H&R Block Inc.’s financial advisors unit was charged with fraud by the NASD for misrepresenting the risks to investors of bonds from Enron Corp. before the energy trader sank into bankruptcy.
The regulator said about 200 brokers at H&R Block Financial Advisors Inc. recommended and sold $16.4 million of Enron bonds to more than 800 customers in about 40 U.S. states from Oct. 29 to Nov. 27, 2001. Enron filed for Chapter 11 protection on Dec. 2, 2001, and the bonds lost most of their value.
The NASD said the brokers “failed to disclose the serious and significant risks associated with an investment in the bonds.” It also said H&R Block paid its brokers higher incentives than normal on sales of similar bonds, and made more than $500,000 in profit from the sales.
The sales force gave investors “misleading information at a time when the brokers knew, or should have known, of the company’s serious financial problems,” said NASD Vice Chairman Mary Schapiro in a statement. “That H&R Block gave the brokers extra financial incentives to sell these troubled bonds is simply intolerable behavior.”
H&R Block, based in Kansas City, Missouri, said it believes the charges will prove unfounded.
“We deeply regret that our clients experienced losses,” said Nick Spaeth, H&R Block’s chief legal officer, “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.”
A spokesman for the U.S. Securities and Exchange Commission, John Nester, declined comment on whether that agency might consider similar action. The NASD was formerly known as the National Association of Securities Dealers.