Speaking of investing... H&R Block fraud?

[Norman Bernstein]

This one is yet another in a long line of examples of corporate irresponsibility that certainly ought to be criminal... if the allegations are true (bold emphasis mine):


NEW YORK - New York state filed a $250 million fraud suit Wednesday against H&R Block Inc., 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.

[ljb5]

Eliot Spitzer is the man!

Sometimes I wish he'd run for president, but I'm sure he'd have less power and get less done if he did.

[George Roberts]

Norman Bernstein ---

It certainly is appaling but ...

It may be that the tax benefit that the clients received from having an IRA even one that lost money over a short time period made the deal worthwhile for the client.

It may have been that:

The intent of the IRA was that a person could start an IRA on the filing deadline and then move it to a better IRA at a later date.

The IRS requires compliance with deadlines.

[ 03-15-2006, 04:10 PM: Message edited by: George Roberts ]

[Norman Bernstein]

George Roberts said:


It certainly is appaling but ...

It may be that the tax benefit that the clients received from having an IRA even one that lost money over a short time period made the deal worthwhile for the client.
Surely you're joking, right? Would any competent financial advisor ever do such a thing? When the money could just as well have been invested in a mutual fund that actually made money?


It may have been that:

The intent of the IRA was that a person could start an IRA on the filing deadline and then move it to a better IRA at a later date.
Now you're really stretching credulity to the absolute BREAKING point!

[George Roberts]

Norman Bernstein ---

There are federal deadlines for IRAs and such. Many people defer until those deadline making their contributions. (Many people do not even know how much they can contribute until their taxes are computed.)

Most new IRA accounts take 5-10 days to set up so they are out of the question. (After 5pm on a filing deadline there are very few choices available.)

These people are left with the option of paying 15-50% tax or making an IRA investment which will cost them 5-10%.

So would you want to pay 15-50% or pay 5-10%?

[Meerkat]

Why would these people wait until the last minute?

It gives an incentive to H&R tax "counsellers" to wait until the last minute so their victims will be forced to put their money in a fund that enriches H&R at their expense.

I'd dearly love to see Spitzer as US AG. Corporate rats would be running and squealing for cover in all directions! :D

[Norman Bernstein]

There are federal deadlines for IRAs and such. Many people defer until those deadline making their contributions. (Many people do not even know how much they can contribute until their taxes are computed.)

Most new IRA accounts take 5-10 days to set up so they are out of the question. (After 5pm on a filing deadline there are very few choices available.)
You're quite the contortionist, George.

Any ethical broker who was capable of actually receiving funds, even on the very last day and hour and minute of eligibility, could deposit those funds into any of a thousand possible vehicles overnight... and then transfer those funds to any OTHER investment, the following day.

If I called on my broker, with a check in hand, at 4:30 PM on December 31st, he could instantaneously establish an IRA account, and put those funds into a cash fund or T-bill fund... he wouldn't have to wait for the check to clear, because settlement time is 5 days. On the morning of January 1st (or, January 2nd), he could move those funds into a common stock or mutual fund of my choice. It doesn't take 5-10 days to establish an IRA account.

I KNOW this from personal experience, because I did just this several years ago on behalf of one of my daughters. It wasn't on December 31st, it was on the 28th, as I recall.... but the new account appeared in my online access by the end of the day.

Even if it DID take 5-10 days (which it most assuredly does NOT), would an ethical broker LEAVE a client's money in a vehicle that charges more in fees than it earns?

Why in the world are you trying to defend these sleazeballs?

Edited to add: sorry, it was a few days before April 15th... which is the deadline for establishing a new IRA for the previous tax year... my error.

[ 03-15-2006, 05:51 PM: Message edited by: Norman Bernstein ]

[ljb5]

George, do you honestly believe that Elliot Spitzer failed to consider any of the possible ethical explanantions and erroneously leapt to the conclusion that something foul was afoot?

