Whistle-Blower Protection Law Starts Small
When lawmakers set out to protect investors from another Enron, they probably never imagined a company -- or a controversy -- like the one stirring inside this one-stoplight town’s namesake bank.
The Bank of Floyd’s board of directors amounts to a Who’s Who of local farmers. Many days, not a single share of its stock changes hands. There are no corridors of power -- bank President Leon Moore’s office isn’t far from the tellers’ windows.
But a fight between the no-profile bank and a former employee is the unlikely first test of an effort by Congress to protect corporate insiders who blow the whistle on financial trickery.
David Welch, fired from his $60,000-a-year job as the bank’s chief financial officer, is the first whistle-blower granted protection under the Sarbanes-Oxley Act, thanks to a little-noticed decision by a Department of Labor judge two weeks ago.
“I’m just a person who wanted to stand up and be counted, to stand up for what’s right,” Welch said. “And when I stood up, I got shot.”
On the surface, his allegations of accounting fraud and possible insider trading at a company with 600 shareholders shouldn’t matter to most people. But the matter is intensely important to people at its center. And to hear them talk, it should matter to others too. After all, they say, what happens the next time an ordinary worker at an ordinary company comes across figures and actions that just don’t seem to add up? When that happens, what is that worker, or his boss -- or the government, for that matter -- supposed to do?
Welch worked at an accounting practice in 1999, when his boss asked if he’d be interested in an opportunity at a small bank that the firm audited. Two weeks later, Welch started at the Bank of Floyd. At 49, the job as chief financial officer offered a big step up, Welch says. And with little training for such a role, it was “more or a less a swim-or-drown kind of thing,” he would later tell a judge.
Welch’s commute wended for half an hour from his home in Meadows of Dan, Va., through the twisting back roads of southwest Virginia’s Blue Ridge Mountains to Floyd’s tiny business district.
Until the early 1990s, the bank did business only in Floyd. Then its leaders pursued a grander vision, opening four branches and making the bank the sole subsidiary of a new holding company, Cardinal Bankshares, named for Virginia’s state bird.
Despite the bank’s growth, its annual profits still average slightly more than $2 million -- about as much in a year as Citigroup makes in an hour.
It’s hard to know when things started going wrong between Welch and the men who run Cardinal. Moore would not be interviewed for this article, referring questions to an attorney for the bank. But it’s clear the relationship between Moore and Welch took a sharp dive after a verbal scuffle late in 2001, according to court papers and interviews with Welch, bank lawyer Laura Effel and the bank’s external accountant, Michael Larrowe.
Most of the bank’s stock is owned by people around Floyd. In October 2001, a shareholder walked into the bank and asked about selling her shares. Welch and Moore agreed that the accountant could send an e-mail to bank employees asking if they were interested. A vice president soon responded and Welch approved the sale of 26 shares.
Moore criticized Welch for allowing a transaction with a top executive so close to the end of the bank’s financial quarter, fearing the appearance of insider trading. That needled Welch, who suspected Moore of having done worse. Welch says he had noticed what he thought was a pattern of stock purchases by Moore and a handful of his friends that appeared to be timed shortly before key announcements sent the bank’s stock up.
“I asked Leon about this and I didn’t get an answer,” Welch said.
Effel, the bank’s lawyer, says Welch was wrong about the timing of the stock purchases and denies that Moore was engaged in insider trading. She points out that Welch notified the Securities and Exchange Commission of his suspicions two years ago, and that the regulator has taken no action.
Welch’s doubts went beyond Moore’s stock purchases. He also informed Moore about what he thought were problems in the way the bank kept its books. In one case, the bank wrote off two real estate loans totaling $195,000, assuming that it would never get the money back. Later, when the loans were repaid, Moore had them recorded as income.
Welch also objected to the way expenses were sometimes recorded in one quarter, then later shifted. The practice appeared to be an unethical attempt to make profits look bigger at times, or at others, setting aside profits for later, Welch said.
While tensions in the tiny bank began to boil, Congress was crafting a new law in the wake of Enron and other accounting scandals. The principal measure requires top executives of publicly traded companies to personally vouch for the soundness of their financial reports. But the law also offers new protection for whistle-blowers, to encourage workers to shine a light on accounting problems without fear of losing their jobs.
“While we are not an Enron Corp., we have some similarities,” Welch wrote in a memo to Moore in January 2002. “Their management did not listen to their accounting employees either. I keep hoping this will change.”
When the new law went into effect, Welch told Moore that he would not sign off on financial documents he believed to be deliberately misleading.
Moore, who Effel says by this point believed that Welch was incompetent and imagining the problems, was equally steadfast. “You must understand,” Moore wrote in a September 2002 memo to Welch, “that these reports will be certified.”
On Sept. 17, the bank board’s audit committee -- three farmers, a dentist and a local school official -- met to hear about the Welch matter. They instructed Larrowe, the bank’s external accountant, and their lawyer to sit down with Welch and hash out his allegations. The sit-down was timed for a week later in the bank president’s office. But it was shifted by a few hours, then canceled, after Welch told the audit committee’s emissaries that he would not meet without his attorney present.
Shortly afterward, the board agreed that Welch was guilty of insubordination for refusing to meet without his attorney. David Welch was out of a job.
He filed a complaint with a Labor Department that has never seen anything quite like the 30 or so Sarbanes-Oxley cases on its docket. Most whistle-blower cases before the department’s administrative law judges involve workers in industries like airlines or mining who allege that they were fired for bringing safety concerns to light.
Indeed, as the law required, the case was first assigned to an Occupational Safety and Health Administration investigator. He ruled that while Welch’s concerns may have been legitimate, the firing was justified because he was insubordinate.
But Stephen L. Purcell, the administrative law judge who heard Welch’s appeal, saw it differently.
“Sarbanes-Oxley was expressly enacted by Congress to foster the disclosure of corporate wrongdoing and to protect from retaliation those employees, officers and directors who make such disclosures,” the judge wrote in a Jan. 28 decision.
He ordered that Welch be awarded back pay and reinstated at the 50-employee bank, a notion that both sides have difficulty envisioning. The bank plans an appeal, saying Congress’ intentions have gone awry.
The law “was never intended to protect employees from a dispute with management. We know what it was intended to do. It was really intended to root out corruption in big companies that employ a lot of people,” said Effel, the bank’s lawyer. “It’s sort of like hitting a gnat with a hammer,” she added of Sarbanes-Oxley’s weight on the bank and other small companies.
Welch sees it differently. Maybe, he says, this is a test from God. If so, it is a test any employee at a company with shareholders must meet, he says.
“Even if there are three shareholders, or one shareholder, is that shareholder any different from one Enron shareholder or one WorldCom shareholder?” he said. “Somebody has to do it for them and protect their interests. And that was my job.”