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discussed it a little, and when he invited me to Wilmington for an
interview, I accepted.

3: Paragraph 3 At the interview, Butler outlined the Trust Company's
history: After some months of handling only pension trusts, the Trust
Company wanted to get into personal trusts, so it had hired Butler away
from one of the local banks to head the personal trust department; he'd
come on board the beginning of 1984 and had been trying to hire two
people to work for him: one to stay inside and mostly draft documents,
which is what they were considering me for, and one to travel around the
country teaching Hutton's brokerage house employees about trusts. In a
year or so they might add an office on the West Coast, and in about
three years Butler would be retiring; I figured that would give me time
to learn what I needed to from Butler, and I'd either get to run the
West Coast Office or get his job when he left. What they were proposing
was a new concept in personal trusts, and I really liked the idea of
getting in on the ground floor of that, but with such a big company
behind us that we could afford to do it right.

3: Paragraph 4 At that interview I met Jay Abbes, the Trust
Company's CEO, and I may have met Bill Hitchcock, its president and COO.
I felt uncomfortable with Abbes; at first I thought he'd taken a dislike
to me, but then I decided it was Butler he was down on, and I'd just
wandered into the firing line.

3: Paragraph 5 They offered me the job, with a salary I probably
couldn't have refused even if I hadn't liked the job so much, and I
accepted, to start work a few weeks later on 30 April. I gave notice at
BNA and started a Wilmington realtor looking for a house. On my
next-to-last day of work at BNA, they threw me a going-away party, and I
got home in one of those mixed moods: touched by how happy my BNA
friends were for me and sad to be leaving them but excited about the
prospects at Hutton.

3: Paragraph 6 There was a message on my answering machine from
Abbes asking me when I'd been planning to start work, telling me Butler
was leaving in a reorganization that would eliminate the job he'd hired
me for, and saying we could discuss it when I got to Wilmington. Fat
chance! I felt like I'd been punched in the stomach, and I couldn't
wait that long to know whether I still had a job at Hutton, so I called
Abbes back right then. He kept talking around most of what I wanted to
know, but he did confirm that I still had a job, on the same terms, but
that it would be a different job: Butler would be staying on for a few
months, but then I'd be in charge of personal trusts; and I'd still come
on as assistant corporate secretary, but when Butler left I'd succeed
him as secretary.

3: Paragraph 7 So from the first day I reported to work at Hutton, I
already knew there was a lot of internal political stuff going on behind
the scenes, and I kept my eyes and ears open in self defense. I learned
overlapping parts of the following story from Abbes, Hitchcock, and the
Trust Company's other directors, from Hutton people in New York and
around the country, from Wilmington lawyers in several of the firms
hired to charter the Trust Company, from the Delaware bank examiners who
audited the Trust Company, from the documents setting up Hutton Trust
Company and Hutton Bank that Hitchcock showed me, and from the Trust
Company's corporate records that were turned over to me when I became
secretary.

3: Paragraph 8 The entity most people thought of as E. F. Hutton,
the one that advertised in the commercials about people listening, was
the brokerage firm whose real name was E. F. Hutton & Co. Inc. It was a
Delaware corporation all of whose stock was owned by E. F. Hutton Group
Inc., a Delaware holding company whose stock was publicly owned and
traded on the New York Stock Exchange. So if you bought Hutton stock,
you were buying shares of Group, but if you bought stock through a
Hutton office, it was Hutton & Co. that was your broker.

3: Paragraph 9 Hutton Group also owned some other corporations,
including E. F. Hutton Life Insurance Company and some investment
managers and funds. The chairman of Hutton Group's board of directors
was Robert Fomon, and the president of Hutton & Co. was Scott Pierce,
who was then-VP George Bush's brother-in-law.

3: Paragraph 10 Much of the money in this country is in pension
plans, most of them now "qualified plans" under the federal pension laws
known as "ERISA." That money isn't tied up, out of circulation, though
- it's invested in everything from real estate and mutual funds to race
horses and precious gems. Managing those investments and doing the
paperwork for both pay-ins and pay-outs is also big business, because
the fees for management and administration are usually a percentage of
the amount in the fund, and even a small percent of a billion dollars is
a lot of money.

