The NASD yesterday lodged fraud charges against H&R Block Financial Advisors Inc. for selling $16.4 million of Enron Corp. bonds to investors without warning of risks, shortly before the energy trading company filed for bankruptcy protection.
About 200 H&R Block registered brokers sold the bonds to more than 800 customers across 40 states between late October and November 2001. The brokers failed to disclose "serious and significant risks" with the debt, including recent downgrades of Enron by credit rating services, an ongoing securities probe, and a $552 million earnings restatement by Enron, regulators from the securities industry's oversight association said.
NASD officials said the Block case, one of the largest litigated by the self-regulatory organization, was unusual because it involved the failure to share troubling information about Enron, as well as higher payments awarded to brokers for selling the bonds. In some cases, brokers at H&R Block actively misled investors, according to the NASD complaint.
"Registered Representative G.R. told customer W.S. that Enron bonds were a safe, secure, and stable investment because Enron was one of the largest companies in the world and would not default on its bonds," the 13-page complaint said.
Just five weeks later, Enron filed for bankruptcy protection and the bonds became worthless.
The H&R Block advisers earned sales credits of between $10 and $17.50 per Enron bond, significantly greater than their typical commissions, the NASD said. In all, Kansas City-based H&R Block earned $500,000 in profits from the bond sales.
The NASD is seeking return of the profits, as well as restitution for investors, said deputy enforcement director James S. Shorris. "Firms need to be careful about what kinds of products they sell and recommend to their clients," Shorris said in an interview.
Dan Grubbs, an H&R Block spokesman, said the company regretted the investor losses but that they stemmed from "mismanagement and bankruptcy" at Enron, not the actions of Block's brokers.
Grubbs said the company would vigorously defend against the NASD charges, which he called "wrong" and "unfounded." Grubbs said there was "no directed sales effort to sell Enron bonds."
The case eventually will be heard by a three-member disciplinary panel and may be appealed to the SEC.
The NASD files more than 1,200 enforcement actions each year, said spokesman Herb Perone, and the majority of them are settled quickly. So far this year, the regulators have collected more than $79 million in fines.