You think that by glancing at a C&P of a news report you are able to find the explanation that has eluded the Attorney General of New York?

You're good -- but you're not that good.

[Meerkat]

I suspect George's middle name is Ebenezer and Charles Dickens wrote a book about his ancestors! ;) :D

[George Roberts]

ljb5 ---

It is not my intention to defend H&R Block. It is also not my intention to defend Elliot Spitzer.

I don't know all the facts. So I looked for a explanation. I presented that explanation here to show that H&R Block may have had a basis for their action.

I expect a trial in a courtroom is better than a trial in the news or on a bulletin board.

Norman Bernstein ---

A lot of people don't have brokers or bankers.

H&R Block customers often do not have enough money to meet the minimum amounts that brokers or bankers want.

[ 03-15-2006, 07:22 PM: Message edited by: George Roberts ]

[Norman Bernstein]

A lot of people don't have brokers or bankers.

H&R Block customers often do not have enough money to meet the minimum amounts that brokers or bankers want.
In 30 seconds of googling, I was able to find several discount brokers, and quite a number of banks, which will open an IRA account for $100... and a few who have NO minimum.

However, most IRA custodial corporations do charge an annual fee... $30 is typical. If you were a financial advisor, and you had a client who had only $100 available to invest in an IRA... would you advise that client to put it into an IRA whose fee would wipe out any possible tax advantage in the year of establishment?

There's been additional news on the H&R Block scam... since they're neither a broker nor banker, their IRA scam offered only fixed interest accounts, at pitifully low rates. An internal memo discovered by Spitzer revealed that it was H&R Blocks' intention (in their own words) to 'nickel and dime' the customer accounts.

Admittedly, none of us have access to the evidence... but if what Spitzer says is true, then these guys are lower than pond scum... and don't deserve ANY defense.

[ 03-16-2006, 01:13 PM: Message edited by: Norman Bernstein ]

[George Roberts]

Norman Bernstein ---

I heard H&R Block's side of the story. To keep it short:

Elliot Spitzer says 85% lost money.
H&R Block says 85% made money.

The difference is that H&R Block considers the tax benefits. Elliot Spitzer does not.

It also appears that those who made a contribution for only 1 year were lost money. Those who made contributions for several years made money.

Typical contribution was $300 each year. Almost any $300 IRA will lose money.

All in all the Attorney General appears to be gaming the system.

[Norman Bernstein]

Elliot Spitzer says 85% lost money.
H&R Block says 85% made money.

The difference is that H&R Block considers the tax benefits. Elliot Spitzer does not.

It also appears that those who made a contribution for only 1 year were lost money. Those who made contributions for several years made money.
Apparently NOT, George:


Still, the lawsuit said, "even taking into account as a 'gain' the tax benefits of opening an IRA , analysis of the accounts opened in 2002 -- the year when the Express IRA was first available nationwide and for which the most data is available -- shows that as of now, about 79% of H&R Block customers who opened accounts in 2002 have lost money."

Spitzer's statement offered examples of two New York state residents: A 32-year-old Albany resident with taxable income of $17,847 made a one-time contribution of $300 to an Express IRA in 2002. Over four years, the investment earned $10.29 in interest while incurring $45 in fees.

A 68-year-old Brooklyn resident with taxable income of $25,421 made a one-time contribution of $300 to an Express IRA in 2004. The consumer paid a $15 account opening fee, a $10 account maintenance fee, and a $25 closing fee when the account was closed after 18 months. The account earned $5.18 in interest.

[Gary E]

If you were a financial advisor, and you had a client who had only $100 available to invest in an IRA... would you advise that client to put it into an IRA whose fee would wipe out any possible tax advantage in the year of establishment?
Norm,
In this case the "advisor" is the TAX PREPAIRER, a Block EMPLOYEE.

In THIS case would the client have the knowledge to ask what he was getting into? and what the fee's were? and how much the "advisor's" commission was? Wonder if this could be like life insur commissions that are actually more than the yearly prem.

