THE SLOW DEATH OF E.F. HUTTON Mismanagement, selfishness, and greed killed the old-line brokerage. ''We made every mistake in the book,'' says a former executive, ''and no one was ever punished.''
By Brett Duval Fromson REPORTER ASSOCIATE Cynthia Hutton

(FORTUNE Magazine) – EVEN AT 63, Robert Fomon can't sit down. For five hours he paces his living room, trying to explain the demise of E.F. Hutton, the brokerage house he ran for 16 years. A haze of cigarette smoke covers the English antiques and sporting paintings that decorate his Fifth Avenue apartment. ''Did I let the firm down?'' he asks. ''Did I let the employees down? No, I don't think so.'' To hear Fomon talk, there are no good explanations for Hutton's collapse and subsequent sale to Shearson Lehman Brothers, no large lessons to be learned. Fomon just doesn't know a good story when he hears one. The Hutton saga is a managerial morality tale that has everything but a hero: an actress, a baseball commissioner, several villains, pretty girls, not to mention mismanagement, selfishness, arrogance, and greed. Call it ''The Fall of the House of Hutton.'' Was Hutton's collapse inevitable? Had the 84-year-old franchise outlived its usefulness? As a laid-off former Hutton employee -- one of 5,000 -- asks: ''Did we have to be laid naked at the feet of Shearson?'' The answer to each question is ''No.'' Hutton's problem, says a former managing director, is that it ''made every mistake in the book, and no one was ever punished.'' The blunders ranged from the ridiculously extravagant (investing $100 million in a glitzy new headquarters when the firm was losing money) to the downright illegal (check kiting). But the seminal error was allowing Robert Fomon to wield absolute power for so long. He hired and promoted whomever he wanted, including close friends. He personally reviewed the salaries and bonuses of more than 1,000 employees. Like a feudal lord, he banished organization, budgets, and planning from his domain. ''His whole life was holding court, making all the large and small decisions,'' says a former Hutton managing director and Fomon confidant. ''When Friday night at six o'clock rolled around, a tear would come down his cheek because he was wondering what the hell he was going to do till Monday. Outside of work, he was the loneliest man who ever lived.'' As Hutton grew, however, it became far too complex to be run so autocratically. After a broken leg and two small strokes between 1983 and 1985, Fomon, says a former Hutton officer, ''lost control of the firm and no one ever regained it.'' Hutton's senior officers contributed to the chaos because so many lacked managerial skills. In the firm's entrepreneurial culture, executives usually came up through the ranks of brokers or dealmakers; they did not regard managing as macho. Bad decisions by the officers tended to be ratified by the board of directors. Until 1986, 18 of the 23 members, on average, were insiders. The outside directors included actress Dina Merrill, E. F. Hutton's daughter, and Edward Cazier Jr., one of Fomon's personal lawyers, whose firm, Hahn Cazier & Smaltz, received large fees from Hutton. The firm's vaunted but poorly organized retail brokerage, which produced about 75% of Hutton's revenues, had problems too. Executives focused so much on increasing revenues that they lost sight of costs. Hutton did not know which brokers made money and which ones did not. Retail brokers retained large clients whose orders could have been executed more cheaply by lower- commissioned institutional brokers. Two executives cite an example of run- amok management: Hutton was expensing party girls from escort services as temporary clerical and secretarial help. From 1981 on, profits slipped steadily at the retail brokerage. Still, Hutton's legendary perquisites continued. Though the firm lost $90 million in 1986, according to a former top executive, it spent $30 million to send its best-producing brokers and their wives on all-expense-paid trips. Between 1980 and 1982, Hutton was not just squandering its own money; it was also using funds from a $4 million check-kiting scheme. Hutton managers intentionally overdrew the firm's checking accounts for a day or two to earn additional interest income. The firm pleaded guilty to 2,000 counts of mail and wire fraud in 1985 and never recovered from the scandal. Not even Robert Rittereiser, a top-notch manager brought in as president from Merrill Lynch, could save Hutton. FORTUNE HAS LEARNED that Fomon's loyalty to longtime associates snared in the check-kiting scheme led him to try to protect them from