Vanguard sued for [failing to charge market rates to and then paying taxes on services to its mutual funds]

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Bracket
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Re: Vanguard sued for charging too little

Post by Bracket »

ProfessorX wrote:Sure hope Vanguard wins this lawsuit.
Amen.
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Re: Vanguard sued for charging too little

Post by denovo »

Gropes & Ray wrote:
Silence Dogood wrote:So is there any consensus here about whether Vanguard's "client owned" structure is at risk?
Great question. That's really what matters to us, right? In theory, Vanguard could demutualize and issue stock to third-party stockholders. But I'm very skeptical that that sort of thing would result from a lawsuit like this. In reality, if it ever happens, it will be because Vanguard's management believes they can make more money as a joint stock company than as a mutual. But I have a feeling that management is doing just fine under the current system.

Vanguard is not a mutual company.
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Re: Vanguard sued for charging too little

Post by Austintatious »

It's difficult to imagine that, over the years, Vanguard's management hasn't thoroughly considered the legal and the tax consequences of its business model, and concluded that it's all up to snuff.
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Re: Vanguard sued for charging too little

Post by Buysider »

http://en.wikipedia.org/wiki/Mutual_organization
A mutual, mutual organization, or mutual society is an organization (which is often, but not always, a company or business) based on the principle of mutuality. Unlike a true cooperative, members usually do not contribute to the capital of the company by direct investment, but derive their right to profits and votes through their customer relationship.[dubious – discuss] A mutual organization or society is often simply referred to as a mutual.

A mutual exists with the purpose of raising funds from its membership or customers (collectively called its members), which can then be used to provide common services to all members of the organization or society. A mutual is therefore owned by, and run for the benefit of, its members - it has no external shareholders to pay in the form of dividends, and as such does not usually seek to maximize and make large profits or capital gains. Mutuals exist for the members to benefit from the services they provide and often do not pay income tax.[1]

Profits made will usually be re-invested in the mutual for the benefit of the members, although some profit may also be necessary in the case of mutuals for internal financing to sustain or grow the organization, and to make sure it remains safe and secure.
Not to quibble, but, yes, I consider Vanguard a mutual. Its shareholders are its customers and it only exists to provide them services.
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Re: Vanguard sued for charging too little

Post by Gropes & Ray »

Vanguard is a mutual. Its members and customers are the funds. I think the confusion stems from people thinking they are the members and customers of Vanguard. Investors are only the owners of the funds. The funds are the owners of Vanguard, and they own it as a mutual.
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archbish99
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Re: Vanguard sued for charging too little

Post by archbish99 »

No, this shouldn't change Vanguard's actual structure. If Vanguard loses the lawsuit, I would guess the results would be two-fold:
  1. They would have to charge "market" rates for the services VGI provides to the funds. This means VGI would turn a profit, pay taxes, then return the profit to the shareholders, which are the funds. Since the funds are now receiving dividends from shares they hold, they pass those dividends to their shareholders like any other dividend. This makes Vanguard funds slightly less tax-efficient (dividends) and higher expense (to cover the taxes), though I suspect the net effect across all the funds' assets would be relatively small. If VGI retains money in a reserve, it might invest that reserve, and might do so in Vanguard funds which in turn own shares of VGI. Which would make VGI partially its own owner....
  2. They would have to pay some obscene amount of money in back taxes and penalties, since they "should" have been doing the above all along. This would potentially be a very large, perhaps even crippling, expense that VGI would have to pay. I have no way to guess the result of that.
Vanguard is mutual in the sense of its organization, but not in the sense that the law allows them special privileges or treatment because of their mutuality.
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Re: Vanguard sued for charging too little

Post by denovo »

Buysider wrote:http://en.wikipedia.org/wiki/Mutual_organization
A mutual, mutual organization, or mutual society is an organization (which is often, but not always, a company or business) based on the principle of mutuality. Unlike a true cooperative, members usually do not contribute to the capital of the company by direct investment, but derive their right to profits and votes through their customer relationship.[dubious – discuss] A mutual organization or society is often simply referred to as a mutual.

