HR Block 2006 Annual Report Download - page 136

processes will afford adequate protection against such risks. Because the financial statements. Credit risk is mitigated by our evaluation of the
we sell or securitize almost all of the mortgage loans we originate, any creditworthiness of potential borrowers on a case-by-case basis.
potential credit problems will be reflected in our consolidated financial Risks to the stability of Mortgage Services include external events
statements in the fair value of the residual interests we hold in impacting the asset-backed securities market, such as the level of and
securitizations, or our recourse reserves established on loans sold to fluctuations in interest rates, real estate and other asset values, changes
third parties. in the securitization market and competition.
Commitments to fund loans involve, to varying degrees, elements of
credit risk and interest rate risk in excess of the amount recognized in
NOTE 17: LITIGATION AND RELATED CONTINGENCIES
We have been named as a defendant in numerous lawsuits throughout notice and administration costs. We recorded a reserve of $19.5 million
the country regarding our RAL programs (the ‘‘RAL Cases’’). The RAL related to this settlement in fiscal year 2006.
Cases have involved a variety of legal theories asserted by plaintiffs. One RAL class action case and a state attorney general lawsuit are
These theories include allegations that, among others, (i) disclosures in still pending, with the amounts claimed on a collective basis being very
the RAL applications were inadequate, misleading and untimely; (ii) the substantial. The ultimate cost of this litigation could be substantial. We
RAL interest rates were usurious and unconscionable; (iii) we did not believe we have meritorious defenses to the remaining RAL Cases and
disclose that we would receive part of the finance charges paid by the we intend to defend them vigorously. There can be no assurances,
customer for such loans; (iv) untrue, misleading or deceptive however, as to the outcome of the pending RAL Cases individually or in
statements in marketing RALs; (v) breach of state laws on credit service the aggregate. Likewise, there can be no assurances regarding the
organizations; (vi) breach of contract, unjust enrichment, unfair and impact of the RAL Cases on our financial statements.
deceptive acts or practices; (vii) violations of the federal Racketeer We are also a party to claims and lawsuits pertaining to our electronic
Influenced and Corrupt Organizations Act; (viii) violations of the federal tax return filing services, our POM guarantee program, our Express IRA
Fair Debt Collection Practices Act and unfair competition with respect product and tax planning services. These claims and lawsuits include
to debt collection activities; and (ix) we owe, and breached, a fiduciary actions by individual plaintiffs, as well as cases in which plaintiffs seek
duty to our customers in connection with the RAL program. to represent a class of similarly situated customers. The amounts
The amounts claimed in the RAL Cases have been very substantial in claimed in these claims and lawsuits are substantial in some instances,
some instances. We have successfully defended against numerous RAL and the ultimate liability with respect to such litigation and claims is
cases, some of which were dismissed on our motions for dismissal or difficult to predict. We intend to continue defending these cases
summary judgment, and others were dismissed voluntarily by the vigorously, although there are no assurances as to their outcome.
plaintiffs after denial of class certification. Other cases have been In addition we and certain of our current and former directors and
settled, resulting in a combined pretax expense in fiscal year 2006 of officers are party to several putative class actions alleging violations of
$70.2 million (the ‘‘2006 Settlements’’). The 2006 Settlements are certain securities laws, and certain of our current and former officers
described below. and directors are defendants in several putative shareholder derivative
On December 21, 2005, we entered into a settlement agreement actions, which have purportedly been brought on behalf of the
regarding four RAL Cases. Pursuant to the terms of this settlement Company and in which the Company is named as a nominal defendant.
agreement, we will contribute a total of up to $62.5 million in cash for The putative securities class actions allege, among other things,
purposes of making payments to the settlement class, paying all deceptive, material and misleading financial statements, failure to
attorneys’ fees and costs to class counsel and covering service awards prepare financial statements in accordance with generally accepted
to the representative plaintiffs. In addition, we paid costs for providing accounting principles and concealment of the potential for lawsuits
notice of the settlement to settlement class members. We increased stemming from the allegedly fraudulent nature of our operations. The
existing reserves related to this matter, resulting in a pretax charge of shareholder derivative cases pertain primarily to our recent financial
$50.7 million in fiscal year 2006. restatement and certain of our products and business activities and
On April 19, 2006, we entered into a settlement agreement, subject to generally allege breach of fiduciary duty, abuse of control, gross
final court approval, regarding one other RAL Case, pursuant to which mismanagement, waste and unjust enrichment. The amounts claimed in
we will contribute a total of $19.5 million in cash for purposes of these claims and lawsuits are substantial in some instances, and the
making payments to the settlement class, paying all attorneys’ fees and ultimate liability with respect to such litigation and claims is difficult to
costs to class counsel, incentive payment awards to plaintiff and all predict. We intend to continue defending these cases vigorously,
although there are no assurances as to their outcome.
66
H&R BLOCK 2006 Form 10K