In his role as the CFO, Welch was responsible for monitoring and reviewing the journal entries that were posted to the general ledger accounts of the bank and of the holding company. Ibid. In addition, he maintained all the general ledger accounts for FBC Incorporated, a subsidiary of the Bank of Floyd. Ibid. He was also responsible for the journal entries and all the financial statements for the holding company. Ibid. He explained that he was initially apprised of his functions as part of his "on the job training," and, about one year later, a job description was developed for the CFO position which described his duties in more detail (Tr. 28). While he participated in the creation of this job description, he did not draft it, but rather obtained it from Marie Thomas and Shelby Rutherford in the Human Resources office (Tr. 28, 357; CX 35).Welch described his initial experience as CFO as "more or less a swim or drown kind of thing, because I really didn't have any formal training other than the two or three week period that I worked with the previous CFO before he left." Ibid.

    Welch testified that he became a shareholder of Cardinal when he received three shares of its stock as a bonus in 1999, 2000, and possibly 2001 (Tr. 30). However, he sold all of his shares (12 shares at the time) to another employee in late 2001 or early 2002 because his spouse was a national bank examiner and he was not allowed to hold stock in any bank without obtaining a waiver which required the filing of extensive annual paperwork. Ibid.

(CX 17 at 1). Welch explained that the text of the representation letter was prepared by Larrowe & Co. (Tr. 358). He also testified that he personally mailed his August 2nd letter via the U.S. Postal Service and enclosed in the same envelope an unsigned copy of the representation letter, in which he incorporated references to the three objections listed above (Tr. 358; CX 17). Specifically, he inserted a bolded, underlined, and capitalized reference stating "see my letter dated 08/02/02 (attached) for response to this item" under the provisions certifying: the absence of irregularities involving management or employees who have a significant role in internal controls; a lack of irregularities involving other employees that could have a material effect on the financial statements; and the absence of violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements (CX 17 at 2).

Ibid.

    In his September 13th memorandum to Moore, Welch stated, in part:

Two weeks from Monday, the 3rd quarter will be ending. Shortly thereafter, another 10-QSB will be due. It would be my preference to avoid the friction experienced last quarter. . . . I have attached a Section 302 certification that contains the verbage (sic) required by the Sarbanes-Oxley Act of 2002 along with explanatory notes. The Section 302 certification is required each quarter beginning with the September 30, 2002 10-QSB. It is also required to be part of the 10-QSB rather than being filed as a separate document. This is to assure its availability to anyone who wishes to review Cardinal's financials.

    The first copy of the 302 certification is as it should be submitted except for the signature and date. The second copy has key phrases underlined and in bold type. Each of these phrases is connected to a comment box which has a brief explanation as to why I will not be able to certify the 3rd quarter's 10-QSB.

    The certification submitted with your "signature" last quarter will not suffice this quarter for two reasons. First, the Section 302 certification noted above must now be submitted. Second, there are material items in the 2001 3rd quarter YTD figures that should be restated. The restatement should be done in order to avoid the unfair presentation of financial statements which could lead a reasonable investor to make a decision they might otherwise not make.

    I would like to address these issues with you today so you can have something to think about over the weekend.

(CX 23 at 1). The copies of the initial and third-quarter certification forms attached to the September 13, 2002 memorandum contained Welch's comments explaining his reasons for not signing these forms, with arrows pointing to the corresponding parts of the certification (CX 23). In addition, for each part of the third-quarter certification that Welch felt was not satisfied, he included in his memorandum a section entitled "Comments or Recommendations" (CX 23 at 3-7).

make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report" (Tr. 48; CX 23 at 2). With respect to this paragraph, Welch's annotations noted the following reason for his refusal to certify this part: "3rd Qtr 2001 income should be restated to properly account for the $195,000 recoveries" (CX 23 at 2). In his comments attached to the annotated form, Welch further explained this comment as follows:

(CX 23 at 3; Tr. 49).

    Welch testified that, in his opinion, the aforementioned effects were material and a sudden increase in the stock price between early September and late October, 2001 convinced him that "these overstatements in income made Cardinal look like it was performing really better than it was," since he could not identify any other explanation for this increase (Tr. at 49). In fact, a stock transfer log prepared by Welch reflects a 21 percent increase in the price of stock after the third quarter report for 2001 from $13.00 per share on September 6, 2001 to $15.75 per share on October 18, 2001 (Tr. 50; CX 5). Welch testified that because he considered this increase to be material, he concluded that these entries constituted untrue statements that did in fact mislead investors (Tr. 50-51). Welch further testified that he did not tell Moore that he (Welch) could not provide a certification, but rather his comments were intended to inform Moore that the financial statements included with the initial certification "needed corrections in order to meet the requirements of Sarbanes-Oxley to avoid the potential penalties" (Tr. 45, 48). As noted below, Welch considered corrections eventually made by Cardinal's management with regard to the $195,000 recoveries to be insufficient.

    Welch further testified that the resulting income increase was not offset by an expense increase:

When the checks were received and deposited there was a debit to cash and a credit to the income accounts, either the other income or the other real estate income. Those were the only two entries. There were not any offsetting expense entries. It was a debit to cash and a credit to income.

(Tr. 359-60). Accordingly, there was no "wash" in the third quarter of 2001 (Tr. 360).

    Welch further testified he believed the fact that Wanda Gardner, Respondent's Vice President and Internal Auditor, made the aforementioned entries for $45,000 and $150,000 was also problematic because "the internal auditor should not be making journal entries to the general ledger when she's going to be responsible for possibly auditing those same numbers. So, there's no independence there" (Tr. 53-54). Welch added that he later learned that Moore was the person who had instructed Gardner to make these entries (Tr. 54).

    With reference to paragraph two of the third-quarter certification, Welch's attached comments also recommended that Respondent "[a]bide by the policies that my job description implies are in existence" and "allow me to follow these policies" (CX 23 at 4). Welch cited the following examples of duties, apparently derived from his job description: "[c]omplies and analyzes financial information to prepare entries to accounts, such as general ledger accounts, documenting business transactions;" "determines proper handling of financial transactions and approves transactions within designated limits;" and "monitors compliance with generally accepted accounting principles and company procedures." Ibid.

    Paragraph three of the third-quarter certification states, in part: "Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operation and cash flows of the registrant as of, and for, the periods presented in this quarterly report" (CX 23 at 2). Welch testified that he could not certify this part for the same reason he refused to certify paragraph two (Tr. 51-52; CX 23). He stated that on at least two occasions he attempted to convince Cardinal's management to correct this problem at the senior managers' meetings in the presence of Moore, Gardner, Compliance Officer Diane Hamm, and other employees (Tr. 53-54). Welch further testified that, after performing the year-end audit of Cardinal, Larrowe & Co. ultimately acknowledged that Welch was right (Tr. 54-55). Specifically, in January 2002, Beth Worrell, the auditor for Larrowe & Co., investigated Cardinal's accounts for inappropriate entries and reversed the two aforementioned entries totaling $195,000 disputed by Welch, after Welch directed her attention to these entries (Tr. 55). However, according to Welch, these reversals corrected only the misstatement of income for the year end, but not for the third quarter of 2001 (Tr. 55-56). According to Welch, this is problematic because under the existing requirements, "the third quarter's income statements and balance sheets [for 2001] would appear in the following year in the third quarter of 2002 as comparative statements" relied upon by the investors (Tr. 56, 71). Welch testified that prior to their meeting on September 20, 2002, he recommended to Moore that this mistake be corrected by restating the financials, but it was never done (Tr. 56-57).