criminal charges. He pleaded the company guilty, in part to avoid indictments of certain top officers. And Fomon himself says that while he answered all the questions put to him by federal prosecutors, he did not tell the grand jury everything he knew. Several former top Hutton employees also maintain that Fomon tried, unsuccessfully, to alter the criticisms of executives named in the report of former Attorney General Griffin Bell, who was appointed by Hutton to help restore its reputation. The check-kiting fiasco was, in many ways, a logical outgrowth of bad old habits. Staid, sleepy Hutton had revenues of $85 million and employed just 1,275 account executives in 1970, when Hutton Chairman Alec Jack chose his protege, Robert Fomon, the head of corporate finance on the West Coast, to become chief executive of the private partnership. Two years later Fomon took the firm public. Between 1972 and 1982, Hutton's share of the brokerage trade expanded from 2.9% to 7.6% as it opened over 200 new offices. Because revenues were growing much faster than costs, Hutton soon began making nouveau riche returns. In the 1970s, profits grew 22% a year, compounded annually, and net worth increased 21% a year. By 1980 almost 4,000 account executives worked for Hutton, and the brokerage had revenues of $1.1 billion -- more than any firm but Merrill Lynch. ''We used to look down our noses at the Paine Webbers, the Dean Witters, and the Shearsons as they went through their traumas in the 1970s,'' says a former executive, referring to the mediocre management and slow growth that was common on Wall Street. ''We were sure that nothing like that could happen to us.'' While Fomon concentrated on corporate strategy and investment banking, his chief aide, George Ball, built up the retail brokerage. Ball put together an elite corps of salesmen who generated more commissions per account than any competing firm. Says a former Hutton broker: ''Ball was like a big brother to us, a leader, a Napoleon. He kept us together, created an esprit de corps.'' In retrospect, it appears that Ball tried too hard to keep his troops happy. ''George gave them whatever they wanted,'' says a former Hutton manager who worked closely with the brokers. ''Up-front money, interest-free loans. In one region he had about 40 such deals with brokers.'' Ball disputes this, but declines to elaborate. IN 1975 the Securities and Exchange Commission deregulated brokerage commissions. As competition from discount brokers increased, Hutton's revenue growth slowed. Costs, however, continued to rise. Former company officers say that by the mid-1980s, many of the top brokers were losing money because their take was so high. At the time, Hutton paid salesmen 40% of the commission, vs. an industry average of 30%. Every few years the company tried to reduce its brokerage costs. But the retail brokers had such influence within the firm that they could successfully beat back any cost-cutting assaults, sometimes by threatening to quit. Hutton's investment bankers did not add much to profits either. ''We were never any good,'' recalls one of the senior bankers. Under Fomon's direction, they sallied forth in a feckless attempt to do battle with the likes of Goldman Sachs and Morgan Stanley. ''Investment banking was the plaything of a few officers,'' says a former close associate of Fomon. ''There was no strategy. They had a Gunfight at the O.K. Corral style: Shoot a lot of deals and see which ones work.'' One debt instrument cooked up by Hutton's bankers in 1982 -- a floating-rate, tax-free corporate note -- ended up costing the firm $55 million in 1986. Hutton had sold the notes with the understanding that holders could redeem them at par. When the creditworthiness of some of the securities deteriorated, Hutton felt obliged to reimburse clients. Despite disappointing earnings from investment banking operations, Fomon and his entourage continued to spend pots of money. One top banker charged $900,000 in travel and entertainment expenses in 1986, according to Hutton records. ''That's a hell of a lot even for an investment banker,'' says an officer at another Wall Street firm. Two corporate jets sat on the tarmac in New York, fueled and ready to fly off to Hutton apartments in Paris, London, and San Francisco. Twice married and admittedly fond of women he calls ''pretty young girls,'' bachelor Fomon lived more like Adnan Khashoggi than Paul Volcker. ''He liked nothing better than being in a jet at 30,000 feet with talented young women,'' says a former top Hutton official. Back in New York, he bedded a number of Hutton