CHAPTER XI: THE BELL REPORT

Following a public outcry because the Department failed to seek to hold any individuals accountable, Hutton retained former United States Attorney General and Federal judge Griffin Bell to investigate the circumstances surrounding its guilty plea.

Judge Bell's investigation was well financed and well staffed; he had 15 lawyers and four paralegals working for almost 4 months before he released his report. His instructions were to take all the time he needed to complete his investigation. Yet his report was replete with errors and misstatements.

In May of 1986, the Subcommittee released to the public its analysis of the report, accompanied by highlights of that analysis and a civil suit against Hutton and Judge Bell. Those documents are reproduced in the Appendix to this Report.

As in any investigation, Judge Bell was confronted with a number of conflicting stories from various Hutton employees about who in the Company authorized the illegal practices. In many key instances, he chose either not to resolve those conflicts or to resolve them without explanation or supporting evidence. For example, according to Judge Bell, John Pearce, the Bethesda and then St. Louis Branch Manager, "claims that the St. Louis/Bethesda drawdown was approved by Michael Wallace, the Central Regional Operations Manager. Wallace denies this assertion." No attempt was made to resolve this inconsistency.

Judge Bell did, however, conclude that certain of the individuals were responsible for the criminality, and he recommended sanctions against them. Ultimately, the evidence shows that he concluded that the higher level employees were to be believed because, in general, the harshest sanctions were meted out to the lower level employees. In the example cited above, Judge Bell recommended that John Pearce be fined $25,000 to $50,000, be placed on probation for one year, and have a letter of reprimand placed in his personnel file. He did not recommend any punishment for Mr. Wallace.

Judge Bell's investigation failed to deal with all relevant facts. For instance, he simply ignored over 60 branches involved in illegal chaining-branches identified by the Department of Justice and by Hutton itself. In this way, he made it appear that the scope of Hutton's wrongdoing was much narrower than it actually was. Furthermore, while there were 25 chains specifically identified by the Department in court, Judge Bell acknowledged and dealt with only 15 of those chains.

According to Judge Bell, Hutton should not have pleaded guilty to all 2000 counts. He alleged that in at least one instance charged by the Department, involving the Hutton branch in Louisville, Kentucky, there was no fraud and no criminal wrongdoing because the bank was aware of Hutton's activities.

The facts are otherwise. Hutton's bank in Louisville was initially not aware of Hutton's practices and never agreed to them. After discovery and several months of attempting to get Hutton to stop, it threatened to close the account. Judge Bell cited as support for this assertion a letter from the bank; however, the language of the letter was suggested by Hutton's Louisville Branch Manager, and bank officials would have made the letter more complete if they had fully understood its purpose.

The report attempted to minimize the harm to the banks by asserting that most of the banks either were aware of Hutton's conduct or consented to it. This is wrong. Many of Hutton's banks became aware of the activities and demanded that Hutton cease them and compensate the banks for their losses. This is not, by any stretch of the imagination, consent. It does not follow that, just because the criminal has returned the illegally gotten gains, there has been no crime.

The Department charged, and Hutton pleaded guilty to, 2000 counts of mail and wire fraud, perpetrated by 113 offices. However, based on interviews and his review of documents, Judge Bell exonerated 28 of these offices, representing 168 counts and $128 million; he exonerated another 55 offices, representing 656 counts and $1.215 billion, because the office personnel denied overdrafting in amounts beyond those mandated by the drawdown worksheet. In addition, he failed to deal at all with 10 offices, representing 176 counts and $623 million. Apparently Judge Bell simply accepted the employees' statements and did not independently evaluate them.

One of the branches exonerated by Judge Bell-Washington, D.C. "Eye Street"-was responsible for 97 counts and $436 million in transactions. The Branch Manager of that office was Perry Bacon. Mr. Bacon managed the Alexandria branch as well, where Hutton also overdrafted in enormous amounts. In approximately one year, beginning in early 1981, bank accounts maintained by Mr. Bacon for his two branches were overdrafted by a total of more than $1 billion. Hutton Chairman Fomon, relying on Judge Bell's report, described Mr. Bacon as "responsible for enacting and supervising a sophisticated scheme of overdrafting the Alexandria branch bank account,' including the drawing down of 'bogus' deposits. [His] conduct, [Judge Bell] concluded, 'was such that no reasonable person could have believed that this conduct was proper.'

1

Judge Bell's conclusion about Mr. Bacon is completely inconsistent with his exoneration of the "Eye Street" office; these kinds of inconsistencies cast doubt on the validity of the entire investigation and report.

Although Judge Bell compared himself to an English "royal commission," he was hardly that. He was retained by Hutton, paid by Hutton, and accountable to Hutton. Hutton claimed attorney-client privilege on documents subpoenaed by the Subcommittee on Crime, yet shared those documents with Judge Bell. It also refused to make Judge Bell's working papers public or available to the Sub

'Fomon letter to Bacon, September 10, 1985.

committee. Judge Bell's assertions that the Subcommittee did not request his documentation 2 are simply wrong.3

Ĥutton took the position that it could have it both ways so far as the nature of Judge Bell's work for the Company was concerned. To enhance the credibility of his work product, it claimed the "royal commission" status. When Hutton's interests called for minimizing scrutiny of Judge Bell's work product, however, he became just another of Hutton's retained counsel, over whom the protective mantle of attorney-client privilege was draped.