This is just another way that the so called "advisors" take very unfair advantage of people that dont know.

Was it Block or another like tax company in the news some time ago? something about under reporting THEIR tax liability?

[Norman Bernstein]

Geez, I almost missed this:


A 68-year-old Brooklyn resident with taxable income of $25,421 made a one-time contribution of $300 to an Express IRA in 2004. The consumer paid a $15 account opening fee, a $10 account maintenance fee, and a $25 closing fee when the account was closed after 18 months. The account earned $5.18 in interest.
Ahh, H&R Block advised a 68 year old with a $25K income (probably half of which was S.S. benefits) to open an IRA account?

Spin your way around THAT one!

[Gary E]

Spin your way around THAT one! I dont follow you...Do you think that's ok? or unfair advantage?

[Norman Bernstein]

I dont follow you...Do you think that's ok? or unfair advantage? I think I'd describe it as criminal fraud.

68 year old people, who are almost undoubtedly retired and drawing S.S., shouldn't be establishing brand new IRA's. The benefit of an IRA is the fact that the growth is untaxed; the dollars that come out of it are taxed like ordinary income; if there's no tax free growth, there's no benefit. Anyone without a long enough horizon to see the principal of their IRA compounding, tax free, shouldn't be establishing an IRA for the first time.... it defies logic!

[ 03-16-2006, 01:43 PM: Message edited by: Norman Bernstein ]

[Gary E]

I agree and in this case the Block guy should be hauled in to re imburse the fellow for all of the lost $$, pay a hefty fine and be banned from ever working in that field again.

[ljb5]

H&R Block's primary product is advice.

Even if we assume that it was actually a good investment (or that it lost money as it was supposed to) -- the fact that 150,000 investors are unhappy with it proves that Block failed to properly educate their customers about the performance of the account.

If the account was supposed to lose money for tax reasons and all the customers understood this, they would be happy about the outcome.

Happy, well-informed customers whose investments perform as expected don't sue.

<hr>George --- of course H&R Block says they're innocent. Duh. That's what all criminals say.

[ 03-16-2006, 02:09 PM: Message edited by: ljb5 ]

[George Roberts]

I remember a little tax firm that was prosecuted by the federal government a few years back. Something about destroying evidence - paper shreading. That little tax firm went under while waiting for the trial and all.

Arthur Anderson was the name. Highly respected.

Oh, those prosecuted were found NOT GUILTY.

And yes, I predicted the outcome. So did everyone else who looked at both sides.

---

I don't take sides in the fight. I simply brought out the truth as H&R Block sees it. Feel free to believe what you will.

Both banks and H&R Block sell only money market funds. You might consider what banks were offering in terms of performance for IRAs in that time period. Let's sue the banks also.

[ljb5]

Originally posted by George Roberts:
Oh, those prosecuted were found NOT GUILTY.
Technically, they were convicted --- later overturned.

Michael Jackson was found not guilty... I suppose that means you would have no problem with him babysitting your kids for the weekend?

[ 03-16-2006, 03:39 PM: Message edited by: ljb5 ]

[Dan McCosh]

You have to be sympathetic to HR Block and other new players in the loan-sharking business. It hasn't been legal all that long,and they haven't figured out the ethics of the business. The old-type sharks were more honest upfront.

[Gary E]

and had lower rates

[Norman Bernstein]

Both banks and H&R Block sell only money market funds. You might consider what banks were offering in terms of performance for IRAs in that time period. Let's sue the banks also. If a bank sold a 68 yr old, with a $25K/yr income, an IRA with a negative rate of return, KNOWING it would be negative, the bank ought to be strung up by the gronicles, as well.

There's a distinction between 'let the buyer beware', and taking outrageous advantage of people too unsophisticated to understand what they're doing. If you KNOW that you're screwing the consumer, that's not 'good business'.... it's positively immoral.


