shares bought and sold, as well as company commentary. A local accounting firm, Larrowe & Co., provided Cardinal with independent audits for the quarterly reports. T 42.

   Welch based the reports he produced on Cardinal's "general ledgers," or "journals," where Welch and others recorded all financial transactions. Cardinal required that a witness countersign each ledger entry and that the CFO review all entries every month. Thus, every month Welch reviewed the ledger for errors and either made corrections himself or recommended corrections to Moore. CX 23.

   Welch testified that he believed that Cardinal violated generally accepted accounting practices (GAAP) because Cardinal allowed people with no special accounting skills to make ledger entries. Under GAAP standards, only persons with accounting expertise should be permitted to make ledger entries. In fact, Welch testified that he wanted all but routine entries to be cleared with him in advance. CX 23; T 61. Moore, who often made ledger entries himself or directed others to make entries, would not agree to limit access to the ledger or to turn over ledger entry control to Welch. And on occasion, Moore refused to make corrections Welch thought should be made.

when Cardinal agreed to merge with MountainBank Financial Corporation, Welch feared that his job would be eliminated. Then, in July, Wanda Gardner, Cardinal's internal auditor, reported to the Board of Directors that Welch's system for retrieving wire transfer information was severely flawed. In August, state bank examiners found over a dozen errors in one of Welch's call reports. CX 6; CX 8; CX 24; T 38-30, 57, 110-111, 116. During the state banking review, Welch emailed one of the examiners that he, Welch, had information about "things that have gone on at the bank that I do not think are on the up and up." But neither the SEC nor the state bank examiners showed any interest in Welch's claims. CX 13; CX 14 p. 2; T 137-130, 156. Welch did not take any of these concerns to Cardinal's Board of Directors or its Audit Committee because he was afraid that Moore would fire him for doing so. T 125, 140.

   Welch wrote Larrowe & Co.'s Worrell on August 2, 2002, that he would not be signing a "representation letter" she had prepared for his signature. The representation letter was a statement attesting to the accuracy, reliability, and completeness of the financial data that Cardinal was providing to Larrowe & Co. Welch was concerned that unqualified persons were making ledger entries, and he told Worrell that he could not sign the representation letter because "over the past year to year and a half, I have been excluded from your [Larrowe & Co. and Moore] communications loop almost entirely." CX 17.

   Two weeks later, Welch notified Moore by memo about these same concerns and therefore would not certify Cardinal's next 10-QSB report either. CX 20. A month later, Welch followed up with a more detailed memo to Moore, elaborating on his opinion that in its 2001 third-quarter 10-QSB Cardinal had overstated its year-to-date income by $195,000 and should file a corrected report, complained that he was being excluded from the process of designing disclosure controls and procedures as the SOX required, complained that he was not permitted to address the Audit Committee or the Board of Directors, and reiterated his views that people without accounting expertise should not be making ledger entries and that Moore had engaged in insider trading. T 109, 119-120; CX 1.

   Moore called a special meeting of the Board on September 17, 2002, in which he read Welch's memo and described various ways that Welch's performance as CFO had been unsatisfactory. Douglas Densmore, counsel to the Board and the Audit Committee, recommended that the Audit Committee investigate Welch's charges and that Cardinal discuss the situation with banking regulators and MountainBank Financial Corp. Venson Bolt, Chairman of the Audit Committee, asked Michael Larrowe and Densmore to investigate Welch's charges and report their findings in writing. Joint Exhibit (JX) 1.

   Meanwhile, Welch scheduled a Sarbanes-Oxley "Briefing" for Cardinal managers on September 20 and consulted with an attorney on how best to make his presentation. According to an outline he prepared, Welch planned to tell the attendees that some of Cardinal's accounting practices were illegal, including treating loan recoveries as income, excluding him from Moore's consultations with Larrowe & Co., and allowing persons

without accounting expertise to make entries to the general ledger. JX 2; CX 26; Respondent's Exhibit (RX) 1; T 74-81.

   He then planned to excuse everyone except Fred Newhouse, the Executive Vice President, and Marie Thomas, head of Human Resources. To Newhouse and Thomas, Welch would present the terms of a retirement package he wanted in exchange for leaving the bank "without saying anything to anyone" about accounting problems at Cardinal. He wanted a salary payment of more than one week for each year of service, the remainder of his 2001 performance bonus, full vesting of his retirement, including all of the Bank of Floyd's contributions, and a letter of recommendation. JX 2; T 144-153; RX 1.

   The group convened on the 20th. Welch began by turning on a tape recorder, and when Moore asked him to turn it off, Welch refused. After explaining to the group that he had been consulting with a lawyer, Welch announced, "I tell you there's three people in this room that are parties to fraudulent acts . . . ." At that point, Moore and Battle left the meeting, and Welch continued as planned. JX 2; T 148-152.

   The following week, when Densmore and Larrowe tried to interview Welch and to get a copy of the September 20 tape recording, Welch told them he did not have the tape and had not been able to consult with his attorney since the September 20 meeting. JX 6, 8, 9, 10, 11. But he told them that he had an appointment with his attorney on the following day, and would then decide how to proceed. JX 6.

