On July 25th, the details of a massive whistleblower lawsuit against mutual fund corporation Vanguard Group were revealed when the suit was unsealed in the New York Supreme Court. The lawsuit (New York ex rel. David Danon v. Vanguard Group Inc. et al.) alleges that Vanguard operated a tax shelter for nearly 40 years and in doing so, avoided paying hundreds of millions of dollars in state and federal income taxes every year.
David Danon, a former employee in Vanguard’s Office of General Counsel, originally brought the lawsuit in May. The complaint alleges that although Vanguard collected substantial payments from the government for management of several state funds, the company failed to file any New York tax returns prior to 2011. In addition, Danon alleges that Vanguard provided services to its mutual funds at deceptively low prices in order avoid federal and state income taxes. As a result of these artificially low rates, Vanguard showed little or no profit, despite managing funds that totaled close to $2 trillion. Because the company falsely reported the amount of income generated by the fund management, they were able to pay little or no federal or state income tax.While the false income reports were specifically based on government funds managed by Vanguard between 2004 and 2011, the complaint suggests that Vanguard’s false reporting during this time was also designed to dissuade Department of Revenue inquiries regarding earlier tax years. Vanguard’s alleged activities violate both tax law and New York’s state False Claims Act.
The complaint also alleges that Vanguard kept a $1.5 billion contingency reserve, funded by shareholders’ money, on which the company also failed to pay taxes. New York should have received between $7 million and $14 million in income taxes off this fund alone. The complaint alleges that Vanguard fraudulently avoided total of more than $1 billion in federal taxes and $20 million in New York taxes. Under the state’s False Claims Act, Danon is entitled to 15-30% of the amount recovered.