Tuesday, Nov. 9, 2004 | 10:54 a.m.
Securities regulators accused H&R Block Inc. on Monday of defrauding individual investors by selling them $16 million worth of bonds in the Enron Corp. in the five weeks before it collapsed amid a major accounting scandal.
Over 200 brokers at H&R Block's investments unit, H&R Block Financial Advisors Inc., sold the bonds to 820 customers in 40 states without telling them how risky the bonds were, according to a statement by the National Association of Securities Dealers, the private-sector regulator that oversees the securities industry.
H&R Block paid its brokers higher-than-usual commissions for the bond sales, which took place between Oct. 29 and Nov. 27, 2001, NASD said. At the time there were public signs that Enron, then an energy giant, was near collapse, it said.
H&R Block earned profits of over $500,000 on the sales, while investors in the bonds lost substantially all of their money when Enron declared bankruptcy in December 2001.
A spokesman for NASD, Herb Perone, said it planned "to ask for disgorgement of ill-gotten gains and restitution for the customers."
NASD's charges are detailed in a disciplinary complaint that it issued Monday to H&R Block Financial Advisors, a step that will lead to a hearing before NASD regulators and could prompt more formal disciplinary action against the brokers, including suspension or expulsion from the securities industry.
H&R Block said in a statement that it was "disappointed" by the charges, and it pointed out that the Enron bonds had carried an investment-grade rating, indicating a relatively safe investment.
"At the time of sale, these bonds were rated investment grade by the national rating services, and evidence of internal fraud at Enron had yet to be discovered," Nick Spaeth, senior vice president and chief legal officer of H&R Block Inc., said in the statement.
Spaeth added, "We deeply regret that our clients experienced losses from the devaluation of Enron bonds," pointing out that at the time of the sale, Enron was the United States' seventh-largest corporation and its stock was widely held.
"However," he wrote, "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."
NASD said public signs of Enron's shakiness were evident at the time of the bond sale.
During the five weeks in which H&R Block sold the bonds to what NASD called "unsuspecting" investors, the bonds' ratings were lowered and Enron's debt was placed on watch for possible further downgrades. Also during that time, Enron said it had overstated its profit for the previous four years by more than $552 million, and told the Securities and Exchange Commission that its problems threatened its ability to continue as a going concern.
Major credit agencies did not lower their ratings on Enron's debt to below investment grade until Nov. 28, 2001, when its plans to merge with a rival collapsed.
NASD also accused H&R Block brokers of telling customers that an investment in the Enron bonds was safe, that Enron was a large company that could not or would not fail, and that Enron's credit rating was higher than it was.
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