Vanguard 'silenced' tax fraud claims, whistleblower says

David Danon tried to warn Vanguard Group it was illegally underpaying its income taxes while he was a tax lawyer for the company from 2008 to 2013 -- and was punished, with "attempts to silence me," until he was fired "in retaliation for my persistent and vocal questioning" of the $3 billion investment company's "unlawful practices," the Wayne resident says in an affidavit filed for his whistleblower lawsuit this week.

He says he only sued after Vanguard officials' "refusal to act on clear violations of law" he brought to their attention, showed the company "intentionally engaged in unlawful conduct," Danon alleged in court papers meant to answer Vanguard's efforts to discredit him and stop his complaint from advancing in a New York court.

Danon alleges Vanguard, based in Malvern, has violated federal tax law governing payments between corporate affiliates, by undercharging for services it provides to its own mutual funds. Low income means less income tax. Danon says Vanguard has used this method to underpay taxes by more than $1 billion over the years.

In October, Vanguard urged Judge Joan Madden, of New York's Supreme Court for Manhattan, to dismiss the case because Danon illegally exploited confidential documents, violated attorney-client privilege and betrayed his employer, in an attempt to collect a cut of Vanguard's back taxes and penalties. 

Vanguard also argued that its "unique" structure and "at cost" payment arrangements have been legal and well-publicized since its founding in 1974. Spokesman John Woerth declined to comment for this article, and told me the company is saving its arguments for court.

In his affidavit this week, Danon says he told Vanguard his concerns over its tax fraud were "extremely serious." He said his concerns were shared with Vanguard lawyers and tax specialists, and that another Vanguard tax lawyer in 2012 shared "deep concerns" with him -- concerns that resulted in the other lawyer leaving Vanguard "due to professional harm from airing these concerns."

Danon said he believes he, himself, was terminated "in retaliation for my persistent and vocal questioning" of the company's tax practices.

Thwarted from persuading the company to do the right thing, Danon says he gave "selected Whistleblower documents" to the Securities and Exchange Commission, the Internal Revenue Service and state tax agents. 

In reply to Vanguard's allegations that Danon abused privileged information, Danon says he used internal documents to support his allegations of Vanguard's "tax and securities fraud," as protected under whistleblower laws. But Danon also says these weren't matters on which he represented Vanguard, and that he has not changed sides on legal issues, as Vanguard alleged.

Danon filed his lawsuit in May 2013, a month before he was terminated. He sued in New York to take advantage of that state's expansive whistleblower law.

The suit became public this summer, after New York prosecutors decided not to pursue the allegations on their own. They "may be waiting for the IRS to restate Vanguard's income," now that Danon has exposed the company's tax transgressions, Danon's lawyer, Stephen Sorensen, wrote in a memo filed with Danon's affidavit.

"Vanguard cheats on its taxes," Sorensen wrote. Underpaying its taxes has helped Vanguard use "predatory pricing" against its tax-paying competitors, and to "skim off billions of dollars in fees from the fruits of this tax dodge," while using some of the money to boost its bosses' pay, which Vanguard does not report.

Sorensen compared Vanguard's claim that Danon owed his employer the loyalty and secrecy due from a trusted professional counselor to an organized crime gang's "code of silence." To the contrary, he argued, Danon had an "obligation" to expose and denounce illegal activity when the company wouldn't stop it.

The fact that millions of Vanguard customers "benefit from Vanguard's tax dodge," by paying low fees, "does not make it right," Sorensen added.