Arthur Andersen Officials Tell House Panel : Hutton Warned on Overdrafts 5 Years Ago

Members of the accounting firm of Arthur Andersen & Co. on Thursday said they warned E. F. Hutton executives five years ago that the company was engaged in questionable banking activity but dropped the matter after Hutton officials assured them that the practice was legal.

During testimony before the House Judiciary subcommittee on crime, members of the accounting firm said they had presented Hutton executives in March, 1980, with evidence that the firm had been writing millions of dollars in checks on insufficient bank funds.

Committee members, who are conducting a lengthy inquiry into Hutton’s controversial banking procedures, praised Andersen officials for having raised the issue. But some strongly criticized the firm for failing to pursue the matter with outside authorities.

“I find it beyond belief that any accounting firm that saw all that money floating around would not have known that there was something wrong,” said Rep. Romano L. Mazzoli (D-Ky.). “If the average person on the street did what E. F. Hutton did, they’d go right to the slammer.”

The testimony by Arthur Andersen partner Philip Peller and other company officials raised questions about previous statements by Hutton officials. Earlier, Hutton executives told the subcommittee that they had no knowledge that their company had engaged in illegal bank overdrafts.

Company officials said they knew that Hutton had engaged in overdrafting activities but added that they had not done so as part of a systematic, moneymaking scheme, which is illegal.

Under questioning by committee Chairman William J. Hughes (D-N.J.), Joel Miller, an Arthur Andersen auditor who participated in the 1980 meeting, said high-ranking Hutton executives knew about the pattern of overdrafts that he had discovered.

Hutton executives were in the “same room as I was. . . . They heard the same things that were said,” Miller said.

Last May, Hutton entered into a plea bargain with the Justice Department under which it pleaded guilty to 2,000 counts of mail and wire fraud. The company admitted a widespread “check-kiting” scheme--in which Hutton officials wrote checks worth millions of dollars on insufficient funds and reaped huge interest gains before repaying the money several days later.

The banks that allowed Hutton to draw out these funds did so because the brokerage firm was considered a “prestige account,” and financial officers probably had no idea that they were part of such a widespread scheme, Hughes said.

Peller recalled that, during his 1980 meeting with Hutton officials, Thomas W. Rae, Hutton’s general counsel, had said that his firm’s overdrafts were legal. Rae had explained that the “major factor” permitting Hutton to legally engage in such transactions was that the company had enough assets to cover its checks, Peller said.

“Mr. Rae concluded that the fact that Hutton had the means to pay precluded any possible illegalities,” Peller said, adding that the accounting firm did not press the matter further “based on his (Rae’s) advice.”

However, Hughes reminded the accountants that they later turned up “mind-boggling” examples of Hutton’s overdrafts, such as checks written for $9.7 million on bank accounts that held less than $3,500, according to company documents provided to the committee.

“I don’t fault you for bringing this matter to their (Hutton) attention, but where I might fault you is whether or not you followed up,” Hughes said. “The situation called for you to do something more than taking Mr. Rae’s verbal opinion that it was all right to do this.”

Peller stressed that the accounting firm had persuaded Hutton to alter its bookkeeping records in 1980, partly to reflect the sizable amounts of its bank overdrafts. He added that none of Hutton’s banking clients had criticized the firm’s overdrafting activities.

“In retrospect, I think we went that extra yard,” said Peller, brushing aside criticism of the accounting firm. “We raised this issue with our client.”