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NY Accuses H&R Block of IRA Marketing Fraud

March 16, 2006

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New York Attorney General Eliot Spitzer has filed suit against H&R Block, the nation's largest tax preparation company, accusing it of fraudulent marketing of individual retirement accounts (IRAs).

The suit alleges that the H&R Block Company steered hundreds of thousands of its clients into IRAs that were virtually guaranteed to lose money because of a combination of hidden fees and low interest rates.

"The conduct described in today's complaint is particularly appalling because many of those hardest hit were working families who struggle to save," Spitzer 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."

The Attorney General's office began the investigation in 2005 after receiving information from an H&R Block tax preparer.

Over the past four years, H&R Block opened more than half a million "Express IRA" accounts for its tax preparation clients. Customers were told that the IRA paid "great rates" and was "a better way to save," but 85 percent of the customers who opened the accounts paid the company more in fees than they earned in interest.

More than 150,000 H&R Block customers closed their accounts, incurring additional undisclosed fees, as well as nearly $6 million in tax penalties.

The civil complaint cites internal documents showing that H&R Block's senior management knew that many of its customers were losing money on their Express IRAs.

For example, in a 2002 email to Mark Ernst, the company CEO, a district manager complained about the impact of these accounts on customers: "I really don't think maintenance fees should exceed the amount of interest that we are paying on these accounts. Clients won't be happy seeing [their] investments decreasing ..."

Ernst forwarded this email to the Express IRA product manager and added his own comments: "The attached note . . . reflects the general sense that I think exists -- that Express IRA is the right thing for our clients, but the product is designed to nickel and dime clients to the point where our field people [don't] feel as good about the product as they should... ."

Some H&R Block employees (including the person who brought the information to the Attorney General) actually refused to promote the product to clients.

In 2003, an internal H&R Block report prepared by the Express IRA product manager described the growing concerns of tax professionals about the product in the following way:

"Top 4 reasons tax pros are not offering the product:

1. $15 setup fee – 'it's too steep for my clients'
2. $15 recontribution fee – 'they've already paid once, why charge them again?'
3. Low interest rate – 'my client will never make up the fee'
4. $10 annual maint. fee – 'my clients have to pay this in addition to the $15 fee.'"

The company's management took no action to address these concerns. Instead, H&R Block continued to tout the Express IRA as a good way for lower and moderate income people to save.

The complaint contends that the company pushed the Express IRA in an effort to encourage repeat customers for its tax preparation services and to maximize its fee revenue.

Spitzer's lawsuit specifically alleges that H&R Block, based in Kansas City, failed to adequately disclose its fees to its customers, failed to warn that the interest paid would not cover the fees in certain instances, and misleadingly described the interest rates as "great" when they were at times less than one percent annually.

This misleading and incomplete disclosure violated New York's consumer fraud law and was a breach of the company's fiduciary duty to its clients, the AG's office said. Relief sought includes an injunction from further violations of New York law, damages and civil penalties.

The company said it would defend itself against the allegations.

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