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Last updated on April 17, 2014 at 13:47 EDT

Spitzer Charges H&R Block with Fraud

March 15, 2006

By Joe Giannone and Bill Rigby

NEW YORK – H&R Block Inc. the largest U.S. tax preparer, fraudulently marketed retirement savings plans that caused hundreds of thousands of clients to lose money, New York State Attorney General Eliot Spitzer charged in a lawsuit filed on Wednesday.

He said he will seek $250 million in fines plus restitution from the company, which he said steered roughly 500,000 tax return customers to invest in individual retirement accounts, but failed to disclose high hidden fees that actually outpaced interest earned on the accounts. As a result, about 85 percent of these customers lost money, the attorney general said.

“Instead of providing these families with accurate information that would have allowed them to make informed choices, H&R Block steered them into retirement accounts that actually shrank over time,” Spitzer said in a statement.

Kansas City-based H&R Block defended its Express IRA accounts and contended Spitzer ignored evidence that disproved his allegations. H&R Block said it was cooperating with the investigation.

“We believe in the Express IRA product and are proud of the opportunities it presents for our clients,” H&R Block Chairman and Chief Executive Mark Ernst said in a release. He said the company would “vigorously defend” the product in court.

H&R Block shares lost $1.43, or 6.6 percent, at $20.56 in morning trade on the New York Stock Exchange. If the shares closed at this level, it would mark a new 52-week low.

The attorney general’s office began the investigation into the company last year after receiving a tip from an H&R Block tax preparer.

More than 150,000 H&R Block customers closed their Express IRA accounts, only to incur additional undisclosed fees, as well as nearly $6 million in tax penalties, Spitzer said.

The civil complaint, filed in Manhattan state court, cites internal documents showing that senior management knew that many of its customers were losing money on their Express IRAs. In a 2002 e-mail to Ernst, a district manager complained about the impact of these accounts on customers.

Customers opening an Express IRA faced fees including a $15 setup fee, a $15 recontribution fee, a low interest rate and a $10 annual maintenance fee, the complaint said. The average account balance was about $300, the suit said.

Yet H&R Block continued to tout the Express IRA as a good way for its customers to save, Spitzer’s office said. The complaint also alleged H&R Block promoted Express IRAs to tax-preparation customers to come back year after year.

H&R Block said it received Spitzer’s notice of intent to sue last month, followed by a settlement demand letter.

“We have cooperated fully and provided volumes of data and detailed analyses to the Attorney General’s office, but it has ignored all of the positives and has chosen to launch this attack,” said H&R Block General Counsel Nick Spaeth.

The company also said that between 2001 and 2005, 78 percent of Express IRA customers experienced “positive net tax savings benefits and interest earnings.”

An attorney for H&R Block also said the company has lost money operating the program.

The suit is the latest in a line of high-profile cases for Spitzer, who made his name with multimillion-dollar settlements of charges against Wall Street investment banks, fund managers and insurance brokers.

H&R Block’s troubles in New York are likely to further complicate the company’s effort to secure a bank charter from the Office of Thrift Supervision.

Last fall, the OTS deemed the company’s application for a charter complete. But opposition from groups like the California Reinvestment Coalition and the Chicago-based Woodstock Institute, which accuse the company of “gouging” poorer consumers with high-rate refund anticipation loans and other products, has delayed approval.

(Additional reporting by James Kelleher)


Source: reuters