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LABOR & EMPLOYMENT LAW — 8/18/08

Fourth Circuit affirms complaint dismissal in high profile SOX whistleblower case

In a high profile whistleblower case brought under the Sarbanes-Oxley Act of 2002 (SOX), the Fourth Circuit Court of Appeals has affirmed a ruling by the US Department of Labor’s Administrative Review Board (ARB) which found that David Welch, chief financial officer (CFO) of Cardinal Bankshares Corporation (Cardinal), did not engage in protected activity when he reported his concerns that the bank: (1) misclassified loan repayments in financial statements; (2) had deficient internal accounting controls; and (3) restricted his access to the bank’s outside auditors. In 2005, Welch made headlines when he became the first employee to win a preliminary order of reinstatement from an Administrative Law Judge (ALJ) in a SOX case. The Fourth Circuit’s decision affirmed the ARB’s dismissal of Welch’s complaint. (Welch v Chao, 4thCir, 91 EPD ¶43,273)

Welch filed a complaint with the Occupational Safety and Health Administration (OSHA) alleging that his various communications to Cardinal constituted protected activity under Section 806 of SOX and that Cardinal fired him because of this protected activity. An ALJ determined that Welch had engaged in SOX-protected activity and issued a preliminary order reinstating him to his position as CFO (Welch v Cardinal Bankshares Corp, DOL ALJ, dkt no 2003-SOX-15 (2005), CCH ¶5203). The ARB subsequently refused to stay the reinstatement order pending its review of the decision (Welch v Cardinal Bankshares Corp, DOL ARB, dkt no 06-062 (2006), CCH ¶5205). However, after reviewing the ALJ’s decision, the ARB reversed, finding as a matter of law that none of Welch’s communications constituted protected activity under SOX (Welch v Cardinal Bankshares Corp, DOL ARB, dkt no 05-064 (2007), CCH ¶5245). Welch appealed to the Fourth Circuit.

Rejecting one of the rationales applied by the ARB, the Fourth Circuit emphasized that “communications about misclassifications in financial statements may, in some circumstances, form the basis for a Sarbanes-Oxley whistleblower action, and the ARB erred to the extent that it held to the contrary.” Had this been the only rationale for the ARB’s decision, the Fourth Circuit would have remanded the case to allow the ARB to determine whether Welch could have reasonably believed that the misclassifications he reported violated relevant laws under SOX.

However, the Fourth Circuit found the ARB’s second rationale sufficient to justify dismissal of Welch’s complaint. The ARB found that even if Welch’s charges proved to be correct, he had, nonetheless, failed to explain to the ARB how he could have had an objectively reasonable belief that these actions violated any of the laws listed in Section 1514A of SOX – i.e. federal fraud statutes, Securities & Exchange Commission rules, or federal laws relating to shareholder fraud. “Although Welch advanced several arguments before the ARB, he supported these arguments only with irrelevant and inapposite authority or conclusory, general statements,” noted the Fourth Circuit. To the extent that Welch attempted to explain his position and cite relevant authorities on appeal, the Fourth Circuit ruled that he forfeited these new arguments by failing to raise them before the ARB.

“Of course, we do not suggest that a whistleblower must identify specific statutory provisions or regulations when complaining of conduct to an employer, nor do we address the burden upon the parties in the proceedings before the ALJ,” the Fourth Circuit was careful to point out (emphasis in original). “We simply hold that Welch completely failed to raise any relevant arguments before the ARB and may not now raise new arguments before this court.”

For more information on this and other topics, consult CCH Employment Practices Guide or CCH Labor Relations.

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