Vanguard Tax Whistleblower Case Advancing After High Court Ruling

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By Jennifer McLoughlin

A former attorney for Vanguard Group Inc. is restarting a whistleblower claim against the investment management firm following a U.S. Supreme Court decision that narrowed the anti-retaliation safeguards in the 2010 Dodd-Frank financial law.

David Danon claims he was fired in June 2013 for alerting company officers and attorneys to illegal tax and corporate activities, including failure to report more than $1 billion in state and federal tax liabilities.

Originally filed in December 2015, the U.S. District Court for the Eastern District of Pennsylvania dismissed Danon’s case in May 2016, ruling that Danon was precluded from relitigating all claims after a New York state court previously addressed the matter and dismissed the case. However, nearly a year later, the U.S. Court of Appeals for the Third Circuit reversed in part, finding Danon wasn’t precluded from alleging a whistleblower claim under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

The parties subsequently agreed to stay the proceedings pending a U.S. Supreme Court case ( Digital Realty Trust, Inc. v. Somers ) that raised the question of whether internal corporate reporting was sufficient to support a whistleblower retaliation claim under Dodd-Frank. The high court ruled last month that Dodd-Frank authorizes whistleblower lawsuits only by individuals who reported the alleged misconduct to the Securities and Exchange Commission.

In an amended complaint filed March 12, Danon argued in part that his “reporting was protected conduct under the Sarbanes Oxley Act and the Dodd Frank Act as set forth by the U.S. Supreme Court in Digital Realty Trust Inc. v. Somers.

SEC Reporting

According to the timeline set forth in Danon’s complaint, the former attorney allegedly took several steps while employed with Vanguard to alert colleagues of unlawful practices in violation of SEC regulations and the federal tax code:

  •  multiple reports to a Vanguard principal,
  •  multiple reports to Vanguard’s controller,
  •  multiple discussions with attorneys in Vanguard’s Tax Division, and
  •  refusal to sign or participate in fraudulent filings.
As of January 2013, Danon was on notice of Vanguard’s intention to terminate his employment—however, according to the amended complaint, the date of termination wasn’t specified.

Danon claimed “protected status” under Dodd-Frank, alleging that while still employed in May 2013, he “reported all of his opinions and prior disclosures to Vanguard to the Securities Exchange Commission.”

“Mr. Danon’s previous claims—including his attempt to claim a ‘whistleblower’ award in New York—have been rejected by the courts,” Carolyn Wegemann, a Vanguard public relations representative, told Bloomberg Tax in a March 16 email. “His latest amended employment claim is equally without merit. We will continue to vigorously defend against all such claims.”

Dodd-Frank Protections

Dodd-Frank prohibits retaliation by employers against whistleblowers and provides a private cause of action in the event they’re discharged or discriminated against by their employers in violation of the act. However, lower courts had conflicted over what form of reporting triggered the anti-retaliation protections.

Writing for the Supreme Court in Somers, Justice Ruth Bader Ginsburg said the “core objective” of Dodd-Frank’s whistleblower program was to “motivate people who know of securities law violations to tell the SEC,” quoting from a Senate report.

Danon’s counsel didn’t immediately respond to a request for comment.

The case is Danon v. Vanguard Grp. Inc. , E.D. Pa., No. 15-CV-6864, amended complaint filed 3/12/18 .

To contact the reporter on this story: Jennifer McLoughlin in Washington at jmcloughlin@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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