This was a voluntary system, you testified a few minutes ago. When did it go into effect? Mr. SULLIVAN. I introduced- Mr. SMITH. Not the first one now, the one that you enhanced. Mr. SULLIVAN. I introduced it, I believe, in May 1978 at a regional operations managers' meeting. Mr. SMITH. It was done at a regional meeting? Mr. SULLIVAN. That is correct. Mr. SMITH. It was advised the system was laid out basically and they were told how they could implement it, correct? Mr. SULLIVAN. That is correct. Mr. SMITH. Did that meeting receive in advance the blessing or had it been discussed with senior officials of Hutton? Mr. SULLIVAN. I discussed that sheet with Mr. Ross, my immediate superior. Mr. SMITH. Who was the vice president of Hutton? Mr. SULLIVAN. That is correct. I also would have spoken to Thomas Lynch who was our chief financial officer of the firm. Mr. SMITH. If I were to indicate to you that we had testimony here previously that no senior management ever agreed that this system should go into effect, would that be inconsistent with what your belief is? Mr. SULLIVAN. I do not know who senior management was. Mr. SMITH. I am not asking you to speculate on that. If I told you that we had previous testimony that there had been no conscious decision of the upper corporate management level, at the level of Mr. Lynch, for instance, not mentioning that he had said it, but there was no decision to implement your additional enhancements to the drawdown system, would that be inconsistent with your understanding? Mr. SULLIVAN. That would be correct, sir. Mr. SMITH. Who taught the branch managers how to run this system after you devised the enhancement procedures? Mr. SULLIVAN. After it was introduced at the regional meeting, George Ball, who was the president of the firm, through a gentleman working for him named Peter Muratore, approached me at the end of 1978 and asked that in their training classes of assistant branch managers and branch managers if I would review Hutton's overall cash management program. One of the items that I covered was this addition to drawdown. Mr. SMITH. Did it ultimately become an element of training for branch managers and for money managers at the regional and branch level? Mr. SULLIVAN. My speaking before that group would be the explanation of the money management system. I do not know if that was an actual item for them to do. Mr. SMITH. Would the system now have required additional people being hired in order to facilitate the collection of additional data and all the working that had to be done at the branch or region, phone calling in for bank balances and the like? Mr. SULLIVAN. No, sir. Mr. SMITH. Now, let me ask you this. What was the date that you say that you left Hutton? And you indicated in your testimony a little while ago it was prior to the time that the system, which was now the subject of the investigation, began to develop in that form. What was the date that you say you left Hutton? Mr. SULLIVAN. I resigned on May 6, 1980. I stayed on, on a volunteer basis, on a part-time basis, to the end of May. Mr. Morely was starting June 1. Mr. SMITH. Let me ask you a question. Are you aware of-you said that you resigned May 6, but you never were present when that system began to create the kind of problems that were subsequently the basis of the investigation. Are you aware of a memo that went to George Ball from Mr. Tom Lillis on April 23, 1980 regarding two specific branches, Casper and Washington, DC? Mr. SULLIVAN. No, sir. Mr. SMITH. If Mr. Sullivan could be given a copy of exhibit 4, please, a memo dated April 23, 1980, to Ball from Lillis? Mr. HUGHES. Lillis? Will the gentleman wish to put that in the record? Mr. SMITH. Yes, for the record. Yes. Mr. HUGHES. Without objection, so ordered. [The information follows:] Mike Castellano requested that I answer your question regarding the interest income of the Casper and Washington D.C. branches. The Casper office carned in excess of $30,000 of net Below is a breakdown of net interest income for both • further detail is not available without delivery of If you have any further questions, please let me know. ނ + cc: M. Castellano FC 14 (RCV. 9/781 Tom Mr. SMITH. This is an E.F. Hutton inner-office memorandum. I am particularly interested in the second paragraph which I will read: The Casper office earned in excess of $30,000 of net interest income for the month of March 1980. In fact, the average net interest income for the last 5 months has been $31,400. The Washington, DC office earned $82,500 of net interest income in March 1980. Both offices have one thing in common; they overdraft substantially through Bill Sullivan in New York. At 20 per cent interest, it is a very profitable product for the branches. In the breakdown of net interest income it says "Net general ledger interest (almost entirely due to BOA drafts outstanding and overdrafting)," and it shows Washington having $47,500 for March 1980. Are you aware of this memo? Have you ever seen it? Mr. SULLIVAN. No, sir. Mr. SMITH. But