E. F. Hutton

ANYONE OLD enough to remember the heyday of E. F. Hutton remembers their ad, “When E. F. Hutton speaks, people listen” in which entire city blocks fell silent to hear the pearls of financial advice spoken by in whisper by a Hutton client. Chief Executive Officer Robert M. Foman was so enamored of Hutton's image that he built a 29-story, $100 million headquarters in Manhattan, New York City, that some people called a memorial to corporate greed.

People stopped listening to Hutton, however, after discovering that the company had been engaged in a systematic effort to avoid paying interest on short-term bank loans through a complicated scheme of check kiting. The scheme came to light in December 1981 when Hutton gave in to the pleas of the Batavia, New York, branch of the Genesee County Bank and moved accounts for its local office from the Marine Midland Bank to the small, local bank.

Over the next several days, bank officials began noticing that Hutton deposited checks worth millions of dollars. Without waiting for credit from the Federal Reserve, the bank had also paid $8,000,000 on checks that had been written by Hutton on the account. Amazingly, the amounts that Hutton were depositing and withdrawing added up to more than the bank's total assets. Internal auditors who were told to monitor the Hutton account wondered why the amounts were so large when Hutton's local office employed only four people.

Within nine days of opening the Genesee account, Hutton had deposited $26,427,507 in checks. The 11 checks had all been written by Hutton on its accounts at United Penn Bank in Wilkes-Barre, Pennsylvania, and American Bank and Trust Company in Reading, Pennsylvania. Hutton was inexplicably moving funds among the three banks. Within that same nine-day period, Hutton had written numerous checks on the Genesee Bank totaling $26,432,000, resulting in an overdraft of $4,493. After additional checks arrived at the Genesee Bank, officials checked with United Penn Bank and learned that Hutton had funds to cover one but not both of two checks written on December 8 for $6,000,000 and $8,000,000.

Later that day, Hutton also deposited a check written on the Reading bank for $110,000, followed by a check for $500,000 two days later. The Reading account did not have sufficient funds to cover either check. The Genesee Bank decided to freeze the Hutton account and returned checks for $2,071,000 and $8,000,000, notifying the local Hutton office of their action.

During a visit to the local Hutton office, three Genesee officials told Hutton to take their business[Page 268] elsewhere. The bank subsequently returned three checks totaling $7,000,000.

Following company procedures, Genesee officials notified the auditor of their parent company about the problems with the Hutton account. Officials there reported Hutton's activities to the deputy supervisor of New York banks and sent copies to the Federal Reserve and the Federal Deposit Insurance Corporation. New York State investigators discovered that Hutton's paper trail led to Manufacturers Hanover Trust (Manny Hanny) and Chemical Bank at which Hutton's main accounts were lodged. By auditing four days of Hutton activities at the two banks, state regulators found the same pattern of inexplicable transfers of funds between Hutton offices and the two banks. For instance, audits of the Manny Hanny accounts uncovered an overnight overdraft of $1.3 billion on the Hutton account. Both banks were astounded to learn that Hutton had been using overdrafts as short-term, no-interest loans that cheated the banks out of millions of dollars in interest. To do this, Hutton had used a check-kiting scheme, which was variously known as “chaining” or “floating” to amass huge profits at the expense of banks that handled their accounts.

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