Welch v. Chao

• Decision Date: 05 August 2008
• Docket Number: No. 07-1684.,07-1684.
• Citation: 536 F.3d 269
• Parties: David E. WELCH, CPA, Petitioner, v. Elaine L. CHAO, Secretary of Labor, United States Department of Labor, Respondent, Cardinal Bankshares Corporation, Intervenor-Respondent. Government Accountability Project; National Whistleblower Center; Taxpayers Against Fraud, Amici Supporting Petitioner, American Association of Bank Directors; Virginia Association of Community Banks; Virginia Bankers Association, Amici Supporting Respondent, Securities and Exchange Commission, Amicus Curiae.
• Court: U.S. Court of Appeals — Fourth Circuit

536 F.3d 269

David E. WELCH, CPA, Petitioner, v. Elaine L. CHAO, Secretary of Labor, United States Department of Labor, Respondent, Cardinal Bankshares Corporation, Intervenor-Respondent.

Government Accountability Project; National Whistleblower Center; Taxpayers Against Fraud, Amici Supporting Petitioner,

American Association of Bank Directors; Virginia Association of Community Banks; Virginia Bankers Association, Amici Supporting Respondent,

Securities and Exchange Commission, Amicus Curiae.

No. 07-1684.

United States Court of Appeals, Fourth Circuit.

Argued: May 14, 2008.

Decided: August 5, 2008.

ARGUED: David B. Shine, Donald Franklin Mason, Jr., Shine & Mason, Kingsport, Tennessee, for Petitioner. Barbara Eby Racine, United States Department of Labor, Washington, D.C., for Respondent. Joseph Michael Rainsbury, Leclair Ryan, PC, Roanoke, Virginia, for Intervenor. ON BRIEF: Gregory F. Jacob, Solicitor of Labor, Steven J. Mandel, Associate Solicitor, Ellen R. Edmond, Counsel for Whistleblower Programs, United States Department of Labor, Office of the Solicitor, Washington, D.C., for Respondent. Douglas W. Densmore, Leclair Ryan, PC, Roanoke, Virginia; Betty Southard Murphy, Marc A. Antonetti, Baker & Hostetler, LLP, Washington, D.C., for Intervenor. Paul Taylor, Taylor & Associates, Burnsville, Minnesota; Jason M. Zuckerman, The Employment Law Group, PC, Washington, D.C., for The Government Accountability Project, The National Whistleblower Center, and Taxpayers Against Fraud, Amici Supporting Petitioner. Arthur P. Strickland, Roanoke, Virginia, for American Association of Bank Directors, Amicus Supporting Respondent. A. Peter Brodell, Williams Mullen, PC, Richmond, Virginia; Joseph E. Spruill, III, Virginia Bankers Association, Glen Allen, Virginia, for Virginia Bankers Association and Virginia Association of Community Banks, Amici Supporting Respondent. Brian G. Cartwright, General Counsel, Andrew N. Vollmer, Deputy General Counsel, Jacob H. Stillman, Solicitor, Mark Pennington, Assistant General Counsel, Securities and Exchange Commission, Washington, D.C., for Securities and Exchange Commission, Amicus Curiae.

Before MOTZ, Circuit Judge, HAMILTON, Senior Circuit Judge, and CLAUDE M. HILTON, Senior United States District Judge for the Eastern District of Virginia, sitting by designation.

Affirmed by published opinion. Judge MOTZ wrote the opinion, in which Senior Judge HAMILTON and Senior Judge HILTON joined.

OPINION

DIANA GRIBBON MOTZ, Circuit Judge:

David E. Welch appeals a final order of the Administrative Review Board (ARB) finding that his discharge by Cardinal Bankshares Corporation did not violate the whistleblower protection provision of the Sarbanes-Oxley Act. For the reasons set forth within, we affirm.

I.

Cardinal Bankshares Corporation is a bank holding company with its common stock listed on the NASDAQ Bulletin Board. As of December 31, 2001, Cardinal had outstanding over 1.5 million shares of common stock, held by approximately 600 stockholders of record. Cardinal is the sole owner of a single financial institution, the Bank of Floyd. Cardinal and the Bank of Floyd share a Board of Directors and managing officers, and Ronald Leon Moore serves as the Chief Executive Officer of both entities. Hereinafter, we refer to the Bank of Floyd and Cardinal interchangeably as "Cardinal."

Welch, the petitioner in this case, is licensed as a certified public accountant in Virginia and holds a bachelor's and a master's degree in business administration. Welch began working for Cardinal in 1999 as a part-time accounting officer, and, in 2000, Moore hired Welch as Cardinal's Chief Financial Officer (CFO). Welch's responsibilities as CFO of Cardinal included preparing and reviewing entries on Cardinal's general ledger accounts; devising and implementing accounting procedures; and preparing various reports and financial statements, including the 10-QSB quarterly reports and 10-K annual reports that Cardinal is required to submit to the Securities and Exchange Commission (SEC), see 15 U.S.C. §§ 78l-78m (2000).