3: Paragraph 11 By the early 1980s Hutton, like the other financial
institutions, derived a significant portion of its income from pension
funds, either as fees for managing the investments by deciding what
stocks or bonds to buy or as commissions for being the broker that
actually traded the securities. It's a conflict of interests,
prohibited by law, for the same entity to manage the investments and get
a brokerage commission, for the same reasons it's now illegal for a
Justice of the Peace's salary to be a percentage of the traffic fines
the JP imposes.

3: Paragraph 12 What happens in many companies is that a few,
usually senior management, employees are the trustees for the fund, so
they make the investment decisions, and the fund has a broker who buys
and sells as directed by the trustees. That's the theory, at least, but
what often happens is the committee of trustees don't know enough, or
have enough time outside of their work, to make investment decisions, so
they take the broker's advice, and that's not necessarily bad. But to
keep the brokers honest, trustees with good sense often deal with
several brokers and play them off against each other, and that's
free-market competition and good for everyone except the greedier
brokers.

3: Paragraph 13 What Hutton wanted was to become trustee for the
pension funds, so it could collect the trustee's fee for managing the
investments, and hire only itself as broker, so it could continue to
collect the brokerage commission on every transaction. It's like the
way they used to catch monkeys for zoos, where they would cut holes, a
tad bigger than a grown monkey's paw, in coconuts, empty them out, put
some dried rice inside, and chain them to a tree trunk; at night the
monkeys would come, reach inside for the rice, not be able to get their
fists out, and be sitting there with their paws stuck in the coconuts in
the morning, when the hunters would come throw a net over them. The
monkeys were too greedy to let go of the rice even to get free, and
Hutton was too greedy to let go of the brokerage commissions even to get
the larger trustees' fees.

3: Paragraph 14 So someone came up with the brilliant idea to set up
a separate Hutton entity to be trustee of the pension funds, and collect
fees for that, and put all the brokerage through Hutton & Co. That
entity would be E. F. Hutton Trust Company, and to be able to act as
trustee it would have to be some kind of bank. Hutton explored
incorporating a bank in several states, but the first few didn't have
the right combination of state laws and susceptible officials. Then
Hutton looked at Delaware, which was offering some tax and legal
incentives to lure companies to Wilmington; you may remember that some
credit card companies moved their headquarters to Delaware then to take
advantage of those incentives and Delaware's statutes allowing
special-purpose banks and unlimited interest rates.

3: Paragraph 15 Hutton hired about five different Wilmington law
firms, one after another, to charter its bank, but the first four
(including Potter, Anderson & Corroon and, as someone told me, Richards,
Layton & Finger and maybe Prickett, Jones, Elliott, Kristol & Schnee)
were unsuccessful: some because they filed the application, but it was
denied, and some because the other banks they represented objected, so
they withdrew from filing Hutton's application. I heard that of those
four, only Potter Anderson returned Hutton's retainer; the others kept
what they'd been paid even though they failed to charter the bank.

3: Paragraph 16 Then Hutton hired the Wilmington office of Skadden,
Arps, Slate, Meagher & Flom, by some measures the biggest law firm in
the country, and certainly preeminent in corporation law. Two of
Skadden's senior partners were Rodman Ward Jr. and Irving S. Shapiro.
Ward is a formidable lawyer who coauthors one of the leading treatises
on corporation law; he's also an interesting person, but he's so smart
he sees what's coming so many moves ahead of where you are that it's
scary sometimes. Shapiro is either a fool or senile, but he used to be
du Pont's CEO, so he's an 800-pound gorilla in Delaware; if you want to
see what the Second Coming will be like, just watch how everybody here
acts around Shapiro. His value at Skadden is not his minimal ability as
a lawyer but his clout with the authorities.

3: Paragraph 17 Shapiro first got the other banks in town, and their
Delaware Bankers' Association, to back off in their opposition to
letting Hutton in, and then he got Delaware's Bank Commissioner John E.
Malarkey to grant Hutton two applications: one for a bank and the second
for the Trust Company. Hutton Bank never did much, but Hutton
considered using it in several packages that didn't get off the drawing
board; we discussed such plans as having it lend money to customers who
would then use that money to buy stock or insurance from Hutton, either
directly or through trusts at Hutton, for example.

