As discussed in a previous SFMS blog, whistleblowers can be employees, suppliers, contractors, clients, or any individual who becomes aware of illegal activities – including attorneys. Although whistleblowers are often incentivized to come forward with information about legal violations, attorneys should be aware of specific restrictions before blowing the whistle. Recently, New York State Judge Joan A. Madden dismissed a case because the whistleblower, who was an attorney, broke ethics rules.
David Danon (“Danon”), a former tax attorney for Vanguard Group Inc. (“Vanguard”), filed a suit alleging that Vanguard avoided more than $1 billion in federal taxes and $20 million in New York taxes through price manipulation. Vanguard allegedly charged artificially low prices to its related funds for investment management and administrative services to avoid paying federal and state income taxes on the profits, violating the federal tax code and the laws of a number of jurisdictions. Danon also claimed that Vanguard knowingly filed false New York tax returns to disguise its practices and that it did not meet its payroll withholding obligations.
However, according to New York attorney ethics code, a company’s former counsel is prohibited from disclosing the company’s confidential information. Danon argued that the “crime-fraud exception” allows attorneys to reveal confidential information to prevent clients from committing a crime. He also alerted the Internal Revenue Service and the Securities and Exchange Commission three months before filing the suit. Nonetheless, Judge Madden was not convinced and dismissed the alleged violations because the extent of the disclosure of Vanguard’s information was broader than necessary to stop the violations.
The Judge noted in her order that the dismissal does not bar state authorities from investigating the claims concerning Vanguard’s tax practices.
The legal team at SFMS has substantial experience representing whistleblowers. If you have any questions regarding this subject or this posting, please contact Chiharu Sekino (email@example.com) or Alec Berin ( firstname.lastname@example.org). We can also be reached toll-free at (866) 540-5505.
Shepherd, Finkelman, Miller & Shah, LLP, is a law firm with offices in California, Connecticut, Florida, New Jersey, New York, Pennsylvania and Wisconsin. SFMS also maintains affiliate offices in London, England, and Milan, Italy, and is an active member of Integrated Advisory Group (www.iaginternational.org), which provides our firm with the ability to provide our clients with access to excellent legal and accounting resources throughout the globe. For more information about our firm, please visit us at www.sfmslaw.com.
Koh, Eric. “Vanguard Tax Fraud Suit Axed Over Attorney Ethics Breach.” Law360. Last modified on November 18, 2015.