The attorney felt vindicated by the favorable law-judge ruling. The brief he filed last week, in preparation for the Fourth Circuit case, tried to capture what he describes as his disbelief that the ARB's opinion dismissed the revelation of GAAP violations and poor internal controls that his client had found at the company.

Because the Securities and Exchange Commission requires the use of GAAP, "it stands to reason that Cardinal's failure to apply the baseline standards embodied by GAAP...leaves Cardinal in violation of longstanding federal securities laws, and SEC rules and regulations which predate the enactment of SOX," Shine wrote.

The review board, however, sided with Cardinal Bankshares' position that misclassifying the $195,000 as income, even if a violation of GAAP, still gave a fair picture of the company's financial condition because "whether reported as income or as a credit to expenses, the fact remained that (Cardinal) had $195,000 that it previously did not have." Indeed, it said that to accept Welch's contention that a claimant reporting a GAAP violation qualifies for Sarbanes-Oxley protection "amounted to a wholesale rewriting" of a section of the legislation.

"I'll be blunt. The ALJs and the decisions they've rendered have evidenced significant legal scholarship, an attribute which does not appear to exist in the ARB's decison," says Shine. "To reverse a 72-page (law-judge) opinion in 12 pages without citing a single significant case, statute or regulation to support their position is mind-boggling."

The ARB's ruling that exposing a GAAP violation doesn't entitle a claimant to Sarbanes-Oxley protection "is the core of my quandary," Shine tells CFO.com. "It's so obvious to anyone who knows anything about the securities industry and reporting. It's like saying that you read the New Testament and that you can't find any record of Jesus."

Shine's conclusion from the decision, and from the statistics showing that the ARB hasn't yet sustained an ALJ victory by a claimant, he says, is that the board "just doesn't like SOX or whistle-blowers."

The Labor Department's position overall, he suggests, is a bit harder to understand. Shine notes that the Fourth Circuit appeals court actually may be hearing oral arguments on two related cases: Welch's challenge of the review board's reversal of the DoL law judge, and Welch's appeal of a federal district court's failure to enforce the law judge's interim order for Welch to be reinstated at Cardinal. While the DoL is defending the review board's reversal of the law judge, the department has joined Welch in his appeal of the second case, according to Shine. The date of the hearing hasn't been set yet.

Did His Expertise Work Against Him?
Douglas W. Densmore, an attorney from the Roanoke, Va., firm of LeClairRyan, who represented Cardinal, tells CFO.com that Cardinal's policy is not to comment on cases still in litigation. He adds that his brief to the Fourth Circuit hasn't yet been filed.

Last year, however, CFO.com reported on comments at the Cardinal annual meeting by CEO Leon Moore, who said the bank at the time had spent at least $400,000 on the case. Further, the tiny community bank, which recorded $450 million in assets and a net income of $2.2 million for 2005, was set to shell out about $125,000 separately in Sarbanes-Oxley compliance costs for that year, he estimated. In an interview with CFO.com, he said, Cardinal's board and shareholders supported the bank's defense strategy.

"Nobody — shareholders or directors — [is] suggesting that we settle," Moore asserted at the time. He said that the case had ramifications for other public companies, since a win by Welch would "set a precedent" allowing employees to make accusations and refuse to meet with the audit committee unless accompanied by a lawyer, as Cardinal said Welch had done.

Moore further pointed out that in 2003, the SEC had asked for documents related to Welch's claims, and that it had never come back to the bank with any comments. Bank regulators, including the Virginia State Corporation Commission and the Federal Deposit Insurance Corp., have also given Cardinal a clean bill of health three times since Welch made his allegations, the CEO noted.

Another attorney with experience representing employers in whistle-blower cases, Lloyd B. Chinn, a partner with ProskauerRose LLP, is supportive of the ARB's decision. "Not every violation of GAAP equals fraud. You can make a mistake and not have fraud on your balance sheet," Chinn says. And he notes that Sarbanes-Oxley's first goal is to protect investors, not employees, who get protection only secondarily. Thus, only serious whistle-blowers making serious charges should be protected by the act.

Once the review board concluded that there wasn't evidence of fraud in the GAAP violation or the other complaints Welch issued, adds Chinn, Welch became "a victim to some extent, in that he's a highly qualified individual. If it's not fraud, someone in Welch's position knows that."

Also supporting Cardinal's position with an amicus curiae brief before the ARB were three banking organizations, including the American Bankers Association. ABA associate general counsel Gregory F. Taylor notes that industry's desire is for standards that discourage frivolous actions by employees, while encouraging legitimate complainants to speak up, go through company channels, and point out where the channels may be broken. "A determination of whether a covered Sarbanes-Oxley violation has occurred can be tricky, as demonstrated by the back and forth in this particular case," says Taylor. The banking industry "wants the Sarbox standards to strike a balance between protecting legitimate whistle-blowers and discouraging frivolous actions by employees."

• « previous
• 1
• 2
• 3
• next »