Diamond Dust - Part 3
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Part 3

3: Paragraph 49 The companies these IDPers headed manufactured aircraft, and maybe tanks, guns, and other war toys -- they had mostly been pilots in WWII and/or the Korean Conflict, 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 ever heard: some about the parties his cousin Tallulah Bankhead used to throw, some about his misadventures as a pilot during the war, some about LBJ, and all of them hilarious.

3: Paragraph 50 IDP's 'raison d' tre' was to borrow money from the pension funds of companies that manufactured industrial, agricultural, and defensive equipment (which we took to mean aircraft, tanks, guns, and related paraphernalia), invest it in U. S. Treasury notes, and lend the interest to developing Third-World nations (mostly in the Middle East 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 said they had the required approvals and gave us phone numbers at the State Dept. and White House to check them out, but Abbes forbade me to do any checking: He said the only checking would be by Hutton & Co.'s president Pierce through Barbara Bush to her husband the VP, and then later he told me we had not just their approval but their encouragement.

3: Paragraph 51 But the reason IDP had come to the Trust Company then, as they told us, was that they couldn't pry any money loose from the pension funds -- remember I said that's where most of the investment money in the country is, but the trustees have to meet the high standards the law imposes on fiduciaries -- so they'd gone looking for money overseas and found some: 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 bank insisted on having an American financial inst.i.tution hold the bag, and IDP had been up one side of Wall Street and down the other and been turned down everywhere.

Then Bush asked Pierce to have Hutton do it, and Fomon agreed and told Abbes to take care of it. It was, of course, a personal trust, so it fell squarely in my lap, and I had most of the dealings with IDP.

3: Paragraph 52 The last week of October 1984 I had to go to Basel, Switzerland, on rather short notice to meet with Owen, Hausman, Walker, Ward, Craig, and someone from the Swiss bank, and that's when I finally saw the printout of how the transaction was supposed to work. There were two kinds of problems with it: One was that the bank wanted Hutton to sign as the one liable for paying the interest for the term of the loan and paying back the princ.i.p.al in Swiss francs at the end, so we would in effect be guaranteeing 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 princ.i.p.al 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 taxes," and I said, "n.o.body wants to pay income taxes, but how do you expect to get out of it?" So they put me on the telephone to Mills -- whom they always referred to as "the Chairman" with such reverence that Abbes tried teasing them once by referring to Fomon the same way, but they were not amused -- back in the States to find out what the story was on taxes. That was the only time I ever talked to him, and he didn't have any idea how to get out of the taxes, either, but he said he'd get the guys there working on it.

3: Paragraph 53 While I was in Basel -- I went on Sat.u.r.day the 27th and came back on Halloween of 1984 -- IDP took very good care of me, and except for when I went back to my hotel to sleep and a couple of hours the last afternoon when I walked around 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 and me falling back on my college German to navigate from an outdated map in the dark! While we were at the Dolder, Owen told us about the last time he'd been there, when he'd run into the exiled Shah of Iran and they'd talked about the good old days.

3: Paragraph 54 One day we drove across the corners of Germany and France on a little sightseeing excursion whose purpose seemed to be to let me see everybody's pa.s.sports when we crossed the borders. They'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 learned from their pa.s.sports were that Hausman did, indeed, carry a diplomatic pa.s.sport and that most of them, especially Owen and Walker, had been in and out of Iran a lot of times over the past year or so.

3: Paragraph 55 One evening when I got back to my hotel after dinner, there were some urgent messages from Abbes to call back, so I did, and because of the time difference he was still in the office. He got one of Hutton & Co.'s lawyers in New York on the phone with us to read us the riot act for my being there when the last thing the Legal Dept. had told me on Friday was not to go -- they kept referring to IDP's plans as "gun-running" and wanting 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 getting me away from my own turf and into exotic surroundings IDP might get me to agree to something, to Hutton's detriment, that I wouldn't agree to at home; Abbes said, "If you think that, you don't know Kay very well!" Abbes knew, from trying to himself, it's virtually impossible to get me to do anything I don't intend to, and it really touched me to know he had so much faith in me, because by then I had a lot of regard for him, and I still do.

