Vanguard resolves long-running whistleblower, broker complaints

Vanguard Group, the Malvern-based investment giant that made low-fee investment funds popular for tens of millions of Americans, has concluded a pair of years-old disputes with former employees who said they had been improperly terminated.

On Sept. 30, Vanguard and David Danon, a tax lawyer fired by the company 10 years ago, agreed to the dismissal of Danon’s wrongful-termination complaint in federal court in Philadelphia, indicating they had reached a settlement in mediation.

But Danon’s legal efforts to get paid as a whistleblower by the federal Internal Revenue Service and the Securities and Exchange Commission continue.

And on Oct. 9, a panel arbitrator for the securities industry’s self-regulating Financial Industry Regulatory Authority (FINRA) ordered Vanguard to remove claims “of a defamatory nature” in former broker Bill Capece’s 2021 termination report, and pay $37,000 as a sanction to Capece, plus most of the $17,000 in hearing fees.

After reviewing claims by Vanguard managers, arbitrators said the company should strike its statement that Capece had violated the company’s code of conduct in his handling of “peers, management and clients” from his potentially career-ending 2021 termination report.

Danon alleged Vanguard terminated him from his $275,000 a year job in 2013 for his refusal to endorse what Danon called the company’s illegal practices: building up a billion-dollar cash reserve that was neither taxed nor shared with investors, and mispricing services sold to its own mutual funds, to avoid income taxes.

His allegations sparked discussion and debate among prominent tax scholars as to how much Vanguard could owe (the IRS typically doesn’t disclose the results of its reviews and investigations), and riled some of Vanguard’s many fans. The company manages over $8 trillion for more than 50 million investors.

Danon’s accusations challenged whether Vanguard, a private, for-profit company, really operated, or could legally operate, “at cost,” as the company formerly advertised.

“While we are limited in what we can say on legal proceedings, after 10 years, we are happy to have put this matter behind us and avoided the time and expense of continued litigation,” a Vanguard spokesperson said in a statement.

The two sides declined to comment on how much Vanguard paid to end the case.

Danon has argued to federal agencies that Vanguard changed its financial and tax practices and paid significantly more taxes in response to his complaints to the agencies about the company’s practices.

In court proceedings, Vanguard had argued Danon’s claims about his firing were without merit. The company said he was properly terminated for refusing to do his job as ordered, and wasn’t deserving of whistleblower protections.

Philadelphia federal court Judge Darnell Jones dismissed Danon’s wrongful-firing complaint in 2016, finding that, whether or not Danon was right about tax law, a separate New York court decision had made the firing complaint moot.

The appeals court allowed Danon to reinstate a part of his claim, and in early 2023 U.S. District Judge Berle Schiller told the two sides to try to work out a settlement in mediation before going to trial. In June lawyers for Vanguard and Danon told the judge they were working toward an agreement, then stopped filing required monthly reports. Vanguard confirmed the case was concluded — but gave no details — in a brief Sept. 30 federal court filing in Philadelphia.

“Has this ended with a whimper?” asked Dan Wiener, a money manager and past publisher of the Independent Advisor for Vanguard Investors newsletter, after the filing, which was first reported in the industry newsletter Ignites.

Public records show Danon has remained active in efforts to collect awards from both the SEC and the Internal Revenue Service.

Danon filed a complaint against the IRS in U.S. Tax Court in 2018, calling on the agency to pay him a significant percentage of what he contends has been a larger federal tax payout following his disclosures to the agency.

Although many case documents have been filed under seal, Vanguard had indeed “filed an amended [tax] return after submission of [Danon’s] whistleblower claim,” and additional tax collected by the government can properly be used to calculate a whistleblower’s award, Judge Joel Gerber wrote as part of a 2020 order. He told the IRS to file reports on negotiations to settle Danon’s claim for compensation.

It is one of the few documents that are public, among dozens of fully-redacted filings in the case.

Gerber didn’t disclose how much extra Vanguard may have paid after the IRS received his information. Court records show an updated report on discussions between the IRS and Danon about his demand for payment will be reviewed by the judge later this month.

Separately, the Court of Federal Claims ruled earlier this year that it would not give Danon an order forcing the SEC to declare what it had done with the information he provided its agents in a series of meetings over several years, after the agency said it had not opened a formal inquiry.

But the court also stressed that Danon has a simpler path: he could demand the SEC directly document what it did with his information. The SEC and Danon’s lawyers would not confirm what steps they have taken since the court issued its order in January.

In Capece’s case, FINRA arbitrators “denied the request for monetary damages” and did not explicitly find that the company had defamed Capece, Vanguard noted in a statement this week to The Inquirer.

But by imposing the $37,000 cash sanction and calling for Vanguard to clear Capece’s record, FINRA took steps that are “somewhat rare,” said Nick Guiliano, a Philadelphia securities lawyer who reviewed the arbitrators’ finding at The Inquirer’s request. He said the award suggests a penalty for Vanguard’s initial reluctance to explain why it had terminated the broker, and its failure to make a convincing case.

“It’s not many times that brokers prevail in cases to have their termination notice amended,” when the former employer hires a corporate-law team to defend its actions, as Vanguard did, Guiliano added.

“The sanctions are an unusual aspect of the case,” said Christopher Coss, of Coss & Momjian LLP in Bala Cynwyd, who represented Capece. “Our position was that what was put on his license was false and defamatory. And that’s the ruling the arbitrators issued — that the language should be removed. We view it as a victory. Our client feels vindicated.”

He noted that Capece had been concerned he’d never work again in the securities industry after Vanguard’s initial termination report. Instead he shifted to the employee-benefits industry, “where he is making more money than he did at Vanguard,” Coss said.