Risk & Compliance

CFO Whistle-blower Still in Limbo

Sarbanes-Oxley ''is certainly not working in terms of reinstatement,'' says the attorney for a onetime finance chief who refused to certify his com...
Alix Stuart and Stephen TaubApril 10, 2006

The Department of Labor’s Administrative Review Board has affirmed a judge’s order that a bank must rehire a former CFO who was the nation’s first Sarbanes-Oxley whistle-blower, but it doesn’t seem to have settled the matter.

In late 2002, David Welch was fired as chief financial officer of Floyd, Virginia-based Cardinal Bankshares Corp., a 65-employee holding company whose subsidiary is the Bank of Floyd, after he refused to certify his company’s financial statements.

“When I refused to certify, I was just trying to get the ball rolling on some improvements,” Welch told CFO magazine two years ago. The former CFO says he raised concerns about several potential abuses to Cardinal chairman and CEO Leon Moore as early as 2001, but to no avail. Included in those concerns were improper journal entries amounting to $195,000, which led to a 14 percent net income overstatement, alleged Welch.

When he escalated the concerns through a series of memos and by withholding his signature from quarterly Securities and Exchange Commission filings for the small bank and its holding company, which trades over the counter, the audit committee hired its external auditor and an outside attorney to investigate the claims. However, he said, the team blocked him from meeting with the audit committee and rigged evidence to make him look incompetent. “[They] misconstrued everything I said and never presented my memos,” he argued. Within weeks, Welch was out of a job.

For its part, the bank claimed it fired Welch because he refused to comply with the audit committee’s direction to meet with its representatives without his personal attorney. Cardinal claims an outside attorney would have violated the company’s need for confidentiality. “David Welch was not a whistle-blower,” said Laura Effel of Flippin Densmore, an attorney for the company. “If he had come to the audit-committee investigators…he would have been protected. But that’s not what he did; he said, ‘I’m not going to come and tell you unless I can bring my lawyer.’ “

Based on minutes from an earlier audit-committee meeting that indicated plans to fire Welch before his refusal to appear without an attorney — as well as the short time that elapsed between Welch’s memos and firing — administrative law judge Stephen Purcell found Cardinal’s argument “simply unconvincing.” (A year-end restatement of the numbers that Welch had questioned in 2001 also helped make his case, although Purcell insisted that whether Cardinal is actually guilty of accounting fraud “is not, and never has been, at issue in this case.” He said that all Sarbox requires is that an employee “reasonably believed” such fraud was occurring.) As a result, in January 2004 he recommended that the Labor Deparment issue orders for Welch to return to his job at Cardinal.

At the time, reported the Associated Press, Cardinal Bankshares argued that rehiring Welch would be “too onerous.” More than a year later, in February 2005, Purcell dismissed those arguments and again ruled in Welch’s favor, awarding him $65,000 in back pay and damages and ordering his reinstatement. The judge also ordered the bank to pay $108,000 in legal fees to Welch’s lawyer, the AP added.

The review board’s ruling noted that “Cardinal’s arguments against Welch’s motion have no merit,” according to the wire service, which also observed that the bank was granted 10 days to file an appeal.

“It certainly runs counter to the regulations giving the impression of immediate reinstatement,” Bruce Shine, Welch’s lawyer, told the wire service. Sarbanes-Oxley “is certainly not working in terms of reinstatement, and it goes to the age-old thing that if you’ve got enough money and enough lawyers, you can keep people busy for years.”

Effel, the bank attorney, maintained that Purcell’s ruling focused only on procedures and technicalities without deciding who was right, according to the AP. “I don’t know that [the review board] made up their minds. I believe this is a technical decision and not a decision evaluating the merits of Mr. Welch’s claim,” she reportedly added.

Effel reportedly added that indeed, Cardinal Bankshares plans to file another appeal.

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