3: Paragraph 56 Some months later we started to realize why the Legal Dept. had been so hot about IDP when it hit the papers that Hutton had been involved in the money-laundering scheme the media called "the pizza connection." IDP kept talking to us for months about doing a deal, but nothing ever came of it.

3: Paragraph 57 Then on 2 May 1985 Pierce entered Hutton & Co.'s guilty plea to 2000 counts of federal mail and wire fraud in what came to be referred to as "the check-kiting." Too much has been written about that for me to have to describe it here; suffice it to say that Hutton had 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 had been doing anything so blatantly against both the law and the customers' interests, but I was surprised they were surprised, because it was the same thing Hutton was still doing through the Trust Company, and it was in keeping with everything I'd seen of the way Hutton was run.

3: Paragraph 58 Hutton was fined $2 million and agreed to pay up to $8 million in rest.i.tution to the banks, but Abbes and the other Hutton higher-ups I dealt with laughed that off as "chump change" compared to the amount Hutton had gained from it. They were, however, concerned that VP Bush was p.i.s.sed off at the political flak 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 to jail would feel the same way now that their own check-kiting at the House bank has come to light. And if Carper hadn't known all along that what Hutton was doing was pretty shady, he has to have known it by the summer of 1985, but he kept trying to help Hutton get more favorable treatment under the federal banking laws.

3: Paragraph 59 Do you remember in "My Fair Lady" when Professor Higgins said, "The French don't care what they do, as long as they p.r.o.nounce it correctly"? That's Hutton all over -- they didn't care that they broke the law, but they got all bent out 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." "Hutton had had a series of bad newspaper notices and was very sensitive to criticism in the press." Apparently the only lesson Hutton learned was that federal felony charges are bad publicity.

Other than that, Mrs. Lincoln, how did you like the play?

CHAPTER IV. A crock of malarkey

4: Paragraph 1 Meanwhile, back at the ranch, the plot was thickening: Hutton Trust was getting into trouble of its own.

4: Paragraph 2 The day I reported to work at Hutton Trust I was a.s.signed to handle the transfer of a.s.sets for the Vietnamese Orphans'

Trust: In April 1975 a number of children were being flown out of Vietnam to be adopted in North America and Europe when a hatch blew off the C-5A, so it crashed near Saigon, injuring many of the children permanently. In settlement of the litigation on behalf of the 45 survivors who were adopted in the U.S., Lockheed Aircraft Corporation had paid $13.5 million into a trust to provide compensation and the costs of medical treatment to the children for the rest of their lives.

4: Paragraph 3 The case had been in federal court in D.C., and a lawyer in the D.C. law firm McDermott, Will & Emery was appointed "co-trustee" to oversee the trust. The complicated trust doc.u.ment called for regular meetings of and reports to the children's parents, and the structure was rather like that of a corporation, with the co-trustee as the board of directors and the beneficiaries as stockholders.

4: Paragraph 4 The lawyer who acted as co-trustee was Charles R.

Work, and the trustee had been American Security Bank in D.C., the one that advertised it was on the back of a currency bill. When I was doing my thesis on taxation of trusts and estates for my 1983 Master of Laws in Taxation at Georgetown University Law Center, my thesis advisor had been a senior trust officer from American Security, and he taught me just about everything I knew about the practicalities of banks'

administering trusts before I came to Hutton.

4: Paragraph 5 An AE from Hutton's C18 brokerage office in D.C., Tom Clark, had persuaded Work to move the trust, which was down to about $2 million because most of the princ.i.p.al had already been paid to the beneficiaries, from American Security to Hutton Trust. Later on I found in the file the misrepresentations Hutton Trust made to the federal judge to get his approval, saying we were qualified to do business in D.C. when we were not qualified to do business anywhere but in Delaware, but all I knew the first day was that Butler told me to make arrangements to receive and invest the a.s.sets.

4: Paragraph 6 We were going to put the a.s.sets in three accounts and invest each separately to provide diversity of the investment portfolio and because part of the princ.i.p.al was earmarked for the trust's day-to-day operating expenses, but part was for long-term investment to cover pay-outs in the distant future, which would diminish continuously.

