted in the hearing that Bacon's memo suggests that Morley directed the overdraft operations. They also pointed to First American's April 1982 letter to Hutton President George L. Ball thanking him for Morley's work in trying to correct the settlement. Ball passed the letter on to other Hutton officials, noting "very nice" in a cover memo.
Shortly after Ball passed that letter on, Hutton ordered a stop to the overdraft scheme. Nonetheless, the subcommittee contended that Ball should have learned about the check-kiting operations about six months earlier from an internal memo by a senior vice president noting "aggressive overdrafting" that brought "astounding" results at several branch offices.
However, Hutton and Ball -- now president of Prudential-Bache Securities Inc. -- issued a statement yesterday saying that that memo, dated November 1981, actually was not written until March 1982. It appeared to be written earlier because it had been stapled to the November document erroneously by a Hutton analyst who had helped to prepare both memos, Hutton said.
"Hutton's cash management function did not report to me," Ball said in a statement. "My knowledge of its basic operation was, at best, sketchy. . . . I have every reason to believe . . . that no senior Hutton official was aware of the practices that led to the firm's being criminally charged."
Subcommittee Chairman William Hughes said yesterday he found Hutton's claim that the memo was written in March 1982 "interesting." The memo is "basically pointing with pride" to the overdraft scheme -- just a month after the company said it had just found out about the check-kiting, he said.
"You would think they wouldn't be going all out to praise it when they had just found out about it," he said.
Hughes said Ball and Hutton officials will have a chance to explain in future hearings.