3: Paragraph 18 The Bank's affairs were handled by its two officers:
the Trust Company's president Hitchcock and Richard Roeder at Hutton in
New York. Hitchcock showed me the papers setting up the Bank, and
Roeder and I had some discussions about it, but I didn't pry into the
matter, because it wasn't my problem. I do remember that what business
the Bank did was a few loans to some Hutton VIPs, but there were some
legal irregularities about the situation, and a major reason we didn't
do more with the Bank was that if it got active those defects might come
to the attention of the regulatory authorities when they audited. Some
of the irregularities had to do with doing business before the law was
changed to allow it, and when the law was changed, it didn't cover
Hutton Bank, but I'll come back to that later.

3: Paragraph 19 Once Shapiro got the Trust Company chartered as a
Delaware limited-purpose trust company in July 1982, other Skadden
lawyers prepared the usual corporate start-up documents and turned them
over to Hutton. From then on, Hutton would call Skadden only when
Hutton got into trouble with Commissioner Malarkey and couldn't get out
of it without Shapiro's influence.

3: Paragraph 20 Hutton hired Hitchcock to be nominal head of the
Trust Company; he had worked for State Street Bank in Boston for a long
time, and Hutton brought in an outsider to be president so it would look
as if the Trust Company was separate from the brokerage firm. In fact,
though, as vice-chairman of its board James C. Lockwood was in charge of
the Trust Company. Lockwood was the head of Hutton & Co.'s Consulting
Services Division, a group that mostly charged fees for advising people
which investment managers to hire: If the manager hired was a Hutton
subsidiary, then Hutton got the management fee, and if the manager was
not a Hutton affiliate, it brokered the investments through Hutton, so
Hutton got the brokerage commissions. It was CSD's relationships with
the pension funds that sparked the idea of the Trust Company, and
Lockwood was responsible for it. He and two of his CSD executives,
John Ellis and Len Reinhart, were on the Trust Company's board of
directors by the time I got there.

3: Paragraph 21 Lockwood and the rest of CSD would come to
Wilmington to share space with the Trust Company, and they would both
move into offices in a new building on the Market Street Mall next to
the Grand Opera House the day I started work in 1984, but when the Trust
Company started in summer 1982 it was just Hitchcock and a few female
clerical employees. He selected a software system called SEI and
started accepting pension trusts.

3: Paragraph 22 Under the governing laws, regulations, and
guidelines, as a trustee the Trust Company had to make both investment
decisions and pay-out decisions in the best interests of the trust's
beneficiaries, but Hutton never intended for the Trust Company to make
those decisions, so no mechanisms were ever set up for them. Instead,
once an account executive from the brokerage firm would sign a trust
client up with the Trust Company, the Trust Company would make whatever
investments and distributions that AE told it to: That violated the
laws requiring a trustee to exercise responsibility for the trust and
also the laws against self-dealing.

3: Paragraph 23 Hutton had picked Hitchcock thinking he was too
wimpy to give Lockwood any back-talk but experienced enough to run the
operation - they were only half right: Hitchcock lacked the intestinal
fortitude to do anything but follow orders, and without experienced
bankers making the management decisions, he was useless. Lockwood
lacked the banking experience to know what bank operations were supposed
to look like, so he couldn't direct Hitchcock in enough detail, and then
Lockwood suddenly fell sick - I think it was a heart attack, but then
he had prostate trouble, and he was incapacitated for many, many months
- and nearly died; when it was feared he would die, or at least never
be able to work again, it was necessary to put someone else in charge of
the Trust Company.

