By: dmc-admin//February 25, 2004//
John D. Finerty, Jr. |
Congress passed the Sarbanes-Oxley Act, also known as the Corporate and Criminal Fraud Accountability Act of 2002, in response to revelations of wide-spread accounting fraud and securities law violations at companies such as Enron, WoldCom and Global Crossing. These companies and others later liquidated or filed for bankruptcy protection and shareholders, many who were employees, lost billions. In an effort by Congress to create a remedy for employee whistle blowers who report fraud, the Act provides civil and criminal penalties against companies and individual managers who retaliate against employees for reporting accounting fraud or violations of other laws meant to protect shareholders.
An administrative law judge at the U.S. Department of Labor on Jan. 28, 2004 released the first whistle blower decision finding for the plaintiff, in a case under the retaliation provisions of the 2002 Sarbanes-Oxley Act. The plaintiff is the former Chief Financial Officer of a small, publicly traded bank holding company in Virginia.
The judge awarded back-pay, interest and attorney fees. The case illustrates the risks inherent in disciplining or discharging any employee who objects to or dissents on accounting or financial reporting issues.
Background
In Welch v. Cardinal Bankshares, Corp., Case No. 2003-SOX-15 (U.S. DOL ALJ Jan. 28, 2004), an administrative law judge held that the Chief Financial Officer of a bank holding company was fired for refusing to sign financial statements and for making reports of illegal insider trading and accounting irregularities. The judge rejected the companys reasons for termination that Welch was a poor performer and refused to cooperate with the companys investigation into his reports calling those reasons pretextual. The judge awarded back-pay, interest and attorney fees.
David Welch, as CFO, was responsible for signing Cardinals financial certifications. In January through September 2002, he reported to the companys president and board that trading among some insiders, which occurred at the opening of a quarter in which Welch claimed the companys earnings were overstated, and company accounting practices might violate federal law and Federal Reserve regulations. The audit committee of the companys board of directors investigated and called for a meeting with Welch.
Welch attended the audit committee meeting, but he attempted to tape record the proceedings on the advice of his attorney. He claimed his past statements had been misrepresented. The company rejected Welchs request and terminated the meeting citing bank policy on confidentiality. Cardinal later terminated Welch and cited his refusal to cooperate with the audit committee investigation as a reason for his termination.
Welch filed an administrative claim against Cardinal with the U.S. Department of Labor. The Department assigned the case to the Occupational Safety and Health Administration for investigation. OSHA ruled against Welch; he appealed and requested a hearing. At the hearing, he alleged, and the judge agreed, that the audit committee interview was set up to create a reason to fire him. According to the judge, the interview was not to conduct an inquiry in to the various concerns raised by Welch; rather, it was meant to create a situation whereby Welch could not attend the meeting so Cardinal could use that act as a justification for terminating his employment.
Lessons Learned by Employers
Sarbanes-Oxley creates a new claim for employees fired or treated adversely because of a complaint or report of conduct by a company that violates a federal law meant to protect shareholders. See 18 U.S.C. 1514A. Supreme Court and Seventh Circuit precedent has held in other retaliation cases that an employees reports, or protected conduct as the judge in Welchs case termed it, does not immunize an employee from termination for poor performance or conduct that violates company policy.
Quite to the contrary, an employer should go to significant lengths to ensure those employees are treated just like anyone else. That raises the issue of whether Welchs case would have come out differently if Cardinal could have produced a set of audit committee procedures and employment policies that required strict confidentiality of company investigations, prohibited tape recording (or, conversely, provided that the company would record all proceedings), and prohibited the presence of any outside third-party, including attorneys.
The company might have also strengthened its position if it could have cited to past investigations, such as in sexual harassment, OSHA, workers compensation or discrimination cases, in which it applied the same confidentiality principles and disciplined or discharged employees who refused to cooperate. Employers may consider reviewing their audit committee and employment law complaint procedures to address these issues. Keep in mind, however, that simply writing a new policy or a new provision into existing policies and procedures may not be good enough. Managers need to fully inform employee of the policy and train them on how to apply it. Then the company needs to audit its practices to ensure the policies are being followed.
For more information on this case or for assistance with defending a Sarbanes-Oxley claim, contact John D. Finerty, Jr. at Michael Best & Friedrich at (414) 225-8269 or on the Internet at [email protected].