Vanguard whistleblower David Danon tells court how he warned the company on its taxes

David Danon at his home August 19, 2014. He is the Vanguard Group tax lawyer whistleblower who says he was fired for alleging large-scale tax fraud by the Malvern mutual fund company to NY State, SEC and IRS after the company refused to comply with the law. He has been fired, believes he has lost his career as a corporate lawyer, and has to support his family and suburban home. ( TOM GRALISH / Staff Photographer )

Nearly five years after he left Vanguard Group, David Danon, the investment giant’s former tax lawyer, has given his most complete account of his attempts to warn the Malvern-based company of what he says were tax violations.

The company fired him for making that warning, and doing his job, which paid $275,000 a year, Danon alleges in an amended wrongful-termination complaint filed in federal court in Philadelphia last month.

Danon’s employment claim is “without merit,” said Vanguard spokesman John Woerth. “We will continue to vigorously defend against all such claims.”

A written response by Vanguard is due this month, under an order by Judge C. Darnell Jones II. Danon’s complaint, first filed in 2015, had been suspended by both sides while they awaited a U.S. Supreme Court decision in the case of Digital Realty vs. Somers, which raised issues similar to Danon’s.

That decision, delivered in February, bolsters Danon’s case by confirming  protections for employees who go to the Securities and Exchange Commission to expose wrongdoing, according to the amended complaint by Danon’s lawyer James Griffith, of Blue Bell.

Danon has argued — at first to Vanguard, and later to the Internal Revenue Service, SEC, and state tax officials,  he says — that Vanguard underpaid the IRS by billions of dollars. It did this by setting aside a large “contingency fund,” from which he said Vanguard paid neither taxes nor shareholders; and separately, by making it appear the company made little or no taxable profit, by charging its own mutual funds artificially low prices for Vanguard management services. This allegedly violated Section 482 of the U.S. Tax Code, which requires companies pay their affiliates market prices so they can’t manipulate taxable income.

The IRS, which doesn’t confirm investigations, can take several years to complete corporate tax decisions. If the agency decides that Vanguard owes back taxes and that Danon as a whistleblower deserves a cut, he could qualify for a percentage. Texas gave Danon a $117,000 share of the back taxes that state says Vanguard paid after Danon took his observations to tax officials there. Last year Vanguard’s marketing affiliate disclosed it was facing tax audits in New York, New Jersey and Connecticut and was disputing corporate income taxes that it paid Pennsylvania.

Danon filed the federal suit after a New York State judge ruled he could not demand to be treated as a whistleblower there. Vanguard argued he didn’t deserve that status, under state legal rules, since he’d worked for the company he turned in.

The SEC filed a friend-of-the court brief supporting Danon’s federal case. Among the new details from the amended complaint:

Danon “on multiple occasions internally reported to Shawn Travis, a Principal of Vanguard, that Vanguard’s financial reporting to the SEC and IRS was in violation of the law,” according to Danon’s amended complaint. Travis, a Harvard Law School graduate, has been head of the company’s Global Tax Advisors unit since 2011.

Instead of acting on Danon’s concerns, Travis told Danon “to cease and desist in his attempts to notify” other Vanguard officials, according to the complaint. Danon “was instructed to never put his opinions in writing.”

Also, according to his complaint, Danon “on multiple occasions internally reported to Paul Atkins, Vanguard’s [then-assistant] controller, of the unlawful practices that were not in accord with SEC regulations” and the tax code.

“Danon advised other attorneys in Vanguard’s Tax Division” that its tax reporting was in violation of the tax code, according to his suit. Danon also alleges that Vanguard got an outside tax opinion agreeing with Danon’s view of the “contingency reserve,” but still “continued to file false reports with the SEC and IRS despite its knowledge that the reports were in violation of the law.” When he refused to sign off on these “fraudulent filings,” the complaint says Vanguard retaliated by telling him, in January 2013, that he would be dismissed, though no departure date was set.

That spring, while still working for Vanguard, Danon took the information he says he tried to raise with Vanguard to the SEC. That made his actions protected under whistleblower provisions of the Dodd Frank Act of 2010, according to the amended complaint, citing  the U.S. Supreme Court’s February decision.

Vanguard terminated Danon in June, 2013. He accuses the company of having “directly or indirectly continued to retaliate” by having “interfered with his attempts to find new employment,” forcing him to hire lawyers.

 

We encourage respectful comments but reserve the right to delete anything that doesn't contribute to an engaging dialogue
Help us moderate this thread by flagging comments that violate our guidelines

Comment policy:

Philly.com comments are intended to be civil, friendly conversations. Please treat other participants with respect and in a way that you would want to be treated. You are responsible for what you say. And please, stay on topic. If you see an objectionable post, please report it to us using the "Report Abuse" option.

Please note that comments are monitored by Philly.com staff. We reserve the right at all times to remove any information or materials that are unlawful, threatening, abusive, libelous, defamatory, obscene, vulgar, pornographic, profane, indecent or otherwise objectionable. Personal attacks, especially on other participants, are not permitted. We reserve the right to permanently block any user who violates these terms and conditions.

Additionally comments that are long, have multiple paragraph breaks, include code, or include hyperlinks may not be posted.

Load comments