3: Paragraph 24 So Hutton promoted Abbes, who had been on the board
since the beginning; he replaced Lockwood as vice-chairman and CEO on 12
October 1983, Hitchcock remained president and COO, and Thomas P. Lynch
of Hutton Group remained chairman. Abbes was a company man in every
respect, so he followed Hutton's policy of not telling anyone more than
he had to: In Hutton's world, managers didn't let subordinates know
what was going on so they couldn't demand a piece of the action for
carrying out the schemes, and they didn't put anything in the record
that would expose their superiors to liability; when there was a
problem, the middle-level manager would take the fall, and whatever
higher-ups he was protecting would make sure he had a soft place to
fall, often as a consultant to one of the investment management firms
Hutton dealt with, if it wasn't possible to move him someplace else
within Hutton itself.

3: Paragraph 25 Hutton Trust was never anything but a fa ade of a
trust company - there was no substance to it, and not even much form.
It performed no personnel functions, for example, and had no operational
bank accounts and no petty cash. When an employee was hired, Hutton &
Co.'s forms for a brokerage firm employee were completed and forwarded
to New York, and then the person went on the payroll and was paid on
Hutton & Co. checks. All reimbursements and employee benefits came from
Hutton & Co.

3: Paragraph 26 Each of Hutton & Co.'s branch offices had a coded
office i.d. number comprising one letter [out of eleven or twelve
possibilities] designating the geographical region and two digits
identifying the specific office, and that code was used as an address
for telexes as well as an administrative identifier. The Trust Company
was treated as a branch office of Hutton & Co. with the code V48,
because we were office #48 in the national region; that's what went on
all our personnel and payroll records. Hutton's brokerage office in
Wilmington was coded A81, because it was office #81 in the Atlantic
region; it was a satellite of the Philadelphia office coded A09. There
were two brokerage offices in Washington DC, coded C16 and C18 because
they were in the Central region, C20 was in Alexandria VA, and C32 was
in Bethesda MD.

3: Paragraph 27 Hutton Trust rented a couple of safe deposit boxes
and opened three checking accounts, but those weren't operating accounts
- they were for payment of trust distributions. So when someone was
supposed to get a pension payment from a fund trusteed at Hutton Trust,
Hutton & Co. would deposit enough money in one of those accounts to
cover the payment, and Hutton Trust would cut a check to the pensioner,
but not necessarily in that order. Where would Hutton & Co. get the
money? Out of the pension fund, of course. Wasn't Hutton Trust the
trustee and supposed to be holding the fund? Of course that's what was
supposed to be happening, but in fact Hutton & Co. never let Hutton
Trust near any money except to launder the pay-outs, and that's what's
wrong with this picture.

3: Paragraph 28 When Hitchcock set up the Trust Company's
computerized accounting system, it was designed to track what happened
in the brokerage firm's computerized system, but there was no electronic
connection between the two. SEI is a perfectly good trust banking
software system used by many banks, including some of the best in
Wilmington; it has all the capability any trustee needs, but it's only
as good as a user programs it to be, and Hitchcock didn't program it to
do much of what it could, and that requires some explanation.

3: Paragraph 29 For every brokerage customer at Hutton & Co. there
was an account in the firm's computer to track the trades. That
computer account included the customer's name, address, and social
security number as well as the office's code, the AE's code, and the
account number; it could be accessed from a Hutton terminal anywhere in
the world, but only the AE could authorize trades in the account.
Whenever a trust account was opened at Hutton Trust, Hitchcock's clerks
would set up an SEI account under the same number as the brokerage
account and enter whatever information they were given about the assets
in the trust. If there were assets that weren't securities - such as
gemstones, real estate deeds, or promissory notes - they might be
listed in the SEI account, but of course they would not be included in
the brokerage account. When securities were bought or sold in the
brokerage account, Hutton Trust would usually get notice of the trade,
and Hitchcock's clerks would keyboard that information into the SEI
account. But if assets other than securities were sold, there was no
way for the Trust Company to know, because that didn't go through the
brokerage firm's computer, so the assets wouldn't be removed from the
SEI account; and if anything was bought outside of the brokerage
account, including mutual funds that kept their own accounts, the
brokerage firm's computer would report the pay-out of funds, and the SEI
account would track that, but whatever assets were bought with the funds
would never appear in either account, so according to our records part
of the trust's value would have simply disappeared.

