NEW YORK - The NASD accused H&R; Block Inc. yesterday of civil fraud for selling $16 million in Enron Corp. bonds in the weeks before the energy company collapsed in December 2001.
About 200 brokers for H&R; Block Financial Advisors Inc. sold the debt to more than 800 customers in October and November 2001, said the NASD, formerly the National Association of Securities Dealers. The value of the bonds plunged when Enron filed for Chapter 11 protection in December of that year in what was then the biggest bankruptcy in U.S. history.
"Hundreds of unsuspecting individual investors innocently relied on their H&R; Block brokers," said Mary L. Schapiro, the NASD's vice chairman and president of regulatory policy and oversight. "Brokers betrayed that trust by selling these investors highly risky Enron bonds."
H&R; Block, based in Kansas City, Mo., joins brokerages such as Merrill Lynch & Co. Inc., Citigroup Inc. and JPMorgan Chase & Co. in being accused of marketing Enron investments when the Houston energy trader was faltering. Enron was once the world's seventh-biggest company.
H&R; Block, the nation's top tax-preparation business, paid its brokers sales credits for the Enron debt that were "significantly higher" than those typically paid for similar bonds, the NASD said, and H&R; Block allegedly earned $500,000 in profit on the sales.
On Dec. 3, 2001, the day after Enron's Chapter 11 filing, its 6 3/8 percent bonds due in 2003 were trading at about 24 cents on the dollar, Deutsche Bank AG said at the time.
"My first reaction was, 'Oh, God, not another one,' " said Theodore T. Southworth, whose $345 million Northern Income Equity Fund owns 20,000 H&R; Block shares. "I can remember all of the Wall Street firms were recommending Enron stock all of the way down, never mind the bonds."
H&R; Block Financial Advisors has more than 1,000 advisers and 400 offices.
The company plans to fight the NASD allegations, spokesman Dan Grubbs said in a telephone interview. "We regret that our clients who bought Enron investment-grade bonds later experienced losses that were due to Enron's mismanagement and bankruptcy, not actions or omissions on the part of H&R; Block financial advisers," he said.
H&R; Block said its brokers offered clients the bonds at market prices then prevailing and that it didn't provide Enron with investment-banking or consulting services.
The NASD charged that H&R; Block brokers should have disclosed a number of risks associated with the bonds, including a ratings downgrade, a negative credit watch and a restatement of earnings because of accounting errors, all of which occurred before or during the period in question.
Some H&R; Block brokers told customers that an investment in Enron bonds was safe and that such a large company couldn't fail, the NASD said.
H&R; Block can file a response and request a hearing by a NASD disciplinary panel. The company said it disagrees with the NASD conclusions and expects its position to be "validated" after a hearing. The NASD can sanction the brokerage with a fine or suspend, bar or expel the brokerage from the NASD.
H&R; Block's shares rose 22 cents, or 4.5 percent, to close at $49.59 yesterday on the New York Stock Exchange after falling 4.3 percent during the session.