NYSE Censures Ball for Failing to Spot Hutton Scheme

The chairman of Prudential-Bache Securities has agreed to a censure by the New York Stock Exchange for failing to oversee E. F. Hutton & Co. properly when he was president of that firm during an illicit overdrafting scheme, sources familiar with the settlement said Monday.

The sources, who spoke on condition they not be identified, said the exchange determined that George L. Ball wasn’t aware of the scheme, which was conducted in the early 1980s and played a role in Hutton’s later demise. But the exchange felt that Ball still bore some responsibility, the sources said.

Thomas Lynch, Hutton’s former chief financial officer, also will be censured, and Hutton must pay a $400,000 fine to the exchange, among the largest ever levied, the sources said. Because Hutton was acquired by Shearson Lehman Bros. late last year, Shearson will pay the fine.

Norman Epstein, a former Hutton executive responsible for overseeing some of its operations, also faced discipline by the exchange but reportedly has been resisting a settlement.

Ball was away from his office and did not return telephone messages for comment, but a Prudential-Bache official said the chairman agreed to the settlement in order to put the matter behind him.

“This is the mildest form of action available to the exchange,” the official said.

“There is no fine, no restrictions; it’s a censure.”

The action by stock exchange investigators is regarded as largely inconsequential. It isn’t expected to have any effect on Ball’s position at Prudential-Bache.

“What they’re saying is, ‘We realize and acknowledge you weren’t aware of any of the improprieties,’ ” the Prudential-Bache official said.

Stock exchange spokeswoman Sharon Gamsin declined comment in accordance with its policy on investigations that have not been concluded.

Shearson officials did not return calls for comment, and the whereabouts of Lynch and Epstein weren’t clear.

Shearson has said previously that in acquiring Hutton, it scrutinized the firm’s legal history and potential liabilities.

The exchange’s investigation stemmed from a 1985 check-overdrafting scheme that Hutton orchestrated through its retail brokerage network. The firm earned up to $8 million in interest income at commercial banks by deliberately overdrawing checking accounts and putting the money to use elsewhere.

Hutton pleaded guilty to 2,000 federal fraud counts and paid a $2-million fine in May, 1985, because of the scheme, which exposed serious management lapses at the firm and led to a chain of events that forced Hutton to sell itself.

Ball departed Hutton for Prudential-Bache in 1982, after a federal probe of the overdrafting scheme had begun.

The stock exchange routinely disciplines member firms for violating its rules of conduct, with punitive actions ranging from expulsions for severe infractions to fines or censure for less serious offenses.