Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]
- steadyeddy
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Re: Vanguard sued for charging too little
$1.5 billion is probably not an outsized contingency fund when compared to Vanguard's operating expenses, though I'm sure that assertion will be debated vigorously by the attorneys.
If the ruling goes against Vanguard, they can always go and domicile in Dublin.
If the ruling goes against Vanguard, they can always go and domicile in Dublin.
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Re: Vanguard sued for charging too little
Whether it is an outsized contingency fund may be beside the point. Are Vanguard's for-profit competitors allowed to deduct their "contingency funds" in computing their income subject to corporate income tax?steadyeddy wrote:$1.5 billion is probably not an outsized contingency fund when compared to Vanguard's operating expenses, though I'm sure that assertion will be debated vigorously by the attorneys.
Re: Vanguard sued for charging too little
Isn't Vanguard a non profit?
Isn't the federal government's retirement savings plan operated this way?
Isn't the federal government's retirement savings plan operated this way?
Re: Vanguard sued for charging too little
You may be overestimating how long it takes to draft a complaint (especially considering that the plaintiff is an attorney) and how long quickly this case will be dismissed. Also, the attorneys who filed the complaint are no longer repreenting the plaintiff.
dodecahedron wrote: He is a major big name in the whistleblowing law industry, with some very impressive credentials.
Last edited by TIAX on Sun Jul 27, 2014 12:33 pm, edited 1 time in total.
Re: Vanguard sued for charging too little
I've not seen Vanguard claim nonprofit status as the law defines it:Calm Man wrote:Isn't Vanguard a non profit?
https://about.vanguard.com/what-sets-va ... p-matters/In other words, Vanguard is structured as a "mutual" mutual fund company.
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Re: Vanguard sued for charging too little
The banks have been fulminating about credit unions for years and trying to eliminate credit unions' tax exemption... irony---> not in their own interests, of course, but in the interests of the victimized credit union customers.<---ironyKyleAAA wrote:I'm not a lawyer, but it unfortunately sounds to me as if there's at least SOMETHING to this lawsuit. These transactions certainly aren't arms-length transactions. On the other hand, the law is stupid and poorly written in the first place if it doesn't allow something like this. Mutual companies aren't exactly rare. State Farm is another example.
Does the mutual structure give some companies an unfair advantage when competing with other for-profit companies in the same space? Yeah, probably.
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Re: Vanguard sued for charging too little
Vanguard is chartered as a regular old business corporation, not a non-profit. A search at https://www.corporations.state.pa.us/co ... search.asp returns:JDDS wrote:I've not seen Vanguard claim nonprofit status as the law defines it:Calm Man wrote:Isn't Vanguard a non profit?
https://about.vanguard.com/what-sets-va ... p-matters/In other words, Vanguard is structured as a "mutual" mutual fund company.
(The Vanguard Group Foundation is the organization through which Vanguard distributes some charitable donations to local causes).
I'm rooting for Vanguard, but I've long been annoyed by the somewhat weaselly language they use to describe their governance structure; in my opinion, it allows people to infer, incorrectly, that Vanguard is non-profit.
Last edited by nisiprius on Sun Jul 27, 2014 1:17 pm, edited 1 time in total.
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Re: Vanguard sued for charging too little
OP here. The thing I hate about our lawsuit culture is the ease in which a complaint with "damning language" can be filed.
Here is one from a few years ago:
http://www.bogleheads.org/forum/viewtop ... 10&t=22574
That lawsuit accused Vanguard of breaking the law and doing all sorts of bad things. It took three years, and a number of appeals, but the lawsuit was dismissed with prejudice.
This most recent press release/lawsuit will suffer a similar fate. The sad thing is, it is cheaper for Vanguard to pay the bitter ex-employee a million dollars to move on then to fight this. Probably from a pure P/L basis it would make sense, but I don't mind them fighting creeps who make outrageous and factually incorrect claims, like the PartyGaming suit above.
The $1.5b reserve is a non-issue. Harvard has $35 billion, a local non-profit whose board i sit on has $1.5 million. In neither case does the existence of reserves and the existence of being tex-exempt or non-tax paying come up as an issue. The "market rate" for the services that Vanguard corp provides Vanguard mutual funds is inflated by an industry with profit margins AND wages are some of the highest in the economy. That isn't put in the complaint. In fact, the whole idea that Vanguard is the only rational provider pricing these investment services is overlooked.
Here is one from a few years ago:
http://www.bogleheads.org/forum/viewtop ... 10&t=22574
That lawsuit accused Vanguard of breaking the law and doing all sorts of bad things. It took three years, and a number of appeals, but the lawsuit was dismissed with prejudice.
