Spitzer sues Block for IRA marketingMar 16, 2006 | www.bizjouranls.com
New York Attorney General Eliot Spitzer sued H&R Block Inc. on Wednesday on behalf of the state, alleging that the company fraudulently markets Individual Retirement Accounts.
Spitzer's suit was followed later Wednesday by a class-action complaint filed in U.S. District Court in Kansas City with a Florida H&R Block customer named as plaintiff.
Kansas City-based Block (NYSE: HRB - News) responded to Spitzer in a written release in which Chairman Mark Ernst said company officials "believe in the Express IRA product and are proud of the opportunities it presents for our clients."
"At a time when the country's personal savings rate has declined to minus 0.7 percent, we've helped 596,000 of our clients begin saving for their future, and more than 40 percent of them had never saved before," Ernst said in the release. "If in the unfortunate event this matter does end up in court, H&R Block will fight vigorously to defend the Express IRA product and ensure it remains available to our many clients who rely on it as a helpful savings option," Ernst said.
Spitzer's suit, filed in New York County Supreme Court, alleges that Block "abuses its relationship of trust by steering its customers into an unsuitable, fraudulently marketed, poorly performing, fee-ridden 'retirement vehicle' called the Express IRA."
"We've been marketing the product for nearly five years now, and we've always been very clear with our clients on the Express IRA," Block spokesman Nick Iammartino said. "As part of that, we've told them about the benefits of saving ... and we've also been very clear about the product's fees and charges and how to avoid those fees and charges."
The suit describes the product as "a retirement account that more often than not will shrink over time because its only investment option is a money market account with an interest rate that does not cover fees -- fees that H&R Block fails to adequately disclose."
In a written release, Spitzer said that Block's alleged actions are "particularly appalling because many of those hardest hit were working families who struggle to save."
Block's Iammartino said that nearly 78 percent of the company's clients who have bought the Express IRA have made money. The gain averages slightly more than $200, he said, including tax savings, interest earned and fees and expenses paid to Block.
"The tax savings plus interest outweigh the fees we charge by about 5 to 1," he said.
Spitzer said his office started an investigation last year after getting information from a Block tax preparer.
The suit calls for Block to pay civil penalties of at least $250 million, refrain from fraudulent practices, disgorge profits obtained by those practices and pay damages and restitution caused by the actions.
The federal suit filed in Kansas City alleged violations of Missouri consumer laws, breach of contract by Block, unjust enrichment and breach of fiduciary duty.