Vanguard

SEC: Vanguard Whistleblower Deserves Protection

The Securities and Exchange Commission (SEC) has filed a brief in support of Vanguard whistleblower David Danon, who claims he was wrongfully fired after opposing the financial firm’s tax practices. The SEC filed its “friend of the court” brief on Monday, claiming Danon should qualify for whistleblower protection.

Mr. Danon worked as a tax lawyer for Vanguard Group, the largest mutual fund company in the United States. He was fired in 2013 for “not doing his job,” according to the Malvern, Pennsylvania-based financial firm.

The Vanguard whistleblower disagrees, and claims, he was fired because he complained internally about the company underpaying federal and state income taxes. He filed a wrongful termination lawsuit in U.S. District Court for the Eastern District of Pennsylvania near the end of last year. Mr. Danon claims that Vanguard owes roughly $35 billion in federal and state taxes, interest and penalties dating back to 2007.

In response, Vanguard filed a motion to get Mr. Danon’s case tossed, arguing that whistleblower protection laws are only for individuals that come directly to the SEC with potential securities law violations before they are fired. In other words, Vanguard says Mr. Danon isn’t eligible for whistleblower protections because he voiced concerns internally to Vanguard before he ultimately brought allegations to the SEC.

The SEC’s brief to Judge C. Darnell Jones—the federal judge overseeing the Vanguard whistleblower lawsuit—maintains that the Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the agency to offer rewards to individuals who voluntarily provide the SEC with information that leads to a successful enforcement action, and prohibits employers from retaliating against whistleblowers. Dodd-Frank whistleblower rules are in place to protect individuals who report violations internally, the SEC says. If the Vanguard whistleblower lawsuit were to be dismissed, the SEC believes it would “substantially weaken” the agency’s ability to use whistleblowers as the foundation for building cases against corporations accused of wrongdoing.

The irony with this Vanguard whistleblower case is that companies have long battled with the SEC over the question of whistleblower status. When Dodd-Frank was being crafted, some companies were adamant that employees should be encouraged to report any wrongdoing internally before bringing allegations directly to the SEC. How ironic that these same companies are fighting a rule they were supporting a few years ago.

How do the courts view this question of whistleblower status when allegations are made internally before being brought to the SEC? Thus far, they haven’t been consistent. According to the Wall Street Journal, a federal appeals court ruled last September that employees who report internally before bringing allegations to the SEC’s attention are protected, but another court has ruled that they don’t enjoy whistleblower protection.

The SEC has said it is not taking a position on the specifics of Mr. Danon’s Vanguard whistleblower allegations, only on the requirements necessary for claiming whistleblower protection. The agency has issued a regulation on the question of whistleblower protection, and Monday’s brief is in defense of that regulation.

The Vanguard Whistleblower is Helping Beyond the SEC

It is worth noting that last year, Mr. Danon received an informer’s fee of $117,000 for helping the state of Texas collect back taxes owed by Vanguard. Texas audited Vanguard on four separate occasions in 2015, finding that the company owed taxes in each audit.

Mr. Danon has made accusations to the Internal Revenue Service, California, New York and other states, claiming the firm illegally avoided paying taxes. In the California case, the state’s Franchise Tax Board recently told Mr. Danon that the claims against his former employer warranted a criminal investigation. Vanguard could be liable for up hundreds of millions of dollars in that case alone.

In addition to these Vanguard whistleblower claims, Mr. Danon has also alleged to the SEC that Vanguard underpaid its own management affiliate in an effort to minimize its income-tax obligations while the firm hid illegal cash reserves from tax authorities and the company’s investors.

For their part, Vanguard has said the company’s financial arrangements are legal.

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