George Ball, the former president of E. F. Hutton Co., knew in February 1982 that Hutton offices generated $5.4 million by overdrawing bank accounts, but he said yesterday that he did not know of the abuses in Hutton's cash management techniques that led the brokerage firm to plead guilty to 2,000 counts of fraud last May.
Ball, who was president of Hutton until July 1982, when he became president and chief executive of Prudential-Bache Securities Inc., was sent two memos in February and March of 1982 discussing how the profits should be credited to the branches of E. F. Hutton scattered around the country.
The memorandums were first published in yesterday's Wall Street Journal. Ball, in a companywide communication to Pru-Bache, referred to the Journal article as "another 'Hutton -- George Must Have Known' story."
The Justice Department has received criticism from Congress and elsewhere because it did not prosecute individuals in the Hutton case. The firm itself pleaded guilty, paid $2 million in fines and another $750,000 in government legal fees. It also agreed to make restitution to banks in which it maintained accounts that were regularly overdrawn, and signed a consent order promising to revise a large number of its so-called cash management practices.
The two memorandums to Ball, from Hutton comptroller Michael Castellano, were not concerned with how the profits were generated. The first memo asked Ball to determine whether the branches themselves or the Hutton regional offices should be credited with generating the profits. The second memo, dated March 17, 1982, detailed the method by which the branches would be credited with the profits Hutton earned by overdrawing their accounts and thereby getting interest-free use of bank money.
A Prudential-Bache spokesman for Ball said the former Hutton executive was not surprised by the amount of profits the branches generated by overdrawing accounts and said he had no knowledge of the Hutton abuses until after he left the firm and joined Pru-Bache.
"It wouldn't seem excessively high to anyone familiar with the business," the spokesman said.
In his communication to Pru-Bache employes, Ball said the memos contained nothing "relating to the mechanics of Hutton's drawdown procedures, much less abuses therein. They straightforwardly ask for a decision to a difficult but absolutely proper profit allocation question."
He noted that the memorandums -- which were obtained by the House Judiciary subcommittee on crime -- had been reviewed by the Justice Department. He noted that the term overdraft, specifically mentioned in the memos, is "a legitimate commercial term used widely by banks and businesses of all sorts."
He said in the Pru-Bache communication that "there's nothing to the allegations" that he had knowledge of improper acts at Hutton. Ball was one of about 300 individuals who testified before a grand jury during the three years the Justice Department investigated the case.
The department has said that two lower-level employes in Hutton's operations department were aware of the full details of the scheme, but that Justice could not find anyone in the highest ranks of the company who knew how the abusive checking procedures worked.
According to the guilty plea in May, Hutton offices around the country would regularly overdraw their accounts but mask the withdrawals by depositing Hutton checks drawn on accounts in New York and California. Hutton had immediate use of the funds the offices withdrew and, because of the time it took for its own checks to clear the New York and California accounts, had free use of bank money for a day or two.
By regularly overdrawing its accounts over a period from July 1980 to February 1982, Hutton cheated its banks out of tens of millions of dollars of interest, the Justice Department estimated.