Risk & Compliance

CFO Whistleblower Reinstated by Court

An administrative law judge rules that the finance chief should get his job back, plus back pay and damages.
Marie Leone and Craig SchneiderFebruary 24, 2005

A federal judge has reportedly ordered the reinstatement of David Welch, a former CFO of Cardinal Bankshares Corp. Welch was the first person to win whistleblower protection under the Sarbanes-Oxley Act after he raised accounting questions at the company and was fired last year.

Besides getting his job back at the small Floyd, Va.-based bank, Welch won nearly $65,000 in back pay and damages in the Feb. 15 ruling by U.S. Department of Labor Administrative Law Judge Stephen Purcell, according to the Associated Press.

For a law governing financial fraud, the Sarbox whistleblower provision, Section 806, is unusually strong in terms of protecting an employee’s job, notes Dan Westman, a partner at Shaw Pittman, a law firm. Indeed, the Sarbox mandate of immediate reinstatement for the whistleblower resembles industry-specific labor laws aimed at protecting workers in the mining and nuclear-power sectors. Westman told CFO.com that regulators in those industries have relied for decades on whistleblower information to provide what he dubs “undersight”—information arising from the workforce that can prevent life-threatening negligence or wrongdoing.

By Westman’s lights, Sarbox is a rare instance of a federal law that mandates reinstatement for whistleblowers who expose financial fraud, rather than unearth safety problems. Since the law was enacted in 2002, workers have filed 144 claims with the Department of Labor alleging that their employers retaliated against them for calling attention to financial mismanagement, the Associated Press reported. Welch is one of just three workers to win their case so far, the newswire noted. Another 16 whistleblowers agreed to settlements.

Purcell’s latest ruling affirmed his January 2004 decision reinstating Welch at Cardinal Bankshares, a 65-employee holding company of which Bank of Floyd is the sole subsidiary. The new ruling refuted arguments made by the holding company that rehiring Welch would be “too onerous,” AP noted.

“While Welch’s reinstatement will pose certain difficulties, those difficulties are not insurmountable and cannot defeat reinstatement,” Purcell wrote, as reported by the newswire. The judge also ordered the bank to pay $108,000 in legal fees to Welch’s lawyer.

Whether the Cardinal Bankshares case is an indication that small companies as well as large ones will be cited in whistleblower cases remains to be seen. However, according to the Department of Labor’s whistleblower case files, small companies are listed as defendants in several cases.

For example, Section 806 cases for 2003-2004 include complaints against the $9.5 million (in sales) A.B. Watley Group, $35 million Parametric Technology Corp., and $400 million New World Pasta Co., as well as ones against giants like Merrill Lynch, EMC Corp, and Duke Energy.

Westman contends that smaller companies are seeing increased court time because, workers are generally more aware of their rights than in past decades, and whistleblowers are no longer ostracized as being “snitches.” Rather, they are “ennobled,” says Westman, pointing to Time magazine’s 2002 Persons of the Year edition highlighting whistleblowers.

An attorney for Cardinal Bankshares, Laura Effel, said Tuesday that the bank’s board was determined to appeal the ruling with the DOL’s Administrative Review Board over the next week, according to AP. “I think this decision by the administrative law judge is so flawed and so disturbing that the board is not interested in resolving this case in a way that would permit this decision to stand,” Effel said.

If the review decides not to take up the case, then the bank will consider whether to appeal to a federal court, she said. Welch, who now lives near Huddleston, Va., was encouraged by the ruling. “If the door is open at Cardinal Bankshares, I’ve got to keep up my end of the bargain and walk through that door,” he told AP.

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