I don't take sides in the fight. I simply brought out the truth as H&R Block sees it. Feel free to believe what you will.
you seem to be believing H&R Block's point of view... despite evidence to the contrary, on at least one very key point (rate of return after tax advantages are figured in).

WHY do you take their side?

[ 03-16-2006, 05:09 PM: Message edited by: Norman Bernstein ]

[George Roberts]

I was not taking sides. I had an hour's drive to pick up some client information and I did some math:

0% interest using H&R BLock fees.

Elliot Spitzer math (for 4 years):

300 (IRA contribution) + 45 (Tax advantage) - 25 (fees)
0 + 0 - 10
0 + 0 - 10
0 + 0 - 35 - 75 (taxes and early withdrawal penalty)

Net loss: $110

H&R Block math (for 4 years):

300 + 45 - 25
300 + 45 - 10
300 + 45 - 10
300 + 45 - 35 (termination to transfer to different investment)

net gain: $100

---

It appears Elliot Spitzer is extorting H&R Block. If this goes to court, he will be eaten up.

---

Edited to add:

My wife is a CPA with a tax practice. Her client's are a bit more upscale than H&R Block's.

[ 03-16-2006, 05:53 PM: Message edited by: George Roberts ]

[Meerkat]

No fool like an old fool.

[ljb5]

Do you really get the tax advantage every year?

Can you explain where you came up with that number?

If your math were correct, they would have 150,000 happy customers.

Instead, they have 150,000 angry customers.

Makes me think your math is wrong.

[ 03-16-2006, 05:59 PM: Message edited by: ljb5 ]

[George Roberts]

ljb5 ---

You get the tax advantage for each contribution you make. $300/year at 15% tax bracket is $45/year.

[ljb5]

Well, George, if you're right they should have no trouble explaining it to Mr. Spitzer.

Perhaps they should have explained it to their clients before they invested.

As we know, investments aren't guaranteed to go up. No one expects a guaranteed positive return -- just honest marketing and appropriate management.

The allegation in the suit is not that they lost money --- but that they were deceived.

Deception, or fraudulent marketing, should not be part of the standard risk of investing.

I still disagree with your math because I suspect Mr. Spitzer can also do math -- but you haven't offered any explanation of why Block's customers are so upset if they got the benefit that they were promised.

If that were the case, they'd be happy.

[ljb5]

George, why don't you try calculating again...

This time, use the H&R Block method, but assume one initial contribution of $300, followed by three years of no contributions --- and then the fee to close the account.

I've done the math over here. You do the math over there and we'll compare results when you're ready.

[ 03-16-2006, 06:26 PM: Message edited by: ljb5 ]

[George Roberts]

ljb5 ---

I used the assumptions that my wife would make for the H&R Block clients.

The clients were upset because they took out their IRA money before retirement and H&R Block was required to withhold.

Braam Berrub ---

I thought my first line notation of each item in the "+" expression was sufficient to explain each line.

---

[ljb5]

If you tickle the numbers enough, you can make them giggle....

But that still doesn't explain 150,000 ticked off clients.

Think of it this way: </font> H&R Block obviously has an incentive to take their clients' money</font> H&R Block obviously has an incentive to deny any wrongdoing</font> Elliot Spitzer has no incentive to falsely accuse them</font>The only incentive that isn't readily apparent is yours --- usually companies have to pay people to slobber all over them like you are.

[ 03-16-2006, 10:28 PM: Message edited by: ljb5 ]

[Paul G.]

sounds like a good scheme to fleece ma and pa investors, I am guessing here but I would imagine an aggressive sales campaign would net plenty of people who start but drop out early.

Its all about making a few free bucks lots of times, Like the banks....they offer zero or low fees but if you happen to write a cheque that is a few dollars more than your limit, the dishonour fees are eye watering :eek:

[Norman Bernstein]

George Roberts wrote:
The clients were upset because they took out their IRA money before retirement and H&R Block was required to withhold.
This was obviously NOT the case, in the situation where they sold one of these crap plans to a 68 year old!

