SOX Whistleblower Gets His Job Back, Plus Payment, Fees

The first whistleblower to prevail under The Sarbanes-Oxley Act of 2002 has now been awarded $175,000—including more than $100,000 in attorney fees—and has been ordered reinstated to his position as CFO of a small bank holding company. The whistleblower is entitled to get his job back even though it means that his successor will be put out of work. In addition, he will have to work closely with the very people who were the target of his complaint, an administrative law judge said.

Although the ALJ first signaled that reinstatement was the proper remedy back in January 2004, the decision issued Feb. 15 of this year is the first to address the company’s objections to letting the ex-CFO, David Welch, back in the Cardinal Bankshares Corp. boardroom and to put a monetary figure on his damages.

The decision shows how costly it can be to mishandle a whistleblower complaint under SOX, which defines whistleblowing broadly. Employees who make allegations of corporate misconduct either to company officials or federal authorities are protected from retribution under Section 806 of SOX, even if their allegations turn out to be false.

Unusual Elements

More than 300 complaints have been filed thus far with the Department of Labor, the agency with the authority to adjudicate SOX whistleblower cases. A large number of the complaints have been dismissed, often pursuant to a non-public settlement between the parties; many of the dismissals were based on procedural deficiencies, such as missing the statute of limitations.

Only four employees have prevailed on their claims, including Welch. Meanwhile, employers have prevailed on the merits in 13 cases to date before the DOL. However, that relatively high winning percentage could be a bit deceptive. In 13 other cases, employees have exercised their right to move their case to federal court, where the suits are now pending.

Wofford

Carrie Wofford, of Wilmer Cutler Pickering Hale and Dorr in Washington, D.C., said that too many companies remain ignorant of the SOX whistleblower provisions. “I do agree that it is not widely known that employees are protected by the Sarbanes-Oxley law once they blow the whistle, even if the employees are incorrect about their allegations, so long as they ‘reasonably believe’ the allegations,” said Wofford, who specializes in SOX whistleblower law.

She adds that there are “a number of other unusual elements of the whistleblower protections under Sarbanes-Oxley, and we would advise companies to seek advice—even in advance of any whistleblowing—on how to comply with the new law.”

Although there may be situations where a whistleblower may have to be terminated, Wofford said that, “as a general matter, companies will want to avoid an immediate reaction to the whistleblowing since the Sarbanes-Oxley regulations specifically allow the Labor Department to infer impropriety simply from a short time span between the whistleblowing and any adverse action by the company.”

Presence Of Lawyer

In the Cardinal Bankshares case, the company claimed it fired Welch, who had served as CFO for more than three years, because he demanded that his lawyer be present before he would meet with company officials to discuss issues he had raised about accounting practices. The bank claimed that allowing Welch to have his lawyer present would interfere with the bank’s attorney-client relationship with its own counsel.

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But the administrative judge, Stephen Purcell, said the employer’s explanation “[did] not ring true.” The evidence, said Purcell, “shows that [Welch] came under attack … immediately after he refused to sign Cardinal’s third-quarter certification and before he ever refused to meet with [company officials]. … [The company] imposed an arbitrary requirement that Welch could not have his personal attorney present while being questioned about the various concerns he had raised about Cardinal’s financial accounting practices. This requirement … was clearly imposed for the purpose of using Welch’s anticipated refusal to comply as a pretext for firing him.”

Purcell turned aside Cardinal Bankshares’ argument that allowing Welch to return to his job would be unfair to the current CFO, who would lose her job if Welch was reinstated. “If the present CFO was unaware of the likelihood of Welch’s reinstatement, responsibility for that ignorance rests squarely with Cardinal, and it should not be permitted to profit from its actions by blocking Welch’s reinstatement to the position from which he was unlawfully removed,” Purcell wrote.

The ALJ was equally unsympathetic to the company’s claim that it would be impractical to allow Welch to return to his job, given that it was a small company and he would be forced to work in close proximity with “persons who have developed a distrust and dislike” of him. “Any hostility which has developed … is no different in kind or degree from that which, regrettably, occurs all too frequently following litigation of this sort,” Purcell said.

Out Of The Ordinary

Shine

D. Bruce Shine, who represented Welch, told Compliance Week that his client is adamant about returning to the company—though the lawyer acknowledged that other people would probably feel differently. Welch is the only SOX whistleblower to date to seek reinstatement, noted Shine, who practices in Kingsport, Tenn.

Effel

Laura Effel, who represented Cardinal Bankshares, told Compliance Week that the circumstances in this case were “out of the ordinary” and that the order of reinstatement was inappropriate. Although reinstatement has long been used as a remedy in other employment contexts, it is “typically granted when there’s a fairly low-level employee involved, such as a truck driver or someone who works in a factory,” said Effel, who practices with LeClair Ryan Flippin Densmore in Roanoke, Va. “It is not typical to order reinstatement for a fairly high-level executive.”

Effel said her client had already authorized an appeal to the Administrative Review Board of the Department of Labor and, if necessary, the 4th Circuit Court of Appeals and that there were “a number of strong issues” that would be raised on appeal. An earlier appeal of the ALJ’s January 2004 preliminary ruling was rejected as premature.

Shine said his client was unlikely to be returning to Cardinal Bankshares anytime soon given the company’s “contentious” posture throughout the case and its determination to contest Purcell’s ruling aggressively. “I operate on the assumption that Cardinal will appeal all the way to the International Court of Justice in The Hague,” Shine joked.