When Griffin Bell issued his report, however, he stated that he had reviewed just such a listing. "We were provided ledgers listing BRCs drawn on Hutton's Chemical Bank account during the period January 7, 1980 through May 21, 1981." 71 When confronted, Hutton claimed that the explanation given to the Subcommittee was prepared by a lawyer for Hutton's Controller, Michael Castellano, and that Hutton's own lawyers had never reviewed the explanation for accuracy. Meanwhile, the Subcommittee had resorted to much less efficient means of tracing the drawdowns. Hutton improperly asserted an attorney-client privilege for many documents and, even when Chairman Hughes denied the claim of privilege and ordered Hutton to produce them, Hutton continued to refuse, and continued to claim privilege.72 Even the documents Hutton did produce were redacted so that, in many cases, their substance was rendered incomprehensible. To protect other documents, the Company asserted the attorneyclient privilege on behalf of individual officers and employees, even when the documents in question were not in the Company's possession, the Company was not the intended recipient of the documents, and the individuals who were the intended recipients had their own lawyers. For instance, Hutton claimed privilege for immunity letters from the Department to certain Hutton officers and employees. It asserted that privilege on their behalf, even though those individuals were represented separately, and not by the Company's lawyers. Hutton's claim was particularly inappropriate because the immunity letters on their faces were not communications between lawyers and their clients. They were communications between the Department of Justice and the individuals or the individuals' lawyers.73 71 THE HUTTON REPORT at 42. 72 Gregory letter to John F. Daum, Esq. (hereinafter cited as "Daum"), M. rch 24, 1986; letter from Daum to Gregory, March 26, 1986; id. March 31, 1986. 73 8 WIGMORE, EVIDENCE § 2292 (McNaughton rev. 1961). CHAPTER IX: OTHERS INVOLVED REGULATORS There were many regulators with oversight responsibility over the Company and its victim banks-for example, the SEC, the CFTC, the Federal Reserve, the New York Stock Exchange, and the various State agencies-that either did not detect Hutton's questionable activities or did not stop them. Since the guilty plea, some of these regulators have conducted investigations into Hutton's activities, and in some cases, those investigations are still continuing. Where appropriate, the Committee exchanged information with these agencies. Their specific findings, which are beyond the scope of this Report, are available through the agencies themselves. LAWYERS During the time of the illegal activities and up until the present, Hutton has been represented in matters relating to those activities by the law firm of Cahill Gordon & Reindel of New York City. It was Cahill, along with Hutton's General Counsel Thomas Rae, that advised Hutton about the propriety of its cash management activities, and that represented Hutton during the Federal criminal proceedings and in the initial stages of the Subcommittee's investigation. Patton, Boggs & Blow, a Washington, D.C., law firm, Hansell & Post, an Atlanta, Georgia firm, Dow, Lohnes & Albertson, also in Atlanta, and Hundley and Cacheris, of Washington, D.C., also represented Hutton in matters related to the guilty plea and its aftermath. Several weeks after the guilty plea and the start of the Subcommittee's investigation, Hutton retained O'Melveny & Myers, based in Los Angeles, as the lead law firm representing the Company in the various investigations by Congress, Federal agencies, and the States. In connection with the criminal investigation, Cahill also represented several top_Hutton_officials, including Robert Fomon, Thomas Lynch, and Thomas Rae, and coordinated with the lawyers representing other Hutton officers and employees. After it entered its plea, Hutton retained Griffin Bell, of Atlanta's King and Spalding, to conduct an investigation of the illegal activities. Judge Bell's investigation and report are discussed infra. CONSULTANTS When the illegalities were first discovered, Cahill engaged the accounting firm of Arthur Young & Co. to educate its lawyers and certain Hutton officials on cash management practices. The consultants were not initially told who Cahill's client was; nor were they told that the client was being criminally investigated by a Federal grand jury. After the first engagement, Arthur Young evaluated the drawdown sheet Hutton used during the summer of 1982 and reviewed and recommended changes in the cash concentration system. In the course of this review and evaluation, the consultants criticized the proposed Hutton system in several respects. Although they did not then know it, these criticisms mirrored the problems in the system that was then under criminal investigation. For example, in a June 23, 1982 presentation, the consultants concluded: The approach appears reasonable given the target balance is an adequate level of compensation and the bank