No matter how the Company attempted to characterize the report as an independent and objective assessment, it was in reality a good attempt at damage control. The report may have served Hutton's purposes. It did not serve the public's.

2 Testimony of Griffin Bell, Hearings on White Collar Crime Before the Senate Committee on

the Judiciary, 99th Cong., 2d Sess. (1986).

3 Daum letter to Gregory, with attached notes, September 20, 1985.

CHAPTER XII: CONCLUSIONS

The Department has recently investigated or prosecuted a number of cases of corporate wrongdoing, but has failed either to prosecute any individuals or to agree to adequate charges or penalties. It was in this context that the plea bargain in the Hutton case was announced, and that the Subcommittee on Crime undertook to investigate that case, and a number of others, to determine whether they represented a pattern of discriminatorily favorable treatment of corporate and other white collar criminals.

The Hutton case has important implications in a number of areas. First, it provides a case study of one particular corporation, and the attitudes and actions that led E.F. Hutton, one of the most prominent brokerage firms in this country, to plead guilty to 2000 felony counts of mail and wire fraud. Second, it provides insight into the ability and willingness of the Department to prosecute white collar crime cases. Third, it adds to the already considerable evidence about deliberate Departmental roadblocks to Congressional oversight investigations.

E.F. HUTTON

The Subcommittee hearings revealed that making money was the overriding goal at Hutton, but it was the uncontrolled pursuit of that goal that led Hutton to its status as a felon. The ethics at Hutton were abysmal. There were deliberate decisions to set up a corporate cash management system that was abused. Management failed to impose corporate controls, and looked the other way when questions arose about the Company's cash management activities. The Company's complete failure, even after the guilty plea, to fully admit what its activities were, and to fully acknowledge that those activities were illegal, says much about the continuing pattern of ethical failures.

The Company's intransigence in cooperating with this Subcommittee, and especially the self-serving statements both on behalf of the Company itself and by its individual officers and employees, makes it impossible to conclude that Hutton has rehabilitated itself. The changes in management may be a step in the right direction but, as with any criminal, the first step toward rehabilitation must be an understanding and public admission of the wrongdoing and how it occurred. These things, in Hutton, have never occurred.

The Subcommittee's Hutton hearings were exhaustive, but whether Hutton's conduct was representative of other corporations on Wall Street or elsewhere-the Subcommittee cannot determine at this point. Further illumination will be sought with the continuation of the Subcommittee's hearings in the next Congress,

where it will examine criminal conduct in a variety of other white collar crime contexts.

THE DEPARTMENT OF JUSTICE

These hearings were called to determine whether the Department of Justice treats white collar crime cases in the same manner as it treats other crimes. Does it devote the same attention and devotion to the prosecution of an E.F. Hutton as it does to a drug dealer or a smuggler of illegal aliens? Is there a need for new laws to combat white collar crime? If existing laws are adequate, are they enforced with equal will and tenacity in white collar crime cases?

Ultimately, the answers to these questions must await an examination of a broader range of cases. There are, however, significant clues to be taken from the Hutton investigation. In a variety of ways, the Department showed much solicitude for Hutton. It at tempted to disguise this solicitude by lauding itself for the plea bargain. The facts demonstrate that these laudatory remarks were undeserved. It described its tenacity in prosecuting Hutton in the face of a variety of obstacles, yet these were obstacles created by the Department in the first place, or contrived after the case was pleabargained away. It claimed that the case law of the Third Circuit, where it brought the case, was unfavorable to the prosecution, yet it insisted on bringing the case in that circuit. It claimed that only a small fraction of Hutton's criminal conduct was properly venued in the Third Circuit, yet it failed to justify not bringing the case in the Second Circuit, where all the charges could have been brought, or using other criminal statutes-such as RICO-that could have greatly expanded the venue of the district chosen.

It failed to prosecute individuals, asserting that they had strong defenses, and that they might be acquitted, or even if convicted, that they might receive probation. Yet there was substantial evidence against individuals and the defenses could have been rebutted. Under these circumstances, charging individuals would have laid responsibility for the wrongdoing where it belonged, not just with a faceless corporation.

The Department claimed that the case might lack jury appeal or that the defendants might have a defense based on their claim that, if they were caught, they stood willing and able to pay back all the money they took. Yet it ignored the simple fact that Hutton never intended to pay back the interest on the money covertly taken from the banks. On the one hand, it claimed that the jurors might actually show sympathy for the defendants because the victims were banks; on the other hand, it glorified the plea bargain as saving the American people and this country's banking system.

Moreover, the plea bargain with Hutton gave too much away, and without sufficient reason. The restitution agreement-so highly touted by the prosecutors and used to justify its entering into the plea bargain-has been proven inadequate. The vaunted injunction, meant to send a clarion signal to the world of cash management, has instead caused great misunderstanding and confusion, and has been derided by much of the cash management community as not worth the effort it took to obtain it.