employees and put girlfriends on the payroll, according to those closest to him. ''He considered it the spoils of war,'' says a Fomon confidant. Another officer says, ''One of the roles I played was to keep him out of trouble. And I would say that I was consistently unsuccessful.'' Fomon's most memorable public gaffe occurred in August 1986, when he agreed to a profile in M, a men's fashion magazine. One photo shows Fomon sitting at a Long Island party with his arms around two good-looking young blondes. ''I'm old enough to be grandfather to some of the girls I take out,'' he told the interviewer. ''They're decorative, nice to look at, they have keen senses of humor.'' Some people at Hutton did not find the article funny. ''It was embarrassing for the firm,'' recalls an executive. At a board meeting, Dina Merrill criticized Fomon for bad public relations. Says Fomon: ''I don't understand why people got upset. I can't help it if I appear in the papers with young girls.'' THE PANDEMIC disorganization and mismanagement at Hutton became acute in 1982, when George Ball left to be chief executive of Prudential-Bache Securities. He had no obvious successor. Fomon temporarily took on the job of running the retail brokerage, but it proved too much for him. So he asked Scott Pierce, Vice President Bush's brother-in-law and an affable municipal bond manager, to replace Ball. Many people at Hutton were flabbergasted that Pierce had been chosen, since he had never worked with the retail brokerage. ''I wasn't the best man for the job,'' says Pierce, who nevertheless agreed to take it. Whether from overwork after Ball's departure or from heavy smoking and drinking, Fomon broke his leg and had two strokes in the mid-1980s. ''He had more serious health problems than anyone has written about,'' says one of his confidants. He fractured his right leg in three places in 1983 -- getting undressed for bed, he says -- and was out of the office for a month. Because the bones never set properly, he has been in considerable pain ever since. ) Then in September 1984 he had the first small stroke. Says a friend and former officer: ''He wasn't the same again.'' Eight months later Hutton stunned Wall Street by pleading guilty to check kiting. ''The guilty plea was the worst decision I ever made,'' Fomon now says. ''We should have fought it in court. I never understood what the aftermath would be. I thought it would soon be ancient history.'' Around Hutton the crime quickly became known as the F (for federal) matter. Fomon says Hutton's outside law firm, Cahill Gordon & Reindel, persuaded him and the board to admit guilt during a 45-minute meeting. The attorneys pointed out that the Department of Justice was planning to indict several senior Hutton officials -- but not Fomon -- on criminal charges. They advised pleading guilty to avoid a long legal battle that would smear Hutton's name. But the guilty plea had precisely the same effect. Says Fomon: ''I should have let the Justice Department indict whomever it wanted.'' Back in 1985, however, he was feeling more charitable to those caught up in the scheme. Even Fomon's critics concede that he is a loyal friend. ''Bob just couldn't stand seeing his buddies dragged through the mud,'' says a close associate. Former Hutton executives describe a meeting between Fomon and two senior officers a few days before Griffin Bell issued his final report. Fomon, say these executives, wanted to kill the Bell report. ''We said, 'No way, Bob. You can't do that,' '' recalls one of the officers. If Fomon could not scrap the inquiry, he could try to water it down. Several former Hutton executives say that he asked Bell to soften his criticisms of specific officers. Bell admits that Fomon lobbied him about one officer but says he did not give in. Fomon denies that he interfered with Bell's report. The brokers were furious that Fomon had hired Bell in the first place. Says one: ''The guilty plea was humiliating enough, but then those dummies went and hired a guy to come in, tell us what we already knew, and republicize it to the world.'' In July 1985, shortly before the Bell report was released, 50 top Hutton managers and brokers flew to New York. At a rebellious meeting in a midtown hotel, they complained to Fomon and Robert Witt, second-in-command of the brokerage, about management ineptitude. Fomon was unfazed. He introduced the hostile audience to Bob Rittereiser, a plain-spoken man he had just hired from Merrill Lynch. Fomon described Rittereiser, then 47, as the firm's bright new hope and savior. At Merrill Lynch, where he had spent most of his