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Danon v. Vanguard: "SEC has been following this with a lot of interest" (Update)

"A strong programmatic interest"

(3/31 update: see Creagan remarks) Does the fact the SEC filed an amicus brief in the Danon v. Vanguard whistleblower-retaliation complaint, three years after Danon first alleged to the SEC that Vanguard underpaid billions in income taxes, mean the agency endorses his tax and reporting complaints?

Danon's side took heart from the SEC's filing, as if the agency was endorsing his complaints; Vanguard says the agency focused narrowly on defending its new whistleblower rules, not Danon's claims. See my post with links to SEC court filings here, story in Wednesday's Inquirer here. I've asked lawyers to comment.

1) One of the first to respond is David Schizer, professor of law and economics and dean emeritus at Columbia University's law school (where Vanguard founder John Bogle serves on an advisory board. Schizer is also a member of the Inquirer's controlling board.) Schizer writes:

"As the SEC specifically said, they are not taking a position about the merits of Vanguard's tax position.  Their amicus brief is focused on a very different issue, relating to the requirements of claiming protection as a whistleblower: Does someone have to report potential violations of the securities law to the SEC before the alleged retaliation, or can someone still claim whistleblower protection without taking this step?  

"The SEC has issued a regulation on the subject, and is defending its regulation.  As the SEC says, 'The Commission has a strong programmatic interest in demonstrating that its reasonable interpretation of Section 21F(h)'s ambiguous statutory language was a valid exercise of its broad rulemaking authority.'  

"The SEC's decision to intervene to defend their regulation does not tell us anything about the SEC's view of the underlying merits of Vanguard's tax position.  Whatever they think of the tax issue -- if they have a view at all, and they may not -- they would still want to intervene on this process issue."

2) On the other hand, the SEC isn't likely to take a stand on a case that looks like a loser, notes a whistleblowers' lawyer:

"It's highly unusual for the SEC to file an amicus brief," says Jeb White, Phliadelphia-based partner at the nationwide firm Nolan, Auerbach & White.

"The government generally does not file an amicus brief unless it has some concern about the law being upset for future cases. But at the same time, they generally don't file a case where they see bad facts," White concludes. If the SEC were skeptical, they would more likely choose other cases to take a stand.

3) The SEC's amicus brief is based on another the SEC posted last month in a Morgan Stanley appeals court case (Sixth Circuit); both briefs say nothing, in themselves, "about the merits of either action," notes David Creagan, a partner at White & Williams in Philadelphia who defends private-sector clients in SEC disputes, speaking only for himself. We can still search for context, he added:

"Both in the motion and in the brief, the SEC is really focused on the traditional deference under the Supreme Court's Chevron decision, which goes back decades, (which supports respecting) an administrative agency's interpretation of its own rules, and that the SEC's interpretation of whistleblower protections available under Dodd-Frank and Sarbanes-Oxley are reasonable. And that's broader than the interpretation Vanguard wants," Creagan said. The brief "is telling the Court it should accept the SEC's rule," protecting whistleblowers who complain internally even before they go to the SEC. SEC's broader interpretation "is probably the right one."

Does that mean the SEC more likely believes, or doesn't believe, in Danon's underlying tax claims? "That's a really, really good question," Creagan said. 

"You don't see a lot (of SEC amicus briefs.) But Vanguard is a big actor. Same as Morgan Stanley. They are at the heart of securities law," and at the heart of SEC's mission. All the more reason for the SEC to take an interest. 

It also looks significant that Danon v. Vanguard is in Philadelphia, where "the Third Circuit has had a really important role through the decades in securities cases," Creagan added. "That may have factored into (SEC's) decision.

"I'm sure the SEC has been following the case with a lot of interest. I suppose that if they thought Mr. Danon was making it all up they wouldn't be so interested; they might be less inclined to get inovlved, on the theory the case was going away," Creagan added.

"Of course, if you ask (the SEC why it filed in Danon v Vanguard), I expect they will tell you they are standing up a principle that cuts across all cases, a principle that is so important they can't just sit by and let Vanguard win on an argument we know to be untrue -- that they were entitled to fire this guy" because he didn't complain to the SEC early enough.