CFO Whistle-Blower Is Vindicated

Court decision is said to be the first related to Sarbanes-Oxley whistle-blower protections.
Stephen TaubFebruary 5, 2004

In a ruling posted late last week, U.S. Department of Labor Administrative Law Judge Stephen Purcell ordered the Bank of Floyd (Virginia) and holding company Cardinal Bankshares Corp. to rehire, with back pay, former chief financial officer David Welch, according to the Roanoke Times.

Cardinal fired Welch in October 2002 after he raised concerns about its financial reporting, alleged insider trading, and internal accounting controls, according to the paper. Welch then filed a complaint with the Department of Labor.

“I think this is the first decision on the merits of a Sarbanes-Oxley complaint,” said John Vittone, chief judge for the Department of Labor’s Office of Administrative Law Judges.

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“I feel totally vindicated,” Welch told the newspaper. “The judge’s decision was clear and convincing.”

Perhaps one of the most remarkable aspects of the case is the fact that Cardinal’s headquarters are in Floyd, Virginia; the 2000 census, noted the Times, counted 432 residents in the rural town. “It’s intriguing in the sense that you wouldn’t expect Floyd to be the place where history is made,” Welch’s lawyer, Bruce Shine, told the paper.

Judge Purcell did not examine or rule whether Welch’s charges were valid, noted the Times, but only whether Welch’s allegations “were based on a reasonable belief that violations were being committed,” the applicable standard for whistle-blower protection under Sarbanes-Oxley.

“We are disappointed in the decision,” Cardinal reportedly said in a joint statement with its attorney Laura Effel, of the law firm Flippin Densmore, and Michael Larrowe, an accountant whose firm was Cardinal’s external auditor. They said they would appeal Purcell’s decision, adding, “We believe a fair review of the factual basis of this claim will lead to a reversal in the case.”

According to the Times, Cardinal stated that it fired Welch because he refused to meet, without his attorney, with Larrowe and with Cardinal attorney Douglas Densmore, whom the company’s audit committee had instructed to investigate Welch’s allegations.

Purcell found that the company’s investigation of Welch’s complaints “was orchestrated by [Cardinal president and chief executive officer] Leon Moore, acting in concert with Larrowe and Densmore, in such a way that [Cardinal] could justify [Welch’s] termination,” according to the report. Welch’s whistle-blowing made him vulnerable to “adverse and discriminatory employment action well before he refused to meet with Densmore and Larrowe,” Purcell reportedly added.