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Post date: May 8 2006

New Evidence Surfaces In H&r Block Case

Attorney General Spitzer today filed an amended lawsuit against the nation’s largest tax preparation company, citing additional evidence of fraudulent marketing of individual retirement accounts.

In his original complaint filed on March 15, the Attorney General alleged that the H&R Block Company steered hundreds of thousands of customers into IRAs with hidden fees and low interest rates. The complaint cited e-mails in which H&R Block’s own employees characterized the company’s Express IRA as a bad investment that they could not in good conscience recommend to clients.

In an amended complaint filed today in State Supreme Court in Manhattan, the Attorney General cites new evidence showing that the company’s senior management did more than simply ignore the concerns of its tax preparers; management penalized H&R Block tax professionals who refused to push the product.

"In addition to designing a flawed product with hidden fees and marketing it fraudulently to unsuspecting customers, senior management steam-rolled conscientious employees who objected to the fact that clients were losing money," Spitzer said.

The newly-obtained evidence cited in the amended complaint includes statements by former H&R Block employees indicating that:

  • Managers disregarded complaints from tax preparers about misleading marketing of the Express IRA;
  • Managers instructed tax preparers "to make a positive presentation" of the Express IRA and "avoid mention of negatives;"
  • Managers told tax preparers at conferences to "sell more IRAs" or "there’s the door;"
As late as the current tax season (2006), tax professionals who refused to sell the Express IRA because it was not appropriate for their clients had their access to customers limited by managers.

H&R Block introduced the Express IRA in 2002, claiming that it "paid great rates" and was "a better way to save," but the product paid less than one percent interest at times, and 85 percent of those who enrolled paid more in fees than they earned in interest.

The lawsuit specifically alleges that H&R Block failed to adequately disclose its fees to customers, failed to warn them that the interest paid would not cover the fees in certain circumstances, and misleadingly described interest rates as "great" when they were actually low. This incomplete and misleading disclosure violated New York’s consumer fraud law and was a breach of the company’s fiduciary duty to its clients.

Settlement discussions earlier this year broke down when the company balked at making full refunds to customers for undisclosed fees. The company now faces statutory penalties of up to $250 million if found to have violated the law.

The investigation was led by Assistant Attorney General James Park, with Assistant Attorneys General Gary Connor and Matthew Gaul and Economist Hampton Finer, and was supervised by David Brown, IV, Chief of the Investment Protection Bureau.


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