A top government prosecutor in the E. F. Hutton check-kiting case said today that a number of major U.S. companies appear to be using schemes similar to the one that enabled Hutton to cheat banks out of tens of millions of dollars.
Assistant U.S. Attorney Albert Murray Jr., who began the Hutton investigation here three years ago, said he based his judgment on bank records he examined while pursuing the Hutton case.
Last week, Hutton pleaded guilty to writing checks over a 20-month period for billions of dollars against deposits that had not yet been collected by the banks. Hutton was taking advantage of the "float" -- the time it takes money to move through the banking system to settle accounts.
Documents introduced in the case by the government show, for example, that during 1981 Hutton deposited $33.5 million of its customers' funds in an account held in an Alexandria branch of United Virginia Bank, but made withdrawals of $640.8 million. To mask the overdrafts, Hutton deposited its own checks drawn on accounts in New York and Kansas City, Mo.
Because those checks took time to clear the system, and therefore the funds were not available to UVB, Hutton in effect tricked the bank into giving it an interest-free loan that averaged about $2 million a day.
Murray said in an interview and in secret proceedings before U.S. District Judge William J. Nealon last week that Hutton does not appear to be an isolated case.
"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," Murray told Nealon. "But we believe that, yes, that similar practices may be going on today."
Hutton pleaded guilty last week to 2,000 criminal counts related to its abuse of the float, paid a $2 million fine, and agreed to make restitution to all its banks.
In a companion civil injunction, Nealon barred Hutton from a wide variety of practices, many of which were not included in the criminal pleading.
Murray said the civil injunction should make it clear to companies that if "corporate America believes it owns the float," the Justice Department is going to go after it. "Items in the process of collection are owned by no one," Murray said.
In many cases, Hutton would write a check on one of the hundreds of banks that services its network of branches that was far in excess of the customer receipts Hutton deposited that day. The big brokerage firm would cover the difference by writing a check on one of its accounts in another bank. Hutton knew its own check would not clear for several days. In the interim, the brokerage firm had free use of the money because the bank was not aware that it was paying Hutton before the checks in Hutton's accounts cleared.
The overdrafts of the UVB account grew larger late in the year as interest rates skyrocketed and Hutton apparently wanted as much money as possible to invest or pay bills (in order to avoid borrowing at high rates). In November alone, Hutton deposited customer receipts of only $2 million but withdrew $130 million from the UVB branch.
Based on interest rates in 1981, Hutton's estimated $2 million a day in interest-free loans that year could have cost the bank more than $300,000 in income.
Murray told Nealon last week that the local branches of Hutton set up the accounts for the ostensible purpose of depositing customer funds. The banks on which Hutton drew the checks to cover the overdrafts were supposed to be used for paying bills and customers -- not to cover purposeful overdrafts.
Robert Ogren, chief of the Justice Department's criminal fraud division, said in an interview Monday that prosecutors sought the guilty plea and the companion civil injunction because a trial might have taken years and the government felt it needed to move quickly to protect the banking system from abuse.
Murray said in the interview that if companies are using the float to create funds, it could threaten the health of the banking system. A company could go out of business leaving hundreds of millions of dollars of its uncollected checks moving through the banking system.
Several banks with sophisticated computer systems that can tell executives not only how much money has been deposited and withdrawn but also what portion of those deposits have been "collected" detected the Hutton scheme.
But the prosecutor said none of the banks knew it was part of a nationwide pattern.
He said companies like Hutton that receive customer deposits all over the country do have a legitimate need to move funds from the local offices to central bank accounts. But he said the transfers should be done by electronics, and not by paper checks, which must physically be moved from one bank to another to move the deposits.
The Justice Department has been criticized because it did not prosecute any individual Hutton employes, even though senior persons in Hutton's cash management division knew of the scheme.
But Murray said that the need to move quickly to stop the practices among other companies overrode the need to prosecute individuals.