This most recent press release/lawsuit will suffer a similar fate. The sad thing is, it is cheaper for Vanguard to pay the bitter ex-employee a million dollars to move on then to fight this. Probably from a pure P/L basis it would make sense, but I don't mind them fighting creeps who make outrageous and factually incorrect claims, like the PartyGaming suit above.
The $1.5b reserve is a non-issue. Harvard has $35 billion, a local non-profit whose board i sit on has $1.5 million. In neither case does the existence of reserves and the existence of being tex-exempt or non-tax paying come up as an issue. The "market rate" for the services that Vanguard corp provides Vanguard mutual funds is inflated by an industry with profit margins AND wages are some of the highest in the economy. That isn't put in the complaint. In fact, the whole idea that Vanguard is the only rational provider pricing these investment services is overlooked.
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Re: Vanguard sued for charging too little
One difference is that when the related companies are wholly owned subsidiaries of a parent company, they aren't going to have separate tax returns. Dividends can be paid to the parent without taxation, they are just treated as profits of the parent company. Vanguard is weird because instead of a parent company that owns subs, there are a group of companies (the funds) that jointly own another company (vanguard). So they don't get the tax treatment of having a wholly owned sub. Each fund only owns based on its percentage of the overall 2 trillion in funds. Again, I'm not a tax lawyer (just a lowly corporate lawyer), but I think it's clear that vanguard should be paying taxes on its profits. I just don't see how anyone can demand that vanguard be operated for maximum profits. Companies are run for the benefit of ownership (shareholders, members, whatever), not for maximum tax contributions. If vanguard is operated for minimal returns, that's a corporate governance issue between ownership (the funds) and the managers of vanguard, and ultimately us as investors. And personally, I think it's great.TIAX wrote:
You can find thousands of these related-pary transactions via EDGAR so the rule certainly can't be that at-cost transactions between related parties are impermissible.
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Re: Vanguard sued for charging too little
I don't understand this at all. I am not a tax expert, but I always thought corporations paid taxes based on consolidated financials. Intercompany transactions for 100% owned subsidiaries such as these are always eliminated in the consolidation process. What am I missing?
Re: Vanguard sued for charging too little
It looks like the plaintiff, David Joseph Danon, was suspended from the practice of law in Pennsylvania.
I guess suing your employer before leaving the practice of law is one way to go. I hope Vanguard has some counterclaims to assert.
I guess suing your employer before leaving the practice of law is one way to go. I hope Vanguard has some counterclaims to assert.
Re: Vanguard sued for charging too little
The link in human readable format: Complaint Filed Against VanguardBuysider wrote:OP here. The thing I hate about our lawsuit culture is the ease in which a complaint with "damning language" can be filed.
Here is one from a few years ago:
http://www.bogleheads.org/forum/viewtop ... 10&t=22574 ...
Like the older thread, please state your opinions factually. Both perspectives (for and against Vanguard) are welcome, but do it in a civil manner. See this post by the site owner, Alex Frakt.
Re: Vanguard sued for charging too little
[(removed) --admin LadyGeek] New York lawyer (and his lawyers) tries to make money off of Vanguard's shareholders. Shocker.
The complaint is an interesting read, if but to help understand how Vanguard's structure is set up: http://taxprof.typepad.com/files/vanguard-complaint.pdf
I haven't gotten to the part about the contigency fund, but I doubt the rest of it is going anywhere. I've never read a complaint that makes the defendant sound like the good guy, but this one does.
JT
The complaint is an interesting read, if but to help understand how Vanguard's structure is set up: http://taxprof.typepad.com/files/vanguard-complaint.pdf
I haven't gotten to the part about the contigency fund, but I doubt the rest of it is going anywhere. I've never read a complaint that makes the defendant sound like the good guy, but this one does.
JT
Re: Vanguard sued for charging too little
Could VGI offer to sell its services to unrelated mutual funds at cost?
Ron
Ron
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Re: Vanguard sued for charging too little
I looked up the credentials of the plaintiff's lead http://www.hanlyconroy.com/thomas.html for that case. There is no comparison between him and the much heavier hitter, Dean Zerbe, who is putting his name and credibility on the line in signing onto this case. Dean Zerbe literally wrote the language of the 2006 IRS whistleblower law (in his former role as lead counsel and tax counsel to Chuck Grassley, Chair of Senate Finance Committee) and Dean Zerbe also obtained the biggest whistleblower settlement to date. This doesn't mean he is guaranteed to prevail, of course, but I do think the judges will have to give a careful and thoughtful weighing to what he says, especially because the principles of transfer price accounting central to this case impinge/intersect with so many other controversial tax avoidance schemes.Buysider wrote:OP here. The thing I hate about our lawsuit culture is the ease in which a complaint with "damning language" can be filed.
