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.