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FIRED CFO WINS EARLY SARBANES CLAIM
Whistle-blower Wanted His Own Lawyer at Internal Hearing

BY MOLLY McDONOUGH

A small-town bank holding company in Virginia is being ordered to hire back its former chief financial officer who says he was fired because he made waves about possible accounting irregularities.

The case, which is ongoing, is believed to involve the first ruling on whistle-blower protections pursuant to the Sarbanes-Oxley Act of 2002. If it stands, the decision also may cause employers to reconsider policies about allowing employees to bring personal lawyers to internal meetings.

Cardinal Bankshares maintains it fired CFO David Welch because he refused to fully cooperate with an audit committee investigation into his concerns of insider trading, internal controls and financial reporting irregularities.

But Administrative Law Judge Stephen L. Purcell ruled Jan. 28 that the meeting with audit committee investigators was a mere pretext to fire Welch. He ordered the financial company to rehire Welch with back pay and to cover his legal fees. Purcell has yet to rule on damages. Welch v. Cardinal Bankshares Corp., No. 2003-SOX-15.

Welch’s lawyer says he is happy with the judge’s opinion, which shows it doesn’t take a mega-company like Enron to get the attention of federal regulators and the courts.

"To have it occur in a small community shows the importance of the legislation and the depth of its impact," says D. Bruce Shine, who practices in Kingsport, Tenn.

Cardinal Bankshares intends to appeal Purcell’s decision.

"My client and I are very disappointed in this decision, and we think it’s wrong," says the company’s trial counsel, Laura Effel of Roanoke, Va. "The Cardinal audit committee did the right thing. They thought so then and they still think so today."

The Floyd, Va.-based company maintains it fired Welch in October 2002 when he declined to meet with audit committee investigators unless he could have a personal attorney present. Cardinal Bankshares argued the presence of Welch’s lawyer would create a breach of confidentiality.

In a detailed opinion that recaps testimony from an August hearing in the case, Purcell sides almost entirely with Welch, including his assertion that the meeting was called to find a reason to fire him.

The meeting, Purcell wrote, "was not to conduct a legitimate inquiry into the various concerns raised by Welch," but rather "to create a situation whereby Welch would not attend the meeting so [the company] could use that act as a justification for terminating his employment."

Once Welch was terminated, he filed a complaint with the U.S. Department of Labor alleging he was fired in retaliation for raising concerns about the company’s financial activities.

Sarbanes-Oxley established a new regulatory framework for corporate accounting and disclosure. Corporate decision-makers who violate the act’s provisions face personal liability, which can include monetary fines and jail time. This action arose out of section 806 of the act, which prohibits employers from discharging an employee or officer who reports potential violations either to the employer or federal government.

An initial probe by an Occupational Safety and Health Administration investigator found Cardinal Bankshares justified in firing Welch because he refused to meet with audit committee investigators alone. (OSHA investigators have been designated to investigate Sarbanes cases.) Purcell, however, found Welch’s actions were protected under Sarbanes-Oxley, and the company knew Welch was engaged in protected behavior when it fired him. Purcell also found that Cardinal Bankshares failed to prove it would have fired Welch for some other reason.

The judge and both parties point out the issue in this case was not whether Welch’s concerns were justified, but whether his concerns were reasonable and whether his termination was in retaliation for raising those concerns.

Effel says it’s a common business practice during internal investigations to reject an employee’s request to have a personal lawyer present. Employees don’t get to decide how to handle investigations, she says.

"I think that’s something that will concern everybody who has to deal with allegations that are of concern to the organization," Effel says.

Birmingham, Ala., labor and employment lawyer Richard Carrigan said he found the opinion striking for its findings on the attorney issue. Carrigan serves on a whistle-blower protections subcommittee within the ABA’s Section of Labor and Employment Law.

"The unusual thing is the judge’s analysis of the reason for the discharge," Carrigan says. "Other employers will be very interested in whether or not you can exclude [a personal] attorney."

Before Welch v. Cardinal Bankshares, Carrigan says, he would have told clients that you can exclude private attorneys from most internal investigations. Now he says he’s not so sure. "I would be very cautious," he says.

Once Purcell makes a decision on damages, it will likely be appealed to the administrative review board and then possibly to the 4th U.S. Circuit Court of Appeals, based in Richmond, Va.

©2004 ABA Journal

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