PhillyDeals: Vanguard makes case against whistle-blower suit

Vanguard Group, the Malvern-based investment giant, has filed what it hopes will be its final reply to the 2013 whistle-blower lawsuit filed by David Danon, a former tax lawyer for the company.

Danon, who resides in Chester County, says Vanguard underpaid its federal and state income taxes by more than $1 billion by arranging for its mutual funds to underpay for Vanguard Group management services, thus reducing the group's income and its tax liability in defiance of federal rules.

The company's 33-page memo, filed Dec. 22, argues that the IRS and other authorities have had many opportunities to challenge Vanguard tax practices if they saw any problem.

But mostly, Vanguard argues that Danon's complaint should be tossed because, the company says, he and his lawyers violated New York's attorney ethics rules in bringing the case. Judge Joan Madden of New York's Supreme Court has scheduled a Jan. 22 hearing to review Vanguard's dismissal request.

The company says Danon breached state attorney ethics rules in "bringing the lawsuit based on misappropriated confidential information" and in failing to bring his concerns to Vanguard chairman John Brennan, chief executive William McNabb, and other senior bosses before suing, according to the company's legal memo filed by Vanguard lawyer Heidi Wendel of the New York law firm Jones, Day.

In justifying his case against Vanguard, where he worked from 2008 to 2013, Danon, through his lawyer, Stephen Sorensen of Los Angeles, has cited the federal False Claims Act, New York's whistle-blower law, and the "crime-fraud" exception that allows lawyers to talk about clients' illegal acts. Danon says he brought his concerns about Vanguard's taxes to his immediate bosses, who disagreed with him, then fired him.

Corporate whistle-blowers have collected large cuts of damages assessed by courts against wrongdoing. The New York Times last week estimated that three former Bank of America employees, including one represented by Danon's previous lawyer, Brian Mahany, shared more than $160 million for helping federal investigators pin mortgage frauds on the bank.

Vanguard cites other cases in which courts have dismissed whistle-blower complaints because ex-company attorneys misused confidential information to sue their ex-employers.

While accusing Danon of using information in his lawsuit that he wrongly took from his employer, Vanguard says Danon's allegations rely on information that the company had already made public, so he shouldn't be considered a true whistle-blower.

Several paragraphs of its memo were redacted from the public record at Vanguard's request. Vanguard declined comment on its case. Sorensen said he looked forward to representing Danon in court Jan. 22.

In earlier versions of this story, Danon's lawyer was incorrectly identified.

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