The disposition of the E. F. Hutton & Co. case May 2 alerted corporate financial officials to a big new fact of life: The Justice Department has drawn a line between aggressive, but proper, money management and illegal practices.
But precisely where is the dividing line? Robert W. Ogren, chief of the fraud section in the department's criminal division, dealt with the question in an interview last week with Washington Post staff writer Morton Mintz.
Understandably, public attention has focused on one element of the unprecedented resolution of the Hutton case: the broker-dealer's plea of guilty to 2,000 felony counts of mail and wire fraud and its payment of a $2 million fine and $750,000 to reimburse the government's investigative costs.
From the point of view of Justice Department officials from Attorney General Edwin Meese III on down, however, two other parts of the disposition were of at least equal importance.
The second part was a civil injunction, signed by Hutton, in which the company agreed to halt all cash-management abuses, including some not cited in the indictment, which covered a 2 1/2-year period ending in 1982, and others that became criminal only after Congress passed the bank fraud act in 1984. The third part, not relevant here, was Hutton's agreement to make full restitution to victimized banks.
Ogren was a principal architect of the civil injunction, which he and other Justice Department officials say was intended to send a cautionary message to corporate America. Excerpts follow:
Q: Let's talk about the extent of cash management abuses. As you know, the Justice Department's comments on this have been rather vague. For example, Albert Murray Jr., the assistant U.S. attorney who originated the Hutton prosecution, told the presiding judge on April 30, "During the course of investigation, we, of course, have stumbled across or come across certain other activity of other companies, which I am not at liberty to mention to the court, but we believe that . . . similar practices may be going on today." You will also recall that the department told the House Judiciary subcommittee on crime in June that "the practices Hutton employed are believed to be widespread and to cause huge interest losses to banks . . . "
A: At the time of the injunction, our investigative sources led us to believe that certain of the cash management practices of Hutton were typical of a number of cash management practices throughout industry. Several of those cash management practices, which included a practice known as "target balancing," are, in our view, or were, widespread in the business community. In the wake of the injunction, a number of commentators familiar with cash management practices have confirmed that target balancing has a rather wide utilization.
Q: Can you define target balancing briefly?
A: In its simplest form, it's an effort to maintain as close to zero your actual balance on deposit in a bank so when, for reasons that may be beyond your control as a depositor, your balance happens to exceed zero during any period, you attempt to compensate for that by overdrawing your account an equal amount to gain the advantage of the overdraft funds by having extra monies available that would be equal to the monies left on deposit.
Q: The attorney general said in a speech on Sept. 18, "Federal Reserve Chairman Paul Volcker attributes a $1 billion rise in M1, the nation's basic monetary measurement, to changes in cash management brought on by the E. F. Hutton prosecution." Can you expand on that or clarify or comment on that?
A: Well, that is the Fed's observation of the possible impact of changes in cash management brought by the Hutton injunction. I'm not in a position to be able to debate whether those numbers are accurate or not. That's something that the Fed is in a much better position than I to discuss. That, however, if correct, is an amazingly large number of dollars that could be influenced by changes in cash management practices.
Q: Congress passed the bank fraud act, or rather, it took effect October 1984 . . . .That was about 2 1/2 years after the close of the period covered by the prosecution of Hutton. How did the bank fraud act figure in the Hutton case? What role did it play?
A: Well, it was the key to the injunction that we obtained against Hutton's cash management practices. The bank fraud act reversed a Supreme Court decision of two-year standing and permitted us, again, to prosecute check-kiting cases and bad check cases, as it were. The basic theory that was reestablished for federal prosecutors to use is that a check amounts to a representation that the amount of the check is on deposit with the bank on which it's drawn.
Q: What is the key concept in the injunction as it affects proper cash management?
A: The central notion is that it is a fraudulent practice to write a check that will be presented for payment against funds at the bank that are either not there or have not been collected -- doing that with an intent to deceive the bank about the nature of what it is that you're doing, that you're writing overdraft checks.
Q: Well, should I assume that I can safely continue to engage in any cash concentration practice that is not specifically barred in the Hutton injunction?
A: No, the Hutton injunction is a product, or an effort to remedy the practices that E. F. Hutton was engaged in. It's remedial in nature so that some of the provisions of it are designed to create an appropriate climate between that company and its bank, and it is simply a list of remedial measures that cure the problems that they were engaged in. Other companies may be engaging in practices that they were not engaging in and that would not be covered by that injunction. The list, while not complete, is nevertheless a good starting point.
Q: Well, would it be perhaps the wisest and best way to protect against abuses, simply to disclose in writing to each bank where I deposit money what my cash management practices are?
A: Yes, that's an excellent idea.
Q: Okay, now, how about overdrafting? The message, one of the messages that came out of the case is that overdrafting can be either legal or illegal depending on the nature, extent and what not. Would it be correct to say that I can engage in overdrafting, provided the bank understands fully and agrees to the practice, or the extent of it?
A: Yes, and as a matter of fact, many banks provide overdraft facilities for their average customers. It's quite common today to have overdraft facilities tied into checking accounts of their customers, and, where there's a disclosure, there cannot be a fraud or sharp practice, and there is no problem from the point of view of the customer or the bank.
Q: Okay, can I engage in "chaining," that is, in causing funds to be successively transferred between various branch and regional bank accounts before they are deposited in my company's prime depository bank?
A: If that practice is not disclosed to banks, that is the banks which are in the chain, and if the purpose of establishing those chains is to run checks that exceed the collected balances, then the answer is no. Or, if it is an effort to create a float situation that amounts to a deception on the banks involved.
Q: Speaking of float, can I create float by contriving to delay or obstruct the clearing of checks deposited in my company's branch or regional accounts?
A: Unless it's something like a stop order or a normally accepted technique, the answer is no.
Q: Can I ever or never engage in "cross check-writing," that is in simultaneously issuing checks that are in identical amounts that are drawn on different banks and that are cross deposited.
A: Well, that is almost a classic definition of a check kite and our belief is that that is no longer permissible as a practice by . . . commercial business institutions or individuals.
Q: I would like to be sure that I'm not missing any good advice at all, any points that I may not have raised that will help me as a money manager be sure that I'm acting properly. Is there anything else that you'd like to say about this?
A: I think the first dominant point is that cash management people and bankers should talk to each other and they should know what each is doing. The atmosphere that may exist in some instances of, the bank as the enemy and all is fair in dealing with your banker, is totally unacceptable and an invitation to disaster. And when you couple an attitude that anything in overdrafting goes with a notion that the bank is the enemy, your company is headed down the road toward certain doom in its cash management practices.
Q: In the June 5 statement to the House subcommittee, the Justice Department said that the three-part resolution of the Hutton case was "a broad-based enforcement stroke that could immediately wipe out cash management abuses throughout the business community." Has it done this or is this a question we've already dealt with?
A: Well, I think there's evidence that there has been compliance. The cash management community has talked about the injunction and, frankly, I'm a believer that people essentially try to obey the law, and if you clarify what the rules of the road are, they will obey them. . . . This is an area in which the rules, frankly, were not clear . . . It was the first time any enforcement action had been taken in this area. I would expect, given the normal willingness of Americans to obey the law, that we will see compliance and we will see a reduction in these fraudulent practices.