Bell probe of E. F. Hutton check scam finds conduct unethical. Report recommends major shuffle in investment firm's management

An investigation of E. F. Hutton & Co. by former Attorney General Griffin Bell blames management for failing to catch overaggressive employees who engaged in a systematic check-overdrafting scheme. Mr. Bell, at a Thursday press conference detailing the investigation, said he tried to link top officers but was ``never able to do that from a standpoint of criminality, but we did find there were some shortcomings in management.'' In reaction to the Bell report, Hutton later announced it would implement the report's recommended management reogranization.

Hutton, the third-largest securities firm in the United States in terms of the number of brokers, earlier this year pleaded guilty to 2,000 counts of mail and wire fraud. The government accused Hutton of bilking interest-free loans from several of its banks by systematically overdrawing checking accounts from mid-1980 through mid-1982.

The company paid $2.75 million in fines and legal costs as part of its settlement with the Justice Department on May 2. The firm also agreed to an injunction that prohibits future overdrafts without bank permission.

The Bell report says Hutton had a ``relatively loose management structure between 1980 and 1982 with overlapping and often vague reporting responsibilities.'' Management, the report said, ``failed to recognize the potential for abuse'' in the overdrafting scheme and did not have adequate internal controls in place to prevent it.

Bell said his investigation, which was commissioned by Hutton, showed that the banks actually did not lose as much money as first believed. There was, however, unethical conduct, he said, in the form of ``excessive or abusive'' overdrafts. He noted, however, that only 29 percent of the banks Hutton dealt with have either filed claims or are considering doing so.

``What we are really dealing with is corporate ethics,'' Bell told reporters.

Nevertheless, Bell recommended the firm's board of directors be reorganized and that various reporting relationships be changed.

A number of Hutton executives have already said they intend to leave their current posts. General counsel Thomas Rae plans to take early retirement, Bell said. Executive Vice-President Thomas P. Lynch has agreed to relinquish his management duties.

The report recommends that Thomas Morley, a first vice-president who functioned as ``money-mobilizer,'' be removed from any responsibility connected with money management or banking.

Six branch managers were expected to be assessed $25,000 to $50,000 in fines each -- the money going to local charities. Their actions were such that ``no reasonable person could have believed that this conduct was proper,'' the report noted. A regional sales manager and several regional operations personnel were singled out for sanctions or disciplinary action.

The report clears former Hutton president George L. Ball, now head of Prudential Bache Securities, and others in the top circle from improper activity in ``excessive overdrafting.''

Hutton chairman Robert Fomon, the report says, now has the responsibility to take action against employees involved in the overdrafting. Mr. Fomon told the firm's employees on Tuesday that Bell had found ``no criminal culpability on the part of any individual. There were failures of judgment.''

Bell called his investigation the ``nearest thing to a public inquiry corporate America has seen.''

A House subcommittee on crime has been conducting hearings on the case, particularly the Justice Department's failure to seek criminal penalities against any individuals.