H&R Block replaces CEO Ernst; Breeden is chairman

NEW YORK (Reuters) - H&R Block Inc replaced Chairman and Chief Executive Mark Ernst on Tuesday following mounting subprime mortgage losses and criticism that the largest U.S. tax preparer had strayed far beyond its roots.

Richard Breeden, 57, a former U.S. Securities and Exchange Commission chairman who won three H&R Block board seats in September after a proxy fight, was named chairman.

Alan Bennett, 57, who retired this year as health insurer Aetna Inc's chief financial officer, was named interim chief executive. He is not seeking the job permanently.

Breeden, now an activist investor, won board seats after arguing that H&R Block should quit banking and subprime mortgage lending and focus on tax preparation, where it has lost market share to Jackson Hewitt Tax Service Inc.

In an interview on CNBC television, Breeden said that "one way or another," H&R Block will exit the subprime business.

"We're going to focus on the business that made us great," Breeden said.

He added it may take six months to find a permanent chief executive.

H&R Block entered banking in 2006 and is trying to salvage a sale of part of its money-losing Option One Mortgage Corp subprime unit, which lends to people with poor credit, to private equity firm Cerberus Capital Management LP.

"This validates Breeden's strategy of focusing H&R Block on tax-related businesses," said David Roberts, a principal at Harvest Investment Advisors LLC in Tallahassee, Florida, which owns H&R Block shares. "This calls into question whether H&R Block should remain in banking. It's a distinct possibility that H&R Block will be broken up."

H&R Block's other businesses include H&R Block Financial Advisors, which has more than 900 brokers, and the consultant RSM McGladrey. The company has more than 14,000 tax preparation offices in the United States, Canada and Australia.

Ernst's resignation is effective immediately, but he will remain a consultant. The 49-year-old executive joined H&R Block in 1998, was named chief executive in January 2001, and became chairman in September 2002.

His departure came 15 days after the resignation of William Trubeck as H&R Block's chief financial officer. Kansas City, Missouri-based H&R Block said it has formed a search committee to find a permanent successor to Ernst.

Breeden and Bennett were unavailable for further comment.

H&R Block shares closed up 25 cents at $19.32 on the New York Stock Exchange. They have fallen 16 percent this year.

OPTION ONE

Breeden led the SEC from 1989 to 1993 and is now a principal at Breeden Capital Management LLC in Greenwich, Connecticut.

At H&R Block's September 6 annual meeting, he won board seats for himself; Robert Gerard, a former assistant U.S. Treasury secretary; and former Chase Manhattan counsel L. Edward Shaw.

In the 15 months ended July 31, H&R Block lost $736.2 million, largely from losses at Option One. In April it agreed to sell the unit to Cerberus for an estimated $1 billion, but that agreement broke down.

Spokesman Nick Iammartino declined to discuss the status of talks with Cerberus.

Ernst had also faced other criticism. Lawsuits have accused H&R Block of marketing costly loans to people awaiting tax refunds, and retirement accounts that cost money for hundreds of thousands of lower-income clients.

In a big embarrassment, H&R Block admitted in February 2006 that it had underreported its own state taxes.

The proxy fight was Breeden's second as an activist investor. In April he won two seats on the board of Applebee's International Inc. Three months later, the casual dining chain accepted a $1.9 billion buyout by IHOP Corp.

H&R Block was founded in 1946 by Henry Bloch and his brother Leon with $5,000 borrowed from an aunt. The brothers changed the company name to "Block," which customers found easier to spell and pronounce.

(Reporting by Jonathan Stempel; Editing by John Wallace and Andre Grenon)