OAKMARK FUNDS'
BILL NYGREN & HENRY BERGHOEF

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Berghoef: Like Bill said, we really weren't worried about the litigation exposure at H&R Block. They've had a number of suits. But the first thing to remember is that this has to do with practices before 1997. So we're not talking about it affecting the value of the business going forward. It has to do with practices that existed in the past. They had many of these suits in the past. And they never paid out anything. They were all dismissed or thrown out or whatever.

But without going into too much detail, they just had this case in Texas - which they settled. And what was interesting was that the stock went from about $40 to $30 on the news of this thing. And there are 180 million shares out there. So just to use round numbers, the market took a quick $2 billion off the quoted value of H&R Block. And we kind of looked at it and said, "This is totally absurd. There's no way in the world that this company is going to pay out $2 billion for this kind of thing."

They never had to pay out anything. And you weren't talking about asbestos litigation where there was a clear link between some compound and death. You were talking about not disclosing exactly properly what the relationship was between a lender and a borrower. And these kinds of suits exist all the time.

Nygren: Maybe we should back up and explain what the case was about. It was refund anticipation loans. People come in, H&R Block prepares their taxes and they find out that they're going to get $100 income tax refund. And H&R Block says, "You can either wait for it in the mail or you can walk out of here with a check."

If you think about that as a loan for a very short time period, the interest rate on it is very high. If you think about it as a convenience for a fee, it's quite reasonable. When I send a wire out of my checking account, I pay $25 to do that. If you think about that as an interest rate, it's usurious. But it's a service that's being provided and a fee.

That's kind of the context of these lawsuits. The issue is exactly how much of what H&R Block is charging represents a fee for a service and how much of it represents interest expense.

Berghoef: So, again, the Texas case was settled for, let's call it, $50 million. And frankly, I think a lot of this publicity that came up put extra pressure on the company to settle for that kind of number. I would have guessed it might even have been less. And yet the market took about $2 billion off of H&R Block's market cap.

There's also a nationwide class action lawsuit that had been settled for $25 million. And for various reasons, that settlement is being renegotiated. But I'd be shocked if it was a number that was a lot larger than that $25 million - again, for exactly the same reasons. You have to remember that you're talking about alleged violations of disclosure regulations - that H&R Block didn't adequately disclose that it was getting a fee from the lender for acquiring the loan for its clients. So again, in context, it's not that big of a thing either.

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