New York appeals court reinstates case against H&R Block

Jan 08, 2009 (The Kansas City Star - McClatchy-Tribune Information Services via COMTEX) -- HRB | Quote | Chart | News | PowerRating -- A New York appeals court has reinstated a case brought by New York's attorney general against H&R Block Inc. over the tax preparation company's Express IRA product.

The Appellate Division in Manhattan ruled that the trial court was wrong to decide it had no personal jurisdiction over Block through the actions of its subsidiaries in New York.

But the appeals court found the trial court was correct to reject Block's argument that New York's attorney general has no authority to recover on behalf of non-New York residents.

About 600,000 customers nationwide have purchased Block's Express IRA.

"New York's vital interest in securing an honest marketplace in which to transact business was threatened when defendants used a New York business to complete the deceptive transactions at issue here by administering their money market fund, and advised customers that the New York business would be their 'authorized agent,' " the appeals court stated.

Nancy Mays, a spokeswoman for Kansas City-based Block, said the company was "disappointed by the court's decision" and believes it "to be in error."

"We will appeal this decision and we continue to defend vigorously the claims being made in the pending case," she said.

The case, which was originally filed by then-New York Attorney General Eliot Spitzer in March 2006, alleged that Block and a subsidiary, H&R Block Financial Advisors Inc., fraudulently marketed retirement savings accounts to customers. The suit said that 80 percent of the people who opened the Express IRA accounts lost money.

Spitzer asked for $250 million in actual damages and an unspecified amount in punitive damages, calling Block's conduct "particularly appalling because many of those hardest hit were working families who struggle to save."

The lawsuit charged that Block, the nation's largest tax-preparation firm, failed to properly disclose high fees associated with Express IRAs.

Block vigorously denied the allegations of fraud and abusive marketing and said Spitzer had ignored facts and had taken information out of context.

In a guest column in The Kansas City Star six days after the lawsuit was filed, Block's then-chief executive, Mark Ernst, wrote that Block was shocked by what he called Spitzer's "unfair attack."

"Contrary to the attorney general's claim," Ernst said, "Express IRA clients receive clear and comprehensive information not only on the benefits and advantages of tax and retirement savings, but also on product fees, with a strong focus on how they can avoid or minimize those expenses."

Block contended that the nearly 600,000 savers who had opened Express IRA accounts had accumulated more than $360 million and achieved additional tax savings. The company said 40 percent of those clients had never saved before.

In November 2006, the trial judge dismissed Spitzer's lawsuit, ruling that she did not have personal jurisdiction over Block because it was a Missouri company "that does not directly conduct business in New York" and has "no physical presence in New York."

But Spitzer's lawsuit triggered a dozen similar actions that were consolidated in mid-2006 in federal court in Kansas City. In August 2007, U.S. District Judge Richard E. Dorr rejected nearly all of Block's motions seeking to dismiss the cases, ruling that the plaintiffs -- investors who bought the product -- had met their initial burden of proof.

Kansas City lawyer Norm Siegel, lead counsel in the Missouri litigation, said that he and his fellow lawyers were coordinating their efforts with the state of New York.

"Certainly we have a common interest in seeing that the rights of Express IRA holders are litigated to their conclusion," he said.

To reach Dan Margolies, call 816-234-4481 or send e-mail to dmargolies@kcstar.com.

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