American Security transferred stock to us, and we sold it and invested the proceeds in other securities; it was when that stock started coming in that I found out our SEI system was not programmed to accept data on market and book values of a.s.sets.

4: Paragraph 7 It was also when I had my first of many run-ins with Clark, because after I told Hutton's trading desk to invest the proceeds in the non-Hutton securities Butler had chosen to avoid a conflict of interests, Clark told me he had decided to invest in other, Hutton funds that paid him a commission. Abbes ordered me to bust our trades and honor Clark's orders, and I did; Butler was unhappy about it, but he was a lame duck.

4: Paragraph 8 Clark was one of the most obnoxious people I've ever met, and that was his reputation throughout Hutton. One AE who was, like Clark, such a big-volume salesman he was invited to the prestigious annual national meetings/blow-outs Hutton threw for its "Blue Chip" AEs, told me he had met Clark when he roomed with him at one of those conventions: The AE who was a.s.signed to be Clark's roomie didn't want to be in with him, and this guy, who didn't know Clark but figured he could get along with anybody for a few days, agreed to swap room a.s.signments. He told me that he hadn't believed anybody could be as obnoxious as Clark, and he was disappointed in himself to find out much and how soon Clark got on his nerves.

4: Paragraph 9 What's surprising is that anybody like him could make a living as a salesman, but that he managed to make such a good living selling proves a person can overcome really huge handicaps. At one meeting in Abbes's office in January 1985, which may have been the first time I met Clark in person, we were sitting at a small, round table discussing the trust, when Clark suddenly looked at me and asked, apropos of absolutely nothing, "Are you married?" I never found out why he asked, but I knew it was extremely inappropriate, and Abbes nearly threw himself on the table between us because he thought my temper was about to blow -- it's easy to tell when I'm seriously p.i.s.sed off, because my ears turn red, my jaw muscles tense up, and my voice comes out sort of clipped and grating.

4: Paragraph 10 Hutton Trust was mishandling all the trusts, but the Vietnamese Orphans' Trust became the major bone of contention with the authorities because it had a better paper trail: The parents' committee and the federal court were both actively overseeing its operations, and its doc.u.mentation was quite explicit about how it was supposed to be handled. I had gone several rounds with Clark and Work in January 1985, and because of those problems and the ones I described in the prior chapter, I was talking to some of Hutton's internal lawyers and AEs about setting up formal procedures for bringing in and managing trusts, but Abbes forbade me to promulgate any formal rules: He said that if we had written rules, we'd have to abide by them, and that he would not allow me to make rules that would interfere with the AEs' ability to keep treating the trust accounts the way they'd been doing.

4: Paragraph 11 In one of our discussions in his office, Abbes asked me what I thought was going to happen if we didn't set up some formal procedures, and I said the worst-case scenario was that the state bank commissioner would cancel our license to do trust business. He said I was supposed to keep it from coming to that, but if it did, we'd tie the commissioner up in litigation for at least three years, probably longer, and during that time we'd still be making money hand over fist, and when we got thrown out of Delaware we'd move to another state and keep going.

That was the first time I was really scared at what I'd gotten myself into, and that's when I vowed not to do anything I could be legally liable for when it came time to throw some underlings to the wolves to protect Hutton.

4: Paragraph 12 In May 1985 the bank commissioner issued his annual audit report on Hutton Trust. Besides describing general problems with doc.u.mentation and listing several specific trusts where there were problems, the cover letter and the text of the report were mostly about the Vietnamese Orphans' Trust. In the report, which was a confidential doc.u.ment not available to anyone except Hutton Trust's management, the commissioner said:

4: Paragraph 13 "Mr. Work is apparently delegating and carrying out his duties as co-trustee in direct violation of the above captioned agreement . . . File correspondence indicates investment policy decisions are being developed and directed primarily by two non-appointed persons, Mr. Thomas Clark, a sales broker for E. F. Hutton Company and the subject trust accounts' transactions, and Mr. Robert Warden, an a.s.sociate attorney for Mr. Work's law firm. An apparent case of self-dealing and improper delegation of duties is evident when Mr.

Work allows Mr. Clark to direct investment policy for the trust as well as take commissions form the sale of trust investments."

