Saturday, February 21, 2015
Following up on my previous posts (links below): Philadelphia Inquirer, Vanguard Whistleblower's First Day in Court:
Last Friday Feb. 13, New York Superior Court Judge Joan Madden held a previously-delayed hearing, in Courtroom 351 of Manhattan's state courthouse way downtown, so she could grill lawyers for both sides on Vanguard Group Inc.'s motion to dismiss former Vanguard tax lawyer David Danon's whistleblower lawsuit, which challenges the legal and expense structure the Malvern investment giant has used over its 40-year history.
It was the first time the two sides have faced each other in court since Danon prepared his complaint while still working for Vanguard in 2013. The case was filed under seal; it became public last summer after New York State declined to prosecute it last year -- whether because the Attorney General considers it a weak case, or because the state is leaving an investigation of the facts to the federal government which Danon alleges is Vanguard's main victim, or for some other reason, New York officials wouldn't tell me.
Danon alleges the company has systematically underpaid more than $1 billion in U.S. and state income taxes. Danon has also complained to the IRS and SEC, detailing his claims that Vanguard charges its own mutual funds artificially low management fees so it appears to make little or no profit, reducing its tax liability; and that Vanguard has, separately, built up a $1.5 billion reserve without paying proper taxes or giving investors a share. If New York or the IRS decide Danon is right and oblige Vanguard to pay back taxes, Danon might be able to claim millions of dollars as whistleblower's compensation.
Both sides agree Vanguard, as a private investment management company owned by its affiliated mutual funds, has set up a "unique" structure and pays low income taxes, enabling the company to charge lower fees than its rivals and win business from them. Vanguard's lawyer said Vanguard has "very strong arguments that show Mr. Danon is completely wrong" about tax fraud allegations.
But before having to explain too much about its internal doings or its tax procedures in a public court proceeding, Vanguard wants the case thrown out: The company says Danon breached attorney-client privilege and New York State legal ethics rules when he used privileged, confidential company documents to make his case, and that this should oblige Madden to toss the complaint. Danon argues he was protected by state and federal whistleblower laws that allow lawyers to bring illegal actions -- crimes, or at least frauds -- to the attention of government authorities. ...
Here are some highlights from the public part of Friday's hearing
Prior TaxProf Blog coverage: