Risk Management

Ex-CFO Snubbed in Whistle-blower Case

Appeals court won't reinstate fired Cardinal Bankshares finance chief in historic first Sarbanes-Oxley challenge.
Stephen TaubAugust 6, 2008

The CFO who became the first person to win protection under Sarbanes-Oxley’s whistle-blower provision suffered yet another setback in his rocky battle to win back his job.

A three-judge panel of the 4th Circuit Court of Appeals refused to reinstate David Welch as chief financial officer of Cardinal Bankshares Corp., ruling that he failed to prove his employer broke federal law.

Welch claims that in 2002 he was fired from Cardinal — the holding company for the local bank in Floyd, Va. — after he raised questions about the bank’s accounting policies and internal controls, and after he subsequently refused to certify its financial results. The bank argued that Welch was suspended, and later discharged, solely because he refused to meet, without a personal attorney, when told to attend a session with Cardinal attorney Douglas Densmore, of law firm Flippin Densmore; and Michael Larrowe, an accountant whose firm was Cardinal’s external auditor.

In 2004, two years after Welch was fired, Cardinal appealed a “recommended decision and order” by Department of Labor Administrative Law Judge Stephen Purcell to reinstate Welch as CFO and award him back pay. The bank’s appeal was denied in June 2006 by the DoL’s administrative review board.

Even so, the bank refused to comply with the DoL reinstatement order, because the original “recommendation” by Purcell to reinstate Welch was not a final order as defined by the Labor Department, according to Cardinal’s outside counsel Laura Effel at the time. Therefore, the bank would wait and see whether the DoL or Welch would take action against the company in U.S. District Court in Roanoke.

In July 2006, Welch’s case advanced slightly when the DoL moved to intervene, submitting a 13-page memorandum in support of his application for reinstatement. The support from DoL did not seem to make a difference to the Roanoke court, however: Judge Glen Conrad said that he did not have the authority to enforce the ruling by the DoL’s administrative review board since it was a preliminary action. Welch then appealed the ruling in the 4th Circuit.

A study last year found that of nearly 1,000 complaints filed under the whistle-blower provisions of Sarbox, not one survived company appeals to result in an unequivocal win for the complainant, although many were settled.

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