Crackback Block
Spitzer filing for a return from tax preparer

1. Block Heads

If tax season gives you a sinking feeling, imagine what they're going through at H&R Block ( HRB).

This week New York state sued the tax preparer, accusing it of defrauding customers by steering them into money-losing individual retirement accounts . The suit seeks $250 million in damages and comes as H&R Block's fiscal fourth quarter is off to a slow start .

But slow is too kind a word to describe income growth in Block's Express IRA, Attorney General Eliot Spitzer says. "Customers were told that the IRA paid 'great rates' and was 'a better way to save,' but 85% of the customers who opened the accounts paid the company more in fees than they earned in interest," he said Wednesday.

An Express IRA account opened with the $300 minimum can expect to earn about $3 a year in interest, Spitzer says. But then there's a $15 setup fee, a $15 re-contribution fee, a $25 account termination fee and around $20 in so-called tax complexity fees for IRA-related tax forms. One Albany resident has seen the account lose 12% of its value over four years, Spitzer says.

"We have cooperated fully and provided volumes of data and detailed analyses to the Attorney General's office, but it has ignored all of the positives and has chosen to launch this attack," the Kansas City, Mo., company carps in response. "At a time when the country's personal savings rate has declined to minus 0.7%, we've helped 596,000 of our clients begin saving for their future."

That's nice, though it's not quite as compelling as the defense offered up by H&R Block's Wall Street lawyer. Even if Express IRA customers got fleeced, suggests Robert Abrams of Stroock & Stroock & Lavan, they surely can't match H&R Block's own ineptitude.

No, despite the ludicrous fees, "This effort has not created windfall profits for H&R Block," he says. "Indeed the company has lost money operating this program."

Oh well, maybe they can write it off on their taxes.

Dumb-o-Meter score: 93. Or maybe not, considering H&R Block's recent plan to restate earnings to fix a state tax error.

To view Colin Barr's video take on H&R Block's entry in Five Dumbest this week, click here .

Misbook 'Em, Nortel
Company accounting for the long run

2. Good Run

Nortel ( NT) got beaned by the bean counters again.

The Toronto-based telecom gearmaker just unveiled its latest financial fiasco . In its third restatement since 2003, Nortel will shave $866 million from previously reported sales to fix yet another round of accounting missteps .

By now Nortel has admitted to misbooking almost $4 billion in revenue over half a decade. But the company insists that new management finally has a handle on those slippery books.

"Although the need to restate certain financial statements is unfortunate, it's the right thing to do," said CEO Mike Zafirovski, who took over from interim chief Bill Owens last fall. "This revenue is real -- it was recognized in the wrong periods."

Small problem. Also questionable is Nortel's take on how the mistakes were made. The company admitted Monday it hadn't checked into that issue -- even though it was just two years ago that three top execs were cashiered for cause in the bonusgate number-fudging scandal . Nortel agreed last month to shell out $2.5 billion to settle shareholder suits tied to those shenanigans.

"While the company has not become aware of any wrongdoing as a result of this extensive contract review, and none was apparent, this review was not focused on conduct matters," Nortel said in a Monday evening clarification. "The company will continue to examine this aspect."

Sounds like a good plan. Of course, that's not all Nortel is doing for investors. The company "remains focused" on effective governance, improving internal controls and ensuring the integrity of financial information, it proclaims.

"We embarked on this marathon in December 2005 when we initiated the first phase of this plan," Zafirovski says. "We're making steady progress and our goal is to realize the full impact of our actions in 2008."

Judging by recent years, Nortel should be hitting the wall about then.

Dumb-o-Meter score: 88. "We cannot give assurances that a restatement will never happen again," Zafirovski purred on a conference call, according to Business Week.

3. Purple Prose

Keeping the Razr's edge is making for trying times at Motorola ( MOT).

The Schaumburg, Ill., wireless titan suffered a bit of a hiccup last week when it emerged that Cingular and T-Mobile had pulled the red-hot Razr phone off the shelves, citing a defect that caused dropped calls.

Motorola's quick reaction should mean that first-quarter sales won't be hurt too bad . But the company still has other issues. Soft sales of the Pebl and Slvr phones spoiled Motorola's fourth-quarter earnings party , due at least in part to supply constraints, and it's not clear that sales have picked up since.

Now, though, Motorola is answering the call in living color. The company said this week that it "is adding four beautiful shades to the smooth, pure lines of the iconic Pebl, showcasing the driving importance of color inspiration in the mobile space."

