Texas Treatment of Whistleblower Differs From New York's

A former in-house attorney turned whistleblower has received very different treatment from two very different states: Texas and New York.

Former Vanguard Group Inc. in-house counsel David Danon acted as a confidential informant during a tax audit of the company. Danon worked for Vanguard as a tax attorney from 2008 until 2013, when he filed a whistleblower suit against the company. In his complaint, Danon alleged that Vanguard operated as an illicit tax shelter, illegally manipulating transfer pricing in order to avoid paying federal and state income taxes.

Under federal and state False Claims Acts, whistleblowers can be entitled to receive a share of any financial recovery the government makes from legal judgments or settlements. Danon first filed suit against Vanguard in New York; the Securities and Exchange Commission and the Internal Revenue Service as well as several states also launched investigations into Vanguard’s alleged wrongdoing.

In a recent decision, the New York Supreme Court dismissed Danon’s qui tam action against Vanguard, saying that Danon had violated attorney ethics rules by sharing confidential company information with government agencies. The court found that as a former in-house attorney, Danon “may not proceed with, nor profit from, any disclosures of confidential information . . . in violation of New York State attorney ethics rules.”

In contrast, the Texas Comptroller of Public Accounts paid Danon $117,000 for his role as a whistleblower. Danon’s attorney said that he might be entitled to more financial rewards pending the outcome of the SEC, IRS and other state investigations.

A tax expert hired by Danon recently sent a report to the IRS estimating that Vanguard’s total unpaid federal income tax liability from 2007 to 2014 was $34.6 billion. Reuven S. Avi-Yonah, law professor at the University of Michigan Law School, said in his report that Vanguard “has no legal justification” for charging its mutual funds artificially low management fees that reduce its reported profits and tax obligations.

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