4: Paragraph 14 Keep in mind the timing -- this report came two weeks after the guilty plea to the check-kiting. By now the white-out and retyping of the monthly reports was taking more than a month, so we had trusts that hadn't received a statement from us since at least February. The bank where Hutton Trust had its three checking accounts refused to let us draw any more pension checks on funds that hadn't been deposited yet, so we moved our accounts to a different Wilmington bank.

4: Paragraph 15 And then Clark popped up with the possibility of getting the co-trustee of the trust for the Vietnamese orphans who had been adopted outside the U. S. to move it to Hutton Trust, too! We were trying to get straight with the commissioner about the mishandling of the one we already had, and he was bringing in another, bigger one he was planning to play just as fast and loose with and so create more problems.

4: Paragraph 16 Then the federal judge in D.C. ordered Hutton to show cause why it shouldn't be removed as trustee in light of the check-kiting. Despite my strenuous objections to Abbes and Hutton's inside lawyers in New York, Hutton represented to the judge that no one at Hutton Trust was involved in the check-kiting, and the two companies were entirely separate. That was enough for the judge, but it didn't happen to be true: The one person who was removed from most of his corporate offices at Hutton Group and Hutton & Co. for his involvement in the check-kiting was Thomas Lynch, who was chairman of Hutton Trust's board of directors. There was also the fact that Commissioner Malarkey had reported that an employee of Hutton & Co. was improperly running the Orphans' Trust. During that summer of 1985, I lay awake a lot of nights looking for a way to keep Hutton Trust out of legal trouble and keep myself from being dragged down, too.

4: Paragraph 17 I'd applied for admission to the Delaware bar and taken the bar exam the end of July, and Rod Ward was my preceptor, so I was frequently discussing with him and with Dave Garrett both Hutton's situation and my own, especially the ethical aspects.

4: Paragraph 18 By the end of September, Hutton Trust was operating with a siege mentality: Hutton Group was interviewing people to replace Abbes and Hitchc.o.c.k as CEO and president, and several of us vp's, especially Ron Hatton and I, were maneuvering to move up in the shuffle.

On 8 October I took a business trip to the Alexandria VA brokerage office, and while I was gone there was a flap about a friend of Hatton's applying for the job of CEO -- Abbes had found out Hatton had told his friend, an officer at a bank in, I think, Pennsylvania, about the opening, and Hutton in New York had interviewed him. It was really funny, but the BOM in Alexandria had filled me in on what was happening at Hutton in New York and why, and that wasn't funny: He and many other BOMs around the country had demanded that Fomon replace Abbes and Hitchc.o.c.k because Hutton Trust wasn't delivering its statements, and the pension trust customers, who were already nervous because of the check-kiting, were starting to bail out of Hutton in droves.

4: Paragraph 19 Abbes and Hitchc.o.c.k were upset and taking it out on us, and for the first time it wasn't much fun to work at Hutton Trust.

As a lawyer I had a particular problem: The ethics rules prohibited my lying to a court, I was Hutton Trust's lawyer, and I knew it had lied to Judge Oberdorfer about Hutton & Co.'s involvement in managing the Orphans' Trust. I decided the ethics rules required me to tell Judge Oberdorfer the truth, but they didn't require me to lose my job if I could help it. (I'd been looking for another job for months, but I never got any offer.)

4: Paragraph 20 First I telephoned the judge's chambers and talked to his clerk; I said I had a copy of a doc.u.ment that bore on how the trust was being managed, and I wanted to send it to the judge, but I needed to know he wouldn't say who gave it to him. The clerk, who was probably right out of law school because he had the arrogance and inflated sense of self-importance you often find in new clerks but seldom in the judges themselves, told me anything they received would be made public, and so would the circ.u.mstances under which they received it. So much for the direct approach, but in a way that simplified matters for me, because it meant I didn't have to worry about keeping the commissioner's report confidential, because as soon as the judge got it, he was going to make it public anyhow.

