NEW YORK – New York state filed a $250 million fraud suit Wednesday against H&R Block Inc. (HRB), the nation's largest tax preparing service, charging the company fraudulently steered customers into a losing retirement account plan.
The news unnerved investors, who sent H&R Block shares down $1.30, or almost 6 percent, to $20.70 in midday trading on the New York Stock Exchange.
The lawsuit, filed in Manhattan's state Supreme Court, says Block advised clients to buy an "unsuitable, fraudulently marketed, poorly performing, fee-ridden 'retirement vehicle' called the Express IRA," an account that actually shrinks over time.
The court papers, filed by Attorney General Eliot Spitzer, say the money in the retirement account decreases because the only investment option offered is a money market account with an interest rate so low that it does not cover the fees — "fees that H&R Block fails to adequately disclose."
The attorney general's lawsuit asks that the company be required to stop engaging in any fraudulent practices, that the company be forced to disgorge profits and pay damages and restitution caused by their scheme, and that it pay civil penalties of no less than $250 million.
H&R Block said in a statement that it will "fight vigorously to defend the Express IRA product and ensure it remains available to our many clients who rely on it as a helpful savings option."
"Make no mistake — we believe in the Express IRA product and are proud of the opportunities it presents for our clients," said Chairman and CEO Mark A. Ernst.
Spitzer said that H&R Block opened more than half a million Express IRA accounts in the last four years. He said 85 percent of customers who opened the accounts paid H&R Block more in fees than they earned in interest. More than 150,000 customers closed their accounts, incurring additional undisclosed fees and almost $6 million in tax penalties, Spitzer said.
The investigation by the attorney general's office was launched in 2005 after it received information from an H&R Block tax preparer.