A mutual exists with the purpose of raising funds from its membership or customers (collectively called its members), which can then be used to provide common services to all members of the organization or society. A mutual is therefore owned by, and run for the benefit of, its members - it has no external shareholders to pay in the form of dividends, and as such does not usually seek to maximize and make large profits or capital gains. Mutuals exist for the members to benefit from the services they provide and often do not pay income tax.[1]

Profits made will usually be re-invested in the mutual for the benefit of the members, although some profit may also be necessary in the case of mutuals for internal financing to sustain or grow the organization, and to make sure it remains safe and secure.
Not to quibble, but, yes, I consider Vanguard a mutual. Its shareholders are its customers and it only exists to provide them services.
Many people here have probably done business with mutual companies, many life insurers like Metlife were "mutual companies" Investors do not own Vanguard directly. The funds do. Personally, it bothers me when Vanguard advertises itself on its marketing materials as a client-owned company, it's not really true. The SEC should slap Vanguard down hard for saying that. If I own Vanguard, the same way I own Berkshire Hathaway, how come I don't know the salary and compensation of Vanguard's CEO. Ya, exactly.

http://articles.philly.com/2014-07-31/n ... up-inc-tax
By making funds and their investors its ultimate owners and squeezing profits out of operations, founder John C. Bogle made Vanguard "similar to a credit union or a traditional mutual insurance company," Vanguard says on its website and marketing materials.

But unlike mutual insurers and credit unions, which operate under well-established federal laws, no law gives Vanguard the right to operate on a tax-free basis, Danon argued in his lawsuit and in interviews with The Inquirer.
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Re: Vanguard sued for charging too little

Post by Gropes & Ray »

But unlike mutual insurers and credit unions, which operate under well-established federal laws, no law gives Vanguard the right to operate on a tax-free basis, Danon argued in his lawsuit and in interviews with The Inquirer.
I think Danon is purposefully obfuscating the issue. Vanguard is not a non-profit, but it is a mutual. The two are not the same. Vanguard is not operating on a tax-free basis; it's operating on a profit-free basis. You can't pay taxes on profits that you never earned.

To be fair, I also think Vanguard obfuscates by advertising itself as a mutual owned by its investors. It is a mutual, but it isn't owned by the fund investors, which is why we don't know how much the officers make. The fund trustees know... but they are the same people as the board of directors. It's certainly a closed loop, but I know the only number I actually care about, and that's around 0.05%.

Obfuscate is the word of the day! :beer
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Re: Vanguard sued for charging too little

Post by ProfessorX »

Gropes & Ray wrote:
But unlike mutual insurers and credit unions, which operate under well-established federal laws, no law gives Vanguard the right to operate on a tax-free basis, Danon argued in his lawsuit and in interviews with The Inquirer.
I think Danon is purposefully obfuscating the issue. Vanguard is not a non-profit, but it is a mutual. The two are not the same. Vanguard is not operating on a tax-free basis; it's operating on a profit-free basis. You can't pay taxes on profits that you never earned.

To be fair, I also think Vanguard obfuscates by advertising itself as a mutual owned by its investors. It is a mutual, but it isn't owned by the fund investors, which is why we don't know how much the officers make. The fund trustees know... but they are the same people as the board of directors. It's certainly a closed loop, but I know the only number I actually care about, and that's around 0.05%.

Obfuscate is the word of the day! :beer
USA has too many frivolous Obfuscation-errific lawsuits. :beer
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Re: Vanguard sued for charging too little

Post by IPer »

That's MY Vanguard he's talking about! [OT comment removed by admin LadyGeek] I'm sure Vanguard paid him well enough when he worked there, [OT comment removed by admin LadyGeek]
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Re: Vanguard sued for charging too little

Post by Boglegrappler »

Haven't read the complaint yet, but went through the thread.

If I'm understanding correctly, the only issue that might arise is if the "reserve" which is an expense charge to investors (if I understand correctly) doesn't bear some rough relationship to anticipated capital needs to run the company. Presumably the normal management fees in the aggregate are enough to pay ongoing operating expenses, including salaries and benefits.

