Posted on: Tuesday, November 9, 2004
H&R Block division accused of fraud
By Marcy Gordon
Associated Press
WASHINGTON — Securities regulators have accused H&R Block Financial Advisors of fraud in selling customers nationwide some $16 million of Enron bonds in late 2001 and touting them as a safe investment when the energy-trading giant had begun to collapse.
The National Association of Securities Dealers, the brokerage industry's self-policing organization, announced its complaint yesterday against the investment division of the world's largest tax preparer. Companies can be fined or suspended from the securities industry if found to be in violation of NASD rules in a disciplinary hearing process.
An NASD official said the group was seeking restitution to the hundreds of H&R Block customers — mostly individual investors, including many retirees — who lost money on the bonds.
H&R Block Inc., based in Kansas City, Mo., disputed the allegations and said it would contest them through the NASD's hearing process.
"We deeply regret that our clients experienced losses from the devaluation of Enron bonds," Nick Spaeth, senior vice president and chief legal officer of H&R Block, said in a statement. "However, the lost value was the result of mismanagement and bankruptcy at Enron that later came to light, not the result of actions or omissions on the part of H&R Block Financial Advisors. At the time of sale, these bonds were rated investment grade by the national rating services, and evidence of internal fraud at Enron had yet to be discovered."
The Wall Street rating agencies — Moody's Investors Service, Standard & Poor's and Fitch Ratings — have been criticized for maintaining high ratings for Enron bonds even as its stock plummeted in late 2001. Brokers at H&R Block selling the bonds failed to tell customers that the agencies had downgraded their ratings during the period in question, the NASD said.
NASD said that in the five weeks preceding Enron's bankruptcy filing on Dec. 2, 2001, while Enron's financial crisis was coming to light and government investigations were initiated, some 200 brokers at H&R Block recommended and sold more than $16 million in Enron bonds to approximately 800 customers in 40 states.
The brokers "made affirmative misrepresentations to customers, touted the supposed benefits of the Enron bonds, and failed to disclose the serious and significant risks associated with an investment in the bonds," the NASD alleged.
Most of the customers lost their investment when the bonds' value disintegrated after the bankruptcy filing.
H&R Block had profits of around $500,000 from selling the bonds, according to the NASD. It said the company paid its brokers higher incentive fees for selling the Enron bonds than for bonds with comparable ratings and maturity dates issued by other corporations — between $10 and $17.50 per bond compared with $3 to $7.50 per bond for others. A spokeswoman for H&R Block denied that higher fees were paid.
"This is an especially troubling case where hundreds of unsuspecting individual investors innocently relied on their H&R Block brokers to give fair and honest advice concerning investments," said NASD Vice Chairman Mary Schapiro.
"H&R Block brokers betrayed that trust by selling these investors highly risky Enron bonds, using misleading information at a time when the brokers knew, or should have known, of the company's serious financial problems — problems which foreshadowed the collapse of the firm.
"That H&R Block gave the brokers extra financial incentives to sell these troubled bonds is simply intolerable behavior," Schapiro said in a statement.
H&R Block spokeswoman Cyd Slayton said "there was no special incentive for this investment-grade bond. Our advisers received the same compensation as they would have with any similarly situated bond."
The regulators also accused the company of violating NASD rules by failing to establish and maintain an adequate supervisory system to monitor the sales of Enron bonds by its brokers.
