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, these branches added 'more. This resulted in increasing the

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.

v. HUTTON'S RESPONSE AND THE FUTURE

Uncovering the Wrongdoing

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 ~·mber 1981 when it collapsed under its own weight. This multiple

This Pennsylvania/New York multiple transfer activity functioned for only 6 days in the first half of December

(Footnote continued on next page)

As Table II shows, the adjustment to the Monday DTC

is sufficient to reduce closing collected balances (after the first day) to the targeted level of $10,000. The adjustment may very well result in Hutton's drawing on uncollected funds. For example, in Table II, if none of the Tuesday customer deposit consisted of immediately available funds, then the closing collected balance at the local bank would not be plus $10,000 but would instead be minus $15,000. The results for the entire week would then be as given in Table III. In Table III, the average closing collected balance (after Monday) is plus $10,000; Wednesday's balance of plus $35,000 makes up for Tuesday's $15,000 deficit. Table IV shows the result if there were no customer deposits at all on Tuesday, in which case a Hutton check (a branch reimbursement check, or "BRC") would have to be deposited in the branch account to prevent Monday's DTC from causing an overdraft. Once again, the

average closing collected balance for Tuesday, Wednesday and Thursday is plus $10,000, although the actual balance on any one day varied.

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

adjustments and/or improvements.

As a result of these consul

tations the DTC calculation procedure was revised in July to eliminate some of the ambiguities in the old procedure and to spell out in a less confusing fashion precisely how the. drawdown was to be computed each day.5 A few months later the procedure was revised again to implement Arthur Young's suggestion that some aspects of the concentration system could make use of wire transfers.

The Company is currently in the process of installing a Branch Information Processing System ("BIPS") -in New York and in the Company's 400 branches, at a cost of $42 million. An automated drawdown system is a priority procedure for BIPS and is currently scheduled to be implemented in 75-100 branches that are expected to be on line shortly. This system will serve a great number of functions and will automate branch cashier functions, branch drawdown, and new accounts processing. The system will curb calculation errors and, more in terms of the issues raised in this case, is designed to allow New York to monitor drawdown activity at the branch and regional levels. By automating the drawdown process, BIPS will completely eliminate ary faint residual possibility that multiple transfers or

5

The Company believes that some of the excessive drawdowns may have begun as a result of calculation mistakes that then became less and less inadvertent.