Not With a Bang, But A Whimper - 1st SOX "Reinstated" Employee Loses on Merits

Posted 9:03 AM by Michael Fox

What turned into an extended procedural battle over the power under Sarbanes Oxley to re-instate whistleblowers based on an interim determination took on another dimension last week when the Administrative Review Board reversed the ALJ determination which reinstated former CFO David Welch and held against him on the merits. Welch v. Cardinal Bankshares Corp., ARB No. 05-064, ALJ No. 2003-SOX-15 (ARB 5/31/07).

The ARB's determination were based on the ALJ's finding of three acts of protected activity — overstatement of income by $195,000, that the outside auditors preferred to deal with the CEO rather than Welch, and the CEO refused to take Welsh's advice on accounting issues. The ARB concluded:

We reverse the ALJ's conclusion that Cardinal violated the SOX because, as a matter of law, he erred in concluding that Welch engaged in SOX-protected activity. Welch's concerns that Cardinal misclassified the loan recoveries and consequently misled investors do not constitute protected activity because Welch could not have reasonably believed that Cardinal misstated its financial condition. Likewise, Welch's complaints about access to Larrowe & Co. and about Cardinal's internal accounting controls are not SOX-protected activity because they do not relate to the federal securities laws. Therefore, since Welch has not demonstrated that he engaged in protected activity, an essential element of his case, we DENY his complaint.

Although not over, as there is still the possibility of an appeal by Welch to the 4th Circuit, it certainly does not present the best case for SOX's procedural remedy that (at least theoretically) empowers reinstatement of whistleblowers based on an interim determination either by the DOL or as in this case, the ALJ. It also leaves unresolved the question of whether that enforcement scheme is viable.

For earlier discussions of the procedural wrangling over reinstatement see my earlier posts, Whistleblower Still Whistling in the Dark, 1st Test of SOX Preliminary Reinstatement Saga Continues , and Latest Step in First SOX Reinstatement Case.

How long has it been going? Welch was terminated in October 2002. Although one can understand the thought that leads to interim remedies, this case clearly shows the dangers. Here if Cardinal Bankshares had taken the frequent path of employers under similar statutes, they would have economically reinstated Welch and continued his pay for the duration of this fight. In fact, the ARB had itself suggested such an action in one of its earlier rulings during the procedural battle over reinstatement. If Cardinal had done so, but prevails following Welch's expected appeal, what realistic remedy would it have of recovering those sums, which my guess is would be in excess of $500,000?

Labels: Sarbanes Oxley

Comments: Post a Comment

Home