HR Block 2008 Annual Report Download - page 37

shareholder derivative action that was consolidated into the securities litigation filed a separate appeal on
March 18, 2008, contending that the derivative action was improperly consolidated. The derivative action is Iron
Workers Local 16 Pension Fund v. H&R Block, et al., in the United States District Court for the Western District of
Missouri, Case No. 06-cv-00466-ODS (instituted on June 8, 2006) and was brought against certain of our directors
and officers purportedly on behalf of the Company. The derivative action alleges breach of fiduciary duty, abuse of
control, gross mismanagement, waste, and unjust enrichment pertaining to (1) our restatement of financial results
in fiscal year 2006 due to errors in determining our state effective income tax rate and (2) certain of our products
and business activities. We believe the claims in these cases are without merit and intend to defend this litigation
vigorously. We currently do not believe that we will incur a material loss with respect to this litigation.
RSM McGLADREY LITIGATION – RSM EquiCo, Inc. a subsidiary of RSM McGladrey, Inc. (RSM), is a party to a
putative class action filed on July 11, 2006 and entitled Do Right’s Plant Growers, et al. v. RSM EquiCo, Inc., et al.
Case No. 06 CC00137, in the California Superior Court, Orange County. The complaint contains allegations
regarding business valuation services provided by RSM EquiCo, Inc., including fraud, negligent misrepresentation,
breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty and unfair
competition and seeks unspecified damages, restitution and equitable relief. We intend to defend this case
vigorously. The amount claimed in this action is substantial, and there can be no assurance regarding the outcome
and resolution of this matter. It is reasonably possible that we could incur losses with respect to this litigation,
although an estimate of such losses cannot be made in light of the early stage of the litigation.
RSM has a relationship with the Attest Firms pursuant to which (1) some RSM employees are also partners or
employees of the Attest Firms, (2) many clients of the Attest Firms are also RSM clients, and (3) our RSM
McGladrey brand is closely linked to the Attest Firms. The Attest Firms are parties to claims and lawsuits
(collectively, “Attest Firm Claims”). Judgments or settlements arising from Attest Firm Claims, which exceed the
Attest Firms’ insurance coverage, could have a direct adverse effect on Attest Firm operations, and could impair
RSM’s ability to attract and retain clients and quality professionals. Accordingly, although RSM is not a direct party
to significant Attest Firm Claims, such Attest Firm Claims could have a material adverse effect on RSM’s
operations and impair the value of our investment in RSM. There is no assurance regarding the outcome of
the Attest Firm Claims.
LITIGATION AND CLAIMS PERTAINING TO DISCONTINUED MORTGAGE OPERATIONS – Although OOMC
terminated its mortgage loan origination activities and sold its loan servicing business during fiscal year 2008, it
remains subject to investigations, claims and lawsuits pertaining to its loan origination and servicing activities that
occurred prior to such termination and sale. These investigations, claims and lawsuits include actions by state
attorneys general, other state regulators, municipalities, individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others alleged to be similarly situated. Among other things, these investigations, claims and
lawsuits allege discriminatory or unfair and deceptive loan origination and servicing practices, public nuisance,
fraud, and violations of the Truth in Lending Act, Equal Credit Opportunity Act and the Fair Housing Act. In the
current non-prime mortgage environment, the number of these investigations, claims and lawsuits has increased
over historical experience and is likely to continue at increased levels. The amounts claimed in these
investigations, claims and lawsuits are substantial in some instances and the ultimate resulting liability is
difficult to predict. In the event of unfavorable outcomes, the amounts OOMC may be required to pay in the
discharge of liabilities or settlements could be substantial and, because OOMC’s operating results are included in
our consolidated financial statements, could have a material adverse impact on our consolidated results of
operations.
On June 3, 2008, the Massachusetts Attorney General filed a lawsuit in the Superior Court of Suffolk County,
Massachusetts (Case No. 08-2474-BLS) entitled Commonwealth of Massachusetts v. H&R Block, Inc., et al.,
alleging unfair, deceptive and discriminatory origination and servicing of mortgage loans and seeks equitable
relief, disgorgement of profits, restitution and statutory penalties. We believe the claims in this case are without
merit and intend to defend this litigation vigorously, but there are no assurances as to its outcome. We are unable to
determine an estimate of the possible loss or range of loss, if any, in light of the early stages of this litigation.
OOMC also remains subject to potential claims for indemnification and loan repurchases pertaining to loans
previously sold. In the current non-prime mortgage environment, it is likely that the frequency of repurchase and
indemnification claims may increase over historical experience and give rise to additional litigation. In some
instances, H&R Block, Inc. was required to guarantee OOMC’s obligations. The amounts involved in these
potential claims may be substantial, and the ultimate resulting liability is difficult to predict. In the event of
unfavorable outcomes, the amounts OOMC may be required to pay in the discharge or settlement of these claims
could be substantial and, because OOMC’s operating results are included in our consolidated financial statements,
could have a material adverse impact on our consolidated results of operations.
H&R BLOCK 2008 Form 10K 17