If this is the case, the suit is DOA.
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Re: Vanguard sued for charging too little

Post by Silence Dogood »

Gropes & Ray wrote:
Silence Dogood wrote:So is there any consensus here about whether Vanguard's "client owned" structure is at risk?
Great question. That's really what matters to us, right? In theory, Vanguard could demutualize and issue stock to third-party stockholders. But I'm very skeptical that that sort of thing would result from a lawsuit like this. In reality, if it ever happens, it will be because Vanguard's management believes they can make more money as a joint stock company than as a mutual. But I have a feeling that management is doing just fine under the current system.
Isn't it obvious that being a joint stock company would make them more money (the managers, not the vanguard clients)?

I can't imagine that the Vanguard managers have the legal right to "demutualize" at will...
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Re: Vanguard sued for charging too little

Post by Gropes & Ray »

Silence Dogood wrote:Isn't it obvious that being a joint stock company would make them more money (the managers, not the vanguard clients)?

I can't imagine that the Vanguard managers have the legal right to "demutualize" at will...
I don't think it is. As it is now, there is a very limited class of people who can limit the pay of the officers. I don't know how the trustees of the funds or the board of directors are chosen, but I'm guessing it is an extremely insular and inbred process. In a regular joint stock corporation, the board would be elected by outside shareholders who might want oversight over executive pay.

But you are correct that it isn't the managers who would demutualize. To be more accurate, the fund trustees would have to vote for it, and the board would have to vote for it (but the trustees and the board are the same people). But by demutualizing they introduce this extra group of people, and would have to show where the revenue is being spent. If vanguard has 2 trillion under management, then even at the lowest e/r (0.05%), they are bringing in $1 billion in yearly revenue. That would be fun to divvy up without anyone looking over your shoulder. :)
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Re: Vanguard sued for charging too little

Post by graveday »

Hey, if I could divvy that up, I wouldn't mind anyone looking over my shoulder. That's a lot of smackers.
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Back story behind the lawsuit?

Post by banjo »

[Thread merged, see below. --admin LadyGeek]

On Saturday, August 9th, the Wall Street Journal published a story saying that a lawsuit has been filed against Vanguard Group by one David Danon contesting that Vanguard has engaged in tax evasion for 40 years. This is the first I have heard of this. Does anybody know the back story behind this?
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JamesSFO
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Re: Back story behind the lawsuit?

Post by JamesSFO »

see this thread - http://www.bogleheads.org/forum/viewtop ... 2&t=143686

Has links to backstory
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Re: Vanguard sued for charging too little

Post by LadyGeek »

I merged banjo's thread into here, which is in the Personal Finance (Not Investing) forum.
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Re: Vanguard sued for charging too little

Post by nisiprius »

denovo wrote:
Not to quibble, but, yes, I consider Vanguard a mutual. Its shareholders are its customers and it only exists to provide them services.
Many people here have probably done business with mutual companies, many life insurers like Metlife were "mutual companies" Investors do not own Vanguard directly. The funds do. Personally, it bothers me when Vanguard advertises itself on its marketing materials as a client-owned company, it's not really true. The SEC should slap Vanguard down hard for saying that. If I own Vanguard, the same way I own Berkshire Hathaway, how come I don't know the salary and compensation of Vanguard's CEO.
Without getting into legalities, which I don't understand--don't know the definition of "mutual"--I have to agree with you. It just doesn't feel very much as if I own Vanguard. There isn't any annual Vanguard shareholders meeting, I don't get asked to vote for directors or on policies, I don't even get a little "dividend" check every year the way my wife does from her REI membership.
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Re: Vanguard sued for charging too little

Post by Jack »

Boglegrappler wrote:If I'm understanding correctly, the only issue that might arise is if the "reserve" which is an expense charge to investors (if I understand correctly) doesn't bear some rough relationship to anticipated capital needs to run the company. Presumably the normal management fees in the aggregate are enough to pay ongoing operating expenses, including salaries and benefits.

If this is the case, the suit is DOA.
No, that is not the issue. Companies cannot expense capital needs that they have not yet incurred. Income that is retained for future expenses is called profit and taxable. You don't get to take an income deduction for something you haven't already spent just because you might spend it in the future.
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Re: Vanguard sued for charging too little

Post by Gropes & Ray »

nisiprius wrote:Without getting into legalities, which I don't understand--don't know the definition of "mutual"--I have to agree with you. It just doesn't feel very much as if I own Vanguard. There isn't any annual Vanguard shareholders meeting, I don't get asked to vote for directors or on policies, I don't even get a little "dividend" check every year the way my wife does from her REI membership.
Nisiprius, I think a lot of people get confused about Vanguard for exactly the reasons you pointed out. Just to clarify, you are not the owner of Vanguard. You own a fund, and the fund owns Vanguard, just like the fund owns Apple, ExxonMobile and Ford. So the trustees of the fund are voting on Vanguard's corporate governance matters. Similarly, they vote on Apple, Exxon and Ford's matters.

