NASD charged that during the five-week period preceding the Enron bankruptcy filing – while Enron’s financial crisis was unfolding publicly and official investigations were being launched – H&R Block’s 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. From October 29, 2001 through November 27, 2001, 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. 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.
When Enron declared bankruptcy on December 2, 2001, the value of those bonds plummeted to a fraction of the original investment, causing most H&R Block customers who invested in the bonds to lose substantially all of their investment.
“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 L. Schapiro. “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.”
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, that Enron was a large company that could not or would not fail, and that Enron’s credit rating was higher than it was.
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.
Under NASD rules, a respondent named in a complaint can file a response and request a hearing before an NASD disciplinary panel. Possible sanctions include a fine, suspension, bar, or expulsion from the NASD.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2003, members of the public used this service to conduct more than 2.8 million searches for existing brokers or firms and requested almost 180,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web Site at www.nasd.com.