    Finally, with reference to paragraph three of the third-quarter certification, Welch included the following recommendation: "permit me to perform the job functions as outlined in my job description," including those listed under part two above, as well as the following: "audits contracts, orders, and vouchers, and prepares reports to substantiate individual transactions prior to settlement," and "reviews, investigates, and corrects errors and inconsistencies in financial entries, documents, and reports" (CX 23 at 4).

    Paragraph four of the third-quarter certification states in relevant part: "The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in [the Act] for the Registrant and have; (a) designed such disclosure controls and procedures . . . ; (b) evaluated [their] effectiveness [within] 90 days prior to the filing date of this quarterly report . . .; and (c) presented in this quarterly report our conclusions about [their] effectiveness . . . ." (Tr. 57; CX 23 at 2). Welch's attached comments state that "[Larrowe & Co.] communicates exclusively with CEO on all disclosure matters" (i.e., to the exclusion of Welch), that Welch had not "participated nor been consulted in the design of disclosure controls and procedures, and that [he] has not evaluated their effectiveness" (CX 23 at 2). With respect to Welch's attached comments regarding paragraph four, he provided the following recommendation: "[p]ermit me to review the disclosure controls and procedures you have put into place in order to evaluate their effectiveness" (CX 23 at 5).

(CX 23 at 5).

(CX 22).

(Tr. 141-42).

    The minutes of the September 17th meeting further reflect that after Moore concluded his presentation, Densmore discussed Welch's concerns. Ibid. Densmore pointed out the need to research the figures for the third quarter of 2001 to determine if Welch was correct in stating that the Form 10-QSB for that quarter required restatement. Ibid. He further stated that the Board had to either terminate Welch based on his inability to do his job, or remind him of his job responsibilities. Ibid. He warned, however, that if the latter approach was taken and Welch's performance did not improve, Cardinal would have little time to correct any problems. Ibid. He also discussed the need for an adequately performing CFO and the potential ramifications of terminating Welch at that time (CX 33 at 3). Finally, Densmore advised that the following steps be taken under the auspices of the Audit Committee:

1. Discuss with Welch the nature and extent of his concerns and investigate them, and take corrective action to the extent Welch's concerns are substantiated.

2. Determine if Welch is correct about the need to restate the figures for Form 10-QSB for the 3rd quarter of 2001, and, if so, make the corrections.

3. Discuss the situation with the MountainBank Financial Corporation to avoid problems under the merger agreement.

Ibid.

   Subsequently, Venson Bold asked Densmore and Larrowe, on behalf of the Audit Committee, to meet with Welch, investigate his concerns, and provide a written report to the Committee. Ibid. Moore approved of this course of action, and Densmore stated that he and Larrowe would not involve Moore in the investigation since some of Welch's issues related to Moore. Ibid.

Ibid. He added that, consistent with the Act, as soon as such inaccuracies are brought to the attention of individuals who made these entries, whether done under the direction of superior officers or by mistake, those individuals become "guilty of fraudulent action because they have condoned it by silence by not doing anything about it" (JX 2 at 7; Tr. 148). He further stated that

Yesterday morning, [Moore] told me to restate the financial statements for the third and fourth quarter of last year the way I wanted them. But that . . . doesn't fix everything. The 10Q, the Call reports, the Y9 reports all have to be resubmitted for the third quarter, the fourth quarter of last year, first quarter, second quarter of this year, because that . . . seemingly little amount of [$195,000] impacted Retained Earnings, Liabilities and like Retained Earnings, the capital accounts roll forward from year-to-year.

Ibid.

    Welch also addressed his refusal to certify the effectiveness of the internal controls, stating that:

My comment under this [paragraph five] is since Leon is the only person that reports to the Board, I have been instructed not to address the Audit Committee and he is the basically the only contact with Larrowe & Company, I can't certify that statement. Certification means that I swear that I did this, I evaluated, I designed and I reported. So I had, I could not address the Board, I could not address the Audit Committee nor the external auditors, nor have I done an evaluation . . . [of the] internal controls . . . .

Ibid.

    Welch again reiterated his concerns regarding too many individuals making journal entries without the Finance Department reviewing or approving them (JX 2 at 7-8). He also stated that he had reported to Moore his concern with insider trading, that it constitutes "fraud," and that "a great deal of case law. . . [confirms that the] purchase date is what causes it to be insider trading," regardless of when the order is placed. Ibid. Welch then addressed the issue of "making credit entries to Sundry accounts on the liability side and debiting entries to Sundry expense at year-end." Ibid. He indicated that Annette Battle had made some inappropriate entries in Sundry accounts, and stated:

But what happened at year-end, items have been expensed . . . as Deferred Expenses and there's really no such thing as Deferred Expenses. There is Prepaid Expenses, but that's not the same. The first year I came here, there was like $18,000 worth of these. . . . This year, I ran across $4,500 more. $4,500 was expensed at year-end and then in May those entries were reversed. . . . In May, when the travel expense, meal expense, officer expense, education expense, when those were reversed, it reduced those expenses which inflated net income which overstated the net income from what it really was. Now when you look at the track record of those having occurred at other times, there is a track record which indicates intent.

Ibid. Welch added that he had not checked every single entry and that "as any auditor will tell you, when they do a random sampling, usually you only see the tip of the iceberg" (JX 2 at 9).

    Welch further brought to everyone's attention Section 806 of the Act entitled "Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud." Ibid. He quoted this Section as stating that "no company or any officer, or employee . . . or agent of the company may discharge, demote, suspend, threaten or harass or in any other matter, discriminate against any employee in terms of condition of employ because of any lawful act done by the employee." Ibid. He added that "Federal law, in my opinion here today, supersedes the bank policy of not recording a meeting and I'll answer for that right or wrong." Ibid. Finally, Welch gave to those present a copy of Moore's September 13th response to his memorandum and stated that Moore made an ominous comment in this response when he stated "[y]ou must understand, these reports will be certified" (JX 2 at 10).

   Gardner then inquired whether the errors in the call report had been discussed with Welch. Moore responded that he was waiting to receive a written report prior to any such discussion, as was his standard practice. Id. at 6-7. Moore then departed the meeting, and Committee Chairman Venson Bolt asked the Committee members if Welch had ever approached them about his concerns, and all members gave a negative reply. Id. at 7.