Now, Vanguard is a mutual because its customers are the funds, and the funds are its owner (i.e. an identical group both owns and patronizes the company). Which isn't to say it's a non-profit. Some people get confused because many of the mutuals that they are part of are non-profits, such as credit unions. But that is a special group of mutuals that have government support (in the form of non-profit status) to undertake a role that is vital to the community. Not all mutuals are non profit.

I hope this helps to clarify a confusing situation.
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Re: Vanguard sued for charging too little

Post by Lancelot »

Electric cooperatives are also non profit, owned by their 'Members' (consumers.) If the co-op has a margin (profit is a bad word, LOLs!) its treated as "Capital Credits' A.K.A Retained Earnings and returned with no interest to a Member at some future time, usually around 20 years. They are also paid in full to the estate of a deceased Member.

Non profits pay local and state taxes, such as property, sales and in the case of electric co-ops many states collect a nice Gross Receipts tax, usually a real cash cow for state coffers.

Taxes- is there really an escape? :)
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Re: Vanguard sued for charging too little

Post by sesq »

Lancelot wrote:Electric cooperatives are also non profit, owned by their 'Members' (consumers.) If the co-op has a margin (profit is a bad word, LOLs!) its treated as "Capital Credits' A.K.A Retained Earnings and returned with no interest to a Member at some future time, usually around 20 years. They are also paid in full to the estate of a deceased Member.
When I read about this case, the first thought I had was whether Vanguard should indeed just become a co-op with the funds as the members. Co-ops have provisions in the tax law that seem completely applicable.
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Re: Vanguard sued for charging too little

Post by Gropes & Ray »

I don't know for sure, but I think co-op and non-profit status is generally limited to certain types of organizations. I would be surprised if an investment firm would fit. I know credit unions date back to a time when banks didn't do much lending to ordinary consumers. Same for mutual insurance companies. Maybe the gov't could authorize non-profit investment companies with the goal of driving investment expenses down? Although, Vanguard is doing a good job of that without gov't help. Hopefully this lawsuit doesn't spoil a wonderful thing.
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Re: Vanguard sued for charging too little

Post by sesq »

About ten years ago I was involved in some scoping for captive co-ops for material supply for large taxpayers (I think we were looking at it for nuclear fuel rods or something like that). Its been ages since I thought much about this and would have to refresh myself on the limitations. I left public accounting shortly thereafter.

The trend of internal tax people joining Qui Tam cases is interesting to say the least. Its a big bet by the attorney that the payoff will come, since unless your name is Mike Smith google will make your interview questions challenging.
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Re: Vanguard sued for charging too little

Post by Silence Dogood »

More information about the person who is suing Vanguard:

http://articles.philly.com/2014-08-24/b ... tle-blower

The "Philly.com" website has a good number of articles about this lawsuit.
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Re: Vanguard sued for charging too little

Post by nisiprius »

Danon has let his bar association memberships lapse...
Whoa. Why did he do that? Does it cost a lot to maintain it?

http://www.pabar.org/pdf/2014ScheduleofDues.pdf

$305 a year? Seems strange that he'd let it lapse. Was he expecting the bar association to begin disciplinary action against him, and does he escape that by not renewing his membership?
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Re: Vanguard sued for charging too little

Post by Silence Dogood »

nisiprius wrote:
Danon has let his bar association memberships lapse...
Whoa. Why did he do that? Does it cost a lot to maintain it?

http://www.pabar.org/pdf/2014ScheduleofDues.pdf

$305 a year? Seems strange that he'd let it lapse. Was he expecting the bar association to begin disciplinary action against him, and does he escape that by not renewing his membership?
Good question. Also:
"Danon left Sullivan & Cromwell after four years, then worked at three other Wall Street firms over the next six years. Such firm-hopping at big law shops, Colon says, is common"
I wonder if "firm-hopping" is actually that common. Three firms in six years?
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Re: Vanguard sued for charging too little

