Georgia Places Hutton on 1-Year Probation as Penalty for Fraud Plea
In what may serve as a blueprint for other states considering disciplinary action against E. F. Hutton & Co., Georgia authorities Thursday placed the investment firm on one-year probation but allowed it to continue doing business without restriction.
The order requires Hutton to file quarterly reports on its compliance with the terms of its guilty plea May 2 to 2,000 federal felony counts of mail and wire fraud. The firm must also pay the $15,000 cost of the state’s investigation.
Although several states, including California, are considering disciplinary action against the firm, Georgia’s action is the first state censure imposed on Hutton since the guilty plea.
It also follows a Hutton-commissioned investigation by former U.S. Atty. Gen. Griffin Bell that blamed five top executives and seven regional and branch managers for the fraud, which largely involved Hutton’s practice of overdrawing its accounts at banks around the country to earn interest on the excess cash.
Georgia’s order may serve as a model for states whose regulators can find little evidence that local Hutton branches or officials were direct participants in the fraud, but who also must reconcile the firm’s plea with local rules allowing the suspension or revocation of securities licenses held by convicted felons.
Gathering in Canada
Georgia regulators said they found no excessive overdrafting at branches in the state and no evidence that Hutton’s 14,000 Georgia customers suffered harm.
The Georgia order comes three days before state securities regulators from across the country gather in Calgary, Canada, to discuss Hutton’s plea as well as a range of other issues. Georgia’s assistant securities commissioner, H. Wayne Howell, is president of the regulators’ association and chairman of its task force on Hutton.
Georgia held three days of hearings and negotiated at length with Hutton before entering its order, which concludes that “the public interest would not be served by suspending or revoking the registration of Hutton or any of its employees.”
Hutton officials expressed some relief at the outcome. “The settlement is a strong one but cognizant of the price the company has already paid for its crime,” said Terrence B. Adamson, a Hutton outside counsel who helped negotiate the order.
He said the company regards the order as legally mandating its implementation of Bell’s recommendations, which include reorganizing its board of directors and various internal departments.
Hutton has already pledged to do so, but Adamson added that “it’s one thing to say we will go through with Judge Bell’s recommendations and another to say, if we don’t, our license will be revoked.”
May Reach Similar Agreement
Several other states are known to be preparing similar orders. Rodger Marting, the securities commissioner of Ohio, said Thursday that he may reach a similar settlement in principle with the firm as early as today, although he plans to continue investigating individual Hutton employees holding Ohio securities licenses who were implicated in the scheme. Marting said he has been in daily contact with Howell this past week, and he called Thursday’s order “a good architecture” for actions by other states.
Other states are investigating Hutton’s behavior with an eye to determining if customers were hurt by the firm’s penchant for manipulating its cash balances to maximize interest income. Some states, like Ohio, are also focusing on the role of individual employees identified by Bell as participants in the scheme.
California authorities have asked Hutton for a statement on whether any customers lost money as a result of its cash-manipulation practices. New York officials are investigating the same question.
Hutton has maintained that its policy of paying customers with checks from remote banks whose drafts would take days to clear ended in 1979, when Merrill Lynch settled a civil lawsuit challenging the maneuver.
California officials are also focusing on the role of William Shaw, a former branch manager in Fresno who Bell said should be fined between $25,000 and $50,000 and placed on a year’s company probation for allowing “excessive and egregious” intentional overdrafting in his branch. Shaw is currently a branch manager in Long Beach.
“I want to follow up on Mr. Shaw,” said G. W. McDonald, chief of enforcement for the California Department of Corporations. Other branch managers implicated by Bell were in Virginia, Maryland, Missouri, Connecticut and Pennsylvania.
A major state fine or license revocation would be potentially so devastating to Hutton’s employees, shareholders and customers that McDonald and regulators in other states said they would probably stop well short of such sanctions.
“We were thinking of something in the nature of a censure--a public slap on the wrist,” he said.
Still, McDonald and other regulators said they would await next week’s meeting in Calgary, which Bell is expected to address and several Hutton executives will attend, before making final decisions on how to discipline the firm.
“I have deliberately not made up my mind before Calgary,” McDonald said. “I’m going to ask all the enforcement chiefs I run into up there what they’re going to do about Hutton.”
And Ohio’s Marting said that, although he may reach a tentative agreement with the firm today, “I’m not going to sign any order until I’ve had a chance to listen to Griffin Bell.”