Report by Bell Cites Lack of Controls Against Overdrafting : Six E. F. Hutton Branch Managers Face Fines

An investigation by former Atty. Gen. Griffin Bell on Thursday cleared E. F. Hutton’s top management of criminal wrongdoing in the firm’s massive bank overdrafting, but it recommended fines of up to $50,000 for six branch managers for “excessive and egregious” practices.

“We tried to link the high officials of Hutton with the wrongdoing that the Justice Department had found, but we were never able to do that from the standpoint of criminality,” Bell said at a news conference.

Nevertheless, he said, “We found some wrongdoing on the lower levels of the company and to some extent in the middle.”

The investigation, commissioned by Hutton, did place responsibility on the brokerage firm for failing to install accounting controls to guard against the excessive overdrafting, which led Hutton last May to plead guilty to 2,000 federal fraud counts.

Despite the Bell report’s recommendations, no criminal prosecution of Hutton executives is possible because the Department of Justice, in its controversial investigation, already had granted immunity to nearly all of the regional and branch personnel linked to the illegal banking practices.

Three to Leave Firm

Bell supported the immunity tactic as “a normal prosecutive device” to gather evidence against higher-ups in the company.

In the wake of Bell’s report, three Hutton officials announced plans to leave the firm.

Hutton’s chief financial officer, Thomas P. Lynch, agreed to relinquish his corporate posts but will remain on the Hutton board of directors. Lynch was found by Bell’s investigation to have failed in his responsibility of ensuring that Hutton establish an adequate cash management system.

Thomas W. Rae, found responsible for Hutton’s failure to fully comply with Justice Department subpoenas in its probe and for not requiring internal financial auditing, will retire as general counsel by Dec. 31. Bell and Hutton noted that Rae previously had said that he wanted to enter private practice.

Hutton’s “money mobilizer,” Thomas Morley, who the report recommended should be removed from responsibility for money management or banking, is leaving the company, Hutton said.

The six branch managers, who will be penalized between $25,000 and $50,000 by the company, headed Hutton offices at the time of the overdrafting in Fresno; Alexandria, Va.; Baltimore and Bethesda, Md.; St. Louis; Hartford, Conn., and Wilkes-Barre, Pa.

Their fines will be given to charities where the branch offices are located--and thus, according to Bell, will be tax deductible.

Unless the six remain as Hutton employees, there is no way to compel them to pay the fines, Bell said, but he added that he expects all of them to do so.

The six were identified as Terry Bacon, Anthony Read, John Pearce, William Shaw, Robert Clark and John Holland.

The three-month Bell investigation, in which he was assisted by 14 attorneys and four paralegals from his Atlanta law firm, found no responsibility on the part of Hutton Chairman Robert Fomon for failing to detect and stop the abusive overdrafting and related practices.

Citing “proper corporate governance,” the report said Fomon was entitled to rely on the decisions, judgments and actions of subordinate officers and employees.

‘Peculiar Structure’

Bell’s report also found “no substantial evidence” that George L. Ball, Hutton’s president during the 1980-82 period covered by the Justice Department charges, was put on notice about any gaps in accounting controls.

Hutton’s “peculiar management structure” gave Ball no responsibility for finance, accounting, operations or legal functions. But acting as an executive sales manager, Ball “constantly exhorted the regional vice presidents and branch managers to earn more through sales and through better interest earnings,” the report said.

“This added to the Hutton overdraft culture,” which the report found to have combined with the lack of internal controls to create a breeding ground for the excessive overdrafting.

In an interview, Bell took issue with the Justice Department’s decision to require Hutton to plead guilty to 2,000 felony counts.

Bell, who served as attorney general during the Carter Administration, said he would not have “leveled as many counts because it blew it out of proportion, making the problem appear to be much greater than it was.”

His investigation concluded that the extent of injury to banks from Hutton’s overdrafting practices had been overestimated by the Justice Department and he disputed the department’s view that Hutton’s practices had endangered the nation’s banking system.

Bell said it appears that the $8 million that Hutton has reserved for restitution to the banks involved--one of the conditions of the firm’s agreement with the government--will not all be used. Only 29% of the 397 banks with which Hutton had accounts have indicated that they will file claims, he said.

Hutton, in following other disciplinary actions recommended by Bell, said it would place reprimands from Fomon in the permanent personnel files of Richard G. Genin, senior vice president of trading operations administration, and Ernest Dippel, co-regional vice president for the central region.

The report said Genin had failed to adequately supervise the regional operations managers who reported to him, while Dippel “knew or should have known that branch managers within his region were excessively overdrafting their accounts.”

Reorganize Parent’s Board

In addition, three regional operations officials will be suspended for 30 days without pay, in line with Bell’s recommendation. While they believed that they were acting in Hutton’s best interest, no reasonable person could have believed that their conduct was proper, according to the report.

The report also urged that the board of directors of E. F. Hutton Group, Hutton’s parent company, be reorganized so that it has a substantial majority of outside directors, a recommendation that Hutton indicated it would follow.

Most of Hutton’s board, which now numbers 18 officials from inside the company and five from outside, “were simply corporate officers over whom the board should have been exercising control,” the report said.