The National Association of Securities Dealers today accused H&R Block Inc. of fraud for misleading investors in the sale of more than US$16 million of Enron Corp. bonds.

The regulator charged that during the five-week period preceding the Enron bankruptcy filing (October 29 through November 27, 2001) — while Enron’s financial crisis was unfolding publicly and official investigations were being launched — approximately 200 H&R Block brokers recommended and sold over $16 million worth of Enron bonds to more than 800 customers in approximately 40 states. When Enron declared bankruptcy on December 2, 2001, the value of those bonds plummeted, causing most H&R Block customers who invested in the bonds to lose substantially all of their investment.

It alleges that the brokers made affirmative misrepresentations to customers, touted the supposed benefits of the Enron bonds, and failed to disclose the serious and significant risks associated with an investment in the bonds. As an incentive, H&R Block paid its brokers sales credits significantly higher than those typically paid for similar bonds. NASD charged that H&R Block received profits of over $500,000. None of these allegations have been proven.

The NASD charged that H&R Block’s representatives failed to disclose risks of investing in the bonds, including:

  • that Enron had recently experienced a number of credit rating downgrades by major rating agencies; that the bonds were on negative credit watch for additional potential downgrades;
  • that Enron had restated its financials for the past four years by over $552 million for accounting errors;
  • that Enron had disclosed in a public filing with the Securities and Exchange Commission that its financial problems were threatening its ability to continue as a going business concern;
  • that the SEC was conducting an investigation into investments associated with partnerships related to the company; and
  • that H&R Block itself had removed another Enron security from the firm’s approved list because of concerns about, among other things, the company’s debt ratings and the SEC investigation.



NASD also alleged that some H&R Block brokers made affirmative misstatements to customers, including representations that an investment in the Enron bonds was safe.

In addition, NASD charged that H&R Block violated NASD rules by failing to establish and maintain an adequate supervisory system to monitor the sales of Enron bonds by its registered representatives.

“This is an especially troubling case where hundreds of unsuspecting individual investors innocently relied on their H&R Block brokers to give fair and honest advice concerning investments,” said NASD vice chairman Mary Schapiro, in a release. “But H&R Block brokers betrayed that trust by selling these investors highly risky Enron bonds, using misleading information at a time when the brokers knew, or should have known, of the company’s serious financial problems – problems which foreshadowed the collapse of the firm. That H&R Block gave the brokers extra financial incentives to sell these troubled bonds is simply intolerable behavior.”