Magazine article American Banker

Bell Report Sparks Departure of 3 Hutton Executives

Magazine article American Banker

Bell Report Sparks Departure of 3 Hutton Executives

Article excerpt

The E.F. Hutton Group Inc. on Thursday announced the departures of three top executives and disciplinary actions against several employees in response to an internal investigation of the broker's highly publicized checkiting scheme.

The move came after former U.S. Attorney General Griffin B. Bell, who conducted the four-month investigation, said he found no criminal wrong-doing on the part of company chairman and chief executive Robert Fomon or any other top officials, at the nation's fifth largest securities firm.

The highest-ranking executive hit by the firm's disciplinary actions was Thomas P. Lynch, who agreed to give up his titles and responsibilities as vice chairman and chief financial officer of the E.F. Hutton Group. He will complete his current term as director.

Mr. Fomon ordered the investigation after his firm said on May 2 that it had pleaded guilty to 2,000 charges of wire and mail fraud in connection with an extensive check-overdrafting system. The elaborate scheme, which took place between July 1980 and March 1982, allowed E.F. Hutton to obtain interest-free loans amounting to about $17 million a day from several of its banks.

Immediately after Mr. Bell disclosed his findings at a Washington news conference Thursday morning E.F. Hutton announced it would implement all of Mr. Bell's recommendations, which included monetary fines, reprimands, suspensions, and removal of responsibilities.

In addition to Mr. Lynch, E.F. Hutton also announced the departures of Thomas W. Rae, the firm's general counsel, and Thomas Morley, who was described as the company's money mobilizer and a key figure in cash management operations.

The firm said Mr. Rae will take early retirement to pursue his "previously expressed desire" to enter a private law practice. He, too, will be permitted to complete his term as director. E.F. Hutton said it would name Mr. Rae's replacement later this year.

Mr. Bell criticizes Mr. Rae for failing to ensure that all documents subpoenaed by the Justice Department were delivered.

The departure of Mr. Morley, 46, was announced after Mr. Bell recommended that the executive be "removed from any responsibility connected with money management or banking." However, his report said, "We do not suggest that Morley be discharged." At a June 19 congressional hearing, Mr. Morley denied any knowledge of any illegal cash management practices.

Explaining his frustration in identifying specific criminal acts by higher E.F. Hutton officials, Mr. Bell cited the aphorism that "victory has a hundred fathers and defeat is an orphan."

That describes the circumstances of Mr. Morley, who has been identified as most closely responsible for designing the scheme. While he received direction from higher executives, "now all disclaim responsibility for Morley's money management actions. Morley now is an orphan, seemingly lost or at least in limbo."

In his 183-page report, Mr. Bell found that Mr. Lynch "failed in his responsibility to ensure that adequate controls were established to prevent abuses."

Mr. Bell said at Thursday's press conference that he considered asking Mr. Lynch to resign, but the chief financial officer eventually volunteered to relinquish all management responsibilities. Mr. Bell, recounting his third interview with Mr. Lynch, said he was "glad" he didn't have to decide whether to recommend Mr. Lynch's dismissal.

Mr. Lynch, 61, had emerged as a probable target for disciplinary action early in the overdrafting scandal.

On June 3 -- a month after E.F. Hutton revealed its guilty plea -- Robert P. Ritterieser, a well-regarded executive at Merrill Lynch & Co., was named to succeed Mr. Lynch as president of the company.

In what proved to be a classic example of being "kicked upstairs," Mr. Lynch was assigned the new title of vice chairman. At the time, he was said to be assuming "new and broader responsibilities. …

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