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Of nearly 1,000 employees who have claimed Sarbox whistle-blower protection, many have seen their cases dismissed, and some have settled. But not one has ultimately prosecuted their case successfully.
Stephen Taub and Tim Reason, CFO.com | US
June 8, 2007
Of nearly 1,000 complaints filed under the whistle-blower provisions of the Sarbanes-Oxley Act since July 2002, not one has ultimately resulted in the whistle-blower making it past company appeals and winning the case.
Section 806 of Sarbox, intended to protect employees of public companies from retaliation for reporting financial misdeeds, is administered by the Department of Labor's Occupational Safety and Health Administration, which handles similar provisions for 13 other laws. The vast majority of Sarbox cases brought to date have been dismissed as having no merit, while about 270 have resulted in settlements between whistle-blowing employees and their companies, according to a report compiled by attorneys at the law firm of Orrick, Herrington, & Sutcliffe LLP.
But of the remaining whistle-blowers that made their way through the DOL's appeals process since Sarbox passed in July 2002, only six have survived the first level of appeal and none have successfully pleaded their case at the highest appeal level, the DOL's Administrative Review Board (ARB).
That includes the case of David Welch, the former CFO of Cardinal Bancshares and the first person to claim whistle-blower protection under Sarbox. Welch also was the first Sarbox whistle-blower to win reinstatement to his job from a DOL administrative law judge. But Cardinal refused to reinstate him and appealed instead to the ARB. As CFO.com reported earlier this week, the ARB ruled on May 31 that Welch's case had no merit.
Few complainants get as far as Welch, who now plans to take his case to federal court. But he has plenty of company among those who have sought the government's protection. Since Sarbox passed, 947 whistle-blower cases have been filed with the DOL, according to the Orrick report.
The DOL dismissed 665 of those complaints as having no merit. Another 126 were withdrawn by the complainant, and 138 were settled before the DOL ruled on them. (Settlements to Sarbox-complaints are subject to DOL approval and are confidential.) Just 17 cases were determined by the DOL to have merit, says the report, which was written by Orrick attorneys Michael Delikat and Renee Phillips, and updated to include Welch's case. Delikat, a partner at the firm, has represented a number of major corporations against Sarbox whistle-blower claims.
At the next level of appeal — the DOL's administrative law judges — only six whistle-blowers have prevailed on the merits. Of those cases, three have been reversed by the Administrative Review Board of the DOL, including Welch's case. Of the other three, one settled, another settled after the ALJ ruled but before the case got to the ARB, and one case remains open — Kalkunte v. DVI Financial Services, Inc.
Altogether, the ARB, the final level of appeal, has heard 31 appeals from both companies and whistle-blowers as of June 7, 2007. Of that number, five cases were later withdrawn or settled, seven were dismissed when the whistle-blower indicated an intention to refile the case in federal court, seven appeals were determined to be untimely, three were dismissed for failure to prosecute (meaning the plaintiff did not show up in court), and nine were dismissed with a finding that the claims of the whistle-blower had no merit.
In Welch's case, the ARB ruled that, as a finance chief and CPA, Welch "could not have reasonably believed that Cardinal misstated its financial condition," and was therefore not entitled to Sarbox protection. Welch claimed that he was fired from Cardinal Bancshares after he raised questions about the bank's accounting policies and internal controls and later refused to certify its financial results. The bank argued that Welch was suspended and later fired solely because he refused to meet with an independent auditor and an attorney representing the company if his lawyer wasn't present.
Welch's attorney, D. Bruce Shine, partner at Shine & Mason in Kingsport, Tennessee, concedes that many of the early Sarbox cases were "junk and never should have been filed." But, he says, it is hard to believe that not a single whistle-blower case heard by the ARB since July 2002 had merit. The ARB has a "very narrow view of what constitutes protected activity," he says. "They have elevated what an employee must believe to something greater than what the statute required."
Reached by phone by CFO.com, Oliver M. Transue, the Administrative Appeals Judge who signed the Welch decision, said, "We don't comment on what we have written."
The Administrative Review Board issues final agency decisions for the Secretary of Labor in a wide array of cases, including ones concerning whistle-blowers. It consists of a maximum of five members, one of whom is designated the chair. ARB members, who are appointed by the Secretary of Labor, typically have law degrees but usually don't have accounting backgrounds, since they hear a variety of whistle-blower cases. ALJ's, by contrast, are career judges.