Della Torre began dropping off his suitcases full of cash at Hutton's front door. Executives with the firm carefully monitored the deposits, making sure that they filled out all of the necessary forms. Over the next few months, Della Torre deposited $15.5 million in small bills at E. F. Hutton.
The next time bomb for Hutton had been planted. By the time it went off, Hutton would already be the subject of a massive federal criminal investigation for its check-kiting scheme.
Like the original complaint that came from the tiny Genessee bank, the criminal investigation of Hutton's check-kiting scheme started in a most unlikely spot. Al Murray was one of the hundreds of young assistant U.S. attorneys who worked for the Justice Department. Murray was an aggressive sort working in the small outpost in Scranton, Pennsylvania, a place that almost never became involved in large-scale securities cases. Still, it would be Murray, the son of a Brooklyn criminal court judge, who would launch the criminal investigation of E. F. Hutton.
On a day in April 1982, Murray sat at his desk studying a curious FDIC memorandum about Hutton. For some reason, the firm had been overdrafting its bank accounts. The details in the memo sent to criminal investigators in New York and Pennsylvania amazed him. To Murray, Hutton's banking practices seemed like the stuff of a great criminal case: a firm with a household name involved in huge money transfers that appeared to siphon off cash from the nation's banking system. Murray decided to dig deeper.
He subpoenaed the full FDIC report in May. It detailed what happened at Genessee Country Bank and United Penn and laid out other information about the practices Hutton used in its bank overdrafts. Murray also found copies of the letters that Lounsbury, the bank auditor, had sent to the government months before. He contacted John Holland, a postal inspector, and the two started working on the case. Holland decided he should speak with Lounsbury to see if the small-town bank auditor might have some information that could help them.
So one morning in the spring of 1982, Holland drove across two states, toward the city of Rochester, New York, on the shore of Lake Ontario. Lounsbury was delighted to hear from somebody in the government. As months of silence had followed his letter-writing campaign, he had just assumed that his complaints had been dropped into some bureaucrat's garbage can.
The meeting started with Holland showing Lounsbury the FDIC memo, saying, “I don't really know what I have here.”
Lounsbury got up from his desk and walked over to his file cabinet. He had planned ahead and saved every scrap of paper relating to the Hutton transactions. “I've got a whole file drawer full of information here that might help you.”
Over the next two hours, they reviewed the records, with Lounsbury walking Holland through each step slowly. He showed how Hutton had used the system to loot the banks.
Eventually, Holland concluded, “Based on this, I think these folks have been committing a fraud by using the United States mail. That's a crime. I think I can get them.”
Holland returned to Scranton and reported what he had learned to Murray. Lounsbury's information emboldened them to press on. Grand jury subpoenas were issued to Fomon, Hutton's chairman, and two other senior Hutton executives. Throughout the top ranks of the brokerage, word spread quickly that a criminal probe of Hutton's checking practices had begun.
Despite all his typical public enthusiasm that summer, Ball had his private, undisclosed anguish. Fomon had become more erratic, clinging desperately to power while backing away from critical decisions. With the overdrafting on hold as the firm's lawyers investigated, Hutton was stumbling and its profits were eroding. The criminal investigation was unnerving the firm's senior ranks.
With all the firm's problems, Ball began thinking about leaving. The planning began in April when he received a telephone call from Leland Getz, an executive with Russell Reynolds Associates, the headhunting firm. His first conversation with Getz had been cryptic.
“I'd like to meet with you about something very important,” Getz said.
“What about?” Ball asked.
“It's about you.”
That was mysterious enough, so Ball agreed to meet secretly with Getz. Over lunch at a Manhattan restaurant, Getz quickly got to the point. “Would you be interested in running Bache?”
Ball sat back and thought. He had never before considered working anywhere else but Hutton. Just one year earlier, he had rebuffed an offer to take a senior job at Bache.
But with all of Hutton's unfolding problems, the timing was perfect for an exit. It seemed as good a time as any to bail out. He leaned up to the table.
“Tell me more.”