Here is one from a few years ago:
http://www.bogleheads.org/forum/viewtop ... 10&t=22574
That lawsuit accused Vanguard of breaking the law and doing all sorts of bad things. It took three years, and a number of appeals, but the lawsuit was dismissed with prejudice.
This most recent press release/lawsuit will suffer a similar fate. The sad thing is, it is cheaper for Vanguard to pay the bitter ex-employee a million dollars to move on then to fight this. Probably from a pure P/L basis it would make sense, but I don't mind them fighting creeps who make outrageous and factually incorrect claims, like the PartyGaming suit above.
I do not know about your nonprofit, but Harvard is in a completely different category from Vanguard. It has 501(c)-3 charitable status as an institution of higher education. It *does* have to pay taxes on unrelated business income (for example, it owns commercial rental real estate and pays corporate income tax on rental profits) but the rules for 501(c)-3's do allow them to accumulate endowments for their exempt charitable purpose. Vanguard has no such status.The $1.5b reserve is a non-issue. Harvard has $35 billion, a local non-profit whose board i sit on has $1.5 million. In neither case does the existence of reserves and the existence of being tex-exempt or non-tax paying come up as an issue.
Re: Vanguard sued for charging too little
it looks like that firm dropped him as a client. His new attorneys are here.
dodecahedron wrote: I looked up the credentials of the plaintiff's lead http://www.hanlyconroy.com/thomas.html for that case. There is no comparison between him and the much heavier hitter, Dean Zerbe, who is putting his name and credibility on the line in signing onto this case. Dean Zerbe literally wrote the language of the 2006 IRS whistleblower law (in his former role as lead counsel and tax counsel to Chuck Grassley, Chair of Senate Finance Committee) and Dean Zerbe also obtained the biggest whistleblower settlement to date. This doesn't mean he is guaranteed to prevail, of course, but I do think the judges will have to give a careful and thoughtful weighing to what he says, especially because the principles of transfer price accounting central to this case impinge/intersect with so many other controversial tax avoidance schemes.
Re: Vanguard sued for charging too little
That's certainly a distinction but I'm not sure I see why it's relevant.
Gropes & Ray wrote:One difference is that when the related companies are wholly owned subsidiaries of a parent company, they aren't going to have separate tax returns. Dividends can be paid to the parent without taxation, they are just treated as profits of the parent company. Vanguard is weird because instead of a parent company that owns subs, there are a group of companies (the funds) that jointly own another company (vanguard). So they don't get the tax treatment of having a wholly owned sub. Each fund only owns based on its percentage of the overall 2 trillion in funds. Again, I'm not a tax lawyer (just a lowly corporate lawyer), but I think it's clear that vanguard should be paying taxes on its profits. I just don't see how anyone can demand that vanguard be operated for maximum profits. Companies are run for the benefit of ownership (shareholders, members, whatever), not for maximum tax contributions. If vanguard is operated for minimal returns, that's a corporate governance issue between ownership (the funds) and the managers of vanguard, and ultimately us as investors. And personally, I think it's great.TIAX wrote:
You can find thousands of these related-pary transactions via EDGAR so the rule certainly can't be that at-cost transactions between related parties are impermissible.
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Re: Vanguard sued for charging too little
If that is indeed the case, that is a very good sign for Vanguard! I wonder if Dean Zerbe abandoned the case after the NY AG declined to sign on.TIAX wrote:it looks like that firm dropped him as a client. His new attorneys are here.
Re: Vanguard sued for charging too little
The article linked in the original post refers to Mr. Mahany as the plaintiff's attorney. I would guess you're right about the reason he was dropped by the original firm.
dodecahedron wrote:If that is indeed the case, that is a very good sign for Vanguard! I wonder if Dean Zerbe abandoned the case after the NY AG declined to sign on.TIAX wrote:it looks like that firm dropped him as a client. His new attorneys are here.
Re: Vanguard sued for charging too little
Okay, so since I did pretty well with my understanding on my first post, let me try to go further and the more knowledgeable folks can let us know if I've gone awry.
My understanding of transfer pricing cases is that the issue is generally with the subsidiaries over-charging, not under-charging. For example, suppose Stlutz Industries purchased toilet paper from my Irish subsidiary--at $1000 a roll. When all was said and done, my US operations lost money while my Irish subsidiary turned a profit of $10B. In that case I'd have a legal problem and I'd end up having to negotiate a settlement with the Treasury for 10 cents on the dollar. This would be case of moving profits around to avoid taxes.
