SEC backs ex-Vanguard lawyer Danon whistleblower claim

See also my article in Wednesday's Philadelphia Inquirer. -- Tuesday post: The Securities and Exchange Commission has filed a "friend-of-the-court" motion and brief supporting the position of David Danon, the former Vanguard Group tax lawyer who says he was fired for opposing federal and state income tax underpayments by the Malvern-based mutual fund giant, arguing that his actions appear entitled to whistleblower protection under the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

In opposing a federal wrongful-termination lawsuit Danon filed last year, Vanguard had argued that federal whistleblower-protection law "protects only individuals who have reported a potential securities law violation directly to the SEC before they were fired," the SEC noted.

But that's wrong, the SEC argues in its memo to federal Judge C. Darnell Jones, who is overseeing Danon's case: A rule the SEC implemented after Dodd-Frank "authorizes the Commission to apply monetary awards to individual swho voluntarily provide information that leads to a successful enforcement action, and prohibits employers from retaliating" against whistleblowers.

Examples of protected whistleblower activity, the SEC says, now include "making a report of a potential securities law violation to a supervisor," even if the whisteblower doesn't also go to the SEC.

That's what Danon says he did in the Vanguard case.

The SEC says its rule "helps protect individuals who choose to report potential violations internally," and that allowing Vanguard to have Danon's case thrown because he hadn't gone straight to the SEC would "substantially weaken" the SEC's ability to use whistleblowers in building cases against corporate wrongdoing.

The SEC in a footnote adds that it "does not take a position" on Danon's complaint or any other steps Vanguard may take to get it dismissed. (Update: Read Vanguard's comment in the amicus in my story at the link above.)

Danon last year collected an informer's fee of $117,000 for helping the State of Texas collect unpaid income taxes from Vanguard. He has also reported alleged illegal Vanguard tax avoidance to the Internal Revenue Service and state tax authorities in New York, California and other states, and has alleged to the SEC that Vanguard has systematically underpaid its own management affiliate to reduce its income tax obligations, while also building up an illegal cash reserve and keeping it from both tax authorities and Vanguard's own fund investors.

Vanguard has said its financial arrangements are legal. 

"It's about time that Danon and other whistleblowers get the affirmative support support that they need," said Mark Schwartz, a Bryn Mawr lawyer whose practice includes defending whistleblowers. (Wednesday update: More legal comment on why the SEC might not be making a point about Danon's claims here.)

Vanguard chose not to contest the SEC's taking a position regarding Danon, SEC assistant general counsel Thomas J. Karr said in a statement filed with the motion.