Fallout from Hutton scam goes on, but outlook for firm is OK
Ripples from E. F. Hutton & Co.'s money management scandal continue to spread. Hutton pleaded guilty last May to 2,000 counts of mail and wire fraud in connection with a systematic check overdraft scheme -- a shell game that generated $17 million for the firm between 1980 and '82 by taking advantage of the ``float'' in the clearing of checks. The scheme was halted after several banks got suspicious. Hutton brought in former Attorney General Griffin Bell to investigate and went through a major reorganization.
But aftershocks continue. The Securities and Exchange Commission, for instance, requires that a public corporation file an annual report. In it, sources of income must be spelled out. As might have been expected, Hutton, involved in a maneuver of questionable legality, did not list check kiting as an income source. Nor did it note that there were financial and legal risks involved. The SEC sued, and last week Hutton consented to the violations without either admitting or denying them.
In a related matter, the SEC censured Hutton for irregularities in reporting and accounting with its mutual funds -- a matter that a company spokesman refers to as ``operational sloppiness.'' And in Massachusetts last week, Hutton was barred from selling most public limited partnerships and tax shelters for several months because of unauthorized sale of units in Silver Screen II, a limited partnership set up to finance Walt Disney movies.
If those events did not ensure that the firm's name remains in the news, the House Judiciary Committee's Subcommittee on Crime has been investigating why the Justice Department charged no individuals when it accepted Hutton's guilty plea in May.
Last Thursday, the subcommittee heard testimony from George Ball, Hutton's former president and now head of Prudential-Bache Securities. Mr. Ball denied ordering or playing a role in the check overdrafting. Subcommittee chairman William J. Hughes (D) of New Jersey indicated, however, that he found it ``incredible'' that Ball did not know about the scam.
By pursuing Hutton, government regulators are sending a message to other money managers that abusing their relations with banks is unacceptable. Several accounting firms report that, since the Hutton scandal broke, financial clients are eager to have their cash management techniques analyzed.
Given E. F. Hutton's size and stature, observers say, it's likely that in six months the worst will be over. But whether the tarnish will affect Hutton's business remains an open question.
There have been some reports that local brokers have been reluctant to prospect for new clients in the wake of the adverse publicity. Hutton spokesman Robert Sharkey, however, says it is ``difficult to quantify the impact'' of these image problems on the firm's financial fortunes.
Elaine Derso, who follows securities firms for Value Line Investment Survey, notes the possibility of problems with customer relations and with the firm's municipal underwriting activities.
But financial analyst Perrin Long, with Lipper Analytical Services in New York, sees ``little consequences over the long term . . . in six months or so it should begin to unwind.'' Fines and restitutions, Mr. Long notes, will make only a tiny dent in the $3 billion to $3.5 billion a year in revenues -- a point Ms. Derso agrees with.