that indicates to you, does it not, that Mr. Ball was aware of what was going on? Mr. SULLIVAN. Yes, sir. Mr. SMITH. Is this unusual, the amounts listed here? Would it be feasible under your drawdown plan, the original plan plus the enhancements instituted by you, that one branch could earn almost $50,000 almost entirely due to BOA drafts outstanding and overdrafting? Would that have been possible given your knowledge of the status of the way the drawdown plan would operate and the normal income flow from branches? Mr. SULLIVAN. The Washington, DC office did a lot of security deliveries which generated a lot of cash payments. So without knowing the finer details, Mr. Congressman, Congressman Smith, I would not be able to answer that directly because they have a lot of cash items in the Washington office. Mr. SMITH. Thank you, Mr. Chairman. Mr. HUGHES. The gentleman from Kentucky is recognized for 5 minutes. Mr. MAZZOLI. Thank you very much, Mr. Chairman. I am a little curious, Mr. Sullivan, in this respect. You indicated in answer to my friend's question-and I was going to ask you the same thing-whether or not in your position with Hutton and now with Cadre that you have passed some provisional qualification exams or tests, as with lawyers or members of the bar and CPA's and so forth. So in answering the question, you did suggest you passed examinations. Are you still considered a member in good standing of your particular profession? Mr. SULLIVAN. No, sir, not in the securities industry because once you leave a firm, 2 years after you leave a securities firm, these registrations expire. Mr. MAZZOLI. While you were with E.F. Hutton, were you a member in good standing in each of all the years through your voluntary departure? Mr. SULLIVAN. Yes, I was. Mr. MAZZOLI. In that sense of the word, this particular plan that you had developed or the additional drawdowns as you call them that you developed, those were developed by someone who is, as you were, in good standing in the profession, a fiduciary industry, and on that basis you felt this plan to be appropriate; is that correct? Mr. SULLIVAN. Mr. Congressman, I always dealt in-my background was not banking. The banks taught me and I have always believed in dealing with banks fairly. So when I designed that addition to drawdown, I did it with fairness in my mind. Mr. MAZZOLI. Fairness in your mind, but in connection with your profession and in connection with your fiduciary responsibilities, was this feeling on your part a fairness tested feeling, except the conversation you had with house counsel, that you test this plan against some industry norm or against some professional ethic or professional standard? Mr. SULLIVAN. The account analysis which is what I keep referring to is a profit and loss statement of the bank, and in dealing with banks all over the country-and I did consulting work with the State of West Virginia and dealt with their banks-we have always used an account analysis as a fair item to determine the bank's profitability on the account. When I developed that addition to drawdown, all the components of that were based on certain facts that we asked the bank ahead of time, and it was again strictly voluntary. Mr. MAZZOLI. So, in other words, the banks were aware of the fact that there would be overdrafting and in some cases aggressive overdrafting and drawdowning and so forth? They were notified ahead of time, each and every bank that was involved in this? Mr. SULLIVAN. No, sir. What I would like to explain is that overdrafting on Hutton's books did not result in overdrawing on the bank's books. One of the conditions-▬ Mr. MAZZOLI. I would like to get into that for a second to the extent of my time because I have a hard time-I had a hard time following your earlier explanation today, which was to the extent that there was some-you were saying that the regionals were drawn down and the area was drawn down and New York took all that in somehow. I gather from looking at data yesterday that every higher region had the lower region's checkbook, so they were writing checks as though I am a Hutton employee, stationed in Washington, DC, I do not have my own checkbook. In a sense it is in Boston or somewhere else. Is that correct? Mr. SULLIVAN. The regions physically held the checkbooks of the branches and New York physically held the checkbooks of the regions. Mr. Mazzoli. So all this was done at the end of the day, like telephonically? Mr. SULLIVAN. We had a wire system in each of the branches and they would wire their information to the region and the region would wire to the- Mr. Mazzoli. If I could get into this just a little bit though, the branch office would say that the-at the end of the business day today, Wednesday, that today is what? Thursday. I forget the day of the week around this place. Today is Thursday and at the end of the day I call the regional office and say I have a number of dollars in the bank. Is that what they did? Mr. SULLIVAN. That is correct. |