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Vanguard: Lawyer-Turned-Whistleblower' Betrayed' Fund Giant
FYI: (Follow-Up Article) Vanguard Group, the Malvern mutual fund giant, has responded to a New York whistleblower lawsuit by former Vanguard tax lawyer David Danon with accusations of betrayal, theft and ethics violations the company says should bar him or his lawyers from bringing the complaint. Regards, Ted http://www.philly.com/philly/blogs/inq-phillydeals/280112952.html
"...Vanguard attached a copy of founder John C. Bogle's initial letter to the SEC reviewing the company's structure at the time of its founding. The document describes the early 1970s mutual fund business as an industry in rapid decline, plagued by high fees, poor results, manager conflicts of interest, and a lack of investor trust. Bogle presented Vanguard's fund-owned and at-cost structure as a way to regain public trust and convince Americans to start buying mutual funds again."
As a Vanguard client/owner, who is paying a portion of the defense costs, this looks like someone trying for lottery level money after abusing a position of trust. Even as a taxpayer, I don't feel cheated by Vanguard. If the Vanguard management employees don't feel cheated by their salaries, why must I pay a higher fee structure for their advice?
There are lots of different things going on here. It's been many days since I read a brief or two on the case, so this may not be exactly right (and I don't have the time now to review), but here goes:
- IMHO Vanguard should win quickly - not on the merits but on procedure - they seem to be arguing that the plaintiff (as former Vanguard counsel) cannot bring suit (breach of attorney client privilege). He may be relying upon a whistleblower exception to the privilege (assuming there is one - I haven't checked statute; Vanguard seems to be saying that caselaw denies there's such an exception).
But if there is such an exception, he'd have to be saying something new. While he may have new details, the basic argument (that Vanguard charges below market rates) isn't new - Vanguard makes it clear this has been public knowledge for forty years.
Vanguard is also arguing on the merits (that they didn't break a rule), but I don't expect it to get that far.
- Why people should care - not because you're a Vanguard investor/owner, but because you're a taxpayer. The complaint is not that Vanguard customers are losing (rather, they're winning with Vanguard's structure), but that the US Treasury, and thus all taxpayers, are losing, because Vanguard isn't paying its fair share of taxes.
There is a rule that says funds must pay market rate for services. Vanguard Group appears to violate this rule by charging cost - clearly below market rate, since fund management companies charge to make a profit. (In Vanguard's case, those profits would be distributed back to the funds, which own the Vanguard Group management company.)
So why does this matter, if the higher charges would simply flow right back to the funds that paid those extra charges? Because Vanguard Group would have to pay taxes to the IRS and to states. Only the after tax profits would be returned to the funds.
If Vanguard Group charged an extra $1M (to earn a $1M profit for all its management services), it might owe the IRS $350K. $650K would flow back to the funds, but the shareholders of those funds would have paid the full $1M extra in management fees.
At least that's my understanding of some of the issues.
Frankly I don't know if Vanguard is guilty or not. I just know that there are a lot many other things what are wrong with investment management and if they get even 1% of notice this thing is getting, we should all be happy.
Comments
- IMHO Vanguard should win quickly - not on the merits but on procedure - they seem to be arguing that the plaintiff (as former Vanguard counsel) cannot bring suit (breach of attorney client privilege). He may be relying upon a whistleblower exception to the privilege (assuming there is one - I haven't checked statute; Vanguard seems to be saying that caselaw denies there's such an exception).
But if there is such an exception, he'd have to be saying something new. While he may have new details, the basic argument (that Vanguard charges below market rates) isn't new - Vanguard makes it clear this has been public knowledge for forty years.
Vanguard is also arguing on the merits (that they didn't break a rule), but I don't expect it to get that far.
- Why people should care - not because you're a Vanguard investor/owner, but because you're a taxpayer. The complaint is not that Vanguard customers are losing (rather, they're winning with Vanguard's structure), but that the US Treasury, and thus all taxpayers, are losing, because Vanguard isn't paying its fair share of taxes.
There is a rule that says funds must pay market rate for services. Vanguard Group appears to violate this rule by charging cost - clearly below market rate, since fund management companies charge to make a profit. (In Vanguard's case, those profits would be distributed back to the funds, which own the Vanguard Group management company.)
So why does this matter, if the higher charges would simply flow right back to the funds that paid those extra charges? Because Vanguard Group would have to pay taxes to the IRS and to states. Only the after tax profits would be returned to the funds.
If Vanguard Group charged an extra $1M (to earn a $1M profit for all its management services), it might owe the IRS $350K. $650K would flow back to the funds, but the shareholders of those funds would have paid the full $1M extra in management fees.
At least that's my understanding of some of the issues.