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Vanguard: Fired lawyer wasn't protected; firm pays 'fair and appropriate' tax

The Malvern-based investment giant says legal victory would result in "finally ending his five years of attempting to plead a viable whistle-blower claim against Vanguard," though it wouldn't necessarily stop the IRS.

Vanguard in Malvern Pa.
Vanguard in Malvern Pa.Read moreSTEVEN M. FALK / Staff Photographer

Vanguard Group has urged the federal court in Philadelphia to dismiss its former tax lawyer David Danon's wrongful-firing lawsuit, arguing that he wasn't protected as a whistle-blower under the 2010 Dodd-Frank financial-reform law because he didn't appeal to the Securities and Exchange Commission until after the company told him in January, 2013, that he would be terminated.

According to Vanguard's filing Monday, a victory for the Malvern-based investment giant would result in "finally ending his five years of attempting to plead a viable whistle-blower claim against Vanguard." The filing, by Vanguard's lawyers at Klehr Harrison Harvey Branzburg LLP in Philadelphia and Jones Day in New York, noted the federal court had previously rejected Danon's claim for protection under the Sarbanes-Oxley federal accounting law and a Pennsylvania whistle-blower law. A New York judge ruled Danon could not demand payment under that state's whistle-blower statute, either.  He has collected $117,000 from Texas for giving that state information that led to Texas collecting more money from Vanguard.

In his amended complaint in the wrongful-filing suit last month, Danon argued he was told in January 2013 he would have to leave, but the company kept him on the payroll until June, so he was still an employee when he told the SEC in May that the company had been systematically and significantly underreporting its taxable income and underpaying its income taxes for years; tax lawyers have said liabilities could reach the billions if the Internal Revenue Service agrees. Danon joined Vanguard in 2008.

If Danon's federal claim is rejected, it's still up to the IRS and state tax officials to decide if his critique of Vanguard's financial and tax policies should result in higher payments of past or future taxes, and whether Danon deserves any reward as a whistle-blower. Danon has also told the SEC that Vanguard failed to properly report tax issues to its shareholders. If the SEC believed Vanguard should say more it could require the private, for-profit company to increase disclosure. The SEC filed a friend-of-the-court brief supporting some of the whistle-blower arguments cited in Danon's initial wrongful-firing suit, but hasn't taken any position as to his tax or reporting claims.

The IRS can take years to decide corporate tax liability questions, and Vanguard could appeal any filing in court. Even if the IRS finds Vanguard underpaid, will it matter to shareholders? Even though the company has lowered fees on many of its funds in recent years, it has increased revenues, to around $5 billion a year, from an estimated $3 billion in the early 2010s, potentially enabling it to absorb a significant back-tax bill or higher future taxes without raising fees, even if the service does find the company should have paid more.

"As we have stated from the outset of these matters in 2014, we are confident that we pay a fair and appropriate amount of taxes," said Vanguard spokesman John Woerth, adding that "we continue to lower costs" and extend savings to investors in the form of lower fees.