In a closely watched case that has tested Sarbanes-Oxley protection for corporate whistleblowers, the 4th Circuit has upheld a Southwest Virginia bank’s refusal to reinstate a CFO who filed one of the nation’s first whistleblower claims under the 2002 Act.
David Welch claimed that Cardinal Bankshares – a holding company for the Bank of Floyd – fired him in retaliation for complaints about bank accounting practices. Welch had complained to bank management that the bank had classified as “income” a repaid $195,000 loan the bank previously had written off, restricted Welch’s access to the bank’s outside auditor and allowed inexperienced personnel to make accounting ledger entries.
Writing for a unanimous panel in Welch v. Chao, Judge Diana Gribbon Motz said a SOX whistleblower doesn’t have to cite code sections to make out a claim, but he has to identify the specific conduct he “reasonably believes” is illegal. The panel said communications about misclassifications in financial statements could form the basis of a SOX whistleblower claim.
Welch’s SOX claim failed because his citation of accounting treatises and later-passed laws and regulations could not show how the bank’s accounting practices reasonably could have been perceived as a violation of federal securities laws.
By Deborah Elkins