   At this point in the meeting, Densmore reiterated that Welch should have been "in immediate contact with the Audit Committee" to bring his concerns to their attention. Ibid. He concluded that there appeared to be "a total breakdown of Welch's ability to perform the functions of CFO" and that Cardinal could not continue in a dysfunctional relationship with its CFO. Ibid. Densmore stated that, nevertheless, it was important for the Committee to fully investigate Welch's concerns and report the results of its investigation to the Board. Ibid.

   Dr. Conduff replied that he "would feel more comfortable to hear what Mr. Welch had to say before any action was taken." Ibid. In response, Van Doren stated that the problem was Welch had refused to meet with Densmore and Larrowe, representing the Audit Committee, to discuss his concerns. He further stated that Welch had no right to have a third party attorney present during a discussion of internal bank matters, particularly since they would be sensitive and confidential and relate to publicly traded securities. Ibid. He added that he did not believe Welch would have a cause of action for wrongful termination under Virginia law should the Board terminate him. Ibid.

   The minutes next reflect that, "[f]ollowing a period of extended discussion" (omitted from the minutes), Densmore made a recommendation that Welch be suspended indefinitely until further action by the Board. A motion to that effect was made by Gardner, seconded by Dr. Conduff, and was approved unanimously by the Committee. Ibid. Subsequently, Bolt again asked the committee members if Welch had contacted them, and no member indicated that he had. Ibid. Finally, the Committee asked Densmore and Larrowe to "complete their investigation of Welch's allegations and report them as soon as possible, hopefully with Mr. Welch's cooperation and assistance." Id. at 8.

   Welch testified that, had he been given the opportunity, he would definitely have met with the Audit Committee, as opposed to its purported representatives Larrowe and Densmore, between September 25th and October 1st. He stated, however, he was never invited to do so (Tr. 90, 92-93). He also stated that he was willing to meet with the Committee without a personal attorney if Densmore and Larrowe were not in attendance (Tr. 93). He testified that neither Bolt, nor any other member of the Audit Committee, ever sought a middle ground solution for the impasse that was created by Densmore's insistence that Welch not have a personal attorney present at the meeting (Tr. 92). In fact, he stated, Bolt never contacted Welch or his attorney during that time period (Tr. 93).

   With respect to his unwillingness to meet Respondent or its representatives, Welch testified that Terry Kilgore, his attorney at the time, wrote a letter to Densmore dated September 30, 2002, in which he stated that Welch would make himself available to meet with the Committee that same day at 4:30 p.m. with Kilgore being present at the meeting (Tr. 94; JX 18). The letter stated that Welch felt he had been threatened, harassed and suspended by Respondent because of his lawful acts, and that he declined to sign documents certifying the quarterly reports because they contained untrue statements of material fact. Ibid. Welch testified that his suspension and the hostile tone of the September 25th meeting put him in apprehension that "if I went in without somebody . . . to speak on my behalf or to advise me, that anything I said or did was going to be taken out of context and used against me" (Tr. 95). He also believed that he was going to be fired for "waiv[ing] a red flag." Ibid.

   Welch also testified that Moore was incorrect when he stated during the September 25th Audit Committee meeting that the state examiners had identified eighteen errors in Welch's call report (Tr. 116). He noted that the number of errors identified by the examiners given to the Committee was three more than he had identified only a few days earlier at the September 17th Committee meeting without specifying what these additional errors were (Ibid., CX 33 at 6).

   When questioned about his qualifications on cross-examination, Welch acknowledged that prior to working for Cardinal, he had not worked for a financial institution and had no prior experience as a stock transfer agent (Tr. 128-29). He further testified that he had served on the Board of Directors of the Dan Luftke Hospitality House and the Sevier Terrace Recreation Organization in Kingsport, Tennessee, neither of which is a public company (Tr. 129). He stated, however, that he had some prior experience working for a public company (Arcata Graphics, Quebecor Printing, Thomas Nelson Publishers). Ibid.

Kyle Venson Bolt

   Bolt testified that he was currently "semi-retired" and previously worked as a farmer and a lumberman (Tr. 168). He had been a member of Cardinal's Board of Directors and the Audit Committee for many years, "ever since the beginning of Cardinal" in the mid-1990s (Tr. 168, 173).

   Bolt testified that Welch was discharged on October 1, 2002 and that, to his knowledge, Leon Moore did not participate in that decision. Ibid. When asked why Welch was fired, Bolt testified: "[w]ell, I think the Committee thought he ought to come to us, I mean, and present his problem with us and he refused to do that" (Tr. 168-69). He learned about Welch's allegations from Moore sometime in mid-September 2002, but Welch never reported his concerns to Bolt or to other members of the Audit Committee (Tr. 169).

   Third, the report indicated that Welch had complained that he had not been permitted to review disclosure controls required under the Act (which had then been effective for only sixty days). Id. at 5, 7. The report noted that Welch's memoranda suggested he did not recognize his obligation to take the lead in the process of designing such controls, and that he had not communicated to the Board that he had been prevented from carrying it out. Id. at 5.The report stressed that disclosure controls had to be developed immediately but determined that Welch should not be involved. Ibid.

   Fourth, the report addressed Welch's complaint that his access to the Audit Committee had been restricted. The report stated that Moore denied this allegation, and noted that if Welch truly believed Moore had restricted his access to the Committee, he had an obligation to report this to the Committee, which he never did. Ibid. The report also stated that the Committee had an open door policy with regard to the CFO. It went on to note, however, that the Committee would "not allow inappropriate restrictions to be placed upon it by any Company officer, including Mr. Welch, by demanding his personal lawyer be present." Id. at 6.

   Fifth, the report addressed Welch's allegation that his access to the bank's outside auditors had been restricted, and concluded, based on an input from Larrowe & Co., that Welch played a "lesser role than he should [have], apparently by choice." Ibid. Again, the report noted that Welch failed to properly inform the Committee of any legitimate concerns of this nature in a timely fashion. Ibid.

   Sixth, the report noted that if Welch's complaint regarding too many people making journal entries was indeed a serious matter, he should have proposed solutions to the CEO, and if still not satisfied, brought the matter directly to the Committee's attention. Ibid. The report further noted that Welch "made no effort to do so." Ibid. In addition, while the outside auditors approved of Cardinal's method of making journal entries, the report directed Moore to "consult with the [CFO] on this matter and to report to the Committee." Ibid.

   Seventh, the report stated that Welch had made vague and unsubstantiated allegations of fraud by Cardinal's officers during the September 20th meeting. Ibid. It further stated that, as the CFO, Welch had an "absolute responsibility" to report incidents of this type to the CEO, and if unresolved by him, directly to the Board of Directors, or, in case of financial irregularities, the Audit Committee. Id. at 6, 7. However, he again failed to do so. Id. at 6-7. "In fact, when the Committee, through counsel, attempted to investigate these allegations, Mr. Welch refused to meet with counsel to facilitate such an investigation [in the absence of his attorney]." Id. at 7. The report added that Moore's stock purchases were cleared by the outside auditors and counsel and followed Cardinal's procedures (since Cardinal had no established "black out period"). Ibid. In addition, the report noted that Welch tape recorded the September 20th meeting over Moore's objection, and later refused to provide the tape to the CEO and the Committee (and instead provided the tape to his attorney after he was directed to turn it over to the Committee). Id. at 3.

