Spitzer Sues H&R Block for Fraud that Bilked Clients in Connection with Sale of Worthless IRAsMar 17, 2006 | Newsinferno News Staff
In a massive lawsuit brought by New York's crusading Attorney General, Eliot Spitzer, tax preparation giant, H&R Block, has been sued for a number of fraud-related practices in connection with the sale of IRA accounts that were "virtually guaranteed to lose money."
The once folksy, consumer-friendly tax service that made its name in storefront outlets across the U.S. has morphed into a conglomerate that now fancies itself as a full-service financial adviser to mostly low- and middle-income families.
In doing so, the company has attracted the attention of a number of states with respect to questionable practices that have reaped tens of millions of dollars in fees and interest in connection with financial products of dubious value to its often cash-strapped clients.
In having its agents shift their goal from providing quick, inexpensive tax preparation to selling financial products that are loaded with hidden fees and high interest costs and penalties, H&R Block has snowballed into a company that is now publicly traded on the New York Stock Exchange.
In fact, even as government agencies and privately-brought class actions against the company are on the rise, federal banking regulators have ensured H&R Block's further growth by approving its venture into banking services (savings, checking, and other services) through a subsidiary business entity.
The New York action, brought in state Supreme Court in Manhattan, seeks $250 million in fines in addition to refunds to its clients for IRAs it sold to some 500,000 customers. Other states and a major class-action commenced this week in the company's home town of Kansas City, Missouri, have targeted H&R Block with similar claims.
According to Spitzer, the Express IRA program targeted mostly working families that found it difficult to save money in the current economy. Spitzer claims that about 85% of the account holders lost money after opening one of the Express IRAs that were sold to them with assurances that these IRAs were sound financial investments.
Once the IRAs were opened, the low interest rates simply could not keep ahead of the charges that included unadvertised account fees thereby making it "mathematically" impossible for the client to earn money.
Since H&R Block's tax preparers are not licensed to sell securities, the Express IRAs have only one investment option: an insured money-market account that pays very low interest.
While H&R Block continues to maintain that the Express IRA program is a sound one for its customers (and that the company has actually lost some $12 million on it since it began in 2001), Spitzer and a growing number of class-action attorneys and consumer advocates are not convinced. They see it as little more than a vehicle by which H&R Block has profited at the expense of its least affluent clients.
The New York action, as well as the class-action in Kansas City, also claims H&R Block breached its fiduciary duty to its clients and used deceptive and fraudulent business practices to steer customers to the Express IRA program.
Recently, H&R Block admitted it had understated its own 2004 taxes by $10 million and saw its tax liability increase by $17.5 million for another quarter. The company will restate profits for two years because of these accounting errors.
H&R Block has also been accused by the state of California of illegally marketing and selling high-cost loans in the guise of "instant" tax refunds. In late 2005, the company agreed to pay $62.5 million to settle four class-action lawsuits related to these "refund-anticipation loans."
The allegations of fraud, overreaching, and breaches of its fiduciary duty have left consumer advocates wondering how the Office of Thrift Supervision could have approved the application that permits H&R Block to enter the banking market. One such advocate even went so far as to call the approval "laughable."