Welch came to believe that Cardinal's accounting practices were seriously deficient in several respects. According to Welch, Moore and others who lacked accounting expertise routinely made entries in Cardinal's general ledger; Welch asserts that this practice itself violated generally accepted accounting principles (GAAP). He also contends that this practice resulted in ledger entries that violated GAAP.

Most notably, on one specific occasion, Cardinal recovered two loans that it had previously written off, expecting that they would not be recouped. Cardinal recorded the unexpected recovery of these written-off loans, totaling $195,000, as income; Welch maintains that GAAP does not permit such recovered loans to be reported as income and instead requires that they be listed on a company's loan reserve account. Welch attempted to change the ledger entries so that the loans would be recorded in the loan reserve account instead of as income, but Moore refused to authorize these changes. According to Welch, these incorrect entries caused Cardinal to overstate its year-to-date income by $195,000 in its 2001 third-quarter 10-QSB report to the SEC. Larrowe & Co., PLC, Cardinal's independent auditor, eventually corrected these entries in Cardinal's annual report during the 2001 year-end audit, but neither Cardinal nor Larrowe & Co. ever submitted a corrected third-quarter 10-QSB report to the SEC.

Finally, Welch claims that Moore would often communicate directly with Larrowe & Co. about financial matters without including Welch. Welch alleges that by so excluding him, Moore restricted his access to Larrowe & Co., and that this "restricted access" prevented him from performing his tasks as CFO and prevented him from confirming the accuracy of Cardinal's financial reports.

Welch forcefully communicated his concerns about these assertedly improper accounting practices in multiple formal memoranda to Moore and others immediately following the July 30, 2002, effective date of the Sarbanes-Oxley Act of 2002, Pub.L. No. 107-204, 116 Stat. 745. Welch also contends that he raised these concerns orally with Moore and others as they arose in 2001.¹

On August 2, 2002, Welch informed Larrowe & Co. in writing that he could not sign a representation letter to Larrowe & Co. confirming that Cardinal provided Larrowe & Co. with accurate financial information for the first and second quarters of 2002, because Moore and others had made ledger entries without his supervision and because Moore and Larrowe & Co. had excluded him from their "communications loop" on various issues.

On August 14, 2002, Welch refused to certify Cardinal's 2002 second-quarter 10-QSB report to the SEC, as required by the Sarbanes-Oxley Act. In a memorandum explaining his refusal to certify the quarterly report, Welch claimed that he could not certify to the accuracy of the company's financial reports because, among other concerns, unauthorized persons had recorded ledger entries. Welch identified the entry as income of the $195,000 in recovered loans as evidence of the inaccuracies he believed this practice had caused. Moore ultimately certified Cardinal's quarterly report himself, because Welch refused to do so.

On September 13, 2002, Welch submitted another formal memorandum to Moore, insisting that Cardinal needed to change its accounting practices before Welch could certify the pending 2002 third-quarter 10-QSB report to the SEC. Welch again complained about the entry of the $195,000 in recovered loans as income, this time arguing that Cardinal needed to correct its 2001 third-quarter 10-QSB report that listed the $195,000 as income; Welch also repeated his complaints that Moore had excluded him from communications with Larrowe & Co. and that unauthorized persons had made ledger entries.

Following this barrage of criticism, Welch's relationship with Moore deteriorated rapidly. On September 17, 2002, Moore called a meeting of Cardinal's Board of Directors to discuss Moore's dissatisfaction with Welch. Moore related to the Board the content of Welch's memoranda and his belief that Welch's concerns were unfounded. Moore also reported that in August 2002, state examiners had found numerous errors in a quarterly call report that Welch had prepared and submitted to the Federal Reserve and the Virginia State Corporation Commission. In addition, Moore related that the examiners had commented that many of the "charts, graphs, and spreadsheet reports" prepared by Welch were "unnecessary and time-consuming." Moore advised the Board that "the situation has deteriorated to the point that Mr. Welch seems to have become disaffected and apparently is unwilling or unable to do what needs to be done to comply with the law." The Board decided to ask the Audit Committee's legal counsel, Douglas Densmore, and outside auditor, Michael Larrowe, to investigate and prepare a report on Welch's assertions, including his claim that Cardinal needed to correct its third-quarter 2001 SEC report because Cardinal had improperly reported the $195,000 in recovered loans as income.

On September 20, 2002, Welch held what he characterized as a "Sarbanes-Oxley briefing" for senior personnel at Cardinal. During this briefing, Welch alleged that three Cardinal employees were "parties to fraudulent acts," outlined his belief that Cardinal's accounting practices violated the Sarbanes-Oxley Act, and proposed that he leave Cardinal quietly upon receipt of a generous severance package. Following the meeting, Densmore and Larrowe attempted to meet with Welch to discuss his charges, but Welch repeatedly refused to meet with them without his personal attorney.

At a meeting of Cardinal's Board of Directors on September 25, 2002, the Board voted to suspend Welch without pay pending the results of Densmore and Larrowe's investigation. Following his suspension, the Board ordered...