With Vanguard, there aren't any (or very little) profits. As Amazon.com shareholders can attest to, there is no law that companies have to be run for maximum profit (except perhaps with some anti-trust rules). Our corporate tax system is based on taxing profits, not revenues or assets. So, the fact that VG manages trillions in assets isn't really material. If they choose not to turn a profit, that's their choice.
If this is correct, then as I see it the real point of vulnerability is that reserve fund, since that would be money that was left over from profits, which theoretically maybe should have been taxed.
Thoughts?
My understanding of transfer pricing cases is that the issue is generally with the subsidiaries over-charging, not under-charging. For example, suppose Stlutz Industries purchased toilet paper from my Irish subsidiary--at $1000 a roll. When all was said and done, my US operations lost money while my Irish subsidiary turned a profit of $10B. In that case I'd have a legal problem and I'd end up having to negotiate a settlement with the Treasury for 10 cents on the dollar. This would be case of moving profits around to avoid taxes.
With Vanguard, there aren't any (or very little) profits. As Amazon.com shareholders can attest to, there is no law that companies have to be run for maximum profit (except perhaps with some anti-trust rules). Our corporate tax system is based on taxing profits, not revenues or assets. So, the fact that VG manages trillions in assets isn't really material. If they choose not to turn a profit, that's their choice.
If this is correct, then as I see it the real point of vulnerability is that reserve fund, since that would be money that was left over from profits, which theoretically maybe should have been taxed.
Thoughts?
Re: Vanguard sued for charging too little
I'm not sure that is correct. Vanguard owns its buildings and the land the campus is built on. Those are assets of the corporation, which presumably runs depreciation expenses through the P&L. At a large 401(k) provider I worked at, the record keeping system for the 401k business cost $450 million to set-up. I'm sure Vanguard's is bigger. Those expenses are borne by the funds in one year. You amortize the costs and accrue the cash to pay for the replacement. A reserve fund should cover operating contingencies as well as include a fund for replacing capital projects. In this industry, some of the capital expenses are very large, and very long term. Accruing a little money each year to set aside for replacing existing systems in prudent, and depending how the depreciation is accounting can cause a firm to have no income, but still grow cash balances.f this is correct, then as I see it the real point of vulnerability is that reserve fund, since that would be money that was left over from profits, which theoretically maybe should have been taxed.
Re: Vanguard sued for charging too little
Whistleblower complaints may originate over a difference of opinion that becomes personal. I have no doubt that the whistleblower is a "true believer" and thinks that everybody else has it wrong. It probably did not go over very well when the WB advised his employer that they had been interpreting the law incorrectly for 40 years, and that their whole business model was wrong. According to the complaint he was demoted! What a way to treat a Fordam graduate, magna cum laude and all. In the whistleblower's mind he advised the company that they are not in compliance with section 482, and never have been. According to the complaint he appears to think they are knowingly breaking the law, and is desperately looking for somebody to support his position. Perhaps a jury in NY will and he will get a big payday, you never know.
The WB keeps looking for somebody to see it his way- VG management, their accountants and legal advisers, the IRS, the SEC and all the state tax authorities where they do business. He has undoubtedly also filed a whistle-blower claim with the IRS, but of course that would be secret, and may never come to light.
The complaint says that VG has never been audited by the IRS or state tax authorities for the transactions in question. If the IRS was pursuing this and proposed an adjustment, VG would probably disclose this, but the IRS may not believe that providing services at cost is an issue in this case, and therefore does not audit it. The complaint says that the company has not filed an Uncertain Tax Position disclosure about any of the transactions, meaning that the company and their auditors probably don't think this is a credible issue. But of course a jury could decide otherwise.
International audits of large corporations don't always go well for the IRS and the result is that billions is cash originating from some very profitable US companies is sitting offshore. In Vanguards' case there is no pot of untaxed offshore cash, except for a relatively small $1.5 billion contingency fund, and it is not at all clear that this is improper. Maybe VG should reduce fees further to eliminate this contingency reserve?
Section 482 of the Internal Revenue Code has a service cost safe harbor that allows passing on some costs without marking them up. The complaint says that VG does mark-up expenses related to it's foreign affiliates by 7.5%, but it is not clear that the foreign subs are similar to the domestic affiliates. In fact there is a lot in the complaint that is not clear, and is contestable. As others have pointed out, the impact of VG not making a profit, is that investors pay lower fees and have higher taxable returns.
Vanguard is a RIC for tax purposes
The WB keeps looking for somebody to see it his way- VG management, their accountants and legal advisers, the IRS, the SEC and all the state tax authorities where they do business. He has undoubtedly also filed a whistle-blower claim with the IRS, but of course that would be secret, and may never come to light.
