First, a bank may have assumed that the deposit mix of the Hutton branch consisted almost entirely of customer checks drawn on nearby banks. If, however, a Hutton branch also includes in its deposit a check from another Hutton branch drawn on a bank outside its immediate environs, the branch's bank may not be able to obtain one-day scheduled collection on these checks. If the bank does not realize this, it will be persistently uncollected.2 Moreover, the Hutton drawdown sys tem - - will - which assumes one-day availability throughout treat the two-day clearing as float to be recaptured, thereby causing the DTCs to grow larger and increasing the injury to the banks.3 Second, increased float results in increased recapture, which in turn results in increased use of branch reimbursement checks (BRCS). The Hutton drawdown system assumes that these BRCS are always given one-day availability. This is a reasonable general assumption, since the BRCs are drawn on 2 3 The civil injunction in this case accordingly requires The DTCS can also grow larger if float occurs over a week- major New York banks, and New York is a one-day point from most of the United States, but the assumption is not universally true. When there is not much float, BRCS are generally small and infrequent and erroneous assumptions as to availability are unlikely to matter much in the long run. As float increases, however, this may no longer be true, and the potential for injury to the banks increases. There was also a third way in which some banks could have been injured by multiple transfers. Some branches combined multiple transfers with excessive drawdowns that is, instead of simply adding the incoming DTC to the outgoing one, This resulted in increasing the these branches added more. uncollected balances. Neither the multiple transfers that were engaged in solely to benefit from float nor the excessive drawdowns were sanctioned Company policy. Both practices became more extensive in late 1981 in response to rising interest rates, and as knowledge about these practices spread. As is common in the Industry, the compensation of Hutton branch managers is tied partially to the profitability of their offices, and one of the elements in determining profitability is interest income. During the period of rising interest rates in 1980 and 1981, there was particular sensitivity to the importance of interest income. It appears that in some instances one of the responses on the branch and regional level to incentives to take maximum advantage of all the float in the system was to take advantage of float that was not there. The Company and its auditors did not detect these deviations because the Company's internal controls were geared towards assuring compliance with the numerous state, federal, and internal regulations that safeguard customer accounts. Those controls have always worked and continue to work well. In retrospect, however, the Company could and should have kept a tighter rein on its internal banking practices to keep them from crossing the dividing line between aggressive and improper. Multiple transfers came to the attention of senior menagement as a result of a series of events in late 1981. A multiple transfer of funds in the Middle District of Pennsylvania came to management's attention in amber 1981 when it collapsed under its own weight. This multiple 4 This Pennsylvania/New York multiple transfer activity functioned for only 6 days in the first half of December (Footnote continued on next page) transfer activity was immediately shut down. In February 1982, when senior management became concerned that the problem might be more widespread, it initiated an internal investigation, which discovered the existence of other multiple transfer systems. Firm steps described below were taken to shut them cown and to prevent their recurrence. (Footnote continued from preceding page) 1981. Hutton's Wilkes-Barre branch drew down three New · York area branches and was itself drawn down by Batavia, New York. Batavia and Strafford, Pennsylvania were drawn down by Fortieth Street (in New York City), which was drawn down by the Atlantic Region concentration account in Rochester. This multiple transfer was dismantled immediately after a: Some of the excessive drawdowns came to light at about the same time, and persons participating in them were directed to stop. Other excessive drawdowns that had occurred were uncovered as the Government's and Hutton's investigations progressed, but there is no indication of such practices having taken place after February 1982; the controls described below were designed to stop all multiple transfers and all excessive drawdowns. Corrective Measures On February 22, 1982, wires were sent to the Regional Vice-Presidents and Operations Managers instructing them where their branches were to be drawn down. The wires required positive acknowledgement by the recipients. Unauthorized branchto-branch transfers have not occurred since the first quarter of 1982. On May 17, 1982 the Company directed all branch and regional personnel to discontinue making adjustments for "on us" and other good funds deposits and to merely draw the branch checkbooks to zero at 'the end of each day (i.e., proceed according to Table I above). Nationally recognized cash management specialists at the Big Eight accounting firm of Arthur Young & Company were retained to review the branch drawdown procedure and consult with the Company about potential |