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Wednesday, February 23, 2005

Judge Orders Reinstatement for First Sarbanes-Oxley Whistleblower

A federal Labor Department judge, ruling in a closely watched test case of a new corporate whistleblower law, has ordered a tiny Virginia bank to reinstate a former employee who questioned its accounting practices.

In the ruling issued Feb. 15, Administrative Law Judge Stephen Purcell ordered Cardinal Bankshares Inc. to reinstate its former chief financial officer, David Welch, and pay him nearly $65,000 in back pay and damages.

The ruling, while focusing on a tiny company little known outside its region, with just a few hundred shareholders, touches on many of the issues that have drawn substantial attention to the case.

Last year Welch, became the first person to win protection as a whistleblower under the Sarbanes-Oxley Act, passed by Congress in 2002 in the wake of corporate scandals at Enron, WorldCom and other firms.

The bulk of the law sets strict requirements for financial reporting by publicly traded companies.

But it also contains a provision designed to protect business insiders who blow the whistle on accounting trickery.

Since the law took effect in mid-2002, workers have filed 144 claims with the Department of Labor, alleging that their employers retaliated against them for calling attention to financial mismanagement.

Welch is one of just three workers to win protection so far. Another 16 cases have ended in settlements.

In his ruling last week, Purcell affirmed his decision in January of last year ordering Welch's reinstatement at Cardinal, a holding company for the 65-employee Bank of Floyd.

But the new ruling sets out specific terms and conditions, and rebuts point-by-point arguments by Cardinal Bankshares that bringing Welch back would be too onerous.

"While Welch's reinstatement will pose certain difficulties, those difficulties are not insurmountable and cannot defeat reinstatement," Purcell wrote in his decision.

In addition to the reinstatement and backpay, Purcell also ordered the bank, based in the southwest Virginia town of Floyd, to pay $108,000 in legal fees to Welch's lawyer.

An attorney for Cardinal, Laura Effel, said Tuesday that the bank's board was determined to appeal the ruling.

"I think this decision by the administrative law judge is so flawed and so disturbing that the board is not interested in resolving this case in a way that would permit this decision to stand," Effel said.

The bank plans to file an appeal with a labor department Administrative Review Board over the next week.

If that board decides not to take up the case, then the bank will consider whether to appeal it to a federal court, she said.

Welch, who now lives near Huddleston, Va., said Tuesday he was encouraged by the ruling.

The ruling of reinstatement, while difficult, answers prayers for a clear-cut resolution in the case, he said.

"If the door is open at Cardinal Bankshares, I've got to keep up my end of the bargain and walk through that door," he said.

posted by Brian Moran @ 8:57 AM   0 comments

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