Bob Fomon's vengeful anger at George Ball poured out to the crowd of Hutton brokers assembled in Denver, Colorado, in August 1982. “That fucking little redheaded wimp jumped ship,” the Hutton chairman growled in an angry, drunken voice. “That son of a bitch.”
It had been a few weeks since Ball's surprise announcement of July 19 that he was leaving Hutton to take over Bache. Fomon at first had taken the news like a bewildered parent abandoned by his child. But on this night, as the realization sunk in that his protégé was now his competitor, Fomon tore into the man. He couldn't believe Ball would desert his team for a place like Bache.
“Bache, for God's sake!” he growled. “The biggest fucking joke on the Street! They've never known how to make money. And that's what
George
used to say! He ridiculed them more than anybody!”
Fomon had good reason for his anger. Since Ball announced his resignation, he had already made it known within Hutton's ranks that he was willing to cherry-pick the firm's best people for Bache. It should have been no surprise to Fomonâafter all, Ball had made his name on Wall Street in part through his talents at raiding other brokerage houses for their top producers. In short order, Ball launched the same war, but this time his beach-head was Bache and the enemy was Hutton: He lured Greg Smith, a close friend who headed Hutton's equity division, as well as a number of the stock analysts who worked for him. He also recruited Hutton's top stock strategist, its chief economist, and a number of its top brokers. Soon Ball would start raiding the firm's legal department.
While Ball was busy building his new team at Bache, a Customs Service agent was making a discovery that would eventually speak volumes about one of the new recruitsâand about the future direction of Ball's new firm.
In October 1982, Mike Fahy sat at a desk in the World Trade Center offices of the United States Customs Service, just a few blocks from Hutton headquarters. His eyes barely moved as he stared at the computer screen in front of him, waiting on the system to finish cross-checking some names. Suddenly a single name popped up on the screen: Franco Della Torre, a customer of E. F. Hutton. Fahy jumped up from his seat.
“I've got a hit!” he shouted.
Fahy had found something that might be the big break in the yearlong investigation of what law enforcement officials thought was the largest international money-laundering and heroin ring ever uncovered. Fahy had found Della Torre by running all the names from the address book of another suspected money launderer through the computer to see if any had been reported making large cash deposits at an American financial institution. Della Torre was the only match. Fahy typed a few commands into the computer and a six-foot-long list of Della Torre's transactions with the brokerage firm began to print out.
Fahy called Robert Paquette, a special agent with the FBI who was in charge of the case, and told him about Della Torre. Paquette was elated. Finally they had a critical lead. If they could follow Della Torre, or even eventually turn him into a government witness, they might crack the entire ring.
Paquette decided to contact Merrill and Hutton, which had both filed forms documenting Della Torre's large deposits. He called Merrill first, which quickly agreed to cooperate with the government investigation. Then Paquette called the security department at Hutton, which passed him on to Loren Schechter in the law department. Paquette explained the government's interest in the Della Torre account. He asked Schechter for Hutton's cooperation, requesting that the firm keep the account open. He wanted Hutton to notify the FBI the next time Della Torre made a cash deposit. That way the government could start monitoring his actions.
“This is a very intense ongoing investigation,” Paquette said. “We need to make sure it's not compromised.”
“Don't worry about it,” Schechter said. Hutton would be glad to cooperate. The firm would need a subpoena to turn over the account information, Schechter said, but he would make sure that Paquette was notified of the next deposit.
Over the next few days, Paquette did some background checks on Della Torre. He contacted Louis Freeh, the assistant United States attorney general in charge of the case, to brief him on the developments. Freeh prepared subpoenas for the account information at both Merrill and Hutton. Paquette served Merrill first and quickly received the information he wanted. Then he walked across the financial district toward Hutton's offices. It was a bitterly cold day, and as he walked along the narrow Manhattan streets, Paquette bundled his heavy coat around himself. He took off his gloves only after arriving in Hutton's lobby. A security guard directed him to Schechter's office.