   Eighth, the report dismissed Welch's concern with Sundry account entries, stating that they were immaterial and intended to better match income and expenses against the periods in which they were incurred. Ibid. Furthermore, the entries made the following year (reversing Sundry Credit entries) would have no impact on the financial statement reader since "these classifications are collapsed for external reporting and the amounts involved are insignificant." Ibid. Again, the report stated that if Welch's concerns were serious, he should have brought them to the Committee's attention, but "made no effort to do so." Ibid.

   Finally, the report concluded that:

It is obvious from Mr. Welch's memoranda that a number of the critical responsibilities of a [CFO] of a public reporting company are not being adequately performed by him. Moreover, Mr. Welch has willfully refused to meet with this Committee or its professional advisors to discuss serious allegations he has made, unless he was permitted to have private counsel present. Despite having been repeatedly informed that he would not be permitted to have counsel present, Mr. Welch continued to insist on this point. Mr. Welch also has refused directives to turn over his tape (or a copy of it) of a meeting with other Company employees where he presented his concerns to them.

   It is apparent that Mr. Welch is unwilling or unable to function effectively as [CFO] of this Company and to fulfill his fiduciary obligations to the Company and its shareholders. Thus, we recommend that the Board of Directors terminate Mr. Welch's employment, effective immediately, and authorize the CEO to being (sic) searching for a replacement.

    Bolt testified that, after reviewing the report prepared by Larrowe and Densmore, he was satisfied that Welch's concerns had been adequately addressed (Tr. 171).

(Tr. 184-85).

   Bolt further acknowledged that Densmore and Larrowe were not on the Board of Directors, but were nevertheless engaged by the Committee to act as its representatives in the investigation of Welch's complaints (Tr. 186). He repeatedly testified he was never advised that part of Welch's complaint was that Larrowe's accounting firm (Larrowe & Co.) was giving bad advice to, or allowed improper practices to exist at, Cardinal (Tr. 187, 189-90).

    Bolt acknowledged that Moore served as the President and Chairman of the Board, and was thus expected to report any significant developments at the bank to the Committee (Tr. 194). He testified that prior to September, 2002, Moore had never reported to the Committee that Welch had made complaints against him, but only that he, Moore, "had a little problem getting along with the staff. Was a little outspoken sometimes, things got pretty loud in the discussions he might have had with Mr. Welch in his office a time or two" (Tr. 195).

Cardinal regarding a stock split, which was first proposed at an executive committee meeting around April 19-20 and approved by the Board on April 25th (Tr. 250). He added that he followed Cardinal's procedure for approving stock transactions made close to the end of the quarter, which consisted of consulting legal counsel and accountants to make sure that there was no significant information unavailable to the general public (Tr. 250, 253). According to Moore, his purchase was cleared by Gene Derryberry, an attorney with the law firm of Gentry, Locke, Rakes & Moore in Roanoke, VA (Tr. 251). Moore also testified that the two entries totaling $195,000 were changed at year's end in 2001, consistent with Welch's recommendation, and those changes were released to the public both when the year-end report was filed (90 days after the end of the quarter) and when the annual report was issued around March 25-30, 2002 (Tr. 251). Moore added that the financial statements released in March, 2002 had no appreciable effect on the stock price, since the price range at the time they were released ($14.67 to $16.25 per share) closely resembled the price range at the time the third quarter financials were issued in September-August 2001 ($15.14 to $15.62 per share) (Tr. 252-53; CX 10).

   Moore testified that he provided Welch's August 14th memorandum outlining his concerns to the Board of Directors on or about September 17th, approximately 30 days after he had received it (Tr. 267; CX 20). Moore also acknowledged that he had received and reviewed Welch's September 13th, 2002 memorandum discussing the applicability of the Sarbanes-Oxley Act to Cardinal's quarterly certifications and offering comments and recommendations on this topic (Tr. 270-71, CX 23). He testified that he first saw Welch's August 2, 2002 letter to Beth Worrell, an accountant with Larrowe & Co., sometime prior to September 17th, and he understood it to say that Welch would not attest to the validity of Cardinal's financial statements because he had not been involved in their preparation (Tr. 271-73; CX 17). He also testified that his conversation with Bishop, the senior bank examiner, took place sometime after August 2, 2002 (Tr. 275). With regard to the September 20, 2002 meeting called by Welch, Moore testified that during the portion of the meeting that he attended, Welch did not discuss Sarbanes-Oxley, but rather accused Cardinal's employees of fraud and misconduct (Tr. 280; CX 25, 26 and 27).

Michael Larrowe

   Larrowe testified that he was a CPA and a managing member of Larrowe & Co., a company that provides auditing services to approximately 30-35 community banks (all but three of these banks are public companies) (Tr. 284). He specialized in auditing community banks and has been doing this work for 23 years. Ibid. Neither Larrowe, nor his company had ever been the subject of any allegations of wrongdoing, nor have they been criticized by bank regulators or clients (Tr. 285-86). According to Larrowe, his company falls within approximately 15% of accounting firms that have never received any criticism as a result of peer reviews (Tr. 286).

   Larrowe testified that David Welch had worked for his company starting in 1998, but that he did not personally recommend Welch for a position as a CFO of Cardinal (Tr. 287). Throughout Welch's tenure as the CFO, Larrowe & Co. provided auditing services to Cardinal. Ibid. Larrowe testified that he intermittently acted as the partner in charge of Cardinal's audits (based on the partner rotation policy), most recently in 2000. Ibid. In 2001, he acted as a concurring reviewer, and in 2002 he only provided technical advice to the engagement team and assisted in the investigation of Welch's complaint (Tr. 286-87).

   Larrowe testified that on September 17, 2002, the Audit Committee of Cardinal asked him to assist in the investigation of allegations made by Welch. Ibid. According to Larrowe, prior to the September 25th meeting of the Audit Committee, copies of Welch's three memoranda dated August 14th, September 13th and September 17th were sent to the home addresses of each Committee member (Tr. 288, 293; CX 22, 23). Larrowe testified that he investigated the allegations found in Welch's memoranda of September 13th and 17th (Tr. 288). In particular, between September 17th and 25th, he looked through Larrowe & Co.'s audit files to determine the validity of Welch's concerns (Tr. 289).

   Larrowe testified that he was present during the entire meeting of the Audit Committee on September 25th (Tr. 291). During that meeting, the Audit Committee was notified that Welch had refused to meet with its representatives without his private attorney. Ibid. Also, Densmore and Larrowe reviewed Welch's concerns and their conclusions with the Audit Committee. Ibid. According to Larrowe:

    The Audit Committee, after hearing the concerns and the results of the investigation, at that point asked or actually didn't ask, the Audit Committee, at that point, reaffirmed or affirmed that the investigation was of an internal nature, that it was not related to the employment of Mr. Welch and therefore his attorney's presence was not appropriate under the circumstances. They also indicated that his participation in the investigation was a requirement of his job in the normal course.

