WASHINGTON — The chairman of a House Judiciary panel said Wednesday that it "almost defies imagination" that E. F. Hutton's top management did not know how illegal check-kiting and overdraft policies originated at their firm.
But four of the brokerage operation's executive officers repeatedly told the crime subcommittee that they were not involved in the formulation of the questionable money management practices.
Rep. William J. Hughes (D-N.J.), opening a series of hearings on white-collar crime, said he does not "buy the argument that upper management was unaware" of excessive overdrafts of their depository accounts at banks.
E. F. Hutton pleaded guilty to 2,000 counts of mail and wire fraud May 2 and promised to pay the government a $2-million fine and $750,000 in government legal fees.
The Justice Department, in return for the plea, agreed not to prosecute any individual top corporate officers.
Rep. Edward Feighan (D-Ohio) said the department applied a double standard in prosecuting the case. "By merely slapping E. F. Hutton on the wrist, the Justice Department has demonstrated a willful, wanton neglect of the public interest," he said in a statement.
"Hutton jeopardized millions of dollars of customers' money, defrauded banks of hundreds of millions of dollars and falsified thousands of payment checks. If a private person were to engage in this type of activity, he or she would be jailed," Feighan said.
"Although the Justice Department claims that they have no evidence that high officials at E. F. Hutton were involved," he said, "I cannot believe that overdrafts of more than $100 million were not brought to the attention of upper management."
Robert M. Fomon, chairman and chief executive of E. F. Hutton Group, acknowledged that the overdraft and float policies were "stupid and clearly improper banking activities." But he personally denied knowing of their existence until they were brought to his attention in 1981 by the firm's general counsel.
He said there was "tremendous performance competition" among the regional managers across the country, "so they pushed to excess to devise interest schemes." Fomon said bonuses were awarded to high-performance regional branch managers.
"We did not have sufficient controls . . . because no one ever dreamed the employees would abuse a drawdown system that was perfectly legal," Fomon testified.
Hughes said that E. F. Hutton devised what is called a "drawdown" sheet that instructs Hutton branch and regional employees, through mathematical calculations, on how to withdraw from Hutton's local bank accounts. Among other things, employees were instructed to use a "multiplier factor" that called for the withdrawal of more funds than Hutton actually had deposited that day, Hughes said.
Eventually, the complicated drawdown practice reached the point where employees "began making enormous overdrafts that had no relation to the amounts of funds deposited that day," Hughes said.
Feighan challenged E. F. Hutton's statement that it had stopped its manipulative practices by early 1982.
The committee staff produced as evidence of this a letter dated April 12, 1985, from Lincoln First Bank of Rochester, N.Y., to the brokerage firm. The letter told E. F. Hutton that its collected balance was overdrawn by $500,000.