Something immediately seemed to be wrong. Schechter wouldn't look Paquette in the eyes. Paquette had interviewed enough guilty people to know that Schechter was acting like he had something to hide.
“I've got all the subpoenas you asked for,” Paquette said. “Has Della Torre surfaced yet?”
Schechter stared down at his desk. “We've got a problem,” he said. “I don't think we are going to be able to help you now.”
“Why?” Paquette asked, growing increasingly uneasy. “What's happened?”
“The accounts have been closed,” Schechter replied.
Paquette couldn't believe it. Somebody had to have been tipped off. “How could that happen?”
“We notified the clients in Switzerland.”
Paquette slumped in his chair. “What?” His mind started racing, thinking of some way to salvage the operation. “Has it been a definitive announcement, or an insinuation?” he asked. “Is there any chance of regenerating contact?”
“You've got to speak about it with our general counsel, Mr. Rae,” Schechter said as he stood up from his desk and escorted Paquette down the hall.
Over the next few minutes, Paquette heard Tom Rae explain how Hutton had decided to notify the clients of the government investigation and shut down the accounts out of fear for the lives of the firm's employees. He told Paquette it would be impossible to reconstruct the relationship.
Paquette left Hutton in a fury.
Schechter stabbed us all in the back!
he thought. It was Schechter who had made the commitment to cooperate and then turned around and breached the government's trust. Paquette couldn't believe that the lawyer hadn't notified him of a problem at Hutton. If Schechter had just given him a courtesy call, Paquette thought, everything could have been salvaged. Schechter had obviously been faced with a choice between doing what was right and doing what was safe. And, Paquette thought, he had made the wrong choice.
Paquette immediately went to the offices of the U.S. attorney at Foley Square, where he found Louis Freeh and told him what had happened. Paquette's anger paled next to Freeh's. More than a year's worth of investigation had been thrown into the toilet by one of America's premier brokerage firms. Freeh launched into an endless tirade against Hutton. The government had to start all over again.
Two years of investigations ensued that otherwise would have been unnecessary. Dozens of FBI agents were used to monitor thousands of hours of wiretaps, running twenty-four hours a day. The cost ran into the millions of dollars. In the end, Freeh and the FBI were able to reconstruct the case and break up the billion-dollar pipeline that funneled heroin to the United States for distribution through pizza parlors and cafés. The case, dubbed the Pizza Connection, would be the largest in the history of law enforcement, and it helped to propel Louis Freeh to the post of director of the FBI. But almost to the end, Freeh never let an opportunity slip to criticize Hutton for its acts.
None of that criticism much affected Schechter. Within a few months of his encounter with Paquette, he had called George Ball about getting a new job. Soon afterward, Loren Schechter was tapped to be the chief law enforcer and top watchdog of the firm that had been renamed Prudential-Bache Securities.
“Average sucks,” George Ball announced in November 1982 to a group of sixty-one top Prudential-Bache brokers assembled at a get-together in Phoenix. “Like Zeus on Mount Olympus, we're going to stand above the others.”
Ball broke into a wide smile as the group of successful stockbrokers erupted into wild cheers. After years of embarrassment from working for a Wall Street also-ran, the brokers finally had someone in charge who made them proud. In just a few months, Ball had invigorated the firm, pushing it endlessly into new, unexplored directions. Almost unbelievably, he had transformed it into one of the hot brokerages on Wall Street. Ball was more than just another boss; for the firm's brokers, his arrival was something more akin to the Second Coming. As they watched Ball push his host of reforms, the brokers whispered their secret hope that he would be able to do for Bache what he had done for Hutton.
On his first day as Bache's new chief executive in mid-August, Ball had hit the firm like a whirlwind. At 7:00 A.M. that morning, he stepped out of the chauffeured sedan that had driven him to 100 Gold Street from his posh home in northern New Jersey. He headed through the revolving door into Bache's lobby. A look of disgust came over his face. Shabby was the best word for the place. The entryway was drab and lifeless; the closest thing to decoration was a series of smudged, handwritten signs warning visitors that security guards could search their packages.