Former attorney general Griffin B. Bell's investigation into the E. F. Hutton & Co. criminal check-kiting scheme was seriously flawed, and regulators in Virginia and other states erred in relying on Bell's report during their own investigations, a congressional study charged yesterday.
Rep. William J. Hughes (D-N.J.), chairman of the House Judiciary subcommittee on crime, whose staff prepared the study, said that because E. F. Hutton authorized and paid for Bell's investigation, Bell's "mission was one of damage control" for Hutton, one of the nation's largest securities brokers.
"I've been rather troubled by the way state agencies have used the Bell report as a bible," Hughes said, adding that he felt Bell had a potential conflict of interest with the company he was investigating.
Hughes released the 21-page report, prepared months ago by the subcommittee staff, on the eve of Bell's scheduled appearance before the Senate Judiciary Committee, which is looking into the Justice Department's handling of the Hutton case.
Bell, who will submit a prepared statement to the Senate committee today, said yesterday that state regulators in Connecticut, Virginia and Georgia received "extensive help" from his investigation team.
Bell, who was attorney general during the first 2 1/2 years of the Carter administration, said state officials asked for and got permission to examine the papers and other materials his team collected during their investigation. Bell said that many of the lawyers on his team also worked closely with state officials to provide information during state probes of the Hutton case.
Bell said, however, that neither he nor any of his staff tried to influence the outcome of the state investigations. Bell also said he did not get a copy of the Hughes study and was never given an opportunity to reply to the accusations in it.
"It annoys me very much," Bell said. "In a court of law this would be lack of due process, but in a congressional investigation there's nothing I can do."
Virginia officials investigating whether Hutton broke state law repeatedly refer to Bell's report in a public document detailing the state's settlement of the case with Hutton. Those officials could not be reached for comment yesterday.
The congressional staff study charged that Bell's investigation included many flaws, including a "beyond belief" exoneration of one of the broker-dealer's two offices in the District.
Bell "cut corners and cut the investigation short," the staff report said. "Perhaps the most fundamental flaw of the Hutton report is its exoneration of branches and personnel based solely upon their denials," it said.
The staff report also alleged that Bell failed to pursue abuses pinpointed by the Justice Department and even by the appendices to his own report, failed consistently "to provide details in support of his assertions" and did not resolve conflicting witness statements.
Hutton entered a surprise plea of guilty in May 1985 to an unprecedented 2,000 felony counts of intentional mail and wire fraud. Hutton paid the maximum allowable fine of $2 million and reimbursed the government for investigative costs of $750,000. It also agreed to make restitution to victimized banks for having gotten what amounted to interest-free unsecured short-term loans, and signed a civil injunction barring practices beyond those in the criminal charges.
Two weeks after the guilty plea, Hutton Chairman Robert M. Fomon retained Bell to make a "special investigation" of the practices that led to the felony charges and to find out who at Hutton was responsible for the practices.
The investigation, aided by a large team of lawyers and paralegals from Bell's Atlanta law firm, King & Spaulding, generally involved the interviewing of large numbers of Hutton executives and employes and the gathering and reviewing of tens of thousands of pages of documents.
The resulting 183-page report, released by Bell at a Sept. 5 press conference, described the over-drafting practices to which Hutton pleaded guilty as deviations from a cash-concentration system that was designed to ensure only that banks received full -- but not excessive -- compensation for services.
The Bell report also said the practices "resulted directly from an environment of implicit approval," and it recommended disciplinary actions and reforms. Fomon immediately announced that "we accept his Bell's conclusions and will implement all his remedies."
A key figure in both the Bell and the subcommittee staff reports is former Hutton vice president Perry H. Bacon, who managed the Hutton branches in Alexandria and at 1875 I St. NW in the District.
In November 1981, while Bacon was in charge in Alexandria, subcommittee documents show, the branch overdrew its checking account at the United Virginia Bank by an average of $9 million a day.
In early 1982, Steven R. Bralove, manager of the Hutton office on Connecticut Avenue in the District, wrote a memo condemning Bacon's "excessive overdrafting" at the I Street branch, saying it "shows a blatant disregard for the consequences of your actions."
In an error it termed "careless at best," the staff report said that Bell concluded that the Alexandria branch had engaged in the wrongdoing that Bralove had found in Bacon's operation in the District.
Moreover, the staff wrote, "it is beyond belief that Bell exonerated the I Street office. "That office was responsible for 97 counts in the Justice Department complaint , and for overdraft checks totaling approximately $436 million, and the Bacon admissions relied upon by Bell were most specifically applicable to that office, rather than to Alexandria."
Bacon's estranged wife disclosed in court papers that he left Hutton early this year with $600,000 "in separation and bonus compensation."
Other highlights of the subcommittee staff report:
*The Justice Department indicated that Hutton had as many as 50 "chains," in which deposits in branch bank accounts were transferred to regional and finally national accounts so as to enable Hutton to profit from delays in the payment system.
"Bell purports to investigate only 25, and makes conclusions about only 15," the staff said. "He does not disclose what happened to the other 10, or why he did not investigate the other 25. Using Bell's own appendices . . . we identified 123 branches involved in a chain; in [his] report, however, Bell has apparently ignored his own appendices and explained the involvement of only 56."
*Fomon told Bell to "take as long as required thoroughly to complete your investigation." But Bell, the staff report said, "cut corners" by abandoning "his announced intention to interview all relevant branch personnel before moving on to the regional level, and moved to final judgment despite the fact that important information was available but not fully evaluated. This was apparently done in order to have the report available before federal and state regulatory bodies acted."
*Bell said the harm done to banks had been exaggerated, and that most of the banks were satsified with their relationships with Hutton.
"He included within this category of 'satisfied' banks those that discovered the overdrafting and that demanded investigation," the staff said. But, the staff went on to say, its investigation "shows that most of these banks were not satisfied, and, in fact, many of them threatened to close Hutton's account if the overdrafting were not stopped.