    Further they expressed concerns about setting a president (sic) of allowing an employee to dictate similar conditions under which they would do their job and, considering all of the above, determined or decided to suspend Mr. Welch with pay at that point.

(Tr. 291-92). The Committee also instructed Larrowe and Densmore to make another attempt to meet with Welch, which they did on September 30th without success (Tr. 292). Larrowe added that he did not perceive any of Welch's allegations as being directed at him or at Larrowe & Co. Ibid.

    He testified that he felt he was able to adequately investigate all of Welch's allegations, even though he never met with Welch in the process. Ibid. He concluded that "the bulk of [Welch's] concerns were without basis in fact and those that might have been technically correct were not relevant because they were not material to the financial statements" (Tr. 294). Even though he never met with Welch, he learned about his concerns from the following three sources: the memoranda of September 13th and 17th and interviews with individuals who were present during the September 20th meeting conducted by Welch, including Wanda Gardner and Leon Moore. Ibid. The investigators also asked the Board if any information had been supplied to them, but were told that Welch had never expressed any concerns to the Board. Ibid.

   Larrowe denied, however, that Item 2 of the investigation report was without basis, and explained that Moore had indicated to him that Welch was seeking authority to approve contracts. Ibid. He acknowledged that Moore's assertion contradicted Welch's job description, but stated that he could not clarify this issue with Welch since he refused to participate in the investigation (Tr. 325).

however, stating he did not contact Welch because he believed that the letter did not contain any "complaints" (Tr. 334). Another reason he gave for not contacting Welch directly was because "it was apparent that he had . . . a relationship problem either with our firm or some concern about that or with the bank or with the process" (Tr. 331). He further explained:

We were, at that juncture, about three days into Sarbanes-Oxley. There were time pressures involved, everyone was working very hard trying to figure out what to do and what implications of the certification process were and basically we get this letter, which really doesn't say anything except, I don't get a chance to review journal entries on the front end. . . . I cannot respond affirmatively to all items included in the representations letter.

    It did not say that he had any problem with any items in the representation letter only that he might have lack of knowledge with regard to some.

    Then, of course, there's some discussion relative to contact with our firm or lack thereof. But, this letter is addressed directly to us.

    I really didn't think that it bore discussion with him at that point because I thought he was picking a fight.

(Tr. 304-05; JX 21 at 8).

   Larrowe testified that in the course of the investigation he also reviewed Welch's memorandum regarding journal entries in the amount of $23,868.71, but did not investigate them because Welch made no allegation of wrongdoing (CX 16). According to Larrowe, this memorandum simply reflected the fact that "Mr. Welch didn't understand the entries and did not post the entries correctly at December 31, 2001," as Larrowe & Co.'s subsequent investigation showed (Tr. 306). Larrowe added that the results of a historical accounting contained in a memorandum dated June 12, 2003 supported his conclusion (Tr. 309; RX 4).

   Larrowe further testified that he is familiar with Cardinal's financial statements and added that they were approved by Welch (Tr. 309-10). In particular, Welch had signed "representations letter[s]" issued to the external auditor from Larrowe & Co., certifying that Cardinal has made all the required disclosures relevant to the financial statements, that all balance sheet items have been appropriately recorded or disclosed, that reserves are accurately stated, that there is no unasserted claims or assessments that were not properly recorded, that all the minutes of official meetings have been provided, that management recognizes its obligation for the accuracy of the financial statements and represents that they are fairly stated (Tr. 310; RX 5). It also contained a blanket representation that all the required disclosures were made and that the signor was not aware of anything "that the auditor did not ask for that they know would be relevant to the financial statements." Ibid. Welch had signed such representation letters on July 31, 2001, October 30, 2001, and April 24, 2002 (Tr. 311; RX 5). Thus, while Welch later complained about accounting issues, he had previously approved the resolution of those issues when the financial statements were being prepared (Tr. 311).

   Larrowe acknowledged that on September 25th, Welch came down to Moore's office to ask Larrowe and Densmore to postpone the meeting until the next day so that his personal attorney could be present (Tr. 339). According to Larrowe,

[This request w]as denied by the Audit Committee because they view that as an investigation of an internal matter or their bank and it was not in connection with his employment. It was not an adversarial proceeding to Mr. Welch whatsoever. All they wanted to know, he was a whistleblower, essentially, that wouldn't blow the whistle. All they wanted to know is what are your complaints. Tell us all you know so that we can investigate that.

(Tr. 339-40). According to Larrowe, prior to the Audit Committee meeting at 4:00 p.m. that day, three attempts were made to meet with Welch (Tr. 340).

   Larrowe testified that during one of its meetings dealing with the investigation, the Audit Committee discussed at length whether it would be appropriate for Welch to have his attorney present during the September 25th meeting with Larrowe and Densmore and decided, by way of a formal action, that Welch would not be permitted to have his attorney present (Tr. 342; 345). However, the minutes of the Audit Committee meetings on September 17th and 25th, and on October 1st do not reflect such a formal action (CX 33 and 34, JX 20). He also testified that the Audit Committee had expressed this determination in a memorandum that was sent to Welch on September 20, 2002 (Tr. 340; JX 3). However, he then acknowledged that this memorandum was not authored by the Audit Committee or even by Densmore, but rather by Leon Moore (Tr. 341; JX 3).

   Larrowe testified that between August 2nd and October 1st, he did not discuss with Welch his allegations outside of Densmore's presence (Tr. 346). He added that it was on September 17th or 13th that "we [learned] that he was making specific allegations and that's the point at which we began to consult our audit file and the people that he had talked to" (Tr. 345).

   On cross-examination, Larrowe was asked to explain the reasoning behind the decision not to allow Welch to have his personal attorney present (Tr. 346). He testified that it was due to the fact that "the investigation of the Audit Committee covered an internal investigation, it was not an adversarial action, with regard to Mr. Welch and it was not in regard to his employment status. The bank was trying to do the right thing and Mr. Densmore and myself, as appointees of the Audit Committee, we were trying to do the right thing" (Tr. 347). He further testified as follows:

Q Did you at any time seek any accommodation or any middle ground between your position and Mr. Welch's position?

A It wasn't my position to take, it was that of the Audit Committee and they did.

(Tr. 347).

