One of the oldest, largest, and best-known brokerage firms on Wall Street, E. F. Hutton ran a major check-kiting scheme that allowed it to acquire interest-free loans, which in turn generated millions of dollars of income. Hutton eventually pleaded guilty to mail and wire fraud, the first criminal conviction for a Wall Street investment firm in U.S. history.
On May 2, 1984, the E. F. Hutton Company, the fifth largest investment firm in the United States, pleaded guilty to two thousand counts of wire and mail
Hutton provided a vast array of services to its clients, including, primarily, stock trading and underwriting bond issues. A major benefit to Hutton was the speed at which it could offer communications and services. It had an aggressive management staff and numerous brokers (more than six thousand) who had direct wire access to the New York Stock Exchange. This success, especially during the 1970’s and early 1980’s, may arguably have been the starting point of the near collapse of the thriving company, which was founded in 1904 by Edwin Francis Hutton, a New York financier, along with his brother, Franklin Hutton, and Gerald Loeb. Hutton was unique when compared to other firms because it offered services to its customers from coast to coast. Hutton also was the first company to gain access from the West Coast directly to New York. The company eventually opened seasonal branch offices in Florida, California, and New York, allowing it to market to a wide range of customers across the country.
Another technique Hutton used to make money was chaining. Hutton branch employees would simply write checks for amounts that exceeded available funds, and Hutton covered those checks with other checks drawn from company branches (checks written by Hutton to Hutton), mainly among rural bank accounts. This made it appear that the company had funds available in more than one account until all checks cleared. The banks used for the scheme were, primarily, United Penn Bank
Thomas Morley, a senior vice president who had been hired to better manage the company’s cash flow, later reported in a company memo that chaining checks allowed the company to profit as much as thirty thousand dollars per month, per branch, in extra income. George Ball, Hutton’s president, was pleased with this report and encouraged these practices throughout the company. Essentially, Hutton was provided the equivalent of interest-free loans. Reports showed that on some days Hutton “earned” $250 million in interest-free loans. Hutton executives were committing white collar crimes, a phrase coined in 1939 by Edwin Sutherland, considered the founder of the study of occupational crime. Sutherland referred to white collar crimes as those committed by individuals (white collar criminals) of higher socioeconomic status, usually within the workplace.
For nearly three years, Hutton continued with the scheme, but the firm’s downfall came when officials at the Genesee County Bank questioned the large deposits that were being made by Hutton. The bank in Batavia was a small branch with four employees, and the deposits seemed far too large for the office. Hutton soon came under question by New York examiners, and it retained Thomas F. Curnin for legal services. Even with Curnin helping, company chairman Robert M. Fomon openly defended all senior executives against criminal charges.
In addition to the guilty plea, the company agreed to pay a $2 million fine, $750,000 for the expenses of the investigation, and restitution in the amount of $8 million. This is the estimated amount the company received in illegal income. The plea bargain and guilty plea freed individual executives from culpability, but the company was barred from practicing within the securities industry. Only the company as a whole would face any repercussions for the criminal offenses. Some critics have argued that Hutton received a lenient sentence because of the plea bargain.
The Hutton scandal led many customers to pull their accounts, led star employees within the company to take jobs with other firms, and kept public agencies from conducting business with the firm. Hutton also was harshly scrutinized by the media, and it was given the sort of attention the company would rather not have. Instead, media reports brought irreparable damage to the company’s reputation.
On December 3, 1987, Hutton, the first Wall Street investment company to be convicted of a crime, was auctioned off to Shearson Lehman Brothers for $1 billion and was renamed Shearson Lehman Hutton. Hutton later came under the ownership of Citigroup. The investment firm, even with its new owner and name, would never again have the respected reputation it held prior to the scandal.
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Brancato, Carolyn Kay, and Christian A. Plath. Corporate Governance Best Practices: A Blueprint for the Post-Enron Era. New York: Conference Board, 2003. A study that examines corporate leadership, ethics, and responsibility at a time of increased public awareness of corporate fraud and mismanagement. -
Carpenter, Donna S., and John Feloni. The Fall of the House of Hutton. New York: Henry Holt, 1989. Corporate biography that includes the history and background of the company, the investigation, and court proceedings surrounding the scandal. -
Ermann, M. D., and R. L. Lundman, eds. Corporate and Governmental Deviance: Problems of Organizational Behavior in Contemporary Society. New York: Oxford University Press, 2002. An overview of governmental and corporate deviance, written from the perspective of organizational behavior and practice. -
Green, G. S. Occupational Crime. Chicago: Nelson-Hall, 1990. Focuses on occupational crime and deviance. One chapter discusses the early beginnings of white collar crime as an area of study in the fields of criminology and criminal justice. -
MacDonald, Scott B., and Jane E. Hughes. Separating Fools from Their Money: A History of American Financial Scandals. New Brunswick, N.J.: Rutgers University Press, 2007. This book provides readers with a detailed history of American financial scandals. Useful for its analysis of corporate fraud.
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