Cardinal Refuses to Reinstate CFO

In the first Sarbox whistleblower case to go to trial, Cardinal Bankshares blocks CFO from reinstatement until a final order comes through.

In a widely watched whistleblower case, Cardinal Bankshares yesterday decided once again to refuse a Department of Labor judge’s recommended order to reinstate the bank’s former CFO, David Welch, the company’s outside attorney Laura Effel told Instead, the bank holding company plans to wait and see whether the DoL or Welch brings an action against the company in U.S. District Court, she noted.

On June 9, the DoL’s Administrative Review Board denied the bank’s request to delay the reinstatement order. The bank previously appealed a 2004 “recommended decision and order” by DoL Administrative Law Judge Stephen Purcell to reinstate Welch as CFO and award him back pay.

Welch was fired from Cardinal in October 2002 for refusing to speak with the bank’s audit committee without his personal attorney present. Welch’s lawyer, Bruce Shine, said the finance chief believed that the bank was preparing to fire him for disclosing improper accounting practices during internal meetings. Thus, Welch refused to meet with the audit committee without legal representation, Shine added.

Welch is said to be the first person to go to trial under the whistleblower protection provision of the Sarbanes-Oxley Act of 2002.

The court battle, which will be four years old in October, “is the closest thing to a divorce case I’ve seen” as an employment attorney, said Shine, a principal with Shine and Mason. Effel, an employment litigator with LeClair, Ryan, Flippin, and Densmore, also notes that the case has dragged on for an unusually long time.

Effel argues that the original “recommendation” by Judge Purcell to reinstate Welch is not a final order as defined by the department. The judge also recommended that Cardinal should award him back pay, possibly future pay, special damages, attorney fees, expenses, and interest on back wages.

For an order to be final, one of a number of things must happen, Effel said. For example, the Secretary of Labor could confirm the review board’s recommended order. Another way for the order to become final would be if the respondent, in this case, Cardinal, decides not to appeal the order, which would make it final after a certain waiting period.

Meanwhile, the bank has spent at least $400,000 on the case, Cardinal CEO Leon Moore told shareholders recently. Further, the tiny community bank, which recorded $450 million in assets and a net income of $2.2 million for 2005, will separately shell out about $125,000 in Sarbanes-Oxley compliance costs this year, estimates Moore.

Nevertheless, Cardinal’s board and shareholders support the bank’s defense strategy, Moore said in an interview. “Nobody — shareholders or directors — [is] suggesting that we settle,” asserts Moore. He says that the case has ramifications for other public companies, since a win by Welch would “set a precedent” allowing employees to make accusations and refuse to meet with the audit committee unless accompanied by a lawyer. Both America’s Community Bankers Association and the Virginia Independent Bankers Association filed amicus briefs with the DoL supporting Cardinal’s position.


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