WASHINGTON — E. F. Hutton, the nation's fifth largest investment firm, today pleaded guilty and was fined $2 million for a massive mail and wire fraud scheme that netted the company millions of dollars in interest-free loans, the Justice Department said.
Hutton was also assessed $750,000 for the cost of the investigation that led to the charges.
Trading in Hutton stock on the New York Stock Exchange was suspended at the firm's request at the start of today's session. After trading resumed, it was off 1 3/4 at $30.75 a share.
The department said it had filed a criminal information against the firm in U.S. District Court in Scranton, Pa., charging Hutton with 2,000 federal counts of mail and wire fraud.
Checks Exceeded Deposits
"The essence of the charges was that Hutton obtained the interest-free use of millions of dollars by intentionally writing checks in excess of the funds it had on deposit in various banks," the Justice Department said.
Officials said the scheme closely resembled "check kiting," whereby checks are written on funds of distant banks before money is available to cover them.
The charges, both criminal and civil, were leveled at the company and not at any individual.
Atty. Gen. Edwin Meese III said the filing of the criminal information was followed immediately by the entry of the guilty plea to all 2,000 counts of wire and mail fraud by the firm.
"This is a sad and difficult day for E. F. Hutton and for me personally," said Robert Fomon, chairman and chief executive officer of the firm known for its advertising slogan that holds, "When E. F. Hutton talks, people listen."
The company announced that its stockholders meeting set for Friday will be delayed until May 17 in New York City.
Besides the fine and investigation fees, the plea agreement calls for payment of restitution to the banks, Meese said, adding that more than 400 banks throughout the country "are believed to have been affected."
The investment firm had total assets of $1.02 billion as of Dec. 31.
A federal grand jury in Scranton had been investigating the cash management practices of E. F. Hutton & Co. between July 1, 1980, and Feb. 28, 1982, the firm said.
The criminal information charged that "during the course of the scheme . . . Hutton's drawings against uncollected funds totaled more than $1 billion, with daily overdrafts sometimes exceeding $250 million," the department said.
It said the purpose of the scheme was "to obtain the daily, interest-free use of millions of dollars in bank funds, thereby avoiding the necessity to borrow funds at interest rates which, during the course of the scheme, reached an annual rate of 20%."
The information said the scheme was accomplished by "Hutton's withdrawing from its depository accounts arbitrary amounts--unrelated to and in excess of the volume of customer funds it had deposited--and thereafter covering such excessive withdrawals by depositing covering checks drawn on other Hutton accounts."