Diamond Dust

hington originally related to 'U.S. News & World Report', but I was looking for another job; I liked the one I had, but it didn't pay enough. One of the people I'

n. In those days, when Hutton talked, people still listened. Butler said he'd had lunch with Garrett, who told him I was looking for a job, and the one at Hutton wasn'

ire 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

tchcock, its president and COO. I felt uncomfortable with Abbes; at first I thought he'd taken a disl

eks 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 p

lmington. 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

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

. 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 t

pany and some investment managers and funds. The chairman of Hutton Group's board of directors was Robert

ulation, 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-ou

ts 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

e 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 n

o 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 si

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

ton & 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, s

. 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 h

n 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 th

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 d

Skadden lawyers prepared the usual corporate start-up documents and turned them over to Hutton. From then on, Hutton would ca

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

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 s

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 Co

xperienced 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

utton'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 t

ions, 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 complete

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 c

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 cou

here 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 t

ccount 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 w

y 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 broke

count. 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

d 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-o

ey 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,

ld 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 s

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

red 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 acc

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 yo

show you why I often felt as if I was workin

oney out of the brokerage account to the mutual fund, and that was the last we heard of it. Several months later, after Butler was gone from the Trust Company, the AE and Broyhill's lawyer started bugging me to submit the required report, and I couldn't find the assets - I found Butler's note in the file saying which mutual fund he had picked, but when I asked that mutual fund, they denied having any account in either Broyhill's name or Hutton Trust's. I finally submitted the report anyway - after all, as far as Broyhill was concerned the trust was deaf and dumb as well as blind, and it was easy to find out what dividends the fund ha

were an improper investment for the Burchards, he told me not to worry - the insurance company wouldn't issue annuities on people their age, so he was going to sell them annuities on their son's life, and when they died the son would inherit and sell the policies and invest in something else, and the AE would collect a commission on each transaction! That struck me as an archetypical example of "churning" an account, which means repeatedly liquidating investments and reinvesting the assets to collect commissions on the new investments. I got into trouble with Abbes for it, but I went over the AE's head to his branch office manager, and the BOM did keep the AE from tying the assets up in insurance. For some reason, every few months the two Burch

ho was a doctor, or his children if they needed them, and "need" was determined under Connecticut law. Kaiser's children appeared to need the money more than he did, especially as we found in the computer about four brokerage accounts in his name with substantial stock holdings in them, but the AE kept paying Kaiser all the income, and Abbe

ind of problems any rational person would expect from not having any mechanism for Hutton Trust to track trust assets or supervise investments or di

so I didn't embarrass either one of us by pushing it. For the most part, Hutton employees didn't have much class - which isn't to say they weren't great to work with and fun to party with, because they were, and the people were part of what I really loved about working there - but Phipps used an Imari cup

an account was signed up for HPM, the AE made the buy-sell decisions and executed the trades but received a fee that was a percentage of the account's value instead of c

d field trips, and one of the trips the day I was there was to the Capitol to meet one of Delaware's Senators and ride the little train under the building. But when we got to the Capitol, there'd been a bombing in Lebanon or

n't yet know the name of our only Representative, but I did know we had only one. When he finally showed up in the small room where we were having soft d

st talk to you." A little later, after he was told I was one of Hutton Trust's officers, Carper drew me a little aside and started explaining why he was having trouble getting the legislation we wanted through the Banking Committee. At first I didn't have the faintest idea what he was talking about, but the way you find things out is by listening, so

named Barton F. Walker Jr., who was president of Walker & Walker Associates, Inc., in Maryland and one of IDP's principals, so Walker had brought IDP to Jennison. IDP's president was Thomas M. Owen, whose phone numbers were in Virginia, and its lawyer was Francis L. Jung, who was also general counsel to Am

ict, and Hausman had worked for Alexander Haig in Vietnam and then at the White House. Owen had been on LBJ's re-election committee, and he told some of the best war stories I

and Central America) that would use the money to buy industrial, agricultural, and defensive equipment (wink, nudge), probably from the companies that had anted up their pension funds. They explained to us that this was all part of President Reagan's plan to cut back on foreign aid from the U.S. government and get the private sector more involved; they

: The royal family of Saudi Arabia had a lot of money to invest but couldn't be seen to do so because of the Islamic prohibition against usury, so they had created something called the Crusader Trust, run by one of the big Swiss banks fronting for them. The Crusader Trust was willing to lend IDP $100 million for some number of years I've forgotten now, but the Swiss ba

eing not only the interest rate on Treasuries but also the exchange rate, and we wouldn't; the other was that there were so many finders' fees and up-front points to be paid to the various players that it would take every bit of income from the Treasuries, compounded by being repeatedly reinvested over the term of the loan, to get the principal back to the amount to be repaid, and that didn't leave anything to pay the income taxes with. When I pointed that out, Owen said, "But we don't want to pay any income taxe

d town, I was always with one of more of them. One evening Owen wanted to drive to Zurich for dinner at the Dolder Grand Hotel, so three of us went with him - that's a whole story of its own, with Owen driving like Barney Oldfield on the autobahn a

hey'd been hinting pretty hard that Hausman was CIA, but I kept acting like I hadn't caught on, and a day or so later Walker finally took me to brunch alone and just told me, but the two things I learn

ing us to drop IDP as a client, but all we did was quit telling them stuff that was only upsetting them - but Bacon and Abbes had both told me later on Friday to go anyhow, with authority from Pierce and Fomon, and Jennison bought my ticket and wired me the money for traveler's checks. I'll always cherish the part of that phone conversation when Abbes asked the lawyer what they were afraid of, and he answered that after turning my head by gett

hen it hit the papers that Hutton had been involved in the money-laundering scheme the media called "th

ad for several years taken advantage of the float on checking accounts by drawing checks to customers on accounts in banks at the other end of the country from where the customers were and then depositing the money to cover the checks later. Many of the AEs were shaken that Hutton

lak he was taking for protecting Hutton, so they decided to hire a prominent Democrat to repair the political fences; they ended up paying former AG Griffin Bell about $2.5 million to handle the damage control. I can't help wondering if all the members of Congress who were shouting so loud then for someone at Hutton to go

of shape that the media reported they did. Here's Shapiro's October 1991 testimony about the check-kiting and related scandals: "Hutton had had a very bad press because of some federal charges, and they were very sensitive about adverse publicity." "