H&R Block wins dismissal of class action shareholder lawsuit in U.S.

Daily Record and the Kansas City Daily News-Press, Feb 20, 2008 by Aaron Bailey

A federal judge dismissed a class action lawsuit against H&R Block that alleged the company purposefully falsified financial statements to artificially inflate its stock prices.

U.S. District Judge Ortrie D. Smith's decision hinged on whether the Kansas City-based company intentionally issued the false statements to the Securities and Exchange Commission in 2004 through 2006, or if the statements were due to honest accounting errors.

Smith on Tuesday decided the plaintiffs failed to demonstrate H&R Block officials were purposely issuing inflated statements, due in part to the plaintiff's reliance on information from four confidential sources.

The lead plaintiff, Horizon Asset Management, a Washington-based company specializing in investments advising, claimed to have lost more than $6.6 million when H&R Block issued a corrected "restatement" of its financial assets in February 2006.

The restatement reflected lower financial earnings than previously reported, to the tune of about $32 million, because of errors in calculating the company's state income tax liability.

H&R Block's 2006 announcement caused its stocks to tumble, the suit alleged, affecting hundreds of thousands of stockholders.

The suit claimed the company purposely or recklessly inflated its earnings before the 2006 corrected restatement to drive up stock prices and sell about $400 million worth of the inflated stock.

H&R Block claimed the restatement was issued when accounting errors were detected and fully investigated in its financial earnings statements from 2004 through 2006.

Calls to H&R Block's attorneys, including lead counsel Christopher Javillonar with Bryan Cave's Kansas City office, were directed to H&R Block representatives.

"We are pleased with the court's decision and believe that it fully vindicates the company's long-standing commitment to full disclosure of all material information to our shareholders and the public," the company said in an e-mailed statement.

Lead local counsel for the plaintiffs, Patrick Stueve of Kansas City-based Stueve Siegel Hanson, did not immediately return a message seeking comment. Attorneys in California for Horizon Management also did not return messages seeking comment.

Smith's 10-page order granting the dismissal request focused on the weight that should be given to the plaintiff's four confidential informants.

According to court documents, the informants were former or current H&R Block employees who allegedly had first-hand knowledge that company officials knew they were issuing inflated financial statements.

While the issue was not whether the informants are named, Smith said the plaintiffs failed to assert that the informants had actual knowledge of intentional deceit.

The informants asserted that H&R Block officials were aware of possible accounting errors as early as 2004, more than two years before issuing the corrected financial statements.

Smith decided the informants failed to prove that the company was purposefully deceiving the public by releasing the inflated statements. The company began an internal investigation with the help of an outside auditor in 2004, Smith wrote in his ruling, "which negated an inference of an intent to deceive the investing public."

Smith had dismissed the lawsuit last year but allowed the plaintiffs to file an amended complaint to more clearly state a claim -- not just that H&R Block has "internal control weaknesses," but rather that it knowingly misled stockholders.

In that dismissal late last year, Smith also warned of previous higher court rulings that weakened the value of confidential informants in establishing that a defendant acted knowingly and purposefully: The 2007 U.S. Supreme Court ruling in Tellabs v. Makor Issues & Rights, and the 2007 8th Circuit ruling in Higginbotham v. Baxter.

"Even assuming the confidential informants' statements were reliable and true ... the statements merely showed that [H&R Block] knew it had problems involving its corporate tax accounting controls -- problems it repeatedly disclosed to investors beginning in July 2004," Smith wrote in Tuesday's order.

The order continued: "[The plaintiffs have] still not pled the facts giving rise to a strong inference that [H&R Block] acted with an intent to deceive the investing public by releasing incorrect financial statements."