Therefore, the ALJ erred in concluding that Welch's complaints about access to Larrowe & Co. constituted protected activity because he does not discuss or make a finding about how insufficient access to Larrowe & Co. relates to the federal securities laws.
C. Welch's Complaints About Inadequate Internal Controls Are Not Protected
The ALJ found that the $195,000 accounting error and Moore's practice of having his secretary, Annette Battle, credit funds earned in one year to expenses incurred in a different year "were part of a pattern that suggested that Cardinal's internal controls were deficient." R. D. & O. at 60. "I find it was reasonable for Welch to believe that too many individuals without financial expertise were making journal entries without the CFO's review and that there were inadequate internal financial controls." R. D. & O. at 59. Therefore, the ALJ concluded that Welch engaged in protected activity when he repeatedly reported that Cardinal's internal controls were deficient because people without accounting expertise had unrestricted access to the general ledger.
Cardinal argues that even if Welch's complaints about internal controls were valid, they do not constitute protected activity because they do not implicate the federal securities laws. Cardinal again points out that the ALJ cited no authority to support his conclusion that its deficient internal controls caused it to violate the federal securities laws. "Although having a deficient internal control may make an institution more vulnerable to fraud, in itself it is not fraudulent." Br. at 18. We hold that the ALJ erred in concluding that Welch's complaints to Moore about inadequate internal controls constituted protected activity because, again, the ALJ did not discuss how, or make a finding that, the deficient internal control system related to the federal securities laws.
[Page 14]
Welch argues that the internal controls themselves were not the problem. According to Welch, the bookkeeping errors about which he complained "occurred not because of a failure in the bank's internal controls, but because those controls were disregarded by Moore and resulted in the financial statements of Cardinal to be unfairly presented." In his September 20 SOX briefing to Cardinal staff, Welch explained that shareholders could be defrauded if his instructions were ignored. "[I]f you do something that [I tell you] is against the law, you're advised of it, and then you refuse to make the correction, then that could be construed as fraud. Because then it's not an accident or mistake, it becomes an intent to leave things in a deceptive state." T 74-75. Thus, because Moore did not heed his advice, Welch argues that Cardinal violated "the second purpose of the SEC to ‘prohibit deceit, misrepresentations and other fraud in the sale of securities.'" Br. at 27.
We reject Welch's argument that when he complained about Moore's refusal to make the changes Welch wanted, Moore intended to mislead investors. Welch has given us no legal authority for the proposition that rejecting the CFO's advice on accounting matters violates or could reasonably be regarded as violating the federal securities laws. Nor has he explained how merely refusing to accept Welch's advice supports an inference that Moore intended to deceive shareholders.
Conclusion
We reverse the ALJ's conclusion that Cardinal violated the SOX because, as a matter of law, he erred in concluding that Welch engaged in SOX-protected activity. Welch's concerns that Cardinal misclassified the loan recoveries and consequently misled investors do not constitute protected activity because Welch could not have reasonably believed that Cardinal misstated its financial condition. Likewise, Welch's complaints about access to Larrowe & Co. and about Cardinal's internal accounting controls are not SOX-protected activity because they do not relate to the federal securities laws. Therefore, since Welch has not demonstrated that he engaged in protected activity, an essential element of his case, we DENY his complaint.
SO ORDERED.
OLIVER M. TRANSUE
Administrative Appeals Judge
M. CYNTHIA DOUGLASS
Chief Administrative Appeals Judge
[ENDNOTES]
1 18 U.S.C.A. § 1514A (West Supp. 2005). Regulations implementing the SOX are found at 29 C.F.R. Part 1980 (2006).
2 Hereafter, we refer to Cardinal Bankshares and the Bank of Floyd interchangeably as "Cardinal."
3 Witnesses and the ALJ sometimes referred to the two loan recoveries as if there had been a single recovery of $195,000 during the third quarter of 2001. This is a convenient shorthand description of what happened because Welch complained about the fact that Cardinal's third-quarter 10-QSB included the $195,000 in its year-to-date income.
