Friday, April 01, 2016

SEC Backs Vanguard Lawyer's Whistleblower Status

By Anne Sherry, J.D.

The SEC filed an amicus brief supporting a former Vanguard attorney's right to sue for retaliation, if not the merits of his claim. The plaintiff was fired after complaining internally at Vanguard that the mutual-fund giant was fraudulently evading taxes. Vanguard is fighting his retaliation suit because, among other reasons, he did not report misconduct to the SEC, but the agency maintains that such external reporting is not a prerequisite to a Dodd-Frank claim (Danon v. The Vanguard Group, Inc., March 28, 2016).

David Danon was an in-house tax attorney in Vanguard's Pennsylvania offices. He allegedly discovered that Vanguard was filing false reports with the SEC and false tax returns with the IRS and raised these concerns internally. According to his complaint, Vanguard told him to stop reporting the conduct and not to put anything in writing, and transferred him to another department. He was terminated after he refused to further the alleged fraud.

Danon's role as an attorney distinguishes this whistleblower case from others. Although he received a $117,000 whistleblower bounty from the state of Texas, a New York court dismissed his qui tam suit there, in part because he violated the attorney ethics rules by unnecessarily including privileged information in his complaint. Vanguard's memorandum in support of its motion to dismiss the Pennsylvania action argues that Danon is collaterally estopped from bringing a retaliation claim similar to the one that was dismissed. Additionally, his job responsibilities included reporting his opinions about Vanguard's tax compliance; doing so does not constitute protected activity.

Vanguard also argues that Danon did not satisfy the statutory prerequisites for a whistleblower complaint under either SOX (by first filing a complaint with OSHA) or Dodd-Frank (by reporting misconduct to the SEC). In answer, Danon challenges the New York court's ruling and invokes federal exceptions to the attorney-client privilege, which he argues trump state ethics rules. He urges the court to defer to the SEC's whistleblower rule, which does not require external reporting. If the court does not, the answer argues, it will be because it determined Congress specifically intended to protect whistleblowers if and only if they report to the SEC, even if the SEC determined that internal reporting should be protected. "Why would Congress want to impose this crazy straightjacket on the agency it charged with furthering Dodd Frank's public policy goals?" he asks.

The SEC is not taking a position on any issue other than the one of whistleblower eligibility. Indeed, the Commission did not tailor its amicus brief to the specific case at all, instead obtaining leave to file the same brief it used in a Sixth Circuit case in February. The SEC has filed similar briefs in many whistleblower cases, arguing its position that the text of Dodd-Frank is ambiguous and that courts should defer to its implementing rule. There is a circuit split on this question, with the Second taking the SEC's view but the Fifth requiring external reporting; the Third Circuit has not decided the issue.

The case is No. 15-6864.

3 comments:

David Danon said...

I am David Danon, the Vanguard whistleblower. This is an excellent post but I would like to to offer a few thoughts.

Everything stated above is entirely accurate but it seems to go too far in suggesting that the SEC's decision to file couldn't possibly reflect a view on the underlying claims; the SEC doesn't stake a flag in every case that raises an issue it cares about, particularly at the district court level. I believe there are a number of district court cases raising the internal whistleblower issue in which the SEC has not filed an amicus brief, so, as the SEC annual report states, the SEC exercises discretion as to the cases in which it will file.

There is a very important added dimension in my case; the SEC almost certainly *has* a view on the merits of my case because my inter-related tax and securities law whistleblower submissions claim that under an SEC approved structure (i) Vanguard illegally evaded billions of dollars in taxes, (ii) touted an illegal tax structure in its securities filings without a shred of statement of risk of IRS or state tax challenge and (iii) deprived investors of billions of dollars of value attributable to their indirect ownership in Vanguard. See the report submitted to the IRS/SEC in 2015 from Reuven Avi-Yonah, one of the most prominent transfer pricing experts in the United States, describing illegal evasion of billions of dollars of tax and the SEC exemptive order pursuant to which this evasion occurred:

http://media.philly.com/documents/ReuvenAvi-Yonah.pdf

I of course can have no knowledge whether the SEC will take enforcement action against Vanguard, but it seems inconceivable that the SEC does not have a view as to whether I am correct nearly three years after my submissions. And it seems very unlikely the SEC would want to provide any support for my claim it it believes I am wrong because if I am wrong I am grandly wrong (i.e. crazy) and have incorrectly implicated the SEC's use of its regulatory authority.

David Danon

Anne Sherry said...

Mr. Danon,

Thank you for taking the time to comment on the story and share some insight regarding your whistleblower case. It's rare that we have the opportunity to hear a party’s perspective on a matter.

I appreciate your clarification about the SEC's views. My statement that the Commission does not take a position referred only to their declining, as a legal matter, to take an official position within the district court case (motion for leave to file amicus brief, footnote 2). I did not mean to imply that the agency has no private view on the matter.

David Danon said...

Thanks so much. I was very happy to be able to contribute to your excellent blog. I hope to be able to write more as my cases progress.

Regards,

David