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February 19, 2010

H & R Block Financial Adviser Claims: Securities Fraud Law Firm Shepherd Smith Edwards & Kantas LLP Investigating Inadequately Supervised Reverse Convertible Notes for Investors

Our securities fraud lawyers are looking into claims by investors regarding their purchase of reverse convertible notes from H&R Block Financial Advisors. Just this week, the Financial Industry Regulatory Authority imposed a $200,000 fine on the broker-dealer for failing to set up proper supervisory systems over RCN sales. H & R Block was also ordered to pay $75,000 to an elderly couple that sustained financial losses from their RCN investments.

FINRA found that not only did H & R Block fail to properly monitor customer accounts for possible RCN over-concentrations, but they also failed to detect and respond to these possible over-concentrations. This is FINRA's first enforcement action over RCN sales.

Reverse Convertible Notes
An RCN is usually an issuer’s high-yield short-term note that is a put option connected to the performance of an unrelated asset (such as an index or a common stock). Upon maturity of the RCN the investor should either get a predetermined amount of shares of the linked equity or the full principal investment. The higher the coupon rate, the greater the expected volatility and the chances that shares will be paid. Risks that accompany RCNs include inflation risk, issuer default, and the underlying asset risks. Most RCNs require an initial investment of $1,000/unit. The majority of maturity dates run from 3 -12 months.

FINRA has issued an Investor Alert called Reverse Convertibles - Complex Investment Vehicles to help consumers better understand RCNs. It also put out Regulatory Notice 10-09 to remind broker-dealers of their sales practice obligations when selling RCNs to retail investors.

Please contact our stockbroker fraud law firm to discuss your H & R RCN investments. Shepherd Smith Edwards & Kantas LLP has successfully helped thousands of clients recover their investment losses.

FINRA fines, suspends Andrew MacGill over sale of revertibles, Bizjournals, February 15, 2010

Reverse Convertibles—Complex Investment Vehicles, FINRA

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February 17, 2010

FINRA Fines H & R Block Financial Advisors (Now Ameriprise Advisor Services) over Sales of Reverse Convertible Notes (RCN)

The Financial Industry Regulatory Authority (FINRA) has fined H&R Block Financial Advisors (now Ameriprise Advisor Services) $200,000 for failing to put in place the proper system to supervise its reverse convertible notes (RCN) sales to retail clients. FINRA also suspended H & R broker Andrew MacGill for 15 days while ordering him to pay a $10,000 fine and $2,023 in disgorgement for making unsuitable RNC sales to a retired couple. MacGill recommended that they invest close to 40% of their total liquid net worth in RCNs. Meantime, H & R Block has been ordered to pay the couple $75,000 in restitution for their financial losses. Without denying or admitting to the charges, the brokerage firm and MacGill consented to the finding’s entry.

According to FINRA, between January 2004 and December 2007, H&R Block sold RCNs without a system of procedures in place to properly monitor whether possible over-concentrations in RCNs were taking place in customer accounts. FINRA says that the brokerage firm relied on an automated surveillance system to monitor client accounts and review securities transactions for unsuitability but that the system was not set up to monitor RCN placement in customer accounts or RCN transactions. This caused H & R Block to miss signs of when there were potentially unsuitable levels of RCN in client accounts. Furthermore, FINRA says that the firm failed to provide guidance to its supervisors regarding the assessment of suitability standards related to their agents' recommendation of RCNs to the firm’s clients.

This is FINRA’s first enforcement action over RCN sales.

Reverse Convertible Notes
Reverse convertible notes offer a high coupon in return for the risk of getting shares valued at under the initial principal. Richard Ketchum, FINRA chief executive and chairman, has noted that it is not recommended for a client to place a significant chunk of one’s life savings into these kind of high risk, complex investments.

FINRA has issued Notice to Members 10-09 cautioning the entire brokerage community about their sales practice obligations to the investing public when it comes to RCNs and other risky “Complex Investment Vehicles.”

If you think you might have sustained investment losses because of unsuitable reverse convertible notes, contact our securities fraud law firm immediately.

Related Web Resources:
Regulator fines H&R Block $200K for poor controls, MarketWatch, February 16, 2010

Regulatory Notice 10-09, FINRA

FINRA Fines H&R Block Financial Advisors $200,000 for Inadequate Supervision of Reverse Convertible Notes Sales, FINRA/Business Wire, February 16, 2010

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June 30, 2007

H&R Block Earnings are Sunk by Subprime Mortgage Unit.

H&R Block reported a loss of $433.7 million for its fiscal year 2007, compared to a gain of $490.4 million a year ago, and it lost $85.6 million in the fourth quarter vs. a gain of $587.5 in the year earlier period. The losses can mostly be attributed to Option One, its subprime mortgage unit, which the company hopes to soon sell.

The nation's largest tax preparer was started in Kansas City by Henry and Roger “Bloch” brothers when the IRS stopped preparing tax returns free in 1955. The firm has been hugely successful in that business – for a few months out of the year. Yet the firm has been mostly unsuccessful in other ventures seeking to earn revenues the rest of the year.

Its investment subsidiary, H&R Block Financial Advisors, arose from the Block’s purchase of Olde Financial Company in 1998 for $850 million. At the time Olde and its founder were in the midst of many regulatory and other woes, many of which Block inherited.

The parent firm’s latest report states: “Conditions in the non-prime mortgage industry continued to be challenging during the 2007 fourth quarter. Mortgage operations were particularly impacted by deteriorating conditions in the secondary market, where reduced investor demand for loan purchases, higher investor yield requirements and increased estimates for future losses reduced the value of non-prime loans,” the report adds.

Block hopes to receive over $1 billion from sale of this subsidiary, but some analysts are doubtful this can be accomplished and others believe any sale would be at a fraction of Block’s asking price.

Shepherd Smith and Edwards is a securities law firm which represents investors nationwide in claims against investment firms. To learn whether our firm can assist you or your firm, contact us to arrange a free confidential consultation with one of our attorneys.

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