I'm sure that this wasn't the only example which makes up Elliot Spitzer's case... he's earned his reputation for agressively going after people like this.

[Norman Bernstein]

Because of my interest, I located the actual complaint by Spitzer on the case... and it's one hell of a lot more shocking than even I thought:

http://www.oag.state.ny.us/press/2006/mar/mar15a_06 .html (http://http://www.oag.state.ny.us/press/2006/mar/mar15a_06.html)

A number of things were not stated in the press reports on this case, which add further insult to injury:

First, H&R Block didn't merely make money on the account fees. They made money in several other ways:

1) Many of these accounts were opened with a Refund Anticipation Loan, which is nothing more than a high interest short term loan often used by poor people who desperately need the cash from a tax refund... so the opening of the account cost them not just the fees, but the interest on the loan. 80% of clients funded their IRA this way

2) The establishment of the IRA account automatically 'bumped' the tax preparation fees that H&R Block charged, because it required a switch from the 1040EZ form to the 1040A form. In essence, this plan had the effect of generating more tax preparation profits for H&R Block.

3) The overwhelming majority of accounts were opened by people with less than $30K of annual income; almost half were opened by people earning less than $20K. These people pay little or no federal tax, so there was little or no tax advantage in opening the account!

4) H&R Block was aware that a substantial percentage of their clients qualified for welfare and food stamps... and that having retirement assets would jepoardize thier client's qualifications to receive this aid... yet failed to inform them.

Spitzer's complaint cited even more egregious examples than the ones cited in the press:


A 40-year-old resident of Jamestown, New York, with a taxable income of$4,084 made a one-time contribution of $300 to a Traditional Express IRA in 2002. Given the Jamestown resident's low income, it is unclearwhether the resident received a tax deduction. Even if the resident did, thededuction was immediately lost because the resident closed the accountjust seven months later, likely incurring a 10% early withdrawal taxpenalty of $30. The account earned just 47 cents in interest but wascharged a $15 opening fee, an IRA form fee of $9.21, and a closing fee of$75. Because of fees and penalties totaling $129, the Jamestown resident's investment declined in value by 43% in just seven months.

A 41-year-old resident of Amsterdam, New York, with a taxable incomeof $8,932 made a one-time contribution of $300 to a Traditional Express IRA in 2003. While the Amsterdam resident may have received anupfront tax deduction, that deduction was immediately lost because the resident closed the account three months later, likely incurring a 10% early withdrawal tax penalty of $30. The account earned just $.91 cents ininterest but was charged a $15 opening fee, IRA form fee of $9.18, and a $25 closing fee. Because of fees and penalties totaling $79, the Amsterdam resident's investment declined in value by 26% in just three months.

A 40-year-old resident of Verona Beach, New York, with a taxable income of $17,828 made a one-time contribution of $300 to a Traditional ExpressIRA in 2005. The Verona Beach resident may have received a Saver'sCredit of $150 and an upfront tax deduction. However, the deduction was lost because the resident closed the account just 10 months later, likely incurring a 10% early withdrawal tax penalty of $30. The account earned just $4.41 in interest but was charged a $15 opening fee, an IRA form feeof $12.99, a Saver's Credit form fee of $15.18, and was charged a closingfee of $25. More than 62% of the value of the Verona Beach resident'sSaver's Credit went to paying fees and penalties totaling $93.76.
Additional statistics on these accounts:



Of the customers who opened accounts in 2003, 37% have lost money todate. 38% of the 2003 accounts have closed or have a balance under $10.Of the 2003 accounts, 36% had total contributions of $300 or less. Morethan 58% of customers with these $300 accounts have lost money and nearly half (47%) have closed their accounts or have reduced their balance to less than $10.

Of the customers who opened accounts in 2005, 36% have lost money todate. 19% of the 2005 accounts have closed or have a balance under $10.

