New York State Ethic Rules Bar Whistleblower Suit By Former Vanguard Tax Lawyer

New York State Supreme Court Judge Joan Madden recently ruled that a former Vanguard Group tax lawyer’s qui tam complaint, filed in 2013 and made public a year later, must be dismissed and cannot be re-filed because it was brought in violation of New York State attorney ethic rules.

David Danon’s complaint alleged that the Vanguard Group, the nation’s largest mutual fund company, illegally manipulated transfer pricing to keep costs – and taxes – artificially low. According to his complaint, Danon repeatedly raised questions internally about the Vanguard Group’s practices; shortly thereafter, Danon was notified that he would be terminated. During the time leading up to his termination, Danon began collecting documents and eventually turned them over to the New York Attorney General’s Office, the SEC and the IRS.

According to the opinion, Danon and his lawyers violated Ethics Rules 1.6 and 1.9(c) by bringing suit while he was still employed and “in a position to obtain confidential information” against Vanguard. While New York permits a lawyer to disclose otherwise confidential information in order to prevent a client from committing a crime, the lawyer may disclose only that information the lawyer “reasonably believes necessary” to prevent the crime. According to Judge Madden, bringing a qui tam lawsuit is not “reasonably necessary to prevent [a client] from committing . . . a crime” because a lawyer could simply inform law enforcement, as Danon did, rather than seeking an award under the False Claims Act. The court also noted that Danon’s disclosure of Vanguard’s past misconduct was improper because disclosing past misconduct is not “necessary to prevent” a client’s future violations.

Judge Madden did not reach the merits of Danon’s complaint, but noted that her decision did not stop New York tax authorities from pursuing potential claims stemming from Danon’s allegations against Vanguard.

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