E. F. Hutton's steps to clean house help regain its listeners
What do Jell-O and E. F. Hutton have in common? The same pitchman. None other than Bill Cosby, the star of America's hottest television show. The ad campaign debuts next week. And it remains to be seen whether comedian Cosby can wrap E. F. Hutton in his aura of popularity. But the Cosby move is one sign that Hutton is emerging from a year of ``trauma and pain,'' as the firm's 1985 annual report puts it.
A year ago today, the nation's third-largest retail broker pleaded guilty to 2,000 counts of fraud. Hutton had taken millions of dollars of free loans in a huge check-float scheme in the early 1980s. The firm paid a $2 million fine and $750,000 to cover government legal costs. But that wasn't the end of it.
An admission of a corporate crime but with no indentified criminals set off a flurry of federal and state inquiries. To quell the storm and clear its name, Hutton hired former United States Attorney General Griffin Bell to do an internal investigation. In addition, a new president was brought aboard to rejuvenate a demoralized work force and restore credibility.
The Bell report, released in September, resulted in the firing, fining, or early retirement of several key executives. And, in line with Mr. Bell's recommendations, Hutton put through a major reorganization in January which, among other things, aimed at the weaknesses that led to the check floating episode.
Until the fraud case sullied its image, Hutton was known as one of the best-managed firms on Wall Street. Now it's regaining that reputation.
``Hutton's a better firm today than it was a year ago. And they're becoming an even better firm,'' says Perrin H. Long Jr., a longtime securities industry analyst at Lipper Analytical Services in New York. ``Everything that has transpired has caused senior management to undertake a real appraisal of what it's doing. As a result, [Hutton] has a new president, new financial officer, and new legal counsel.''
Hiring Robert Rittereiser from Merrill Lynch was a smart move, Mr. Long says. Mr. Rittereiser fills a void created by George Ball's departure to head up Prudential-Bache Securities. ``At long last the troops in the field have someone they can relate to. That's not to say Rittereiser has the confidence George Ball had. But he's doing an excellent job.''
Still, in an industry where switching firms is relatively common, competitors took full advantage of Hutton's problems.
``A lot of good salespeople moved to other firms,'' says Allen Mottur, director of the financial services group at Temple, Barker & Sloane, a Lexington, Mass., consulting firm. Mr. Mottur says he has internal memos from a competing firm which directs branch office managers to be alert for disgruntled Hutton brokers.
Defections picked up in the fourth quarter, analyst Long says, and carried over into January and February at a higher than normal rate. But he figures those that are going to leave have probably gone by now. Having just returned from visiting five Hutton offices on the West Coast, Long says: ``You can just sense a rejuvenation [of morale] beginning to develop.''
Hutton is starting to see some bottom-line rejuvenation, too. After heavy trading losses and mortgage write-offs in 1985, the firm reported a 66 percent jump in net earnings for the first quarter of '86. The bull market has boosted many brokerages to record earnings levels.
Hutton earnings would have been higher, said president Rittereiser, if it weren't for the municipal bond drought brought on by uncertainity over tax reform. Hutton is one of the top public-finance players.
Despite the improvement, Mottur warns that Hutton may not be ``out of the woods yet. I see the takeover and consolidation trend continuing. And they may find themselves part of that trend.''
Presumably to repair its reputation with the investing public, Hutton brought Cosby aboard. He will star in 10 television commercials, print ads, and concerts sponsored by Hutton. The ad content has not been revealed.
Meanwhile, the drawn-out federal and state investigations are nearly over. A US House Judiciary Committee report is expected soon on whether the US Justice Department was as aggressive in prosecuting individuals as it could have been.
A Senate Judiciary Committee hearing next week is expected to probe this issue further -- but the Justice Department, not Hutton, is in the hot seat.
And in the next few months the Securities and Exchange Commission plans to hold a hearing on whether Hutton should be given a permanent exemption from the law that forbids convicted felons from acting as investment advisers. Observers think an exemption is likely.
At the local level, similar securities laws in most states have resulted in Hutton's paying fines, legal fees, or both. Most states also imposed some business restrictions and raised their scrutiny of the firm.
Connecticut came down hardest on Hutton: exacting a $350,000 fine, preventing it from doing any new business for 10 days in late February, suspending a Hartford office manager's license for six months, and putting the company on probation for a year.
Hutton agreed earlier to pay banks for any lost interest in the check overdrafting scheme. The firm set aside $8 million; about $1.25 million has been paid so far. Hutton officials say they don't expect to have to dish out more than $4 million.
Finally, the Hutton case has had a sobering effect on the cash management practices of corporate America. Before Hutton, when corporations looked at cash management they focused on revenue operations and cash savings, says Lawrence Maiser, partner in charge of financial management at Peat, Marwick, Mitchell & Co.
``Now they look at control and oversight,'' he says, ``and ask, `Is it appropriate?' ''