Post by chaz »

nisiprius wrote:
Danon has let his bar association memberships lapse...
Whoa. Why did he do that? Does it cost a lot to maintain it?

http://www.pabar.org/pdf/2014ScheduleofDues.pdf

$305 a year? Seems strange that he'd let it lapse. Was he expecting the bar association to begin disciplinary action against him, and does he escape that by not renewing his membership?
The State Bar Assn. can't do anything to a lawyer who dropped out. But he could still be sued by Vanguard for filing a frivolous lawsuit (unless there is merit to it).
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Re: Vanguard sued for charging too little

Post by G-Money »

nisiprius wrote:
Danon has let his bar association memberships lapse...
Whoa. Why did he do that?
My guess is the rest of the sentence answers the question:
. . . and he said he didn't expect to work as a corporate tax lawyer again.
nisiprius wrote:Was he expecting the bar association to begin disciplinary action against him, and does he escape that by not renewing his membership?
No escape. Danon is on "administrative suspension," which could be from his failure to pay the annual fee. http://www.padisciplinaryboard.org/look ... &pdcount=0. The PA disciplinary jurisdiction extends to attorneys on administrative suspension:
Rule 201. Jurisdiction.
(a) The exclusive disciplinary jurisdiction of the Supreme Court and the Board under these rules extends to:
(1) Any attorney admitted to practice law in this Commonwealth.
(2) Any attorney of another jurisdiction specially admitted by a court of this Commonwealth for a particular proceeding.
(3) Any formerly admitted attorney, with respect to acts prior to suspension, disbarment, administrative suspension, or transfer to retired or inactive status, or with respect to acts subsequent thereto which amount to the practice of law or constitute the violation of the Disciplinary Rules, these rules or rules of the Board adopted pursuant hereto.
(4) Any attorney who is a justice, judge or district justice, with respect to acts prior to taking office as a justice, judge or district justice, if the Judicial Conduct Board declines jurisdiction with respect to such acts.
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Re: Vanguard sued for charging too little

Post by G-Money »

Silence Dogood wrote:
"Danon left Sullivan & Cromwell after four years, then worked at three other Wall Street firms over the next six years. Such firm-hopping at big law shops, Colon says, is common"
I wonder if "firm-hopping" is actually that common. Three firms in six years?
Yes, it is. Particularly for associates in the really big firms.
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Re: Vanguard sued for charging too little

Post by Silence Dogood »

G-Money wrote:
Silence Dogood wrote:
"Danon left Sullivan & Cromwell after four years, then worked at three other Wall Street firms over the next six years. Such firm-hopping at big law shops, Colon says, is common"
I wonder if "firm-hopping" is actually that common. Three firms in six years?
Yes, it is. Particularly for associates in the really big firms.
Interesting.

G-Money, what is your opinion on this lawsuit?

Do you think the client-ownership structure is at risk?
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Re: Vanguard sued for charging too little

Post by G-Money »

Silence Dogood wrote:G-Money, what is your opinion on this lawsuit?

Do you think the client-ownership structure is at risk?
I don't have an opinion. Not a corporate/tax attorney, so really have no idea what the issues are and whether there's any merit to the claim.

Not following the case with great interest; just happened to click on a thread where nisiprius was the most recent poster. :)
Don't assume I know what I'm talking about.
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Re: Vanguard sued for charging too little

Post by investor1 »

Silence Dogood wrote:More information about the person who is suing Vanguard:

http://articles.philly.com/2014-08-24/b ... tle-blower

The "Philly.com" website has a good number of articles about this lawsuit.
I don't think we need to attack the man but the arguments. Let's not lower ourselves below the logical, no non-sense approach we already have. [OT comment removed by admin LadyGeek]

Honestly, I'd like to know more about VG's costs. I'd like to see more transparency. What if our fees could be lower? I wouldn't mind an extra year or two of retirement. It won't bother me if that means a few rich people are less rich.

