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Ex-Vanguard In-House Gets Backing From the SEC in Whistleblower Case

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By Jonathan R. Tung, Esq. on April 28, 2016 3:58 PM

A former in-house lawyer for Vanguard group has a friend in the SEC in his wrongful termination battle against the giant mutual fund. It is a great example of the sort of whistleblower situation that no lawyer should wish on another.

This is one more case in a recent series of relator suits against large financial institutions that've been accused to tax-shenanigans.

In-House Lawyer, Whistleblower

David Danon was an in-house lawyer for Vanguard when he secretly filed a complaint in a New York state court, shining a light on Vanguard's underpayment of state and federal taxes to the tune of about $1 billion. Not surprisingly, he was soon let go and another complaint was filed against Vanguard. But the court dismissed the suit on the theory that Danon had violated local ethics rules concerning client confidentiality and privilege. It did not detail the merits of Danon's claims or his allegations.

The latest is that the SEC has decided to intervene in Danon's favor, claiming that the now-ex-employee should enjoy U.S. whistleblower protections. Vanguard has moved the district court to dismiss the case, and Danon has parried with a motion to deny.

State of Flux and Dodd Frank

The current environment for regulators and financial institutions is tumultuous and nobody seems to know what rules apply -- or how. Controversies have erupted in recent years over questions of who whistleblowers are, and how much protection they should enjoy -- particularly when those whistleblowers owe their clients a fiduciary duty, like lawyers.

In the formative years of Dodd Frank, companies argued that workers and company lawyers should be encouraged to report up the food chain first. However, there has been a sea-change in sentiment as more companies now believe that lawyers should skip the board and go straight to government authorities. Court opinions are hardly consistent. One court has opined that lawyers must stick with a more "keep it in the family" approach while another court has favored the alternative view.

No Easy Answer

This leaves many in-house lawyers stuck between a rock and a hard place. Company tax evasion is illegal and arguably bad for the company. But in-house lawyers cannot simply report that information to the SEC or local authorities willy-nilly. It's bad for the company (not to mention your career). Prudent attorneys will have to take the reasonable path and check local ethics rules.

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