   In his post-hearing brief, Complainant David Welch argues that he engaged in activity protected under the Sarbanes-Oxley whistleblower provision by repeatedly communicating to Respondent his concerns regarding Cardinal's financial statements and procedures (Complainant's Brief, "Comp. Br.," at 13-14). Complainant asserts that his allegations involved Respondent's conduct which he reasonably believed to be prohibited under the Act. Id. at 14-19. Complainant further argues that he has carried his burden of proving by a preponderance of the evidence that his protected activities were a contributing factor in his discharge from Cardinal. Id. at 38-41. He also asserts that Respondent has failed to prove by clear and convincing evidence that he would have been discharged in the absence of the protected activities in which he engaged. Ibid. Specifically, he argues that Respondent has failed to present any evidence justifying its refusal to allow his personal attorney to attend his meeting with Larrowe and Densmore. Id. at 41. Instead, according to Complainant, this refusal constituted an effort by Densmore and Larrowe "sanctioned by Moore" to manipulate the investigation of his complaints and to create "an arbitrary barrier" to his appearance before Cardinal's Audit Committee. Id. at 27-37. With respect to the damages, Complainant seeks reinstatement without loss of seniority, back pay with interest, litigation costs, expert witness fees, and his reasonable attorney fees. Id. at 41. Complainant notes that no evidence relating to these potential damages was offered during the hearing, and requests that the parties be allowed to agree on the exact dollar amount. Id. at 42.

   According to Respondent's post-hearing brief, Complainant was suspended and discharged solely for refusing to meet with the appointed representatives of Cardinal's Audit Committee without his personal attorney present (Respondent's Brief, "Resp. Br.," at 4-7). Respondent argues that Complainant was not entitled to have a private counsel present during this meeting and that the presence of Complainant's

attorney would have "destroyed the confidential nature of the communications and would have prevented the attorney-client privilege from attaching." Id. at 9-18. In addition, Respondent asserts that Complainant's claim that he needed an attorney because of intimidation "does not ring true." Id. at 18-19. Respondent further argues that Complainant's "whistle blowing" activities were not protected, because he could not reasonably believe that his allegations were true. Id. at 19-20, 27-33. Respondent also alleges that, even if Complainant's activities were protected, they did not lead to his discharge. Id. at 20-24. Finally, Respondent notes that even though Complainant's motivation for engaging in protected activity does not constitute an element of his claim, the evidence shows that he was simply using threats of prosecution under Sarbanes-Oxley as leverage in his effort to obtain a severance package and pursue employment elsewhere. Id. at 24-25.

   The whistleblower provision of Sarbanes-Oxley, set forth at 18 U.S.C. §1514A, states, in part:

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

(C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct) . . . .

18 U.S.C. § 1514A (a)(1); see also 29 C.F.R. § 1980.102 (a), (b)(1).

   In Marano v. Dept't of Justice, 2 F.3d 1137 (Fed. Cir. 1993), interpreting the Whistleblower Protection Act, 5 U.S.C. § 1221(e)(1), the Court observed:

The words "a contributing factor" . . . mean any factor which, alone or in connection with other factors, tends to affect in any way the outcome of the decision. This test is specifically intended to overrule existing case law, which requires a whistleblower to prove that his protected conduct was a "significant," "motivating," "substantial," or "predominant" factor in a personnel action in order to overturn that action.

Marano, 2 F.3d at 1140 (citations omitted).

   If Complainant fulfills this burden of proof, Respondent may avoid liability under Sarbanes-Oxley by producing sufficient evidence to clearly and convincingly demonstrate a legitimate purpose or motive for the adverse personnel action. See Yule v. Burns Int'l Security Serv., Case No. 1993-ERA-12 (Sec'y May 24, 1995).Although there is no precise definition of "clear and convincing," the Secretary and the courts recognize that this evidentiary standard is a higher burden than a preponderance of the evidence and less than beyond a reasonable doubt. See id. at 4.

   A. Whether Complainant engaged in activities protected by Sarbanes-Oxley?

   "Protected activity," as defined under the Act and relevant regulations, includes, inter alia, providing (or causing to be provided) to an employer or to the Federal Government information regarding any conduct which the employee reasonably believes constitutes a violation of various fraud provision of Title 18 of the U.S. Code (§§ 1341, 1343, 1344, or 1348), any rule or regulation of the SEC, or any provision of Federal law relating to fraud against shareholders. 18 U.S.C. § 1514A (a)(1); see also 29 C.F.R. § 1980.102 (a), (b)(1). This statutory language makes it clear that Complainant is not required to show the reported conduct actually constituted a violation of the law, but only that he reasonably believed Respondent violated one of the enumerated laws and regulations. See id. The standard for determining whether Complainant's belief is reasonable involves an objective assessment. See, e.g., Minard v. Nerco Delamar Co., 92-SWD-1 (Sec'y Jan. 25, 1995), slip op. at 8.

   Complainant alleges that he engaged in protected activity by:(1)submitting a memorandum dated August 2, 2002 to Beth Worrell, external auditor with Larrowe & Co.; (2) submitting a memorandum to Moore dated August 14, 2002, advising Moore that he could not certify the financial statements contained in the Form 10-QSB for the second quarter of 2002; (3) submitting a memorandum to Moore dated September 13, 2002, detailing some of the concerns raised in his earlier memorandum of August 14th; (4) sending an e-mail to Fred Doyle, a state bank examiner, asking for an opportunity to discuss his concerns regarding Cardinal's financial reports; (5) and by holding a meeting with Cardinal's senior personnel on September 20, 2002 concerning the applicability of Sarbanes-Oxley to Cardinal's financial practices (Comp. Br. at 13-14). In all these communications, Welch made one or more of the following allegations: (1) that two journal entries totaling $195,000 were improperly recorded with the effect of inflating Cardinal's reported income; (2) that his access to the outside auditors had been restricted; (3) that Cardinal's internal controls were inadequate since too many people without appropriate expertise were making journal entries; (4) that he was excluded from designing and evaluating Cardinal's disclosure controls; and (5) that his access to the Audit Committee had been restricted.

   In its post-hearing brief, Respondent argues that Complainant's allegations are unsupported by a reasonable belief that violations were being committed because they were based on mere "assumptions and imagined facts that were not true" (Resp. Br. 19-20, 27-33).

   For the reasons stated below, I find that at least three of the five allegations made by Welch were based on a reasonable belief that violations were being committed and that his activities associated with bringing these matters to light thus constituted "protected activity." This finding obviates the need to address whether or not the remaining two allegations also meet this definition.

   (1) Welch's allegation that two journal entries totaling $195,000 were improperly recorded with the effect of inflating Cardinal's reported income.

   I also find that it was reasonable for Welch to believe that these entries were material and that Respondent had to restate them in its financial statements for the third quarter of 2001. Welch disputed Respondent's claim that the resulting income increase was offset by an expense increase, stating:

When the checks were received and deposited there was a debit to cash and a credit to the income accounts, either the other income or the other real estate income. Those were the only two entries. There were not any offsetting expense entries. It was a debit to cash and a credit to income.

(Tr. 359-60). His September 13, 2002 memorandum to Moore further explains:

In June and July of 2001, we received two recoveries on loans that had been written off quite some time before. When these monies were received they should have been . . . [booked to] the Valuation Reserve.
. . . .
As a result of these incorrect entries, Net Income, after income tax effect, was overstated by 13.7% for the third quarter of 2001 and 7.4% for the YTD September 30, 2001.

