Vanguard: Judge should chuck ex-tax lawyer's complaint
Danon case set for Jan. 22 hearing
(Link to Jan. 5 Inquirer column with updates here) Vanguard Group, the $3 trillion-asset, Malvern-based investment giant, has filed what it hopes will be its final reply to the 2013 whistleblower lawsuit filed by David Danon, a former tax lawyer for the company. Danon's complaint said Vanguard has systematically underpaid its federal and state income taxes by more than $1 billion by arranging for its mutual funds to underpay for Vanguard investment services, reducing the group's income and tax liability, in violation of federal tax policy limiting "at cost" pricing for services a company buys from its affiliates.
The company's latest 33-page memo, filed Dec. 22, mentions Danon's accusations in passing -- it notes the Internal Revenue Service and other authorities had the opportunity to adjust Vanguard's taxes if they had seen any problems with its SEC-approved structure or its publicly-disclosed at-cost service payments. But mostly, Vanguard argues that Danon's complaint should be tossed because, the company says, he and his lawyers violated several provisions of New York's attorney ethics rules in bringing the case.
Judge Joan Madden of New York's Supreme (district) Court for Manhattan has so far declined to toss the case just on Vanguard's say-so. She has scheduled a Jan. 22 hearing to review the dismissal motion.
Vanguard says Danon breached state attorney ethics rules in "bringing the lawsuit, based on misappropriated confidential information;" in making that information public; in filing the suit (originally sealed from public disclosure) while he was still at Vanguard; and in failing to bring his concerns to Vanguard Chairman John Brennan, CEO Bill McNabb, Vanguard's hand-picked board members and other senior bosses before suing, according to the company's legal memo filed with Madden's court last week by former government lawyer Heidi Wendell and her colleagues at the law firm Jones Day.
In justifying his case against Vanguard, where he worked from 2008-13, Danon, through his lawyers, currently Stephen (corrected) Sorensen of Thomas, Alexander & Forrester, has cited the federal False Claims Act, New York's whistleblower law -- one of the few that allows whistleblowers to be paid a chunk of taxes paid as a result of their disclosures -- and the "crime-fraud" exception that allows lawyers to disclose crimes by their clients. He has also argued he brought his concerns to his immediate superiors, who disagreed with him, and ultimately fired him.
But neither the law nor the exception allow Danon to "take matters into his own hands" in hopes of "personal benefit," by failing to go to the top of the company before suing, or by disclosing information that should have been kept secret under attorney-client privilege, Vanguard argues.
In some cases, whistleblowers have collected major percentages of damages assessed by courts against corporations found guilty of wrongdoing. For example, the New York Times last week estimated that four former Bank of America employees, including one represented by Danon's previous lawyer, Brian Mahany of Milwaukee, shared more than $160 million for helping federal investigators pin billions of dollars in mortgage frauds on the bank after each initiated a lawsuit against their former employer.
But Vanguard cites other cases, including Bibi vs. Quest Diagnostics, in which courts have dismissed whistleblower complaints, whatever the companies' alleged wrongdoing, because company attorneys who brought the cases improperly used company information to sue their ex-employers.
The company also says Danon's complaint lacks proof of concrete wrongdoing: Since the Internal Revenue Service and other tax authorities have discretion over how to tax companies' services payments to their own affilates, Danon, despite his tax expertise, can't say how much Vanguard should have paid; that's a matter between the company and the government, Vanguard says.
While accusing Danon of using information he wrongly took from his employer in his suit against the company, Vanguard also accuses Danon of not adding any information about potential wrongdoing that the company hadn't already made available -- which he has to do to have a chance at being awarded whistleblower status, Vanguard argues.
The company required several paragraphs in its memo to be blacked out so they are not part of the public record.
Vanguard declined comment on its case. Sorensen said he looks forward to representing Danon in court on Jan. 22.