Vanguard ‘whistleblower’ sues SEC, cites signs company gave up billions in untaxed funds

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Former Vanguard lawyer David Danon has asked a federal court to speed a Securities and Exchange Commission ruling on his nine-year-old request to be named a whistleblower, so he can try to get paid for sharing data he says cost him his job.

Piecing together reports he says suggest the government used his help between 2013 and 2016 to make the Vanguard Group stop hiding billions from tax collectors, Danon says he’s owed an answer as to whether his analysis was used to ensure Vanguard now pays its taxes.

Danon is petitioning the U.S. Appeals Court for the District of Columbia to order the SEC to finally respond to Danon’s request for whistleblower status, within 30 days. Danon has also called on the court to make the SEC provide specific information he’s been seeking to back his claim for a whistleblower’s cut of money Vanguard may have paid the government.

In May 2013, Danon told the IRS and SEC he believed the investment giant was massively underpaying state and federal taxes. At least one state, Texas, later paid Danon for pointing its tax collectors to funds Vanguard owed. Danon’s petition accuses the SEC of showing a lack of “good faith” in taking so long to decide if he has a basis for a federal claim, as well. The SEC declined to comment on the case.

Vanguard, which is not a defendant in Danon’s action, also declined to comment, said spokeswoman Emily Farrell. The company in the past has said it paid taxes that it owed.

Danon’s complaints are all too familiar, said Bill Singer, a New York lawyer who has represented whistleblowers, investors and securities firms.

He said Congress, in the Dodd-Frank Act of 2010, intended to “empower” employees who risk their careers to report wrongdoing by giving them powerful cash incentives, as at other agencies. But the SEC has instead used the program “to generate press releases” about rare awards, while frequently using tipsters’ information, or passing it along to other enforcement agencies, and ignoring the tipsters’ pleas for protection and pay, Singer said.

“It is the black hole of despair,” Singer said of the SEC response to people like Danon once staff has gotten what they want from them. “They don’t return calls. They don’t write back.”

He said courts have been reluctant to overrule the SEC, saying it has the power to decide which tips to pursue and which to reward.

Danon also has a complaint pending that he was fired illegally in retaliation for telling the truth about the company’s tax practices. Vanguard lawyers have said he was terminated for not performing his job as assigned, including during the period before he approached the feds. They have noted that his earlier retaliation claim was dismissed in court.

Reached at his Chester County home, Danon declined to comment on whether a similar action for a portion of payments would be filed at the IRS. His lawyers — Anthony J. Bolognese, based in Philadelphia, and whistleblower lawyers Steven W. Thomas, Mark Forrester and Stephen Sorensen of Thomas Alexander Forrester & Sorensen in Las Vegas — had no comment.

Federal law entitles whistleblowers to up to 30% of the funds the government collects thanks to useful information they provide. Neither the government nor Vanguard has confirmed that Danon’s information led the company to pay more taxes.

According to his petition, Danon in May 2013 “began reporting to the SEC about widespread securities, financial and tax fraud at the company.”

Danon also supplied information to the IRS. In the appeals court filing, Danon said he “was doing his job in speaking up about this illegality that not only violated federal tax laws,” but also broke U.S. securities laws, leaving its SEC public filings “materially misleading” to investors.

Neither agency has disclosed actions against Vanguard; IRS actions are typically conducted in strict secrecy, unless they result in litigation.

Danon was fired by Vanguard 25 days after he reported reaching out to federal authorities. He has testified that he went to the agencies after Vanguard leaders, including senior law and accounting officials named in the petition, refused to act on his criticisms or change the “institutional and illicit ways of doing business” that he flagged as illegal.

He continued giving the SEC information after his firing. In 2015 and 2016, according to the petition, he worked with the head of the SEC Office of the Whistleblower and a senior lawyer in the SEC Department of Enforcement. But the chief left for a job at a defense law firm that year. Since then, according to Danon’s petition, the SEC failed to keep his lawyers informed of his whistleblower application.

In 2017 Danon asked the SEC for records related to the information he provided. According to documents in support of the petition, the agency responded that it would take at least three years and thousands of dollars to gather it for him. When he asked again in 2021, but limited the request to documents connected to an SEC investigation, the agency responded that it couldn’t find any — which the petition calls a contradiction that gave Danon’s lawyers “less confidence” of the agency’s sincerity.

Danon, a graduate of Fordham Law School who had worked for a pair of blue-chip New York corporate law firms before joining Vanguard in 2008, told the SEC and IRS that Vanguard’s claim to provide services to its own investment funds “at cost,” instead of at market prices, violated federal tax laws designed to prevent companies from minimizing their reported income to avoid taxes.

He noted that Vanguard has dropped its “at cost” claim since he flagged it as illegal. (Vanguard told the Inquirer in 2019 that it dropped the phrase as it was “streamlining and simplifying our disclosures.”)

Danon also cited what he called an intentional effort by senior Vanguard officials, starting in 1999, to build up a “contingency reserve” in its mutual funds over a period of years, when the money was neither paid out to investors, nor reported as taxable income. Danon referred to the money as a “slush fund” and said the company eventually held back more than $2 billion from both its customers and the IRS.

In his filing, Danon argues that the Inquirer’s reporting on the untaxed funds, and a follow-up last year by Dan Wiener’s Independent Advisor for Vanguard Investors newsletter documenting the belated disclosure and then the reduction and elimination of these reserves in Vanguard SEC reports for 2015-2020, suggest the government used Danon’s information to pressure Vanguard to eliminate the reserve and pay its proper taxes.

Wiener wrote that Vanguard said that the declining reserves were reported to ensure the company was “complying with regulatory and accounting requirements.”

Danon’s petition contends that “it is completely implausible” to expect that Vanguard made that change, getting rid of the “slush fund” in stages between his 2015 meeting with the SEC and its 2020 elimination, “without at least some agreement or understanding with the SEC,” guided by Danon’s information.

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