As Spitzer’s War of Words with H&R Block Heats Up, Chances of a Settlement Dim

By Steven DiJoseph 

To be sure there are a number of crusading attorneys general around the U.S. who have battled powerful industries, giant corporations, and financial institutions. Some of the more prominent ones are Bill Lockyer (California), Greg Abbott (Texas), Bill Sorrell (Vermont), Steve Carter (Indiana), Charlie Crist (Florida), and Tom Corbett (Pennsylvania).New York, however, has a particularly consumer-protection oriented Attorney General in Eliot Spitzer. Long before he had any aspirations to run for Governor of New York, he was in the forefront of virtually every major investigation and prosecution involving the securities industry financial fraud, and identity theft.
Thus, it is not surprising that Spitzer found the results of his office’s investigation into the Express IRA program offered by <"">H&R Block particularly troubling.

In a massive lawsuit brought earlier in the week by Spitzer, tax preparation giant, H&R Block, was accused of a number of fraud-related practices in connection with the sale of <"">IRA accounts that were “virtually guaranteed to lose money.”

Regardless of the allegations made by any state attorney general, however, the goal of their investigations and prosecutions is to protect the people of their states, stop the illegal or unfair practices, and settle the matter without protracted and costly litigation.

The settlement aspect of state and even federal consumer litigation is extremely important since it seeks to obtain monetary penalties and refunds while not putting the industry or company involved out of business. In the case of major banking, insurance, and securities companies, settlements save thousands of jobs and avoid significant disruptions within the industry involved.

Thus, there was no reason to believe that the H&R Block matter would proceed any differently. There was a thorough investigation done, a public announcement of the results and the commencement of litigation to correct the alleged problem.

Apparently, however, that may not be the case this time. It seems H&R Block has riled Spitzer to the point where he doubts an amicable settlement will be possible.

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.

These allegations have apparently placed H&R Block in a difficult position since a settlement (coupled with recent tax “errors” of its own and other major settlements) would severely damage the company’s image.

This could hurt H&R Block both in what has become a highly competitive business (tax preparation) and in the eyes of federal regulators, who could use the settlement and any admissions or evidence obtained in the New York case as a reason to reopen (and possibly deny) the company’s banking application.

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.” 

H&R Block has therefore dug in its heels so far with respect to its defense of the Express IRA program.

In response, Spitzer claimed that he would seek “vast” fines and “penalties” for the company’s refusal to admit wrongdoing. Spitzer made no secret of the fact that he believed H&R Block had made a number of false and misleading statements during recent negotiations.   

Although Spitzer maintains that it is his office’s goal to keep companies “alive and viable” even when they have been engaged in egregious conduct, he sees the H&R Block’s press release and denials as making it “very difficult for me to imagine that we will settle.”

Spitzer was particularly infuriated by the denials of company CEO Mark Ernst of any wrongdoing whatsoever. The company, however, did not flinch and responded tat it would “stand by what we’ve said.”

Ernst had countered Spitzer’s his op-ed piece where he stated, “this suit is an unfair attack on a good product that plays a key role in our mission to help lower- and middle-income Americans start saving for retirement.”

The CEO went on to clam that Express IRA clients “receive clear and comprehensive information not only on the benefits and advantages of tax and retirement savings, but also on product fees, with a strong focus on how they can avoid or minimize those expenses.”

Ernst then made the allegation that Spitzer’s office had made a series of demands for settlements ranging from $30 million to $60 million and that the demands had been rebuffed because “the attorney general is simply wrong.”

Spitzer states that Ernst’s claim that settlement demands had been made are “flat out false,” since his office has never sought less than full restitution for H&R Block’s customers.

The Attorney General’s words clearly indicate a long battle is brewing since the company is “trying to justify behavior that can not be justified. I’m not hopeful that there’s going to be any quick resolution and we’ll dig deeper into the company.

Spitzer revealed a bit of the negotiations, himself, when he disclosed that contrary to H&R Block’s defense of the Express IRA program, the company had admitted it may have been guilty of inadequate disclosure of fees associated with the accounts.

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