Regulators Fine H&R Block Unit for Trading Practices
KANSAS CITY, Mo. – A subsidiary of H&R Block Inc. (HRB) said Tuesday it has agreed to pay $500,000 in fines to settle charges that two former brokers helped a hedge fund engage in improper trading practices.
The National Association of Securities Dealers (search), the brokerage industry's self-policing organization, also required the investment division of the world's largest tax preparer to pay $325,000 in restitution to mutual funds affected by the improper trades.
The subsidiary, H&R Block Financial Advisors Inc. (search) , said it agreed to settle the case without admitting wrongdoing.
"The trading in question was isolated to two former financial advisers who executed unsolicited trades requested by one client," said Brian Nygaard, H&R Block Financial Advisor's president and chief executive, in a written statement.
Shares of Kansas City-based H&R Block Inc. were down 40 cents a share to $48.11 on the New York Stock Exchange, well off the stock's 52-week high of $61.
The NASD said that between October 2002 and July 2003, two brokers in the company's Orlando office allowed one of their customers, a New York-based hedge fund, to evade attempts by mutual funds to prevent the hedge fund from engaging in so-called "market timing."
Market timing is a type of rapid, in-and-out trading that is not illegal, but widely restricted by many funds because it skims profits from long-term shareholders.
The mutual funds sent 44 letters to H&R Block, trying to stop the hedge fund from making these types of trades. The NASD said the two Orlando brokers helped the hedge fund get around the restrictions by opening seven related accounts in both Orlando and New York City to continue the trading.
Investigators said the hedge fund made 64 transactions that violated the mutual funds' restrictions, collecting $325,000 in profits.
The NASD also said the brokers helped clients avoid restriction letters by switching who was listed as the broker of record on nine different accounts. In one instance, the broker of record was switched to a house account for the Orlando branch, a transfer that was approved by the office manager.
"The deceptive market timing practices found in this investigation do more than just violate securities regulations — they have a profoundly negative impact on investor confidence," NASD vice chairman Mary Schapiro said in a statement. "The enforcement action announced today, and similar cases we have brought in recent months, make clear that NASD expects firms to have enhanced procedures, systems and practices to ensure that illicit market timing activities like these do not occur."
Nygaard said the charges didn't involve illegal after-hours trading or sweetheart deals with the mutual funds. Nygaard also said the company restricted the trading and closed the client's account when it found out what the hedge fund was doing.
"Our firm took steps to close the accounts months before the NASD issued industry guidance on market timing in November of 2003," he said.
Company spokesman Dan Grubbs said the company has reviewed and made changes to its internal policies to prevent market timing in the future.
Last month, the NASD charged H&R Block Financial Advisors with fraud, claiming the company sold $16 million of Enron Corp. bonds to customers nationwide in late 2001 and touted them to be safe investments even as the energy-trading giant began to collapse. H&R Block is disputing those charges, which are not connected to the settlement announced Tuesday.