3: Paragraph 30 The important point is that there never were any
assets at the Trust Company. All the assets were in the brokerage
accounts at Hutton & Co., and all the Trust Company ever had was the
phantom SEI accounts supposedly reflecting whatever happened in the
brokerage accounts. The companies the trusts belonged to got monthly
statements from the brokerage firm and monthly statements from the Trust
Company, and if they didn't match, the customers were likely to complain
to their AEs, who would usually complain to the Trust Company.

3: Paragraph 31 The monthly statements from SEI were printed in bulk
by SEI and delivered to us in boxes, and Hutton & Co. sent us copies of
the monthly brokerage statement in each account that was coded as a
trust account. After the AEs started complaining, when there were
discrepancies between the two statements Hitchcock and his clerks would
white-out the parts of the SEI statements that didn't match and type in
the information from the brokerage statement, because they knew whatever
the brokerage statement said was what had actually happened in the
account. But they changed only the paper statements and never put the
changes in the computer!

3: Paragraph 32 It doesn't take an Einstein to figure out that once
the two statements for a trust got out of sync, they would stay that way
until at least one of the computerized accounts was changed to bring
them back into agreement, but that concept seems to have been beyond
everyone at the Trust Company. By the time I got there in spring 1984,
it was taking about a week each month to white-out and retype the SEI
statements for the month, and that's a week with everyone in the
operations dept. working all day and half the night and most of the
weekend, which added up to a lot of overtime.

3: Paragraph 33 There was also the problem, actually several
problems, that the Trust Company wasn't keeping any tax records. For
one thing, even though the pension trusts were exempt from paying income
tax, they still had to file information returns about their transactions
each year, and you have to keep track of the tax basis of a pension
trust's assets, because at some point you end up distributing those
assets, and you have to know what they're worth for tax purposes then.
But the Trust Company wasn't keeping those records, and the customers
kept complaining they couldn't get the information for their annual
Forms 5500.

3: Paragraph 34 A second aspect of the problem was that Hutton Trust
had about a dozen "collective funds" that were like mutual funds in that
the assets from a lot of separate pension plans would be pooled and
invested, and the profits would be prorated among the participating
plans. Those were perfectly legal entities, authorized by the Internal
Revenue Code and called "pooled income funds," and they're tax-exempt,
but they have to file information tax returns every year so the IRS can
make sure they're complying with all the applicable ERISA and tax laws.
But Hutton had never filed any tax returns for any of its collective
funds because neither Hitchcock nor anyone else at Hutton knew they were
supposed to.

3: Paragraph 35 The third part of the problem didn't appear until we
started doing personal trusts, and that was that non-pension trusts have
to file tax returns every year and pay taxes on their profits. So just
as any individual or corporate taxpayer has to, a non-ERISA trust has to
keep track of its tax basis for assets and report not only its income
from its investments but also its capital gain on the sale of those
assets. And Hitchcock hadn't activated the fields to keep track of the
tax basis and fair market value of trust assets, because that
information didn't appear in the brokerage firm's computer.

3: Paragraph 36 Compounding that was the fact that a trust usually
has "income beneficiaries," who get the income for some definite or
indefinite period of time, and "remaindermen," who get what's left at
the end of that period. A trustee is required by law to keep track of
the trust's capital and income separately, because the trust's
beneficiaries have different interests, with the income beneficiaries
entitled to the income and the remaindermen entitled to the capital.
The fiduciary accounting is worse than the London 'Sunday Times'
crossword puzzle, and it's absolutely impossible without the records,
but Hitchcock hadn't activated the required data fields in SEI, and
neither he nor any of his clerks knew how to keep the records.

3: Paragraph 37 The complexity of the record-keeping and
tax-reporting is a large part of the reason fiduciaries get paid such
juicy trustees' fees, but somehow that concept had escaped the rocket
scientists at Hutton, too. Another reason for the fees is that trustees
have to make some hard decisions about distributing money from trusts:
Many trust documents give the trustees a lot of discretion about making
both investments and pay-outs, and if you've ever been in the middle of
a family squabble over a legacy you can appreciate that trustees earn
their fees. But Hutton skipped over those difficulties by letting the
AE on each account make all the investment and pay-out decisions, so all


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