Pursuant to car conversation of Cctober 6, 1981, this letter is written to confirm our mutual understanding for the balance relationship maintained by E.F. Hutton & Company, Inc. with Piggs. We are appreciative of your interest and responsiveness in regards to this matter.

Commencing at this time, it is onderstanding that efforts will be made to correct the balance deficiencies which have occurred on an intenittent basis during recent months. For your reference, I have enclosed copies

of the analysis of account since December of 1980.

On a quarterly basis, the bank will review the Analysis generated for the E.F. Hutton relationship. If compensation is required, it is our preference to directly charge the corporate account for the net amount of the loss.

Again, we appreciate your assistance and look forward to arriving at a mutually satisfactory relationship.

Sincerely,

Zijn 2. Dillon

Lyn R. Dillon

Assistant Vice President

LAD: pob

cc: James Miscannen

Mr. HUGHES. And it's referenced to the account with the Riggs National Bank of Washington, DC, indicating that the conduct of your checking account is unsatisfactory, and they have indicated that they were closing out your account at that time.

I mean, there were a number of things occurring during this period of time. Were any of these cancellation of accounts, settlements, anything that was brought to your attention, Mr. Lynch?

Mr. LYNCH. No. Not of the ones that you have mentioned. I had only one discussion with a west coast bank claiming that they were not receiving fair compensation services and that they showed negative balances over a period of time. Mr. Morley and I met with the banker. I don't remember when it was, but back probably in 1981, 1982, and the conclusion was, after making certain adjustments in their analysis, that we would leave funds with them to make up for the shortfall. But there is no indication from them or any discussion of any excessive draw downs or any illegal practices.

Mr. HUGHES. One of the things that just puzzles me is how the regional vice presidents in the nine regions, wherever these practices were being perpetrated-and, now, I'm not suggesting that they were perpetrated in each region. I mean, that is something I am not prepared to address, because I don't have any information that would tell me one way or the other. But we know that several regions were involved in excessive draw downs involving overdrafts, bogus funds, if you will.

It puzzles me as to how the regional vice presidents in those regions could escape knowledge that these practices were being perpetrated on the part of the branch banks.

Can you enlighten me on that, Mr. Castellano? How could the vice president in the regions where these transactions were taking place not be aware of what was occurring?

Mr. FOMON. I think I could answer that better than Mr. Castellano.

Mr. HUGHES. I have asked Mr. Castellano.

Mr. FOMON. OK.

Mr. CASTELLANO. I don't know the answer to that.

Mr. HUGHES. He's a good soldier.

Mr. Mazzoli, you know, was asking if you had ever been at that type of inspection. I never have, but there's something to be said for being a good soldier.

Yes, Mr. Fomon.

Mr. FOMON. I think that if a bank, a number of banks, had contacted the regional vice president about compensation problems, yes, he should have been alerted to look into it. But-

Mr. HUGHES. How could the excessive overdrafts occur without the regional vice president knowing about it?

I mean, you're talking about literally, you know, dozens and dozens of transactions involving chaining of checks across the country.

Mr. FOMON. His cashier would know about it, or his branch operations manager would know about it.

Mr. HUGHES. Can you imagine a cashier working for you that didn't do what you told him was proper?

Mr. FOMON. No.

Mr. HUGHES. I can't either, as a matter of fact.

Mr. Castellano, two memos that emanated from you, one dated February 9th of 1982 and one dated March 17th of 1982, dealing with interest on regional bank overdrafting, which I offer for the record without objection, suggest to me that a problem developedI don't know how major it was-in the regions over who was going to get credit for much of the interest profit that was being generated. And the sum and substance of it is, it was bucked up to Mr. Ball, I believe it was, for him to attempt to arbitrate and decide, because it was a major policy decision.

Am I correct in assuming that there were some rumblings at the regional level as to who was going to get credit for the aggressive overdrafting, if you will?

[The documents referred to follow:]

After analyzing the branch system generation of interest
dollars we have decided to credit interest profits generated
via overdrafting of regional bank accounts by New York to
the branches in each region. This would be in addition to
interest profits earned via regional draw downs of branch
accounts which are presently credited to the branches.
Based on the philosophy that the re-ional operations and
administration offices are not act of loss centers, it
the naturally flow that interest pro
as well as costs
should not be retained.

To maintain the cost control and comparability features
of the present regional interbranch system, these credits
to branches must be in the form of a monthly journal entry
to the general ledger interest line of each branch's P&L,
rather than offsets to regional interbranch allocations.

This credit will be given each branch based upon its
relative interest earned on bank balances vs. the total
earned by the region. The first such credit will be pro-
cessed in March for the first three months and will be booked
monthly thereafter. A detailed explaining the method-
ology will be issued to the regional operations managers and
I would suggest you clear any specific problems you may have.
with your respective Regional Operations Managers.

At the same time there will be a lesser but perceptible
change in the interest earned by the branch system on out-
standing Bank of America checks. In the past the cleared
B Of A checks did not hit the branch general ledger (account
2732) until one day after the bank debited our master
account with them. This resulted in a branch's receiving
one extra day's interest credit. Due to improvements in
the B of A check system, the firm and branches will be both
charged on the same day the B of A checks are processed by
Bank of America.

Although this will somewhat mitigate the benefit gained on the regional overdrafting, based on historical data, the credit will exceed the charge. Those branches who draw down their bank accounts effectively will reap the greatest benefit from the above changes.

interest on Regional Bank Overdrafting

He should stress in the memo--which should go to BOMS--
stressing how (fairly) we are doing this--would like
:c see before it's, sent.

1 Good point.

بار

Although you have made the decision to give branches credit for interest earned via overdrafting of the Regional Bank Account, how these branch interest credits are determined and accounted for is still unresolved. The importance of this is underscored by the magnitude of these credits $5,400,000 or 285 of the $19,700,000 regional interbranch costs in 1981. (see attached)

Accounting

I feel strongly that the interest should be allocated to branches as a credit in the interest category and not s an offset to regional interbranch charges. If the interest were accounted for as an offset to regional interbranch, incentives to control these rapidly growing costs would be reduced since, in a region with large regional ! overcraft interest credits, net regional costs would be cut in half.

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In addition, the recently implemented regional interbranch system would be undermined. The main reason it was changed was to standardize the allocation method and types of costs passed on to branches. If regional overdraft interest was used to reduce regional interbranch, standard- Ple ization would be lost to the extent this interest varies from region to region. Since the same P&L effect can be achieved by a credit to the net interest total by branch, I believe this is a more reasonable approach. In discussion with Jim Daniel, he agreed completely.

The attached schedule indicates the magnitude of the $3.4 million by region and leads to more questions (as does everything that we seem to touch these days). Some of the questions raised are:

1. Malew York is drawing down 30 branches in the Atlantic Region and -6 branches in the Central Region directly, are Josing the extra float for the firm?

2. 1 the Hountain and South Central Regions are drawing down branches in other regions, how do we get the credit Lack to the proper branch (and region)?

3. Is the Southeast Region, doing a poor jcb or are the
credits being carned by the South Central Region?