The complaint says that VG has never been audited by the IRS or state tax authorities for the transactions in question. If the IRS was pursuing this and proposed an adjustment, VG would probably disclose this, but the IRS may not believe that providing services at cost is an issue in this case, and therefore does not audit it. The complaint says that the company has not filed an Uncertain Tax Position disclosure about any of the transactions, meaning that the company and their auditors probably don't think this is a credible issue. But of course a jury could decide otherwise.
International audits of large corporations don't always go well for the IRS and the result is that billions is cash originating from some very profitable US companies is sitting offshore. In Vanguards' case there is no pot of untaxed offshore cash, except for a relatively small $1.5 billion contingency fund, and it is not at all clear that this is improper. Maybe VG should reduce fees further to eliminate this contingency reserve?
Section 482 of the Internal Revenue Code has a service cost safe harbor that allows passing on some costs without marking them up. The complaint says that VG does mark-up expenses related to it's foreign affiliates by 7.5%, but it is not clear that the foreign subs are similar to the domestic affiliates. In fact there is a lot in the complaint that is not clear, and is contestable. As others have pointed out, the impact of VG not making a profit, is that investors pay lower fees and have higher taxable returns.
Vanguard is a RIC for tax purposes
Definition of 'Regulated Investment Company - RIC'
A mutual fund, real estate investment trust (REIT) or unit investment trust (UIT) that is eligible to pass the taxes on capital gains, dividends or interest earned on fund investments, directly to clients or individual investors. A regulated investment company is qualified under Regulation M of the Internal Revenue Service (IRS) to pass taxes onto investors to be taxed at the individual level.
Re: Vanguard sued for charging too little
I am now opening another Vanguard account for my mother-in-law. Glad to help Vanguard break the law.
Re: Vanguard sued for charging too little
I was thinking the same thing!letsgobobby wrote:I thought this would be an Onion article.
- steadyeddy
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Re: Vanguard sued for charging too little
I hadn't realized that Vanguard was for-profit. It is common for non-profits to have surplus funds (not profit!) that are placed in a contingency fund. Despite looking a lot like profits to the laymen, those funds are not taxed.dodecahedron wrote:Whether it is an outsized contingency fund may be beside the point. Are Vanguard's for-profit competitors allowed to deduct their "contingency funds" in computing their income subject to corporate income tax?steadyeddy wrote:$1.5 billion is probably not an outsized contingency fund when compared to Vanguard's operating expenses, though I'm sure that assertion will be debated vigorously by the attorneys.
It's unclear to me how a for-profit corporation can have any surplus funds that are non-taxable.
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Re: Vanguard sued for charging too little
You're missing that Vanguard is the opposite of that. There isn't a wholly-owned subsidiary, because there isn't a single parent company. Instead, there are lots of companies with a mutually-owned subsidiary.Strevlac wrote:I don't understand this at all. I am not a tax expert, but I always thought corporations paid taxes based on consolidated financials. Intercompany transactions for 100% owned subsidiaries such as these are always eliminated in the consolidation process. What am I missing?
And as others have pointed out, Vanguard is not non-profit, but it is not-for-profit. That is, it's not tax-exempt, but it's ownership structure is such that it doesn't try to make a profit. There's nothing illegal about a company that doesn't attempt to make money, though, that I'm aware of. However, it's also questionable whether it's valid to charge a related company below market price when you're not willing to market that service at that price to anyone else.
Maybe the solution is that The Vanguard Group had to offer the service at cost to other mutual fund companies, and can exert further downward pressure on the overall prices of mutual funds...?
I'm not a financial advisor, I just play one on the Internet.
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Re: Vanguard sued for charging too little
What is/was the advantage to having the separate funds "hold" the one company, vs having the one company hold all the funds as subsidiaries?
RM
RM
Re: Vanguard sued for charging too little
But is trying to become a monopoly illegal? As long as you don't succeed?hiddensee wrote:This reminds me of a quote about anti-trust law: if you're charging above market, it means you're a monopoly; if you're charging below market, it means you're trying to become a monopoly; and if you're charging market, it means you're colluding!
Kalo
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Re: Vanguard sued for charging too little
Mutual funds cannot be subsidiaries. They must be "mutual". That is, they must be owned by their customers.ResearchMed wrote:What is/was the advantage to having the separate funds "hold" the one company, vs having the one company hold all the funds as subsidiaries?
RM
The Vanguard mutual funds own a subsidiary because Jack Bogle needed a job. After Bogle was fired from Wellington Capital he persuaded the other directors of the Wellington funds to use assets of the funds to start a company for him to run.
