The National Association of Securities Dealers charged H&R Block Financial Advisors Inc., the investment arm of the tax prep giant, with fraud in the sale of $16 million worth of Enron Corp. bonds after the energy firm's finances and bond ratings had begun to collapse.
The NASD charged that during the five weeks before Enron filed for bankruptcy, Block's brokers made affirmative misrepresentations to customers, including representations that an investment in the Enron bonds was safe; touted the bonds' supposed benefits; and failed to disclose the risks associated with the bonds.
Responding to the charges, the Kansas City, Mo.-based company said that it disagrees with the NASD's conclusions and believes its position will be validated through the NASD hearing process.
"We deeply regret that our clients experienced losses from the devaluation of Enron bonds," said Nick Spaeth, H&R Block Inc. senior vice president and chief legal officer. "However, the lost value was the result of mismanagement and bankruptcy at Enron that later came to light, not the result of actions or omissions on the part of H&R Block Financial Advisors. At the time of sale, these bonds were rated investment grade by the national rating services, and evidence of internal fraud at Enron had yet to be discovered."
According to the NASD charges, from Oct. 29, 2001, through Nov. 27, 2001, some 200 Block brokers recommended and sold over $16 million worth of Enron bonds to more than 800 customers, for which Block received profits of more than $500,000. The NASD also alleged that the company paid its brokers "significantly higher" than usual sales credits on the Enron bonds as an incentive. Enron declared bankruptcy on Dec. 2, 2001, sending the value of the bonds plummeting.
"This is an especially troubling case where hundreds of unsuspecting individual investors innocently relied on their H&R Block brokers to give fair and honest advice concerning investments," said NASD vice chairman Mary L. Schapiro. "But H&R Block brokers betrayed that trust by selling these investors highly risky Enron bonds, using misleading information at a time when the brokers knew, or should have known, of the company's serious financial problems - problems which foreshadowed the collapse of the firm. That H&R Block gave the brokers extra financial incentives to sell these troubled bonds is simply intolerable behavior."
The NASD also charged that the company violated NASD rules by failing to establish and maintain an adequate supervisory system to monitor the sales of Enron bonds by its registered representatives.
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access