working life, Rittereiser was one of several candidates in line to replace Chief Executive William Schreyer. But he jumped at the Hutton offer because it seemed to give him a surer shot at the top. Ritt, as he is known to his friends and colleagues, saw an opportunity to make Hutton a first-class retail brokerage with a small but profitable investment banking arm. He says that when he agreed to join Hutton, ''I had no idea that the firm was in such bad shape.'' He began to get the picture the first day. Fomon told him that a client of Hutton's most productive broker, Houston's Don Sanders, had bounced a check for $48 million but had been allowed to resume trading in another account he had with the firm. ''I told Fomon that if it were up to me, I'd close the account today,'' says Ritt. ''And I wondered why he hadn't.'' But the decision had already been made to let Sanders's client keep trading. Rittereiser was powerless to do anything more than shake his head. Rittereiser spent his first six months soothing state regulators who wanted to close Hutton down and bankers who wanted to pull the firm's credit lines. ''Because of the check-kiting scheme, he had to cash in a ton of chips with insurance commissioners, regulators, and banks or Hutton would have gone down the tubes a lot sooner,'' says one of Rittereiser's closest aides. On New Year's Eve, for example, the firm was in financial peril because institutional holders wanted to sell nearly $1 billion of Hutton's short-term paper to raise cash. Since Hutton was the sole market maker, and no other firm would bid at par, it had to buy the paper. Ritt to the rescue. ''I arrived at 7 A.M. with a small team and $800 million in fed funds. Over the next 12 hours we masterminded the settlement of every security transaction Hutton had made so that we could stay within our bank limits. If we had overdrawn, some banks would have pulled their lines of credit. It was a question of the survival of the firm.'' Rittereiser left the building at 7 P.M., and before going home he stopped at Our Lady of Victory church to offer a prayer for having survived his first half year. By mid-1986, Rittereiser had the nucleus of his new management team in place. They erected legal and financial controls to prevent a repeat of the F matter. They also organized Hutton's relocation from downtown buildings to expensive new headquarters in midtown, a move Fomon had spent years planning. But they proved singularly unsuccessful at capping costs. For fear of losing its best account executives, Hutton still paid them such large commissions that many, especially those whose clients traded commodities, were unprofitable.

The relationship between Fomon and Rittereiser began to deteriorate in late 1986. Fomon, perhaps realizing that he was losing control of his firm, actively tried to sell it. Several companies, including Chrysler, seemed interested but backed off when they realized the extent of Hutton's problems. Fomon frequently complained about Rittereiser behind his back. ''I wanted to sell the firm because I could see that he was a consensus guy, not a leader,'' says Fomon. A blowup between the two was inevitable. IN OCTOBER 1986, Shearson Chief Executive Peter Cohen set off the explosion. He flew to Bermuda to meet with Rittereiser, who was vacationing with his family, and proposed a merger between Shearson and Hutton. Rittereiser was ambivalent, but over the next six weeks he and Fomon met twice with Cohen and once with James Robinson III, the chairman of Shearson's parent, American Express. Rumors of a takeover swept Wall Street, and once again turmoil swept Hutton. During a management committee meeting, one of the many Hutton officers who opposed a sale almost came to blows with Fomon. ''I had to break it up,'' says an investment banker who was there. At an all-day meeting on November 6, Fomon and Rittereiser told the board that Shearson was floating a $50-per-share offer for the firm. But the head of the retail brokerage, Jerome Miller, warned the directors that many brokers would quit if the firm were sold. The board asked Rittereiser for his position. He said that he opposed the sale and argued for more time to turn Hutton around. Fomon maintains that Ritt was just trying to save his job. The differing positions of the chairman and president perplexed Hutton's board. ''These two guys had created the interest in selling,'' says a director. ''Then whoa, they split.'' The outside directors caucused and concluded that Hutton's investment bankers at Salomon Brothers should ask Cohen for $55 a share. But by now Cohen had sized up