Ron
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Re: Vanguard sued for charging too little
Thanks!Oicuryy wrote:Mutual funds cannot be subsidiaries. They must be "mutual". That is, they must be owned by their customers.ResearchMed wrote:What is/was the advantage to having the separate funds "hold" the one company, vs having the one company hold all the funds as subsidiaries?
RM
The Vanguard mutual funds own a subsidiary because Jack Bogle needed a job. After Bogle was fired from Wellington Capital he persuaded the other directors of the Wellington funds to use assets of the funds to start a company for him to run.
Ron
RM
Re: Vanguard sued for charging too little
I'm not sure what "surplus funds" means. I'm an accountant by trade so maybe I'm thinking with the wrong hat on. I think of surplus funds as a positive cash balance, which is unrelated to taxation. Taxes are based on profits. Some firms are very profitable but have no cash to speak of. Others are unprofitable but have positive cash flow.steadyeddy wrote:I hadn't realized that Vanguard was for-profit. It is common for non-profits to have surplus funds (not profit!) that are placed in a contingency fund. Despite looking a lot like profits to the laymen, those funds are not taxed.dodecahedron wrote:Whether it is an outsized contingency fund may be beside the point. Are Vanguard's for-profit competitors allowed to deduct their "contingency funds" in computing their income subject to corporate income tax?steadyeddy wrote:$1.5 billion is probably not an outsized contingency fund when compared to Vanguard's operating expenses, though I'm sure that assertion will be debated vigorously by the attorneys.
It's unclear to me how a for-profit corporation can have any surplus funds that are non-taxable.
Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.
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Re: Vanguard sued for charging too little
Most investment companies are corporations with shareholders. The funds are owned by the fund investors, but the company that manages the funds is owned by shareholders. So, the company has two responsibilities: one, they have to run the funds well for the investors; two, they have to maximize returns for the shareholders. These two goals are at odds with one another. In order to maximize returns for shareholders, you have to charge high fees to the fund investors. Obviously, high fees reduce fund performance for the fund investors.ResearchMed wrote:What is/was the advantage to having the separate funds "hold" the one company, vs having the one company hold all the funds as subsidiaries?
RM
Vanguard avoids this issue by merging the two classes, shareholders of the company and fund investors, into one group. Investors (like you and me) own the funds, and the funds own the company. So, vanguard's only responsibility is to do their best for their fund investors. That is why fees are so low. There is no pressure to pay dividends or maximize share price.
Re: Vanguard sued for charging too little
Gropes & Ray wrote:Most investment companies are corporations with shareholders. The funds are owned by the fund investors, but the company that manages the funds is owned by shareholders. So, the company has two responsibilities: one, they have to run the funds well for the investors; two, they have to maximize returns for the shareholders. These two goals are at odds with one another. In order to maximize returns for shareholders, you have to charge high fees to the fund investors. Obviously, high fees reduce fund performance for the fund investors.ResearchMed wrote:What is/was the advantage to having the separate funds "hold" the one company, vs having the one company hold all the funds as subsidiaries?
RM
Vanguard avoids this issue by merging the two classes, shareholders of the company and fund investors, into one group. Investors (like you and me) own the funds, and the funds own the company. So, vanguard's only responsibility is to do their best for their fund investors. That is why fees are so low. There is no pressure to pay dividends or maximize share price.
Isn't the more simply way to do this as a "mutual" company?
"Don't trust everything you read on the Internet"- Abraham Lincoln
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Re: Vanguard sued for charging too little
Thanks!Gropes & Ray wrote:Most investment companies are corporations with shareholders. The funds are owned by the fund investors, but the company that manages the funds is owned by shareholders. So, the company has two responsibilities: one, they have to run the funds well for the investors; two, they have to maximize returns for the shareholders. These two goals are at odds with one another. In order to maximize returns for shareholders, you have to charge high fees to the fund investors. Obviously, high fees reduce fund performance for the fund investors.ResearchMed wrote:What is/was the advantage to having the separate funds "hold" the one company, vs having the one company hold all the funds as subsidiaries?
RM
Vanguard avoids this issue by merging the two classes, shareholders of the company and fund investors, into one group. Investors (like you and me) own the funds, and the funds own the company. So, vanguard's only responsibility is to do their best for their fund investors. That is why fees are so low. There is no pressure to pay dividends or maximize share price.
RM
Re: Vanguard sued for charging too little
The wiki has additional background: Wellington Management CompanyOicuryy wrote:The Vanguard mutual funds own a subsidiary because Jack Bogle needed a job. After Bogle was fired from Wellington Capital he persuaded the other directors of the Wellington funds to use assets of the funds to start a company for him to run.
