E. F. Hutton & Co.'s top attorney confirmed on Capitol Hill yesterday that he refused to write an opinion on the legality of the brokerage firm's cash management system, including the issuing of checks on accounts with zero or negative balances.
Arthur Andersen & Co., Hutton's independent auditor, requested the written opinion at a meeting with Thomas W. Rae, Hutton's general counsel and executive vice president, in March 1980. That was four months before the period covered by a 2,000-count criminal check-kiting charge to which Hutton pleaded guilty in May.
The House Judiciary subcommittee on crime released an Andersen memo on the meeting, which an Andersen spokesman said yesterday was a "routine" effort to get a better grasp of Hutton's cash-management procedures. The memo also cited a 1978 court ruling in which a California company was "found criminally at fault for writing checks in excess of book and bank balances."
Rae told the subcommittee that up to the time of the meeting, he had not heard of "any impropriety" in the system, which had been in effect for 2 1/2 years, or of a complaint "in any way, shape, or form." His testimony accorded with the Andersen memo's account of his remarks at the 1980 meeting.
After the discussion, the memo said, Andersen partner Joel Miller "requested that Tom Rae render a written legal opinion stating that Hutton's activities in this don't present any potential legal problems." Rae declined on the spot, saying that the banks "are fully cognizant of Hutton's procedures, that this is an accepted banking practice and that there is no question as to the propriety. . . . "
In these circumstances, Rae told subcommittee Chairman William J. Hughes (D-N.J.), his oral opinion sufficed. He said he viewed writing an opinion as "an annoyance" and an "imposition on my time." He also testified that the 1978 court ruling dealt with conduct "totally dissimilar" to Hutton's.
The Andersen memo concluded by noting that Miller had said he would discuss the matter with his partners, "whose clients include major money-center banks to ascertain what the banks' 'point of view' is regarding" the issuance of checks on accounts "with no book balances."
Yesterday, the Andersen spokesman said that Miller had in fact followed up and found the situation to be "basically consistent" with Rae's report.
Even if none of the approximately 400 banks in which Hutton had accounts had no complaints at the time, many complained later that they had been deceived into making huge no-interest loans, and some refused to do further business with Hutton. Hutton has agreed to create an $8 million reserve to make restitution to banks.
In a new case disclosed by the subcommittee, the Commerce Bank of Kansas City, Mo., told Hutton Executive Vice President John Latshaw that its loss on Hutton accounts in the first 10 months of 1981 totaled $210,310. The bank billed Hutton, protesting that the brokerage firm had not made good on its numerous assurances that the accounts would be restored to profitability.
The Missouri bank memo was covered by the sweeping subpoena for Hutton documents served by the subcommittee in early June, but the staff received it only last week in an interview with a Hutton regional official.
Rep. Bruce A. Morrison (D-Conn.) termed it "unacceptable" that the document should turn up so late and in such fashion. "That's not the cooperation that was promised" by Hutton, he said. Rae said he was "unacquainted" with the reasons the document hadn't been supplied earlier.
Hutton Chairman Robert M. Fomon pledged a month ago that Hutton would "cooperate fully" in the subcommittee's investigation and testified yesterday that "we have kept our pledge." He and Rae said that documents supplied Thursday and yesterday brought the firm into overwhelming compliance.
Subcommittee members and Assistant Attorney General Stephen S. Trott wrangled about whether the Justice Department would violate grand-jury secrecy by turning over documents sought by the panel. Under a potential partial solution proposed by Rep. Romano L. Mazzoli (D-Ky.), Hutton would ask the federal judge in the case to return its papers, copy them at its own expense, and turn the copies over to the subcommittee.