New York Sues H&R Block Over Alleged Investment Fraud
RENEE MONTAGNE, host:
And the giant tax preparation company, H&R Block, is being accused of fraudulently marketing a money-losing investment retirement account to its customers. The allegations are included in a complaint filed yesterday by New York Attorney General Eliot Spitzer. He is suing the company for a quarter-billion dollars. H&R Block denies the charges, and says it will continue to sell the IRA to its customers.
NPR's Jim Zarroli reports.
JIM ZARROLI reporting:
H&R Block files more than 15 million tax returns a year. In recent years, it's been urging customers to put their tax refunds into what's called an IRA Express account, and more than half a million have done so. In its commercials, H&R Block markets the IRA account as a way to save money.
(Soundbite of television ad)
Unidentified Man: (In H&R Block commercial) A while back, a young couple came into H&R Block, and I said, you know, if you open an Express IRA, you'll get a bigger refund. Then you can use the IRA to save for a house.
ZARROLI: But Attorney General Spitzer says the IRA Express account is not what it's cracked up to be. He says money deposited into the accounts can only be invested in money market funds, so they earn very low returns. What's more, Spitzer says, the company charges unusually high fees, like a $15-dollar setup fee, and a $10 annual maintenance fee.
Attorney General ELIOT SPITZER (Attorney General, State of New York): For 85 percent, remember this number, 85 percent of the customers who opened these accounts, the fees that were imposed exceeded the interest that was earned.
ZARROLI: That means someone who invests the minimum in an Express IRA, which is $300 dollars, would see it erode over the years. And Spitzer says H&R Block only disclosed the fees in tiny, hard-to-read disclaimers, not in its ads or marketing brochures.
Mr. SPITZER: They did not have the decency or the sense of fairness to disclose to these low-income clients that the fees that they were imposing would mathematically, necessarily outweigh the interest that was being paid on these accounts.
ZARROLI: Spitzer says Block knew what it was doing. He cited an e-mail from CEO Mark Ernst noting that some employees were unhappy about the product. This is the latest in a series of lawsuits filed by Spitzer, who's running for New York governor. He's waged controversial, highly-publicized battles against Wall Street analysts, insurance companies, and the recording industry, often winning big settlements. For its part, H&R Block said it tried to cooperate with Spitzer, and he responded by offering to settle the case. The company refused, and yesterday, it said it stood by its product.
Ms. JULIE McDOUGALL(ph) (H&R Block Representative): We're disappointed in Spitzer's actions. We don't understand them, but we're going to continue to offer this product.
ZARROLI: H&R Block's Julie McDougall says that when tax savings and credits are included, 78 percent of those who open IRA Express accounts make money. She also says the accounts have low minimum deposits, and that the fees are less than those charged by other IRAs.
Ms. McDOUGAL: They can open this account right at the tax desk when they're getting their refund, and put some or all of that refund money aside.
ZARROLI: This is the second embarrassing episode for H&R Block this year. In February, it acknowledged miscalculating its own tax liabilities, and had to restate earnings--not an easy admission for a company that makes its money doing tax returns. After yesterday's charges, nervous investors helped drive the company's share price down by 6.2 percent.
Jim Zarroli, NPR News, New York.