I think VG will win the case, but I'd like to see the case provide more transparency into the company.
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Re: Vanguard sued for charging too little

Post by graveday »

What Investort said. Ad hominem and all that.
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Re: Vanguard sued for charging too little

Post by gardemanger »

Moderators, cleaning up the duplicate threads on this topic must be driving you buggy. Might I suggest giving it a totally unambiguous title and making it sticky at the top of the board? At least for the present time.
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Re: Vanguard sued for charging too little

Post by LadyGeek »

Report the duplicate threads by clicking on the "!" in the top right corner of the post. One of the reasons is "Duplicate thread." I'll merge them into here, it's not much work at all.

I think the title is OK (and very creative). This thread does not need to be a sticky.
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Re: Vanguard sued for charging too little

Post by Silence Dogood »

investor1 wrote:
Silence Dogood wrote:More information about the person who is suing Vanguard:

http://articles.philly.com/2014-08-24/b ... tle-blower

The "Philly.com" website has a good number of articles about this lawsuit.
I don't think we need to attack the man but the arguments. Let's not lower ourselves below the logical, no non-sense approach we already have. [OT comment removed by admin LadyGeek]

Honestly, I'd like to know more about VG's costs. I'd like to see more transparency. What if our fees could be lower? I wouldn't mind an extra year or two of retirement. It won't bother me if that means a few rich people are less rich.

I think VG will win the case, but I'd like to see the case provide more transparency into the company.
investor1,

It was certainly not my intention to attack this person. I just thought it was an interesting article that relates to the thread topic and can give us a better insight as to what is happening. I was hoping that the article would give us a better indication of how legitimate this case is and what the motivations are behind this.

I actually agree with your thoughts about Vanguard being more transparent. Particularly, if Vanguard is going to call itself "client-owned" I believe that we, the owners, should have a right to know what we are paying our executives.

I certainly want the client-owned structure to remain intact.
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Re: Vanguard sued for charging too little

Post by investor1 »

Yep, I wasn't accusing you, but I see how my post can be interpreted like that. I saw a number of replies to your post, and could see the conversation shifting in an unproductive/unhealthy direction. Overall, I think the thread is interesting, so I'm just trying to make sure we stay on point :)
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Re: Vanguard sued for charging too little

Post by Buysider »

http://www.philly.com/philly/business/2 ... n_out.html

Update from the Inky about the case. Not much to add, but I suppose the case will be decided soon.
investor1
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Re: Vanguard sued for charging too little

Post by investor1 »

Vanguard Group is owned by Vanguard's mutual funds, which pay the company for management services. Danon's suit alleges the company lowballs the price of professional services so it shows little profit and pays little tax. Low taxes allow Vanguard to charge lower fees and lure business from tax-paying rivals. But that violates Section 482 of the Internal Revenue Code, which requires companies to charge market-rate prices, not lower "at-cost" prices, for services to related firms, Danon argued.
I wonder why there isn't a line around the block to support this guy.
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archbish99
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Re: Vanguard sued for charging too little

Post by archbish99 »

Not that I'm not on Vanguard's side, but it sounds like they're making contradictory arguments here: "You're not allowed to sue us, because your suit is based on proprietary information you were required to keep confidential. But all this has been widely publicized, so the IRS or SEC could have spoken up at any time if they didn't like it, and since they didn't, it's presumptively lawful."

Much as I hate it, it really does seem like he's right under the law. Wholly-owned subsidiaries, like captive insurers, get this treatment, but there's no parent corporation of which Vanguard is a subsidiary. It's more like a club, where your buy-in is the purchase of a chunk of Vanguard Group.
I'm not a financial advisor, I just play one on the Internet.
AndroAsc
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Re: Vanguard sued for charging too little

Post by AndroAsc »

Can't believed I missed this development.

Anyway this sentence caught my eye "But that violates Section 482 of the Internal Revenue Code, which requires companies to charge market-rate prices, not lower "at-cost" prices, for services to related firms, Danon argued"

Can anyone with legal background comment on this seemingly ridiculous claim? Is there a law that states that businesses must charge market-rate prices? So it's illegal to setup a business and sell products at cost or even sell it at a loss? Seriously?!?!
bsteiner
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Re: Vanguard sued for charging too little

Post by bsteiner »

Internal Revenue Code Section 482 says:

In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.
Silence Dogood
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Re: Vanguard sued for charging too little

Post by Silence Dogood »

Danon has until Nov. 17 to respond to Vanguard's request for dismissal.
Well, November 17 is tomorrow.

