The brokerage firm of E. F. Hutton & Co. Inc. pleaded guilty in federal court yesterday to a scheme that defrauded up to 400 banks and gave the company millions of dollars in interest-free loans.
Under the scheme, Hutton, during a three-year period ending in 1982, wrote more than $1 billion in checks that exceeded funds it had on deposit at the banks, with daily overdrafts sometimes exceeding $250 million.
Hutton President Scott Pierce pleaded guilty for the company in U.S. District Court in Scranton, Pa., to 2,000 counts of mail and wire fraud. The company said 20 offices out of 300 branches may have engaged in the activities. No individuals were named in the case.
The firm was fined $2 million, and agreed to set up an $8 million fund to provide restitution to the banks. It also will pay the government $750,000 to cover the costs of the federal investigation.
Hutton also was forced to seek a waiver from the Securities and Exchange Commission to permit it to continue acting as an investment adviser for the mutual funds it manages for about 500,000 customers. Under a 1940 law, anyone convicted of a felony cannot act as an investment adviser unless the SEC waives the requirement.
The SEC agreed to a temporary waiver for 180 days, during which time it will decide whether to grant a permanent exemption. SEC Chairman John S. R. Shad, former vice chairman of E. F. Hutton, will recuse himself from the case, an SEC official said.
In a business in which hundreds of millions of dollars are regularly borrowed for an overnight period, Hutton was able to avoid some of that borrowing by writing checks that were not covered by the deposits in the Hutton accounts.
Most of those deposits were checks from Hutton customers that had not yet been collected by the bank at which the Hutton branch had its account.
At a press conference, Attorney General Edwin Meese III said the scheme involved "more than just making use of the float" -- the time while a check is en route to the writer's bank for payment. Meese said "a multiplier effect was used" in which Hutton employes on certain days of the week would increase by a factor of two, three or four the amount of money they would write in checks against deposits available.
"The essence of the charges was that Hutton obtained the interest-free use of millions of dollars by intentionally rigging checks in excess of the funds it had on deposit in various banks," the Justice Department said.
An official appointed by the court will determine the amount of funds the company owed each bank and financial institution.
Meese called the plea agreement a "comprehensive and open-ended restitution plan." He said the company's agreement to reimburse banks for funds that were borrowed without the banks' knowlege showed the Justice Department's "concern for victims" and its desire to "make whole those banks and other institutions that may have suffered any loss."
Assistant Attorney General Stephen Trott, head of the criminal division, said between 10 and 25 company employes were involved in the scheme and at least 10 employes were granted immunity so prosecutors could gather evidence.
Meese said that in this particular case it was more important "to get recompense to the victims than to prosecute the individuals."
Hutton Group Chairman Robert Fomon said yesterday was "a sad and difficult day for E. F. Hutton and for me personally." He said the "practices to which the company has pleaded guilty represented violations of our policy and procedures. Nonetheless, the company and its top management assume full responsibility."
Fomon said the violations occurred during a time of high interest rates, when Hutton's strategy was to reduce its interest costs. "Our employes did not realize they were doing something illegal and breaching our company policy," he said. "The company was at fault for not having internal controls" over its practices, he said.
The company stressed that the practices "did not involve or jeopardize customer or client funds."
According to court papers, the company provided "financial inducements and incentives to its branch office managers" that encouraged them to be more "aggressive" and "creative" in overdrafts.
The inducements and incentives included granting 10 percent of the branch profits to branch office managers.
When asked why employes were not held personally liable for the scheme, Meese said that in most white-collar crime cases in which persons are held liable, "the individuals get some personal gain. This was different. This was clearly a corporate scheme. This was a blatant business transaction."
In response to further questions, Meese said the company benefited from the scheme and the individuals "benefited from the profits."
Under a companion civil suit, the firm agreed to a permanent injunction against the "practices in question and mandates certain disclosures by Hutton to the banks with which it does business."