4 "Loan reserve accounts" are funds that a bank holds in reserve to cover projected losses. United States v. Whitmore, 35 Fed.Appx. 307, 314-315 (9th Cir. 2002).
5 Cardinal and amici Virginia Bankers Association, Virginia Association of Community Banks, and American Association of Bank Directors argue that the ALJ committed error in holding that SOX section 1514A gives whistleblowers the right to be accompanied by private counsel during internal company investigations of their complaints and that the attorney-client privilege would not have applied to Densmore and Larrowe's interviews of Welch. Inasmuch as the ALJ did not purport to rule that whistleblowers have a right to be accompanied by counsel during internal investigations of their complaints, he did not err. And because the privilege issue is not implicated in our decision here, we need not address the question whether the interviews would have been privileged.
6 Secretary's Order 1-2002 (Delegation of Authority and Responsibility to the Administrative Review Board), 67 Fed. Reg. 64,272 (Oct. 17, 2002); 29 C.F.R. § 1980.110 (2007).
7 See 29 C.F.R. § 1980.110(b).
8 Clean Harbors Envtl. Servs., Inc. v. Herman, 146 F.3d 12, 21 (1st Cir. 1998), (quoting Richardson v. Perales, 402 U.S. 389, 401 (1971)).
9 Universal Camera Corp. v. NLRB, 340 U.S. 474, 488 (1951).
10 5 U.S.C.A. § 557(b) (West 1996).
11 See Getman v. Sw. Secs., Inc., ARB No. 04-059, ALJ No. 2003-SOX-8, slip op. at 7 (ARB July 29, 2005).
12 18 U.S.C.A. § 1514A(a).
13 See 49 U.S.C.A. § 42121(b)(2)(B) (iii) (West Supp. 2006). See also Getman, slip op. at 8; Peck v. Safe Air Int'l, Inc. d/b/a Island Express, ARB No. 02-028, ALJ No. 2001-AIR-3, slip op. at 6-10 (ARB Jan. 30, 2004).
14 Hereinafter, we refer to these Federal statutes and SEC rules and regulations, collectively, as the "federal securities laws."
15 Platone v. FLYi, Inc., ARB No. 04-154, ALJ No. 2003-SOX-27, slip op. at 17 (ARB Sept. 29, 2006).
16 But as Cardinal points out, and the record supports, since the third quarter 2001 report was not filed with the SEC until November 14, 2001, the stock price spike between September 6 and October 18 could not have been the result of the SEC report. Rebuttal Br. at 4; RX 6.
17 Melendez v. Exxon Chems. Am., ARB No. 96-051, ALJ No. 97-ERA-006, slip op. at 27-28 (ARB July 14, 2000)
18 Jordan v. Alternative Res. Corp., 458 F.3d 332, 339 (4th Cir. 2006), cert. denied, __ U.S. __, 127 S.Ct. 2036 (2007).
19 See Jordan, 458 F. 3d. at 339.
20 The ALJ did not make findings whether Cardinal violated GAAP or FFIEC standards.
21 15 U.S.C.A. § 7213(a)(2)(A)(iii)(ll)(bb) (West Supp 2006). Oversight Board rules require independent accountants of publicly traded companies to comply with generally accepted auditing standards. But the Oversight Board did not adopt these rules until 2003, long after Cardinal fired Welch. See ww.PCAOB.org/standards/interim-standards/index.aspx.
22 See Hall v. U. S. Dep't of Labor, ARB Nos. 02-108, 03-013, ALJ No. 1997-SDW-005, slip op. at 6 (ARB Dec. 30, 2004) (failure to present argument or pertinent authority waives argument), aff'd, 476 F.3d 847, 861 n.8 ("allegations unsupported by legal argument or citation to evidentiary support in the record are insufficient to raise the specific legal theory [appellant] now alleges ARB overlooked"). Cf. 2A Sutherland on Statutory Construction § 46:4 (N. Singer, 6th ed. 2000) ("A party who asks the court to ignore the plain language of a statute must show that it is manifest that the legislature could not possibly have meant what it said in that language, or the natural reading of the statute would lead to an absurd result").
23 Platone, slip op. at 17. See also Getman, slip op. 9-10.