E. F. Hutton Executives Plead Guilty to Fraud
E. F. Hutton, once a prominent investment firm in the United States, faced serious legal consequences when its executives pleaded guilty to over two thousand counts of wire and mail fraud in May 1984. The firm had engaged in a sophisticated check-kiting scheme that allowed it to profit from interest-free loans by floating checks during the lengthy clearing process typical of the pre-digital banking era. This scheme, which involved writing checks beyond available funds and covering them with checks from other branches, reportedly earned the company substantial illicit income. Investigations into Hutton began after local banks questioned unusually large deposits, leading to scrutiny from regulatory bodies.
The legal fallout included a $2 million fine and $8 million in restitution, although individual executives largely escaped personal culpability through a plea bargain. The scandal severely tarnished E. F. Hutton's reputation, prompting clients to withdraw their accounts and top talent to leave the firm. Ultimately, the company was sold to Shearson Lehman Brothers in 1987 and subsequently absorbed by Citigroup, but it never regained the trust and standing it once enjoyed in the financial community. The case exemplifies the broader issues of white-collar crime and corporate accountability within the investment sector.
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E. F. Hutton Executives Plead Guilty to Fraud
Date May 2, 1984
One of the oldest, largest, and best-known brokerage firms on Wall Street, E. F. Hutton ran a major check-kiting scheme that allowed it to acquire interest-free loans, which in turn generated millions of dollars of income. Hutton eventually pleaded guilty to mail and wire fraud, the first criminal conviction for a Wall Street investment firm in U.S. history.
Locale New York, New York
Key Figures
Robert M. Fomon (d. 2000), E. F. Hutton chief operating officer, 1970-1986, and chairman, 1977-1987Thomas Morley (fl. 1980’s), E. F. Hutton senior vice presidentTom Curnin (fl. 1980’s), E. F. Hutton defense attorneyGriffin Bell (1918-2009), former U.S. attorney general, 1977-1979, headed investigation of E. F. HuttonGeorge L. Ball (fl. 1980’s), president of E. F. Hutton, 1977-1982
Summary of Event
On May 2, 1984, the E. F. Hutton Company, the fifth largest investment firm in the United States, pleaded guilty to two thousand counts of wire and mail fraud. Beginning around 1980, Hutton had implemented and executed an elaborate, illegal, check-kiting scheme that would earn the company millions of dollars from interest-free loans. Hutton floated checks that were still in the clearing process, allowing the firm to earn interest during the time banks processed the checks and deposits. This approach worked for Hutton because of the slow rate in which checks cleared the banks, all in the days before electronic banking.
Hutton provided a vast array of services to its clients, including, primarily, stock trading and underwriting bond issues. A major benefit to Hutton was the speed at which it could offer communications and services. It had an aggressive management staff and numerous brokers (more than six thousand) who had direct wire access to the New YorkStock Exchange. This success, especially during the 1970’s and early 1980’s, may arguably have been the starting point of the near collapse of the thriving company, which was founded in 1904 by Edwin Francis Hutton, a New York financier, along with his brother, Franklin Hutton, and Gerald Loeb. Hutton was unique when compared to other firms because it offered services to its customers from coast to coast. Hutton also was the first company to gain access from the West Coast directly to New York. The company eventually opened seasonal branch offices in Florida, California, and New York, allowing it to market to a wide range of customers across the country.
Another technique Hutton used to make money was chaining. Hutton branch employees would simply write checks for amounts that exceeded available funds, and Hutton covered those checks with other checks drawn from company branches (checks written by Hutton to Hutton), mainly among rural bank accounts. This made it appear that the company had funds available in more than one account until all checks cleared. The banks used for the scheme were, primarily, United Penn Bank in Wilkes-Barre, Pennsylvania; American Bank and Trust Company in Reading, Pennsylvania; and Genesee County Bank in Batavia, New York. A number of overdrafts of these local bank accounts triggered the start of the investigations against Hutton. These investigations would be headed by former U.S. attorney general Griffin Bell.
Thomas Morley, a senior vice president who had been hired to better manage the company’s cash flow, later reported in a company memo that chaining checks allowed the company to profit as much as thirty thousand dollars per month, per branch, in extra income. George Ball, Hutton’s president, was pleased with this report and encouraged these practices throughout the company. Essentially, Hutton was provided the equivalent of interest-free loans. Reports showed that on some days Hutton “earned” $250 million in interest-free loans. Hutton executives were committing white collar crimes, a phrase coined in 1939 by Edwin Sutherland, considered the founder of the study of occupational crime. Sutherland referred to white collar crimes as those committed by individuals (white collar criminals) of higher socioeconomic status, usually within the workplace.
For nearly three years, Hutton continued with the scheme, but the firm’s downfall came when officials at the Genesee County Bank questioned the large deposits that were being made by Hutton. The bank in Batavia was a small branch with four employees, and the deposits seemed far too large for the office. Hutton soon came under question by New York examiners, and it retained Thomas F. Curnin for legal services. Even with Curnin helping, company chairman Robert M. Fomon openly defended all senior executives against criminal charges.
In addition to the guilty plea, the company agreed to pay a $2 million fine, $750,000 for the expenses of the investigation, and restitution in the amount of $8 million. This is the estimated amount the company received in illegal income. The plea bargain and guilty plea freed individual executives from culpability, but the company was barred from practicing within the securities industry. Only the company as a whole would face any repercussions for the criminal offenses. Some critics have argued that Hutton received a lenient sentence because of the plea bargain.
Impact
The Hutton scandal led many customers to pull their accounts, led star employees within the company to take jobs with other firms, and kept public agencies from conducting business with the firm. Hutton also was harshly scrutinized by the media, and it was given the sort of attention the company would rather not have. Instead, media reports brought irreparable damage to the company’s reputation.
On December 3, 1987, Hutton, the first Wall Street investment company to be convicted of a crime, was auctioned off to Shearson Lehman Brothers for $1 billion and was renamed Shearson Lehman Hutton. Hutton later came under the ownership of Citigroup. The investment firm, even with its new owner and name, would never again have the respected reputation it held prior to the scandal.
Bibliography
Brancato, Carolyn Kay, and Christian A. Plath. Corporate Governance Best Practices: A Blueprint for the Post-Enron Era. New York: Conference Board, 2003. A study that examines corporate leadership, ethics, and responsibility at a time of increased public awareness of corporate fraud and mismanagement.
Carpenter, Donna S., and John Feloni. The Fall of the House of Hutton. New York: Henry Holt, 1989. Corporate biography that includes the history and background of the company, the investigation, and court proceedings surrounding the scandal.
Ermann, M. D., and R. L. Lundman, eds. Corporate and Governmental Deviance: Problems of Organizational Behavior in Contemporary Society. New York: Oxford University Press, 2002. An overview of governmental and corporate deviance, written from the perspective of organizational behavior and practice.
Green, G. S. Occupational Crime. Chicago: Nelson-Hall, 1990. Focuses on occupational crime and deviance. One chapter discusses the early beginnings of white collar crime as an area of study in the fields of criminology and criminal justice.
MacDonald, Scott B., and Jane E. Hughes. Separating Fools from Their Money: A History of American Financial Scandals. New Brunswick, N.J.: Rutgers University Press, 2007. This book provides readers with a detailed history of American financial scandals. Useful for its analysis of corporate fraud.