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By Samson Habte
Nov. 20 — A qui tam action filed by a former in-house lawyer for the mutual fund giant Vanguard Group Inc. was thrown out Nov. 13 because the lawyer revealed confidential information about Vanguard in his complaint.
The decision by Justice Joan A. Madden of the New York Supreme Court, New York County, adds to a small—but largely harmonious—body of case law that precludes in-house lawyers from pursuing whistle-blower claims against former employers when doing so would violate the lawyer's professional obligations not to spill secrets about clients and former clients.
The court said David Danon, Vanguard's former in-house counsel for tax matters, violated two ethics rules when he filed a qui tam complaint that accused Vanguard of violating New York's False Claims Act by illegally evading $1 billion in federal taxes and $20 million in New York taxes over the last decade.
Those rule violations required the dismissal of the lawsuit and disqualification of Danon and his lawyer from “any subsequent related qui tam action,” Madden said.
Leah Robinson, a partner at Sutherland Asbill & Brennan LLP, told Bloomberg BNA in a Nov. 19 e-mail that “The tainted nature of the whistle-blower's evidence here is likely why the Attorney General did not intervene in the first place.” New York Attorney General Eric T. Schneiderman (D) declined to intervene in the case. “It's the type of case the AG shouldn't touch with a 10-foot pole,” Robinson said.
Madden's 23-page order dismisses a qui tam lawsuit that Danon filed in 2013, while he was still working at Vanguard.
Citing “direct information obtained through his employment,” Danon alleged that Vanguard used “false records or statements to conceal, avoid, evade, or decrease [its] obligation to pay” taxes.
Vanguard argued the lawsuit should be dismissed because Danon's complaint divulged confidential information and thus violated several New York Rules of Professional Conduct, including Rule 1.6 (confidentiality) and Rule 1.9(c) (confidentiality duties to former clients).
Danon claimed the disclosures were authorized under Rule 1.6(b)(2), which carves out an exception to the general duty of confidentiality. That provision states: “A lawyer may reveal or use confidential information to the extent that the lawyer reasonably believes necessary … to prevent the client from committing a crime.”
But Madden said the exception was inapplicable because “the extent of the disclosure of Vanguard's confidential information was broader than reasonably necessary to stop the alleged tax violations.”
The opinion notes that while Danon's qui tam claims were predicated on purportedly illegal tax practices that occurred from 2011 to 2013, his complaint details alleged violations “dating back to 2004.”
The inclusion of that information renders Rule 1.6(b)(2) inapplicable because the exception “is ‘strictly construed … and is applied only when a client is planning to commit a crime in the future or is continuing an ongoing criminal scheme,'” Madden said.
She quoted United States v. Quest Diagnostics Inc., 734 F.3d 154, 29 Law. Man. Prof. Conduct 699 (2d Cir. 2013), which held that a former in-house counsel's disclosures of a company's confidences dating to 1996 were broader than necessary to prevent ongoing crime in 2005.
Madden also cited New York County Ethics Op. 746, 29 Law. Man. Prof. Conduct 677 (2013), which advised that ethics rules generally preclude corporate lawyers from seeking whistle-blower bounties from the Securities and Exchange Commission.
The court said it also was significant that Danon—like the relator in Quest—had “alternate means of preventing” Vanguard's alleged crimes.
Madden noted that Danon exercised those alternate means when, three months before he filed suit, he gave “internal Vanguard documents to the IRS, SEC and the New York State Attorney General, authorities which Danon does not claim lack the ability to redress the alleged fraud in the complaint.”
Madden said cases Danon relied on in arguing that the crime-fraud exception applied were “inapposite in that they addressed whether an evidentiary exception to the attorney-client privilege exists” and not the issue here: “whether the exception to confidentiality applies under the ethics rules.”
“In this connection, the courts have held that ‘[t]he ethical duty to preserve a client's confidences is broader than the evidentiary privilege,'” Madden said.
Madden further held that both Danon and his attorney—like the lawyer for the relator in Quest—were disqualified from taking part in “any subsequent related qui tam action” against Vanguard, including litigation that the state may pursue.
“Danon's counsel has been put in a position to obtain confidential information and would be in a position to use this information to give any subsequent client an unfair and unethical advantage,” Madden stated.
Stephen Sorensen of Thomas Alexander & Forrester LLP, Venice, Cal., represented Danon.
Vanguard was represented by Heidi A. Wendel, Robert Gaffey, Andrew Kleinfeld and Dennis Rimkunas of Jones Day, New York; and by Raymond Wiacek of Jones Day, Washington, D.C.
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