Whistleblower’s complaint against Vanguard dismissed by New York SC

By Vimbai Chikomo | Dec 10, 2015

NEW YORK -- The New York Supreme Court has dismissed a complaint against a global investment management company by a former in-house tax attorney alleging the company submitted false claims under the state’s False Claims Act.

On Nov. 13, the court concluded the complaint should be dismissed because the court found that David Danon, the whistleblower, had improperly disclosed and used information he obtained while employed at Vanguard to file suit.

According to court documents, Danon filed the complaint on behalf of New York State in May 2013 claiming that The Vanguard Group Inc., The Vanguard Group of Mutual Funds and Vanguard Marketing Corporation, collectively known as Vanguard, allegedly violated dozens of Unites States laws and avoided $1 billion in federal income tax and at least $20 million in New York tax over a 10-year period through “illegal price manipulation” and sheltering its worldwide income.

Danon further alleged Vanguard failed to file required tax returns in New York for decades. And the times it did file, it allegedly provided information that was false and fraudulent. As a result, Danon claimed that Vanguard’s engagement in the “persistent practice of misrepresentation” warranted false claims violations under the False Claims Act.

In his claim, Danon sought a judgment, on behalf of himself and the state, equal to three times the amount of damages sustained, plus a civil penalty of $6,000 to $12,000 for each act in violation of the law, with interest, plus the cost to the state for expenses related to the action.

The complaint was filed under seal on May 8, 2013, and only became public when the New York Attorney General’s Office “declined to convert or intervene in the action.”

Vanguard filed a motion to have the complaint dismissed based on violations of attorney ethics rules, claiming Danon “violated his duty of loyalty and confidentiality” to Vanguard by violating Rules 1.6 and 1.9(c) of the New York Rules of Professional Conduct. The company also claimed it didn’t knowingly submit a false claim.

Danon argued he did not violate any ethical rules by reporting Vanguard, and that he was legally permitted to “blow the whistle” on Vanguard’s alleged tax fraud and bring an action to prevent ongoing criminal conduct supported by Rule 1.6(b)(2), which states that “a lawyer may reveal or use confidential information to the extent that the lawyer reasonably believes necessary to prevent the client from committing a crime.”

“I think the case provides some lessons both to companies and to individuals who might be considering doing this,” Jeremy Schlosser, an associate at Dorsey & Whitney LLP, said. “I’ve read from secondary sources that there seem to have been a few cases across the country that have involved whistleblowers that may have provided information they obtained while working as an attorney.”

Schlosser said although he is aware of several other FCA tax cases that are pending, he did not know the circumstances surrounding those cases.

In its decision, the court ultimately found that Danon disclosed confidential information in his complaint that was “broader than reasonably necessary” to stop the alleged tax violations by disclosing information that had already been provided to the relevant authorities tasked with addressing alleged fraud, and by revealing information in his complaint that dated as far back as 1999, which was broader than necessary to prevent any ongoing crime.

Based on these findings, the court dismissed the complaint and disqualified Danon and his counsel from any subsequent action based on the facts brought forward in the complaint.

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