E. F. Hutton to Repay Mutual Funds Holders More Than $1 Million
In the latest round of penalties stemming from E. F. Hutton’s financial practices, federal regulators Tuesday ordered the investment firm to repay more than $1 million to shareholders of some of its mutual funds and to give up a claim of $800,000 in fees from the funds.
Officials of Hutton and the Securities and Exchange Commission, which issued the order, said the problems at the firm’s mutual fund unit appeared unconnected to the check-kiting scheme for which Hutton pleaded guilty to 2,000 counts of felony fraud in May.
But the overcharging of customers and “miscalculations” of management and distribution fees were unearthed during an SEC audit that was ordered as part of a major examination of the firm inspired by the guilty plea, SEC officials said.
No New Retail Branches
Disclosure of the new SEC penalties came as Hutton settled--without admitting or denying the charges--a wide range of SEC complaints resulting from the bank overdrafting fraud. Hutton has already paid a $2-million fine and established an $8-million fund to repay banks defrauded by the maneuver.
In the latest settlement, entered in U.S. District Court in Washington, Hutton agreed not to open any new retail branch offices until it hires an independent consultant to examine its retail branch policies and procedures and adopts that consultant’s recommendations.
The firm also consented to a permanent injunction against future violations of SEC rules on bookkeeping and disclosure of financial practices.
The agency had charged that Hutton’s practice of overdrawing its bank accounts to illicitly boost interest income contributed $3.5 million to the firm’s total increase in income of $22 million from 1980 to 1981. It added that Hutton’s net interest income declined by $2.8 million the following year, when the practice ceased. The SEC said those amounts were of material significance to shareholders and should have been publicly disclosed.
Second Exemption
The SEC also granted Hutton a second exemption from rules barring convicted felons and other violators of regulations from serving as investment advisers or underwriters of certain securities. Hutton’s initial 180-day exemption, dating from its May 2 guilty plea, expired Tuesday. The SEC said it will hold a formal hearing on whether to grant the firm a permanent exemption.
In a written statement, Hutton Chairman and Chief Executive Robert Fomon said the firm is “gratified to have resolved the cash concentration (i.e., bank overdrafting) issue with our principal regulator.” Fomon observed that the SEC found no indication that the banking practices alone contributed to any customer losses.
In its complaint about Hutton’s mutual fund accounting, the SEC charged that, from 1981 until last Aug. 21, and particularly from May to Aug. 21, Hutton’s practice of improperly crediting customer funds and management fees for several of its mutual funds cost the funds and their shareholders more than $1 million. The funds involved were Hutton’s Bond and Income Series, which currently has assets of $210 million; Government Securities Series, with $2.6 billion in assets; Growth Series, with assets of $808 million, and Option Income Series, with assets of $135 million.
Tuesday’s order is the second in less than a year involving Hutton’s administration of its mutual funds. Last December, the firm agreed to return $191,000 to the funds, or the amount that the firm earned from the “float” period between the time customers paid for their fund shares and the time the money was credited and began earning dividends.
The SEC’s latest order requires the firm to reimburse the affected funds $721,987 and to add a further $303,437.87, for a total of $1,025,424.87, while forgoing a claim from the funds of $800,000 in distribution fees.
The money thus flowing back into the mutual funds will likely be credited to the accounts of many customers who were unaffected by the practices and leave uncompensated many who were improperly charged but are no longer customers. But John Sturc, associate director of the SEC’s enforcement division, noted that “the amounts that might go to an individual shareholder might come to pennies,” while the order is chiefly designed “to prevent Hutton from being enriched by that process.”
Hutton’s problems were not confined to federal regulators. The firm disclosed Tuesday that it had settled a complaint by the New York state attorney general by agreeing to pay New York customers with checks drawn on New York banks. Previously, the firm paid with checks drawn on San Francisco-based Bank of America, apparently profiting from the period of several days to more than a week before local banks clear those checks for cashing. Hutton must also reimburse the state of New York $100,000 to cover the cost of its investigation.
Separately, the state of Massachusetts barred the company from selling most public limited partnerships and tax shelters in the state for the rest of the year. The ruling is the final resolution of a temporary ban imposed in June when the state ordered one of Hutton’s limited partnerships to pay back $4.8 million to about 700 Massachusetts investors.
