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.