Skeptics might note that the iconic silvery Razr was out for more than a year before the company resorted to any colorful versions. That might suggest that the onset of green, pink, blue and orange Pebls is more a cry for help than an expression of strength.

But don't tell Motorola's vice president and director of consumer experience, Jim Wicks.

"We've gone from pink to 'whoa' -- leveraging our leadership in color and design to make the Pebl expressive and refreshing," Wicks says. "Combining a rich experience in technology with the value of self expression, the Motorola Pebl in living color is a break from the traditional and makes a deeper connection between consumer and mobile device -- it allows you to directly mix and match your mobile phone style."

We'll have to take his word for that.

Dumb-o-Meter score: 85. "This is a product you choose because you want it, not because you need it," Wicks adds.

Watkins You Do?
Why, 'whistle-blower' sold some stock herself

4. Whistling in the Dark

The Enron case hit a higher pitch this week.

The trial of former CEOs Ken Lay and Jeff Skilling moved into a seventh week. A pitched battle loomed as former exec Sherron Watkins took the stand to rehash her prediction that Enron was doomed to collapse in "a wave of accounting scandals."

Watkins testified Wednesday that she had confronted Lay with questions about some partnerships used to hide losses at Enron. The partnerships were cooked up by former finance chief Andrew Fastow, who has pleaded guilty to two felonies. Fastow is the government's key witness in the fraud-and-conspiracy trial. The defense has claimed there was no fraud at Enron, despite a wave of guilty pleas.

Watkins' comments to Lay, of course, immortalized her in 2002 as one of Time's Persons of the Year. "They took huge professional and personal risks to blow the whistle on what went wrong," Time gushed of Watkins and two others in what it deemed Year of the Whistle-Blower. In so doing they helped "remind us what American courage and American values are all about."

Values aside, Watkins didn't actually blow the whistle on anyone. She simply took her concerns to Lay -- a notoriously hands-off manager whose apparent response to Watkins' bracing warning was to keep pumping and dumping Enron stock.

And if that reaction dismayed Watkins, she had an odd way of showing it. She went on her own stock-selling spree in the months before Enron's December 2001 collapse. Though she hardly cashed out on the mind-boggling scale of Lay or Skilling -- they both took home tens of millions of dollars in compensation from Enron -- Watkins did sell $47,000 in Enron stock at the end of August 2001 and in the first week of October, after she had told Lay (but not regulators or anyone else who might want to know) about the problems.

Watkins admits the stock sales were "wrong" because she knew about Enron's travails, The Washington Post reports. "I had more information than the marketplace did," she said.

Turns out everyone at Enron shared certain values.

Dumb-o-Meter score: 85. In a charitable gesture totally unmotivated by his client's own sales, Lay's lawyer says Watkins' sales weren't illegal -- assuming there was no fraud.

5. Time Warp

Beat the Clock apparently was quite the pastime at Bear Stearns ( BSC).

The big Wall Street firm agreed Thursday to pay $250 million to settle Securities and Exchange Commission charges that it acted as a full-service facilitator for abusive traders in the mutual fund scandal. Alleged abuses at Bear's big clearing operation have been well-documented by TheStreet.com's Matt Goldstein.

"Bear Stearns was the hub that connected the many spokes of market timing and late trading, hedge funds, brokers and mutual funds," said Mark Schonfeld, director of the SEC's Northeast regional office.

Market-timing is a legal but frowned-upon trading strategy that some mutual fund families tried to stop. Late trading is the illegal buying or selling of mutual fund shares after 4 p.m. in order to take advantage of late-breaking, market-moving news.

Bear neither denied nor admitted the allegations, but the SEC certainly got hold of some interesting telephone tapes. In one August 2003 call, the head of Bear's Mutual Fund Operations Department seems to be touting the firm's full-service approach to uncouth market actions.


    Broker: Is there anything else you can think of that might -- that I could use -- any information that might be beneficial to me hearing now?
    MFOD Head: Well, just to let you know -- just to get you aboard -- we probably do the best clearance there is on the Street on market timing, because it is infrastructurally built that we have, you know, very good experienced people here.

Later, the conversation continues:


    Broker: What's the cut-off time?
    MFOD Head: ... You have plenty of time to do trades laughing . Pretty much a quarter to six, 5:45 to enter a trade.

Judging by that $250 million hit, Bear's probably not laughing now.

Dumb-o-Meter score: 82. At least now Bear's out of the woods on this charge.
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