the antipathy of Hutton's brokers, and he called the deal off. With Cohen out of the picture, the board had to decide who was going to run its company: Fomon or Rittereiser. Clearly the two could not work together any longer. Before it acted, the board wanted assurances that Hutton could survive on its own. Peter Ueberroth, the commissioner of baseball and a board member since 1984, put the question to Rittereiser. Ritt told the directors that he and his team would have Hutton earning money by 1988. At the initiative of Ueberroth, the board directed Fomon and Rittereiser to decide who was in charge. But the members left little doubt that they preferred Rittereiser. The next day, Fomon bought Ritt lunch at an Upper East Side hotel and in a tense meeting said, ''You want to be CEO? Okay, I'll do it.'' Although Fomon was as good as his angry word, he remained chairman for six months while he negotiated an $11 million golden handshake. At his final appearance before the board, Fomon took one more swipe at Rittereiser by nominating Ueberroth as chairman. According to Hutton officers, Fomon hoped Ueberroth would take the job and sack Rittereiser. When Ueberroth refused, Fomon said, ''I'm going to put Hutton in play,'' and left the room. Now that Rittereiser was chief executive, he had the power to shake Hutton to its bottom line. Despite the bull market, the firm was still losing money and investor confidence. But instead of acting quickly, Rittereiser set up committees to study Hutton's problems and come up with solutions. In the summer of 1987, his marketing team produced a remarkably simple-minded coloring book to tell employees what had to be done and why it had to be done quickly. Though it was meant to dramatize Hutton's desperate plight, the book simply offended people. ''It was an insult to our intelligence,'' says one broker. ''We couldn't believe that headquarters had put it out. These were the guys who were going to save the firm?'' Confidential Hutton documents show that Rittereiser told the board Hutton would earn $74 million during the first nine months of 1987; in fact, it made only $15 million and lost money in September. Then came October 19. All the brokerage stock prices sank, but none more than Hutton's, which cratered at $15 a share, vs. $35 two weeks earlier. ''When Hutton stock got below $20, the firm was history,'' says Kendrick Wilson III, former head of corporate finance. ''It was only a matter of time before some bargain-hunter snapped us up.'' Fomon, who had been trying unsuccessfully to shop Hutton all summer, seized the moment. In a bitter act of revenge, he fomented a bid from former Shearson chairman Sanford Weill. If Weill were successful, Fomon stood to collect a $3 million finder's fee, in addition to whatever he could get for his 250,000 shares of Hutton stock. At a series of dinners Fomon held in his apartment, he introduced Weill to the directors. Having lost confidence in Rittereiser, they saw Weill as the take-charge guy who might rescue the company. But when Weill demanded an exclusive deal with Hutton without offering a firm price, the directors demurred. On November 23, Ueberroth and the board reopened discussions with Cohen. Nine days later, they agreed that Shearson would buy Hutton for $29 a share. Though the price came close to $1 billion, it was far short of Cohen's $50-a-share proposal the year before. AFTER THE Shearson takeover, Hutton's board voted itself more than $2.5 million in retirement benefits. Ueberroth alone will pocket almost $1 million, including $500,000 for leading the negotiations with Cohen. Rittereiser, who did not request an employment contract, will get about $3 million if he leaves the newly named Shearson Lehman Hutton. Some members of his management team, who refused to join Hutton without contracts, will do better, collecting from $1 million to about $5 million each. Just about forgotten in the rush to divide the spoils were Hutton's other employees. Because of the way the board structured the company's profit-sharing plan, they will not be permitted to sell the Hutton shares held for them in trust. Most will walk away with little more than the right to collect unemployment checks. Although the directors' special treatment of themselves seems unfair, it is in keeping with the long tradition of me-first-manship at Hutton. Robert Fomon was the exemplar of that spirit. ''People around here believed that if they could get away with something, they should do it,'' says a former Fomon associate. At Hutton, selfishness was a way of doing business. The company lived -- and died -- by it.