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 Hutton Trust had to do to "earn" its fee was white-out and retype the statements.