Lawsuit on Vanguards Cost Stucture

[Sittingduck]

Saw a blurb in USA Today on a lawsuit filed against Vanguard for their unfair low cost fee structure.

Now why did he want to do that? Half of what I have is in Vanguard. Hope it has no merit....

Anybody know anything more about this?

Lawsuit aims at Vanguard’s at-cost structure | America's Markets

 

[user5027]

It is a whistleblower lawsuit. If Vanguard pays the IRS, the plaintiff collects a nice %.

 

[cbo111]

Wow! I just moved half a mil into a Vanguard account precisely due to that low cost structure.

 

[Ready]

Wow, shocking! I hope they get through it OK. They have been great to work with.

 

[pb4uski]

Vanguard is unique in the industry in that its is owned by the mutual fund shareholders it serves, sort of like a mutual or cooperative owned by its members.

Most other players are shareholder owned.

If the shareholder owned players lowered their fees so they had less profit, then they wouldn't pay as much in taxes either. Based on the short article, there doesnt; seem to be much merit to the suit - probably just a disgruntled former employee looking for a windfall.

 

[MRG]

I wouldn't worry. Looking at ICI data fund fees have been dropping for 30 years. Part is what Vanguard did with low cost index funds, but other fund companies have followed suit. ETF fees are dropping too. Who's he going after next.

 

[ERhoosier]

Agree with pb4uski. I've owned Vanguard funds for years due to that shareholder-friendly fee structure. Even fees for too frequent trading in certain funds basically go back into the those funds (vs the investment co pockets). IMHO- Vanguard has essentially operated like a non-for-profit somewhat analogous to a member-owned credit union or a mutual insurance company. Seems to me that under this guy's logic every NFP in the country would "owe" the IRS huge "back taxes".

 

[Sittingduck]

They needed an exemptive order from the SEC to operate without a profit.

Weird and unheard of apparently.

 

[Sittingduck]

Based on the short article, there doesn't; seem to be much merit to the suit - probably just a disgruntled former employee looking for a windfall.

Hope you are right. However, with $1B+ in back taxes at stake, and brought by Vanguard's own former tax counsel, I wouldn't say it is inconceivable they might loose. Then fees would really have to go up - I don't see how they could collect retroactively...

 

[samclem]

Ridiculous. Plus, it's not like the US govt wasn't getting the tax revenue anyway--any extra paid to shareholders due to the lower cost structure resulted in these shareholders paying more taxes (sooner or later). If VGD has to pay a fine for several past years worth of taxes, I want a refund for the taxes I overpaid those same years because I received too much CG and Divs from my VGD holdings.

And I wonder why New York State is involved--isn't Vanguard incorporated in PA?

We need a "loser pays" tort system.

 

[Sittingduck]

More in depth article.


Vanguard's singular model is under scrutiny

 

[Texas Proud]

I just wonder if this guy still has his law license... you are not supposed to tell anybody about someones taxes unless under subpoena...

Isn't there attorney client privilege even if there is employee/employer relationship

 

[Texas Proud]

This is interesting... I used to work at a big mega doing internal 'product costing'... IOW, allocation of internal services all over the world...

We never put a profit on any of the services... and we are talking about a few billion dollars... across many countries and legal entities... I would think that if it were as big of a deal as the article makes out our legal team would not have let us do that... it is not like it was a secret as we would publish books on our costs and allocations to the various entities including legal...

 

[pb4uski]

I doubt this clown lawyer will ever see employment again.

 

[target2019]

More in depth article.


Vanguard's singular model is under scrutiny

Definitely a good presentation of the issues.

Note that this is not about internal costs. The relationship between the mutual funds and Vanguard is much different than an accounting dept. and engineering dept. in the same company.

I think a settlement will occur, as the legal costs and future penalties are uncertain for Vanguard. State of NY seems to always get their bear.

 

[REWahoo]

State of NY seems to always get their bear.

According to the article, the State of NY isn't hunting:

The suit was unsealed after the New York state attorney general declined to prosecute the case, freeing Danon and his lawyer to pursue a civil action.

 

[target2019]

Here's the filed complaint:
http://taxprof.typepad.com/files/vanguard-complaint.pdf

 

[Sittingduck]

Here's the filed complaint:
http://taxprof.typepad.com/files/vanguard-complaint.pdf

Thanks for posting this. It will take a while to digest...

I am kind of thinking samclem is right. There might be a claim that the tax wasn't paid in the right location, as they argue New York, but the investors in the funds had to pay tax on the "artificially" increased pass through gain to the funds (or when the funds are withdrawn if a tax advantaged account).

They will probably get nailed for the $B "slush" fund of cash laying around though...

 

[clifp]

I certainly don't have a clue what the law is. The second article makes feel that Vanguard's former attorney has a least a reasonable case. But I am trying to figure the motive other than revenge. The only "victim" would be states or the federal government who presumably should have collected more taxes,which instead when to Vanguard mutual fund owners.

I am not sure why the lawyer would get a cut of the back taxes owed other than legal fees. Of all the whistleblower cases out there, this is definitely one where I am shaking my head, and asking why is the problem again. Vanguard charges too little fees, and puts the rest of Wall St at competitive disadvantage. Those poor wall st firms and their employees barely scraping by on billions in profit and millions of dollar salaries. If it goes to trial I hope Vanguard gets a jury of retail investors.

 

[MichaelB]

I am not sure why the lawyer would get a cut of the back taxes owed other than legal fees.

I would imagine if the State of NY prevails a similar suit from the IRS would follow and would qualify for whistleblower status and compensation.

Vanguard losing this would be a shock to me. Intercompany charges and transfer pricing have long been subject to intense IRS scrutiny, and corporations manage to "transfer" vast amounts of their costs to low or no tax locations. This will be interesting and I bet the big IP businesses have this on their radar screens.

 

[REWahoo]

I would imagine if the State of NY prevails...

Did I interpret this quote from the article incorrectly when I understood it to say NY wasn't interested in pursuing the case and it was a civil matter?

The suit was unsealed after the New York state attorney general declined to prosecute the case, freeing Danon and his lawyer to pursue a civil action.

 

[MichaelB]

Did I interpret this quote from the article incorrectly when I understood it to say NY wasn't interested in pursuing the case and it was a civil matter?

No, but I did.

The motivation is probably the same. If he were to prevail and had already filed an IRS whistleblower report he could make some pretty big bucks (wag here).

hard case to prove, though...