Also: The Vanguard Group
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Re: Vanguard sued for charging too little
According to the complaintKalo wrote:
I'm not sure what "surplus funds" means. I'm an accountant by trade so maybe I'm thinking with the wrong hat on. I think of surplus funds as a positive cash balance, which is unrelated to taxation. Taxes are based on profits. Some firms are very profitable but have no cash to speak of. Others are unprofitable but have positive cash flow.
Kalo
119
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Although Contingency Reserve Fees are deductible by the Funds and reduce
the value of investors’ interests in the Funds, Vanguard has not included them in
income because it defers their receipt or transfers them back to the Funds (a loan
subject to Section 7872, as discussed below) until Vanguard makes an actual
disbursement.
120
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In other words, Vanguard defers reporting and paying tax on the Contingency Reserve Fees because it chooses to defer receipt
or invests them in the commonly controlled Funds, in violation of the fund amental income tax principle that income is taxable when “it is actually or constructively received” or “is due and payable.”
Essentially the complaint states that the Funds "deduct" the fees but VGI does not recognize them as income
VGI carries it on its books as a "receivable" even though it has full access to the cash.
Re: Vanguard sued for charging too little
Maybe I missed it but can someone post a link to the complaint itself?Professor Emeritus wrote: According to the complaint
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Re: Vanguard sued for charging too little
I went to the obvious place: New York State Supreme Court Records OnLine Library SCROLL. I could not locate the case.JamesSFO wrote:Maybe I missed it but can someone post a link to the complaint itself?Professor Emeritus wrote: According to the complaint
...
I checked the file, which clearly states "Index No. *SEALED*" and "Filed under seal and in camera pursuant to N.Y. State Fin. L. § 190(2)(b)"TIAX wrote:Actually, the suit invokes New York State's False Claims Act, not the federal Act. The complaint is available here.
Did this website violate any court orders by posting this document? I also found this: Breaking News – Tax Whistleblower Suit Against Vanguard Unsealed which says this order was unsealed:
Why does the order still say "Sealed" and it's not in the NY State Supreme Court database? Can the legal experts please explain? I am confused.The case was filed under New York’s False Claims Act last year by a former senior manager at Vanguard and remained under seal until this month.
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Re: Vanguard sued for charging too little
JamesSFO wrote:Maybe I missed it but can someone post a link to the complaint itself?Professor Emeritus wrote: According to the complaint
...
My apologies I thought I had
http://taxprof.typepad.com/files/vanguard-complaint.pdf
Re: Vanguard sued for charging too little
No way the guy will win. I have to figure that between teh various federal attorneys, a whole bunch of them own Vanugard funds. And if the guy wins? So Vanguard will first discontinue it's charitable giving, raise it's expense ratio as needed and distribute less in dividends. So I guess the guy Vanguard didn't want around wins a few dollars, his lawyers get a lot of dollars and everybody else loses a bit.
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Re: Vanguard sued for charging too little
You seem to misunderstand the nature of a qui tam lawsuit. This is a new york state court filing for failure to pay New york state taxes.Calm Man wrote:No way the guy will win. I have to figure that between teh various federal attorneys, a whole bunch of them own Vanugard funds. And if the guy wins? So Vanguard will first discontinue it's charitable giving, raise it's expense ratio as needed and distribute less in dividends. So I guess the guy Vanguard didn't want around wins a few dollars, his lawyers get a lot of dollars and everybody else loses a bit.
2) no charitable giving is involved.
3) if Vanguard had actually rebated the contingency fund to it's fund shareholders, it would have been distributed to customers as dividends.
if they want to keep a contingency fund, they have to pay taxes on it.
The contingency fund represents how much lower vanguard's fees would have been if they had not been retained in this questionable fund.
IMHO the rest of the lawsuit has little potential but this is the diamond in the rough.
Re: Vanguard sued for charging too little
Thanks!Professor Emeritus wrote:JamesSFO wrote:Maybe I missed it but can someone post a link to the complaint itself?Professor Emeritus wrote: According to the complaint
...
My apologies I thought I had
http://taxprof.typepad.com/files/vanguard-complaint.pdf
Re: Vanguard sued for charging too little
IANALE. I assume that when something is unsealed, the text doesn't change. Thus, the new unsealed document will read exactly the same as the old sealed document with the only difference being Index No: *SEALED* is now Index No: *SOME NUMBER* and "Filed under seal and in camera pursuant to N.Y. State Fin. L. § 190(2)(b)" is no longer there.LadyGeek wrote: Did this website violate any court orders by posting this document?
...
Why does the order still say "Sealed" and it's not in the NY State Supreme Court database? Can the legal experts please explain? I am confused.
Re: Vanguard sued for charging too little
It's probably worth noting that for the past few years Vanguard has not has the lowest costs in the ETF market--Schwab has. The assumption around here has been that Schwab is not offering ETFs "at cost" but at "below cost" (although I question that assumption).
