Editing EF Hutton (section)

=== 1980s check scandal ===
In 1980, several Hutton branches began writing checks which were greater than the cash they had on hand at the bank, then making a deposit in another bank equal to the amount it wrote at the first bank.  This strategy, known as "chaining", is a form of [[check kiting]].  "Chaining" gave Hutton the use of money in both accounts until the checks cleared.  In effect, Hutton was giving itself a free loan that also did not carry any interest.  Thomas Morley, who was in charge of getting the firm to better manage its cash, wrote a memo to Hutton's president, George Ball, saying that this practice netted one branch an extra $30,000 per month.  Ball sent the memo out across Hutton's network of regional sales managers, with the note, "A point well remembered—and acted on."<ref name="HC">{{cite book |last=Kornbluth |first=Jesse |title=Highly Confident: The Crime and Punishment of Michael Milken |year=1992 |publisher=[[William Morrow and Company]] |location=New York City |isbn=0-688-10937-3 |url=https://archive.org/details/highlyconfidentc00korn }}</ref>  Over the years, Hutton shuffled money in this manner between 400 banks (mostly small rural banks), gaining the use of an estimated $250 million a day without paying a penny in interest.  Whenever something was amiss, Hutton questioned the bank's procedures.<ref name="NYTimesGuilty">{{cite news|last=Nash|first=Nathaniel C.|url=https://www.nytimes.com/1985/05/03/business/ef-hutton-guilty-in-bank-fraud-penalties-could-top-10-million.html|title=E.F. Hutton Guilty in Bank Fraud: Penalties Could Top $10 Million|date=1985-05-03|work=New York Times|access-date=2020-03-14|at=May 3, 1985, Section A, Page 1 of the National edition}}</ref>

The scheme worked for almost three years until officials at the Genesee County Bank in Leroy, New York,<ref>{{Cite web |title=Small Genesee County bank blows whistle on Hutton |url=https://www.upi.com/Archives/1985/05/09/Small-Genesee-County-bank-blows-whistle-on-Hutton/2635484459200/ |access-date=2023-10-22 |website=UPI |language=en}}</ref> discovered that the large deposits made by Hutton's four-person office there were far more than the office's banking requirements.  They also discovered that the checks Hutton was using to make the deposits were drawn on two [[Pennsylvania]] banks.  When Genesee officials learned that Hutton did not have enough money in the Pennsylvania bank accounts to cover the checks, they stopped honoring Hutton checks.  One of the banks involved, United Penn Bank (now part of [[Citizens Financial Group]]), asked the [[Federal Deposit Insurance Corporation]] to investigate.  In 1984, the matter was forwarded to the [[United States Attorney for the Middle District of Pennsylvania]], who opened a federal criminal probe.

Hutton retained Tom Curnin, a respected defense attorney who was inclined to fight the government.  However, in February 1985, Curnin discovered a memo from a Hutton regional vice president for the [[Washington, D.C.]], area which stated that his offices drew on "bogus deposits".  The memo—tantamount to a [[smoking gun]]—led Curnin to change tactics and begin negotiations for a plea agreement.  In the spring of 1985, Curnin told Hutton's board that it faced two choices: plead guilty to a massive list of [[felony|felonies]] or face a trial that would likely see three senior Hutton executives convicted and drive Hutton out of business.  Curnin advised settling with the government to avoid years of bad publicity.<ref name="HC"/>

On May 2, Hutton agreed to plead guilty to 2,000 counts of [[mail fraud|mail]] and [[wire fraud]], as well as pay a $2 million fine plus $750,000 for the cost of the investigation. This is equivalent to approximately ${{Format price|{{Inflation|US-GDP|2000000|1985|r=-5}}}} and ${{Format price|{{Inflation|US-GDP|750000|1985|r=-5}}}}, respectively, in {{Inflation/year|US-GDP}}.{{inflation-fn|US-GDP}} Hutton also agreed to pay $8 million in restitution—the estimated extra income earned from the fraud. This is equivalent to approximately ${{Format price|{{Inflation|US-GDP|8000000|1985|r=-5}}}} in {{Inflation/year|US-GDP}}.{{inflation-fn|US-GDP}} In return, Curnin wrung two major concessions.  First, no Hutton executives would be prosecuted (even though the government determined that 25 senior officers masterminded the scheme).  Second, the [[Securities and Exchange Commission]] allowed Hutton to stay in business; offenses of this magnitude usually result in an individual or firm being permanently barred from the securities industry.<ref name="HC"/><ref name="NYTimesGuilty"/>

An internal review conducted by former Attorney General [[Griffin Bell]] concluded that the scam occurred due to inadequate internal controls.  For example, no one admitted to being Morley's immediate supervisor.<ref>{{cite magazine| url=http://www.time.com/time/magazine/article/0,9171,959840,00.html | archive-url=https://web.archive.org/web/20080506233451/http://www.time.com/time/magazine/article/0,9171,959840,00.html | url-status=dead | archive-date=May 6, 2008 | magazine=Time | title=Placing the Blame At E.F. Hutton | date=September 16, 1985 | access-date=May 1, 2010}}</ref>  However, a wide perception that Hutton had not been punished enough (for example, ''[[The New York Times]]''{{'}} [[William Safire]] claimed that the $2.75 million fine amounted to "putting a parking ticket on the [[Brinks robbery (1981)|Brink's getaway car]]"), led several customers to pull their accounts with Hutton, and many of the firm's star performers fled to other firms.  Several public agencies also took their business elsewhere.<ref name="HC"/> Although Fomon was not implicated in the scandal, the board fired him in 1987.<ref>{{Cite news|url=https://www.nytimes.com/2000/06/03/business/robert-m-fomon-75-is-dead-ex-chairman-at-e-f-hutton.html|title=Robert M. Fomon, 75, Is Dead; Ex-Chairman at E. F. Hutton|first=Patrick|last=McGeehan|newspaper=The New York Times|date=June 3, 2000}}</ref>