Did he respond yet?
georgewall42
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Re: Vanguard sued for charging too little

Post by georgewall42 »

I'm not sure how well the article summarized the issues that Vanguard raised in the defense. Essentially, Vanguard is arguing that the plaintiff abused his attorney-client privilege by using confidential documents to which he had access in order to build his case. IANAL, but the legal issues between what is and is not covered by whistle-blower statutes when attorney-client privilege is involved are likely quite complex, especially when the attorney is also an employee. In any event, Vanguard is trying to get the suit dismissed by dismissing the plaintiff's evidence on procedural grounds, which is standard practice in a lot of these lawsuits. Once the evidence is dismissed, the case itself would have no grounds to continue.

The legal/tax issue is also poorly framed by the article. There is no requirement that an investment advisor charge "market rate" fees. However, there are rules for internal cost transfers that are intended to prevent companies from hiding profits from the taxing authorities by artificially moving them to subsidiaries subject to a lower taxation rate for whatever reason. Vanguard's statement that the IRS hasn't complained is a press release for PR purposes, not necessarily a legal defense.

Plaintiffs suing large firms are always at a disadvantage unless they themselves are a large firm. Based on that alone, the chances of this suit going anywhere or resulting in any change to Vanguard's structure are quite slim. Personally, I don't think the plaintiff has a leg to stand on.
Silence Dogood
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Re: Vanguard sued for charging too little

Post by Silence Dogood »

Interesting. Thanks for that valuable input, georgewall42.

Should we expect that the decision of whether or not to dismiss the case will be made soon?
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in_reality
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Re: Vanguard sued for charging too little

Post by in_reality »

Silence Dogood wrote:
Danon has until Nov. 17 to respond to Vanguard's request for dismissal.
Well, November 17 is tomorrow.

Did he respond yet?
Yes. See this: http://www.philly.com/philly/blogs/inq- ... _says.html
Silence Dogood
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Re: Vanguard sued for charging too little

Post by Silence Dogood »

in_reality wrote:
Silence Dogood wrote:
Danon has until Nov. 17 to respond to Vanguard's request for dismissal.
Well, November 17 is tomorrow.

Did he respond yet?
Yes. See this: http://www.philly.com/philly/blogs/inq- ... _says.html
He said his concerns were shared with Vanguard lawyers and tax specialists, and that another Vanguard tax lawyer in 2012 shared "deep concerns" with him -- concerns that resulted in the other lawyer leaving Vanguard "due to professional harm from airing these concerns."
It is very strange to me that this other tax lawyer wouldn't join him in this lawsuit. I mean, if he really thought that Vanguard was doing something wrong, he could have sued without ever having to worry about his professional life again (I highly doubt anyone would care about finding a new job after getting a 25-30% cut of a billion dollars).
HurdyGurdy
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Re: Vanguard sued for charging too little

Post by HurdyGurdy »

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in_reality
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Re: Vanguard sued for charging too little

Post by in_reality »

HurdyGurdy wrote:A Forbes column on the lawsuit:
http://www.forbes.com/sites/kellyphilli ... 1-billion/
Interestingly it notes:
Specifically, when the investment company got its start, it asked the Securities and Exchange Commission (SEC) to issue an exemptive order, approving its “joint participation” arrangement (SEC order downloads as a pdf). Danon alleges, however, that the SEC order only allowed the transactions for securities purposes, not for tax purposes.
Reading that agreement, it seems clear that it deals only with the structure of Vanguard and not tax issues. The ruling is that "the determination of whether the Funds would benefit from internalization of the advisory function should be left to the directors." Thus the structure of Vanguard is approved but taxation is not seemingly addressed.

Perhaps though Vanguard has other rulings approving it's tax treatment. If it did though, why wouldn't they have told Danon about it to quiet his concerns?

So if Vanguard's activities are subject to Internal Revenue Code Section 482, and I don't honestly know if they are or aren't, there doesn't seem to be anything (I've seen so far) saying their unique structure exempts them from it.
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