PhillyDeals: Fired lawyer's affidavit details lawsuit against Vanguard

David Danon tried to warn Vanguard Group it was illegally underpaying its income taxes while he was a tax lawyer for the company from 2008 to 2013 and was punished in return, according to an affidavit filed in his whistleblower lawsuit last week.

Danon, of Wayne, contends that after trying to "silence" him, Vanguard fired him "in retaliation for my persistent vocal questioning."

He said he sued only after Vanguard officials refused to act on what he termed "clear violations of law."

Danon said Vanguard, based in Malvern and holding $3 trillion in assets, was "intentionally engaged in unlawful conduct," in court papers meant to answer Vanguard's efforts to discredit him and stop his complaint from advancing in New York Superior Court.

Danon said Vanguard violated federal tax law governing payments between corporate affiliates by undercharging for services it provides to its own mutual funds. Lower income means less income tax, the affidavit said.

Danon said Vanguard had used this method to underpay taxes by more than $1 billion over the years.

In October, Vanguard urged Judge Joan Madden of New York's Supreme Court in Manhattan to dismiss the case because Danon illegally exploited confidential documents, violated attorney-client privilege, and betrayed his employer in an attempt to collect a cut of Vanguard's back taxes and penalties.

Vanguard also argued that its "unique" structure and "at-cost" payment arrangements had been legal and well-publicized since its founding in 1974. Spokesman John Woerth declined to comment for this article, adding that the company was saving its arguments for court.

In his affidavit, Danon said that he shared his "extremely serious" concerns about tax fraud with Vanguard lawyers and tax specialists, and that another Vanguard tax lawyer who shared his concern left the company in 2012 - "due to professional harm from airing these concerns."

Unable to stop what he saw as corporate crime, Danon said he gave "selected whistleblower documents" to the Securities and Exchange Commission, the Internal Revenue Service, and state tax agents

Answering Vanguard's accusation that he abused privileged information, Danon said he used internal documents to support his allegations of Vanguard's "tax and securities fraud" as protected under whistleblower laws. Danon said these weren't matters on which he represented Vanguard, so he has not changed sides on legal issues, as Vanguard alleged.

Danon filed his lawsuit in May 2013, a month before he was terminated. He sued in New York to take advantage of that state's expansive whistleblower law.

The suit became public this summer, after New York prosecutors decided not to pursue the allegations on their own. "[They] may be waiting for the IRS to restate Vanguard's income" now that Danon has exposed the company's practices, Danon's lawyer, Stephen Sorensen, wrote in a memo filed with Danon's affidavit.

"Vanguard cheats on its taxes," Sorensen wrote. This has helped Vanguard use "predatory pricing" against its tax-paying competitors, and to "skim off billions of dollars in fees from the fruits of this tax dodge," the memo charged.

Sorensen added that some of that money was used to boost its bosses' pay, which Vanguard does not report.

Sorensen compared Vanguard's view that Danon owed his employer the loyalty and secrecy of a trusted professional counselor to an organized crime gang's "code of silence."

But Danon had an obligation to expose and denounce illegal activity when the company wouldn't stop it, the lawyer wrote.

The fact that millions of Vanguard customers "benefit from Vanguard's tax dodge" by paying low fees "does not make it right," Sorensen argued.

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