Of the 2005 accounts, about 54% had total contributions of $300 or less.More than 44% of customers with these $300 accounts have lost moneyand 18% have closed their accounts or have reduced their balance to less than $10. I'm actually staggered by the incredible, overwhelming, amoral GREED of H&R Block... selling a $300 IRA account to a person with $4000 annual income?

You have to spin VIOLENTLY to justify this sort of thing!

[Norman Bernstein]

I forgot to mention:

The incentive, for H&R Block employees, to sell this pig was $100 for getting five customers to buy... paid in the form of a deposit to the same kind of account, on behalf of the employee.

In other words, H&R Block was making money off their own employees' incentive plan!

[ 03-17-2006, 09:00 AM: Message edited by: Norman Bernstein ]

[Gary E]

I wonder if Henry W Bloch will stand up and take some responsibility in this, or will he do a Ken Lay of Enron and say....uhhh...everythings okedoke here, I didnt know, was some other's idea, you mean thats' not legal?...uhh a respected consultant guy named Geo out in OK said it wuz ok...

HRB is taking a dive... SHORT IT

[ 03-17-2006, 09:25 AM: Message edited by: Gary E ]

[George Roberts]

Norman Bernstein ---

H&R Block charges for tax prep by the form. 1040 has one charge; Schedule C has a diferent charge. The employees are paid by the form. All firms that do production processing of forms charge that way.

Refund anticipation loans are done by a lot of firms. No one says they are good for the consumer.

We had a client we did not want. Old. Fixed income of $25k/year. Wanted someone to talk to. She ran up $5000 in chargable phone time in 1 week. No content in the phone calls. Just rambled on.

Did we take advantage of her?

[Norman Bernstein]

H&R Block charges for tax prep by the form. 1040 has one charge; Schedule C has a diferent charge. The employees are paid by the form. All firms that do production processing of forms charge that way.
Absolutely.... that is totally understandable. However, if H&R Block failed to inform the client that by initiating a money-loosing IRA, they would also have to pay more for tax preparation (11-18%, according to the complaint), then it engaged in 'deceptive practices'.


Refund anticipation loans are done by a lot of firms. No one says they are good for the consumer.
Yes... it's the closest thing to legal loan-sharking that exists today... aside from certain credit card fees, of course. There are, and will always be, ways to make money that are more or less ethical... but someone who takes on the de-facto role of 'financial advisor' (which is essentially what H&R Block does when it sells products like the IRA) has, or certainly SHOULD have, a fiscal responsibility to the best interests of the client. Did THEY?


We had a client we did not want. Old. Fixed income of $25k/year. Wanted someone to talk to. She ran up $5000 in chargable phone time in 1 week. No content in the phone calls. Just rambled on.

Did we take advantage of her? It's a simple fact of life in that kind of business.... like 'pro bono' work for lawyers. i OFTEN do the same, spending time on the phone with former clients which is not billable time. It's good customer relations.

In your case, if you billed her for the time and didn't explain to her that her calls were costing her substantial money, then you would have been less than honest in your dealings with her. If she was informed and paid the bill willingly, against advice, so be it.

[ljb5]

Originally posted by George Roberts:
We had a client we did not want. Old. Fixed income of $25k/year. Wanted someone to talk to. She ran up $5000 in chargable phone time in 1 week. No content in the phone calls. Just rambled on.

Did we take advantage of her?If you failed to disclose your billing structure and charged her $5000 for the week, then yes you did take advantage of her.

If you billed her for time in which you were not actively working on her behalf, then yes you did take advantage of her.

When you realized she was just rambling on, you should have said, "Excuse me. If we don't have any business to conduct, I'm going to have to get off the line." And then hang up and stop billing her.

Honestly, George, I think I just gained a whole new understanding of your 'ethics.'

[ 03-17-2006, 10:07 AM: Message edited by: ljb5 ]

[Gary E]

With those kind of practices why would anyone call Geo?... maybe once, but why in the world the second time????