   When Densmore and Larrowe reported to Bolt that Welch was not willing to be interviewed because his attorney was out of town, Bolt suspended Welch with pay pending the outcome of the investigation. "We consider your refusal to meet with counsel and outside auditors to discuss matters within your area of responsibility a serious breach of your legal obligations to the company and its Board of Directors." JX 11.

   The meeting was cancelled, and on October 1, 2002, Densmore and Larrowe presented their findings to members of the Board and the Audit Committee. Densmore and Larrowe concluded that the available information – material in Larrowe & Co. files, Welch's memos and letters to Moore, Worrell, and others, and statements from various Cardinal employees – did not support Welch's allegations. Densmore and Larrowe told the Board that if Welch really thought that Cardinal's accounting practices were deficient to the point of illegality, he had a fiduciary duty not only to tell the Board or the Audit Committee, but to cooperate unconditionally in the Committee's efforts to investigate his charges. Densmore and Larrowe recommended that the Board terminate Welch's employment immediately. By unanimous vote, the Board converted Welch's suspension into a termination effective October 1. JX 19, 20, 21, 22.

   Welch then filed this whistleblower complaint. After an investigation, the Occupational Safety and Health Administration (OSHA), the Labor Department agency charged with investigating SOX whistleblower complaints, concluded that Welch's complaint had no merit. Welch requested a hearing before a Labor Department ALJ. As already noted, the ALJ concluded that Cardinal violated the SOX and recommended that Welch be reinstated and receive back pay and other forms of relief. Cardinal appealed.

1. The Legal Standard

   The employee protection provision of the SOX prohibits employers from retaliating against employees for providing information or assisting in investigations related to securities fraud:

(a) Whistleblower protection for employees of publicly traded companies.--No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)), or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee--

(1) to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by--

(A) a Federal regulatory or law enforcement agency;

(B) any Member of Congress or any committee of Congress; or

2. Welch Did Not Engage in SOX-Protected Activity

   A. The $195,000 Loan Recovery Entries

   The ALJ found that in September 2001 Welch told Moore that the loan recoveries should not be classified as income. He concluded that Welch reasonably believed that entering the loan recoveries as income was "improper" because Welch testified, and Cardinal did not dispute, that instructions for preparing a Federal Reserve call report, a form similar to the SEC 10-QSB, required that loan recoveries be reported in the "allowance account" (i.e., the loan reserve account), not in the income account. Moreover, he found that when Larrowe & Co. corrected these entries in its 2001 annual report to the SEC, Welch's concern that loan recoveries should not have been entered as income was confirmed. R. D. & O. at 55.

more at the end of the third quarter than it had before it recovered the two loans. But the ALJ was "more persuaded" by Welch's testimony than Larrowe's because he found certain portions of Larrowe's testimony to be contradictory. Id. at 55-57.

   Cardinal argues to us that Welch did not have a reasonable basis for believing that it overstated its net income. Br. at 11. To support this argument, Cardinal contends that even if the original decision to enter the loan recoveries as income in the general ledger was an accounting mistake, it does not follow that the SEC report overstated income to date. "In 2001, Cardinal collected certain bad debt in the amount of $195,000. It did not, as it should have, credit[ed] the allowance and then enter[ed] negative entries in the expense line item for ‘provision.' Rather, it classified the $195,000 as forms of income. However, an entry adding $195,000 to income has exactly the same effect on the bottom line as an entry subtracting $195,000 from expenses: they both increase it by $195,000." Br. at 13. "What Welch – and the ALJ – repeatedly fail to recognize is that, with these $195,000 recoveries on previously written-off accounts, real money came into Cardinal's door – money that was not there before." Rebuttal Br. at 3 (emphasis in original). "A reasonable CPA and CFO could not have concluded that there was an overstatement of net income." Id.

   Cardinal also argues that the ALJ erred in concluding that Welch engaged in protected activity "because Welch's complaints – even if well founded (which they were not) – did not allege conduct that constituted a violation of, or even a reasonably perceived violation of federal securities laws. Conspicuously absent from the ALJ's analysis is any explanation of how the conduct complained about constituted a violation of federal securities laws." Br. at 11.

   Welch Could Not Have Reasonably Believed That Cardinal Misstated Its Financial Condition

Although the ALJ did not expressly distinguish between Welch's subjective belief and what a CPA/CFO in Welch's position would reasonably believe, his opinion implicitly makes both determinations because he wrote, "The standard for determining whether Complainant's belief is reasonable involves an objective assessment." R. D. & O. at 53.

because these standards and the federal securities laws have the same purpose – protecting investors from financial misrepresentations. Br. at 8-21.

supplied by management. It does not act as a source of information to management." Id. at 16-17.

   Welch contends that, "[i]n failing to work with Welch in providing him information to accomplish his function and comply with the Sarbanes-Oxley certification program, Cardinal and Larrowe & Company defeated the intent of the SEC and Congress that investment decisions by the public be made and based upon accurate and non-misleading financial statements." Br. at 22-23.

   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.

   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