New York Trial Court Dismisses FCA Tax Case against Vanguard; Determines Relator Violated Confidentiality Provisions of State Attorney Ethics Rules
On November 13, 2015, the New York State Supreme Court dismissed a qui tam action brought under New York State Finance Law §§ 187-194 (“False Claims Act”) against The Vanguard Group Inc., The Vanguard Group of Mutual Funds, and Vanguard Marketing Corporation (collectively, “Vanguard”) by a former Vanguard in-house tax attorney because the Court found that plaintiff had improperly relied on confidential information obtained through his employment at Vanguard to bring the claim. State of New York ex rel. Danon v. Vanguard Grp., Inc., No. 100711-13 (N.Y. Sup. Ct. Nov. 13, 2015).
In May 2013, David Danon (the “Relator”) brought suit under the False Claims Act on behalf of New York State against Vanguard, primarily alleging that Vanguard used its at-cost corporate structure to illegally manipulate transfer pricing, shifting income to tax-exempt and tax-deferred investment vehicles to avoid $1 billion in federal income tax and at least $20 million in New York tax over a 10-year period. Relator claimed that Vanguard’s use of false representations and false documentation to support its conduct constituted false claims under the False Claims Act. Relator sought on behalf of himself and New York a judgment equal to three times the amount of damages sustained, plus a civil penalty of $6,000 to $12,000 for each False Claims Act violation, with interest, including the cost to New York of any action-related expenses.
Relator’s qui tam lawsuit was filed under seal and made public after the New York Attorney General’s Office declined to convert or intervene in the action. Subsequently, Vanguard filed a motion to dismiss the complaint, arguing in part that Relator’s lawsuit should be dismissed, and he and his counsel disqualified from the action, because Relator allegedly violated Rules 1.6 and 1.9(c) of the New York Rules of Professional Conduct pertaining, respectively, to the confidentiality of information and duties owed to former clients. Relator responded, inter alia, that he was permitted to bring the action to stop Vanguard’s ongoing criminal conduct under the “crime-fraud” exception of Rule 1.6(b)(2), which provides that “[a] lawyer may reveal or use confidential information to the extent that the lawyer reasonably believes necessary…to prevent the client from committing a crime.” 22 NYCRR Part 1200 (Rule 1.6(b)(2)).
While the Court acknowledged that Relator, as a private party, had the right to bring a qui tam action under New York’s False Claims Act § 190(2), it found it “appropriate to look toward federal law” to determine the effect that Relator’s potential violation of ethics rules would have on his qui tam action because “New York’s False Claims Act ‘follows the federal False Claims Act (31 USC § 3729 et seq.)’”. See State of New York ex rel. Seiden v. Utica First Ins. Co., 96 A.D.3d 67, 71 (1st Dept.), lv denied 19 N.Y.3d 810 (2012). Accordingly, the Court reviewed U.S. v. Quest Diagnostics Inc., 734 F.3d 154 (2d Cir. 2013), in which the Second Circuit affirmed the dismissal of a qui tam action because the relator – through the defendant’s former general counsel – had disclosed confidential information dating back to 1996 that was beyond what was “necessary” as contemplated by Rule 1.6(b)(2) to prevent any alleged criminal conduct ongoing at the time the lawsuit was filed in 2005. There, the Second Circuit held that “[n]othing in the False Claims Act evinces a clear legislative intent to preempt state statutes and rules that regulate an attorney’s disclosure of client confidence.” Id. at 163-165.
Applying this principle to the instant case, the Court found that it was not reasonably necessary for Relator to bring his qui tam action and reveal Vanguard’s confidential information in order to prevent Vanguard from committing a crime based on its alleged tax violations. First, it found that Relator could and did provide internal Vanguard documents to the relevant authorities with the ability to redress the alleged fraud prior to filing his lawsuit. Second, Relator revealed in his complaint information that went far beyond that required to prevent alleged future tax fraud, alleging tax violations dating as far back as 1999.
Accordingly, the Court dismissed Relator’s qui tam action, and disqualified both Relator and his counsel in order to prevent any subsequent client from using the improperly disclosed information against Vanguard. The Court’s decision provides further guidance as to what constitutes acceptable conduct by a relator when bringing a qui tam action, and underscores the importance of vigilantly protecting confidential corporate information.