Who is David Danon, and what drove him to take on his old bosses at Vanguard Group Inc., alleging that its nearly $3 trillion in assets were built on an illegal tax strategy?

The son of a refugee from Bulgaria, Danon got in scraps as a schoolboy in Tenafly, N.J., where his short stature and harelip made him a target for bullying. "The teachers didn't do anything," Danon said. "I got into lots of fights that I should never have had to."

The struggle with Vanguard, where he worked for nearly five years as a tax lawyer, is Danon's toughest fight.

In a lawsuit made public in July, Danon alleged that Vanguard's tax avoidance and a lack of regulatory oversight have cost federal and state governments more than $1 billion.

Danon told the Securities and Exchange Commission that the company fired him after he refused to go along with wrongful practices. He has also told his story in complaints to the Internal Revenue Service and in a New York State whistle-blower lawsuit.

To Vanguard, the nation's largest mutual fund group and the largest business employer in Chester County, with about 10,000 workers at its Malvern campus, Danon is a turncoat employee whose "theft and disclosure" of secret company tax and financial documents breached the attorney-client privilege that keeps internal corporate matters private, according to an Aug. 15 court filing in the New York case. Vanguard also wants its documents back.

Danon and his attorney, Brian Mahany, say he is protected by whistle-blower laws that rate disclosure of illegal activity above attorney-client privilege.

Vanguard has denied wrongdoing and says it has always worked closely with regulators, including tax regulators.

Vanguard won't discuss Danon's specific allegations, says spokesman John Woerth. The company would rather no one else talk about it, either: On Aug. 14, Vanguard asked New York Supreme Court Judge Joan A. Madden for a restraining order to seal Danon's arguments from public view.

Madden hasn't sealed the case. She did sign an order Thursday temporarily taking five of the 210 paragraphs in Danon's lawsuit off the official record, at least until a Sept. 12 hearing to review the status of Danon's Vanguard documents.

Key allegations

Those paragraphs - which were unsealed and public before last week's agreement - include some of Danon's key allegations:

Vanguard Group "has never sought a ruling or approval from any U.S. tax authority [for its] at-cost pricing scheme," under which Vanguard charges its own mutual funds minimal fees for providing them with fund management services. Danon alleged this practice illegally reduces the group's income taxes.

Vanguard has "fraudulently failed to report [a] $1.5 billion 'Contingency Reserve,' " funded by payments deducted from Vanguard mutual funds.

Vanguard has been moving sales and marketing people out of Pennsylvania to drum up business in local markets around the country, without maintaining records required for tax purposes.

If the New York court, the Internal Revenue Service, or the SEC agrees with Danon and orders Vanguard to pay back taxes and any penalties, Danon could be entitled under whistle-blower laws to a percentage of those payments. The IRS typically limits reviews and penalties to the most recent three to six years. That could still qualify Danon for millions, if he is successful.

'Very bright'

Danon earned a degree in economics at State University of New York at Oneonta in 1983, and a master's degree at SUNY Stony Brook in 1992. Along the way, he says, he ran a painting business and worked jobs in publishing and municipal securities.

In 1995, he enrolled in Fordham University's law school, where he says he won honors as the top first-year student, top tax graduate, top contracts student, and a member of the law review and the honor society Order of the Coif.

"He was great. Very bright. That's why he ended up at Sullivan & Cromwell," said Fordham professor Jeffrey Colon, referring to one of the nation's top financial-law firms.

Danon left Sullivan & Cromwell after four years, then worked at three other Wall Street firms over the next six years. Such firm-hopping at big law shops, Colon says, is common.

Danon's next move, Colon said, to a senior legal job at a big, suburban company like Vanguard seemed to fit his growing family. Danon and his wife have children from middle-school to college age. His hobbies include tennis. The family resides in a Cape Cod-style home on a cul-de-sac in eastern Chester County, about a 15-minute drive from his former office at Vanguard.


The merits of his case aside, some lawyers who work with corporate clients say they were surprised to see an employee of Danon's rank using his position to try to turn in his employer.

"Has he breached his obligations as a lawyer by ratting out his employer to the IRS on matters in which he had been advising this employer?" asks Stanley Kull, partner at Saul Ewing L.L.P. in Philadelphia.

"I am certain he will claim protection of the 'crime-fraud exception' to [attorney-client] privilege, and that may work, if someone decides Vanguard actually committed a crime or a fraud," said John H. Schapiro, who heads the tax-law practice at Kleinbard Bell & Brecker L.L.P. in Philadelphia.

"But it is completely chilling to think that a lawyer who was intimately involved in a client's tax-planning decisions could turn around and sue the client."

Danon said the law was clear: "The SEC rules trump any confidentiality. The same with New York. Corporations don't get to just violate the law and forbid their employees from telling the authorities about it when they leave. That's what whistle-blowing is all about."

Danon said he didn't make the decision lightly: "For years, I wondered when they would get caught. I refused to aid and abet it. That led to my termination.

"You don't want to turn in people you work with. It's painful. You do it when you have no other choice. I was pushed against the wall. I have no other career."

Danon has let his bar association memberships lapse, and he said he didn't expect to work as a corporate tax lawyer again.