Tax accounting franchise H&R Block agreed to pay regulators $825,000 to settle allegations that it helped a hedge fund customer engage in abusive trading practices that harmed mutual fund shareholders.
The NASD said that from October 2002 to July 2003, two brokers and a branch manager in its Orlando office enabled one of the brokers customers to sidestep mutual fund controls designed to block or restrict its market-timing transactions. The Kansas City, Mo.-based company will pay a $500,000 civil penalty and another $325,000 in restitution. H&R Block did not admit nor deny any wrongdoing.
"The enforcement action announced today, and similar cases we have brought in recent months, make clear that NASD expects firms to have enhanced procedures, systems and practices to ensure that illicit market-timing activities like these do not occur," said NASD Vice Chairman Mary Schapiro.
H&R Block recruited and hired the two brokers in September 2002 knowing the brokers were going to open accounts for hedge funds that intended to rapidly trade in and out of funds that discouraged such behavior, according to the settlement. The hedge fund customers were charged a flat 1% fee, higher than what was customary for fee-based accounts similar in size. The inflated fees were a kickback for the ability to market time funds.
Despite receiving 44 restriction letters from fund companies for its market-timing activity, H&R Block allowed the hedge funds to use linked accounts and open new accounts in other cities in order to continue timing the funds. The customer executed 64 inappropriate transactions that generated $325,000 in returns.
An investigation into the brokers who orchestrated the scheme is continuing, NASD said.