Spitzer alleges fraud in H&R Block

H&R Block Inc., the largest U.S. tax preparer, fraudulently marketed retirement savings plans that caused hundreds of thousands of mostly low-income clients to lose money…

The Globe and Mail
March 16, 2006

Spitzer alleges fraud in H&R Block lawsuit
Joe Giannone and Bil Rigby

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

The suit seeks $250-million (U.S.) in fines plus refunds after H&R Block 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, Mr. Spitzer said.

As a result, about 85 per cent of these customers lost money, he said.

The suit is the latest in a line of legal and accounting issues faced by H&R Block and comes at a crucial time for the tax preparer as millions of Americans get ready to file taxes before the April 17 deadline. Its shares fell more than 4 per cent.

H&R Block used the retirement accounts, with a minimum initial deposit of $300, to try to make sure tax customers returned every year, the suit charges.

"This is the bait designed to keep consumers coming back," Mr. Spitzer said at a news conference in New York. "They [H&R Block] did not have the decency or the sense of fairness to disclose to these low-income clients that the fees that they were imposing would mathematically outweigh the interest being paid on these accounts."

Mr. Spitzer said an investigation was launched into the "Express IRA" product after complaints from customers and a tip from an H&R Block tax preparer.

He said one 32-year-old Albany, N.Y., resident made a one-time deposit of $300 into an H&R Block Express IRA in 2002, but actually ended up with less money four years later. The customer received $10.29 in interest but paid out $45 in fees.

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

"We believe in the Express IRA product and are proud of the opportunities it presents for our clients," H&R Block chief executive officer Mark Ernst said in a release. He said the company would "vigorously defend" the product in court.

By H&R Block shares fell $1.37 or 6.2 per cent to $20.63 on the New York Stock Exchange, their lowest level since September, 2003. Shares of Jackson Hewitt Tax Service Inc., its main rival, also fell. They were down 2 per cent to $29.75 on the NYSE.

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

Levies included a $15 setup fee, a $15 recontribution fee, a low interest rate and a $10 annual maintenance fee.

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, Mr. Spitzer said.

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Risks: Deceptive marketing practices, Predatory actions, Preying on the economically poor, United States, 20060316 Spitzer alleges

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