agrees to the practice. The approach is an acceptable practice within the industry. We expressed concerns that: Certain banks may not be able to provide collected balance information. Therefore, the Company must have banking arrangements to cover negative ledger balances. Circular DTC's and created ledger balances are practices incongruent with Fed. objectives. . . . There appear to be more efficient mobilization procedures such as: Automated clearing house (ACH) transactions. Centralization of treasury information [emphasis added].1 In August 1984, Arthur Young prepared a document for Cahill entitled "Contemporary Cash Management Practices and the E.F. Hutton Concentration System," which Hutton's counsel submitted to the Justice Department in November 1984 in an attempt to convince the Department of the legality of Hutton's activities, representing that the report was an evaluation of Hutton's practices during 1980 and 1981.2 Instead, the report was based on the study of hypothetical situations and facts supplied by Cahill and Hutton, rather than through Arthur Young's own independent investigation. From the time of its initial performance of two engagements for Cahill (June 1, 1982 through July 8, 1982), through its performance of several cash management engagements and one brokerage engagement for Hutton (August 23, 1982 through August, 1984), AY and its consultants were not involved in any way in investigating the facts pertaining to the DoJ's investigation or the abusive transactions which were ultimately described in the Information. From June, 1982 until August, 1984, AY reviewed the cash management procedures to be put into effect after June, 1982, and to make recommendations to improve Hutton's cash mobilization activities and operations. AY was not told anything during this period about the facts and/or Letter from Arthur Young & Co. to Kavaler at attachment p. 2, July 28, 1982, Subcommittee Hearings, Part II at 1505. 2 Hundley, Curnin, and Kavaler letter to Ogren, November 9, 1984. cash management transactions which were under investi- Beginning in August, 1984, through the date of Hutton's guilty plea AY performed typical litigation support services for Cahill Gordon . During this process AY's cash management experts did not independently investigate the underlying facts or transactions relating to the DoJ's allegations, nor were they retained to do so. Beginning in February 1985, AY, for the first time was asked to look at a limited number of transactions relating to the pre-1982 period under investigation [emphasis in original].3 Despite Hutton's representation to the Department, then, the scope of Arthur Young's evaluation was of little relevance to the alleged criminal conduct under investigation because it did not cover the period when the questionable practices were occurring, but rather was a critique of the system after it was changed in response to the criminal investigation. 3 Statement of Arthur Young & Co. at 3-4, Subcommittee Hearings, Part II at 1460-61. CHAPTER X: E.F. HUTTON'S PUBLIC STATEMENTS Because the Hutton case did not go to trial, and because the circumstances surrounding the plea and Hutton's illegal activities were either not clearly articulated or were kept secret, the Department failed in one of its presumably key objectives: to adequately educate the public and, in particular, the case management community, about what cash management practices are illegal. If this objective had been met, Hutton's ability to interpret the record in the light most favorable to itself would have been circumscribed. As it is, however, Hutton has issued a series of public statements since its guilty plea that have consistently misled the public about why it pleaded guilty and what the questionable activities were. The Department's failure to rebut these statements has only aggravated the situation. Hutton's officers and employees refuse to acknowledge the wrongdoing. Thomas Curnin and then-Company President Scott Pierce responded affirmatively when the court asked them, "Has the corporation had a sufficient opportunity to review the 2,000 counts, and can Mr. Pierce, on behalf of the corporation, represent to me that the corporation is guilty of the 2000 counts as contained in the Information?" Yet the Company's post-plea statements could lead to precisely the opposite conclusion. Robert Fomon has stated on several occasions that the Department did not have evidence to support each and every one of the 2000 counts-that the Department arrived at that number of counts simply to justify a $2 million fine. During hearings before the State of Connecticut's Department of Banking, Mr. Fomon said, I explained to the Congress that the way it was explained Before the Subcommittee, he stated, You understand that there is no evidence that there were 1 RECORD at 68-9 (May 2, 1985), Subcommittee Hearings, Part I at 856. 2 Fomon testimony, In the Matter of E.F. Hutton & Co., Inc., Connecticut Office of the Banking Commissioner at 244, November 7, 1985. Fomon testimony, Subcommittee Hearings, Part I at 482. |