Net Loans were overstated by $195,000 (only 0.2%); Valuation Reserves were understated by $195,000 or 14.1%; Other Liabilities were overstated by $66,300 or 17.4%; and Retained Earnings were overstated by $128,700 or 4.5%.

Therefore, the Income Statement, Balance Sheet, and Cash Flow Statement for the third quarter of 2001 should be restated to accurately reflect the results of operations, financial condition, and cash flows (see attached sample Income Statements and Balance Sheet).

    (2) Complainant's allegation that his access to Respondent's external auditors was restricted.

   In his August 2, 2002 letter to Beth Worrell, a CPA with Larrowe & Co. who supervised Cardinal's 2002 external audit, Welch stated that he could not attest to the validity of Cardinal's financials by signing a representation letter prepared by Larrowe & Co. because he did not have access to the necessary information. He stated that over the course of his tenure as Cardinal's CFO, "Larrowe & Co. has communicated primarily with Leon Moore on all issues" and "[o]ver the past year to year and a half, I have been excluded from your communications loop almost entirely," (CX 17; Tr. 358). He added that in light of the recent enactment of Sarbanes-Oxley, he "need[ed] a better level of comfort before signing a representation [letter] such as yours." Ibid. Similarly, in his September 13th memorandum to Moore, Welch stated that "you [ i.e., Leon Moore] . . . have been the (practically) exclusive contact with Larrowe & Company . . ." and cited this exclusion from communications as grounds for his inability to certify the adequacy of Cardinal's third-quarter certification (CX 23 at 2; Tr. 57; 23 at 5).

    Respondent asserts that this allegation was not reasonable. As evidence, Respondent cites the investigation report which concluded, based on a consultation with Larrowe & Co., that Welch "plays a lesser role than he should, apparently by choice" (JX 21 at 6). Respondent also notes that correspondence between Welch and various members of the auditing firm shows that his access was not restricted (Resp. Br. at 30; Tr. 298).

   The evidence establishes that Complainant reasonably believed Larrowe & Co. did not sufficiently communicate with him regarding financial matters entrusted to him by his job description, but rather "went directly to Moore and around [Complainant]" (Comp. Br. at 16). Michael Larrowe's reaction to Welch's August 2nd letter to Worrell supports this allegation: Larrowe acknowledged that Moore was the first person he called upon seeing this letter and that he never contacted Welch to discuss his concerns (Tr. 330). The reasons cited by Larrowe for not contacting Welch are entirely unconvincing. He testified that, in his opinion, Welch's letter did not contain any allegations of wrongdoing, but mere "complaints," and that "it was apparent that [Welch] had . . . a relationship problem either with our firm or some concern about that or with the bank or with the process" (Tr. 331, 334). However, Welch's concerns were unambiguously expressed and serious enough to prompt Larrowe to discuss them with Worrell, Moore and Gardner (Tr. 312). Larrowe also provided an alternative and inconsistent explanation, stating that he understood Welch's letter to mean that Welch simply lacked the necessary information because he was out on sick leave for several weeks during the relevant quarter (Tr. 332). However, Welch specifically stated in his letter that he had been "excluded" from such information "[o]ver the past year to year and a half" (CX 17). Finally, Larrowe testified that he did not inquire into Welch's concerns because it was sufficient for the purposes of the audit for Moore to sign the representation letter (Tr. 334). However, this testimony only illustrates Larrowe's willingness to bypass Welch, even in disregard of his explicit complaint.

   Welch's allegation that Moore and Larrowe & Co. limited his input on important matters concerning Cardinal's financials is further supported by Michael Larrowe's approach to investigating Welch's complaints. In the course of this investigation, Larrowe (along with Densmore) relied heavily on Moore's representations without questioning their accuracy (CX 33; JX 21 at 5, Tr. 298). At the same time, (as I find below) they created what Complainant correctly terms "an arbitrary barrier" to his participation in the investigation (Comp. Br. 27).

(CX 30 at 2).

   Finally, the investigation report prepared by Larrowe and Densmore directed Moore to consult with the CFO regarding the adequacy of internal controls and "to report [the results] to the Committee" (JX 20 at 6). The fact that, following what Respondent considered a "thorough investigation," the Audit Committee directed Moore to further investigate this allegation is inconsistent with Respondent's assertion that the investigation had determined Welch's concerns were unreasonable. Similarly, the investigation report noted that "[i]f this is indeed a serious matter, we would have expected Mr. Welch to attempt to resolve it with the [CEO] by proposing workable solutions and if it remained a real concern to him from a financial reporting standpoint, to bring the matter to the Committee's attention directly." Ibid. The report admonished Welch for making "no effort to do so." Ibid. However, the record shows that Welch clearly made reasonable efforts to resolve the situation with Moore by providing workable solutions to the problem. The record further demonstrates that Welch reasonably believed he could not go directly to the Audit Committee, and instead attempted to bring these matters to light in such a manner that they would have to be addressed by Cardinal.

    B. Whether Respondent, actually or constructively, knew of, or suspected, such activity?

   C. Whether Complainant suffered an unfavorable personnel action?

   Sarbanes-Oxley provides that an employer may not "discharge, . . . suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment." 18 U.S.C. § 1514A (a)(1); see also 29 C.F.R. § 1980.102 (a), (b)(1). Complainant has alleged, and I find, that he suffered an unfavorable personnel action when he was suspended on September 25, 2002 and terminated on October 1, 2002.

   D. Whether Complainant's activity was a contributing factor in the unfavorable personnel action?

   For the reasons stated below, I find that Complainant has carried his burden of proving by a preponderance of the evidence that his conduct was a contributing factor in his suspension and subsequent discharge. The evidence establishes that Respondent's "investigation" of Welch's complaints was orchestrated by Leon Moore, acting in concert with Larrowe and Densmore, in such a way that Respondent could justify Complainant's termination.

   First, I note that proximity in time between Welch's protected activity and the adverse action is itself sufficient to create an inference of unlawful discrimination. Macktal, 171 F.3d at 327; Zinn, 1993-ERA-34; Overall, 1997-ERA-53 at 12. Welch wrote to Beth Worrell on August 2, 2002 stating that he could not sign the representation letter she had sent him for all the reasons cited above (CX 17). As Moore knew, he also wrote to Fred Doyle, a State bank examiner, expressing concerns about Cardinal's accounting procedures (CX 14; Tr. 156). On August 14, 2002, Welch wrote to Moore advising him he could not certify the financial statements in the Form 10 QSB for the second quarter of 2002 (CX 20). He again wrote to Moore on September 13, 2002, reiterating his concerns outlined in the preceding memorandum (CX 23). On September 20, 2002, he conducted a meeting with Moore, Wanda Gardner, and others to discuss the implications of Sarbanes-Oxley and the various concerns he had raised in his earlier memoranda (JX 2). The minutes of the joint meeting of the Cardinal and Bank of Floyd Audit Committees thereafter held on September 25th reflect that Welch was suspended that date in order to prevent him from having a "forum for further inappropriate internal meetings" (CX 34 at 7). Welch was subsequently fired on October 1, 2002. Thus, within a relatively brief period of time � approximately six or seven weeks � Welch had engaged in a number of activities, all of which are close in proximity, and inferentially related, to Cardinal's decision to suspend and then terminate him.