Re: Vanguard sued for charging too little
I am not sure, but a lot of businesses have loss-leaders, and that's perfectly legal too.stlutz wrote:It's probably worth noting that for the past few years Vanguard has not has the lowest costs in the ETF market--Schwab has. The assumption around here has been that Schwab is not offering ETFs "at cost" but at "below cost" (although I question that assumption).
"Don't trust everything you read on the Internet"- Abraham Lincoln
Re: Vanguard sued for charging too little
Is Vanguard charging below market rates? I use Fidelity Spartan funds with ERs very similar to Vanguard's.
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Re: Vanguard sued for charging too little
It's an interesting question.spth wrote:Is Vanguard charging below market rates? I use Fidelity Spartan funds with ERs very similar to Vanguard's.
The finest, albeit the most difficult, of all human achievements is being reasonable.
Re: Vanguard sued for charging too little
In the historic case of Gregory v. Helvering, Judge Learned Hand famously wrote, “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”
I am all for Vanguard lowering its taxes and my taxes whenever possible. I am not a lawyer, but this appears to be tax avoidance not tax evasion. Although shrill voices will often accuse.
Of course Vanguard is charging below market rates. The market rates are confiscatory over the long term.
I am all for Vanguard lowering its taxes and my taxes whenever possible. I am not a lawyer, but this appears to be tax avoidance not tax evasion. Although shrill voices will often accuse.
Of course Vanguard is charging below market rates. The market rates are confiscatory over the long term.
Re: Vanguard sued for charging too little
Interesting complaint there seem to be two main thrusts, one is that VGI should charge the funds above cost instead of "at cost", quite honestly that seems like garbage to me. The complaint argument of "oh they could just charge an X% profit" and some of it would go back to the funds is weak and doesn't really add up because why would the individual funds sign up to that? Instead they would be incentivized to rebid for someone who charged actual costs. As someone pointed out Schwab has lower fees (loss leader suspected) and Fidelity has identical fees, so the value of Vanguard is that the funds hold a torch to VGI to not charge more than the costs AND to keep those costs low. Further, courts generally don't like to meddle in running the details of a business to that degree, if cost isn't "fair" what is "fair"? 1% profit, 10%? And given that most of it goes back to the funds why would they in an arms length transaction agree to overpay?
The part about the reserve fund strikes me as more interesting potentially, but while I am a lawyer, I'm not a tax lawyer, and this part strikes me as odder. But tax law can be odd.
Lastly, reminder to non-lawyers, the complaint like an opening statement isn't proof or fact, but the best version of the story you hope to tell. So take the complaint with a grain of salt. Prosecutors had ~6 months or so to review this and consider EDITmaintaining the civil suit directlyEND EDIT and they didn't find it compelling. So perhaps there is a lot less to this than meets the eye.
(edit to fix reference to criminal complaint, same basic point though)
The part about the reserve fund strikes me as more interesting potentially, but while I am a lawyer, I'm not a tax lawyer, and this part strikes me as odder. But tax law can be odd.
Lastly, reminder to non-lawyers, the complaint like an opening statement isn't proof or fact, but the best version of the story you hope to tell. So take the complaint with a grain of salt. Prosecutors had ~6 months or so to review this and consider EDITmaintaining the civil suit directlyEND EDIT and they didn't find it compelling. So perhaps there is a lot less to this than meets the eye.
(edit to fix reference to criminal complaint, same basic point though)
Last edited by JamesSFO on Mon Jul 28, 2014 12:34 pm, edited 1 time in total.
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Re: Vanguard sued for charging too little
The accusation is that Vanguard charges more for it's overseas operations than it does it's domestic ones (50% higher ER for example for S&P500 ), and that this is evidence of under charging. On the face of though, there seem like any number of reasons why costs may be higher for funds in a foreign countries ...JamesSFO wrote:Interesting complaint there seem to be two main thrusts, one is that VGI should charge the funds above cost instead of "at cost", quite honestly that seems like garbage to me. The complaint argument of "oh they could just charge an X% profit" and some of it would go back to the funds is weak and doesn't really add up because why would the individual funds sign up to that? Instead they would be incentivized to rebid for someone who charged actual costs. As someone pointed out Schwab has lower fees (loss leader suspected) and Fidelity has identical fees, so the value of Vanguard is that the funds hold a torch to VGI to not charge more than the costs AND to keep those costs low. Further, courts generally don't like to meddle in running the details of a business to that degree, if cost isn't "fair" what is "fair"? 1% profit, 10%? And given that most of it goes back to the funds why would they in an arms length transaction agree to overpay?