Lawyer’s Role at Issue in Hutton Case : House Probes When Managers Learned of Cash Practices
The general counsel for E. F. Hutton & Co. declined to write a legal opinion in 1980 defending the brokerage house’s aggressive money management practices--only four months before the firm took illegal actions that resulted in $2 million in fines for massive overdrafts, according to company documents released Friday at a congressional hearing.
But Thomas Rae, the counsel, told members of a House subcommittee that his refusal to render such an opinion was only to conserve his time--not because there were any illegalities involved in those transactions.
Nonetheless, Rep. William J. Hughes (D-N.J.), chairman of the House Judiciary subcommittee on crime, which is examining the Justice Department’s handling of the Hutton case, told Rae that he found that explanation “very difficult to believe.”
Questions have been raised over when Hutton’s senior management became aware that the company was engaging in widespread illegal overdrafts at banks nationwide, and some members of the subcommittee attempted to show that the firm’s officials had early warning of the practices, which are known to have occurred from July, 1980, to February, 1982.
Hutton managers have maintained that they did not learn of the problem until 1982, and then moved to correct it.
But the transactions on which Rae was asked to render an opinion had been questioned by the accounting firm of Arthur Andersen & Co. in a March 7, 1980, memorandum written by two Andersen officials after they were briefed on Hutton’s money management practices.
The memorandum is among the thousands of documents that Hutton has turned over to the subcommittee.
The Andersen officials wrote: “Joel Miller, AA&Co.; engagement partner, requested that Tom Rae render a written legal opinion stating that Hutton’s activities in this area don’t present any potential legal problems.
“Mr. Rae declined to render such an opinion, stating that the banks are fully cognizant of Hutton’s procedures, that this is an accepted banking practice and that there is no question as to the propriety of such transaction.”
In another attempt to show that Hutton officials knew of the illegal overdrafts before 1982, Rep. Bruce A. Morrison (D-Conn.) cited a Nov. 3, 1981, letter from Commerce Bank of Kansas City, Mo., complaining that Hutton’s account there had posted a 10-month loss of $210,310.
“We have continued to service the E. F. Hutton accounts, despite the substantial losses we have suffered, because we have been assured on numerous occasions by representatives of your firm that the accounts would be restored to a profitable basis,” David W. Kemper, the bank’s senior executive vice president, wrote to John Latshaw, then executive vice president in Hutton’s Kansas City office.
“Since this has not happened, we have no alternative but to request payment of $210,310 at this time,” Kemper wrote.
Morrison contended that the bank’s letter was a “critical document” that should have been disclosed earlier.
“That’s not cooperation,” he chided Rae. Rae replied that not one bank had complained to his office.