4: Paragraph 21 After several more days of thought, I decided the only kind of person I could trust to carry the report to the judge and not say who gave it to him was a journalist, so I called the 'Washington Post' and talked to a reporter there. After several conversations, in which I did not give my name or any information he could trace me by, some days later I agreed to send him a copy of the report, and he promised to take it directly to Oberdorfer; I believed he would, because any good reporter would naturally take it to the judge first and see what happened -- that would make for a better story.

4: Paragraph 22 So I mailed, anonymously, a copy of the bank examiners' report to the reporter and waited to see what would happen, and two things did: First, Hutton bought off the 'Washington Post'!

After the 'Post' took the report to the judge and got him worked up, a reporter called Hutton for comment before publishing the story; for about two days Hutton Group's highest officials spent a lot of time on the phone with the 'Post''s owner, and then the 'Post' killed the story.

That scared the h.e.l.l out of me, because I hadn't thought anyone had that much clout, but when the VP's brother-in-law is one of your senior officers, I guess everyone in D.C. listens when you talk.

4: Paragraph 23 The second thing that happened was that on 31 October Oberdorfer issued a notice scheduling a conference for the next week to discuss, among other things, why he hadn't heard about the bank commissioner's report until the reporter showed it to him. The upshot was not only that Hutton lost the European orphans' trust that was coming in, but Work and Hutton were removed as co-trustee and trustee of the one we already had; it was consolidated with the European one all right, but in the hands of the trustees that already had that one.

4: Paragraph 24 Abbes always believed I was the one who leaked the commissioner's report to the 'Post', but he couldn't prove it, and I never admitted it to him. Not that I was ashamed of what I'd done -- quite the contrary, as I'd done what the ethics rules required me to do and the corporate bylaws authorized me, as a vp, to do -- but once the 'Post' knuckled under to Hutton, I knew the undercurrents were too strong for me to keep rocking that particular boat.

4: Paragraph 25 By December Hutton Group had decided to send someone down to Hutton Trust to whip things into shape, and they chose Ken Simon; he had us hire every accountant and accounting clerk the temp agencies in Wilmington could provide, and then we got some from Philly, too, and we started digging out from under the mountain of overdue statements.

4: Paragraph 26 At Hutton Trust's board of directors meeting on 4 December, I got a nasty surprise: As corporate secretary, I was there taking the minutes, and because of how much trouble we were in, Fomon attended the meeting. At one point he asked how our efforts with "the Congressman" were coming, and Ellis answered that we had Carper "under control," that Phipps was telling him what laws we wanted pa.s.sed, and it was okay to release the campaign contribution Carper was supposed to get for his help.

4: Paragraph 27 During the 1990 campaign, Carper's opponents showed me his campaign-contribution reports from that period, and they reflected two equal contributions from Hutton; I don't remember now -- the amount I think I recall them being was $20,000, but that may have been the total. They told me that when they asked Carper about them, he said the second one was a clerical error, that Hutton had made only one contribution, and he'd later given it back, but when he paid it back it got added to the report instead of subtracted. That, of course, raises the questions of why he gave it back and why he can't tell the difference between adding and subtracting that much money in his checking account records, but with what we know about House banking now and his three bad checks, it's remotely possible.

4: Paragraph 28 But Carper sent me a letter dated 17 February 1987 in which he referred to Phipps as his "friend and supporter," and I know Ellis identified Phipps to Fomon as the bagman who was controlling Carper for Hutton, so I'm left wondering whether Carper is a fool, who didn't know he was being controlled by Phipps, or a liar, who didn't know I knew it.

4: Paragraph 29 Remembering the definition of "honest politician" as one who, once he's bought, stays bought, Carper seems to be an honest politician, and the facts that he's a Democrat and Hutton is a Republican bastion merely reflect the reality that in Delaware party labels don't count for anything, and the Establishment is the only party that does count.

4: Paragraph 30 By February 1986 I was in the position Tom Lehrer described as that of a Christian Scientist with appendicitis: I couldn't afford to quit Hutton Trust until I found another job, and I couldn't get another job because I'd been working for Hutton Trust; if I stayed I might end up in trouble when the authorities found out what Hutton Trust had been doing, and if I left they would certainly blame the illegalities on me when they got caught -- I was, after all, the one who'd been sending memos describing them to our directors and lawyers, so I was the only one on record as knowing what was happening.