Paul L. Caron

Monday, August 25, 2014

Who Is the Vanguard Tax Whistleblower?

VanguardFollowing up on my previous posts:

Philadelpha Inquirer, Who Is Whistle-blower David Danon, Who Is Suing Vanguard?:

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 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. ...

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. ...

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

Tax | Permalink