   Even without the inference of unlawful discrimination based on timing, Respondent's explanation of its actions does not ring true. Respondent argues that Welch was suspended and later discharged solely because he refused to meet with Larrowe & Densmore without a personal attorney (Resp. Br. at 1-19). Respondent repeatedly states that any adverse employment action was taken against Welch "[f]or this reason � and this reason alone" (Resp. Br. at 2). However, the evidence adduced in this case shows that Complainant came under attack by Moore, Larrowe, and Densmore immediately after he refused to sign Cardinal's third-quarter certification and before he ever refused to meet with Larrowe and Densmore. First, Moore, Larrowe, and Densmore disparaged Complainant's performance before the Audit Committee to create a formal record of criticism directed at Complainant. Next, Moore, through Larrowe and Densmore, imposed an arbitrary requirement that Welch could not have his personal attorney present while being questioned about the various concerns he had raised about Cardinal's financial accounting practices. This requirement, as the sequence of events described below shows, was clearly imposed for the purpose of using Welch's anticipated refusal to comply as a pretext for firing him.

   Thus, Respondent had already taken significant steps during the September 17th Board meeting towards terminating Welch. Respondent concedes, and the evidence shows, that Welch was not discharged for any of the alleged performance deficiencies. Indeed, Moore testified that he never planned to fire Welch and, in fact, offered him the opportunity to become the head of Cardinal's prospective insurance business (after the CFO's position was eliminated when Cardinal completed an impending merger with MountainBank Financial Corporation) (Tr. 259; CX 34 at 7). The events which transpired at the September 17th Board meeting establish that Welch became the subject of an adverse and discriminatory employment action well before he refused to meet with Densmore and Larrowe without his personal attorney (and even before any investigation into Welch's complaints had taken place). Thus, his subsequent "insubordination" was a mere pretext for his eventual termination.

would not be allowed to meet with him and Van Doren at 11:30 a.m. that date (CX 34 at 2). When Welch showed up at Moore's office for the meeting:

Mr. Densmore told him that the purpose of the meeting was for Mr. Densmore and Mr. Larrowe, acting on behalf of the Audit Committee, to investigate and understand the issues that Mr. Welch had raised and to report the matter directly to the Audit Committee as directed by Mr. Bolt. Mr. Moore was not present. Mr. Welch stated that he would not participate in the meeting because his personal legal counsel could not meet at the time and he would not participate without legal counsel. Mr. Densmore informed Mr. Welch that the matters to be discussed were internal, confidential bank matters raised by Mr. Welch, that it was not a meeting to discuss his employment situation, and that outside legal counsel would not be permitted to attend. Mr. Welch requested time to speak with his attorney. Mr. Densmore directed that Mr. Welch meet with himself, Mr. Van Doren and Mr. Larrowe at 1:00 p.m. Mr. Welch departed.

Resp. Br. at 9 (internal record citations omitted)(italics in original).

   (1) Welch's right to counsel generally.

   Respondent cites, in support of its argument that Complainant had no right to have an attorney present during the meeting with Larrowe and Densmore, "general employment law principles [establishing] Welch could have been discharged for even consulting with counsel on a matter related to his duties at Cardinal." Id. at 10. Although such principles may, indeed, provide a legitimate basis for terminating employees under certain circumstances, they have no application here. As explained above, the purpose of the meeting arranged by Moore and Densmore was not to conduct a legitimate inquiry into the various concerns raised by Welch regarding Respondent's accounting deficiencies and improprieties. Rather, it was their intent to create a situation whereby Welch would not attend the meeting so they could use that act as a justification for terminating his employment.

   (2) Welch's right to counsel under the circumstances presented by this case.

   Nor can Respondent justify the exclusion of Welch's private attorney from the proposed meeting on the grounds that his attendance at the meeting "would have destroyed the confidential nature of the communications and would have prevented the attorney-client privilege from attaching." Resp. Br. at 11. Respondent had no reasonable expectation that the information to be discussed at the meeting was, under the circumstances presented here, confidential. The attorney-client privilege was thus inapplicable. Furthermore, even if the privilege applied, Welch, as an officer of Cardinal, could have waived its application.

    a. "Confidentiality" of information to be discussed.

   The sole purpose of the meeting, according to Respondent, was to elicit information from Welch about the circumstances surrounding events which he believed were unlawful, not to reveal to Welch information of which he was not already aware. This fact is made clear in a letter from Respondent's counsel to the OSHA investigator originally assigned to look into Welch's allegations. Counsel for Respondent wrote:

Since the meeting [between Welch, Densmore, and Larrowe] would have been solely for the purpose of obtaining information from Mr. Welch that may have been material to publicly traded securities, such matters could not have been discussed with anyone not under a duty exclusively to the company to protect the confidentiality of the discussions for the benefit of the company. The presence of an attorney whose only obligation was to Mr. Welch personally would have made full disclosure of such matters problematic and, in fact, would have hindered the company's fact-finding efforts.

   Furthermore, it is worth noting that the minutes of the September 17, 2002 special meeting of the Board expressly note that MountainBank Financial Corporation ("MFC"), a third-party entity with which Respondent was then attempting to merge, was to be apprized of the situation involving Welch's allegations (CX 33 at 3). The minutes of the September 25, 2002 Audit Committee meeting confirm that MFC had in fact been fully informed of the situation (CX 34 at 5). Respondent's disclosure of the substance of Welch's allegations to a third-party would itself constitute a waiver of the privilege if it applied in this situation. See, e.g., United States v. Jones, 696 F.2d 1069, 1072 (4th Cir. 1982) ("The proponent must establish not only that an attorney-client relationship existed, but also that the particular communications at issue are privileged and the privilege has not been waived.").

   Finally, in circumstances not wholly dissimilar to the situation presented here, one court noted that, "in determining the applicability of the attorney-client privilege . . . the court should consider whether an employer enjoyed an expectation of privacy with respect to a particular employee at the time the disclosure was made." Amatuzio v. Gandalf Systems Corp., 932 F.Supp. 113, 118 (1996). One factor considered by the court in that case was the employer's knowledge that the employee "was potentially subject to an adverse employment decision." Ibid. In determining that the former employee's attorney should not be disqualified from litigation brought by the client against his former employer, the court held that:

[C]ommunications with a corporation's attorney made by, to, or in the presence of a non-attorney employee who later becomes adverse to the corporation are not protected by [state rules of professional responsibility governing attorney conduct] or the attorney-client privilege from disclosure by the former employee to his litigation counsel if (i) the litigation involves an allegation by the employee that the corporation breached a statutory or common law duty which it owed to the employee, (ii) the communication disclosed involves or relates to the subject matter of the litigation, and (iii) the employee was not responsible for managing the litigation or making the corporate decision which led to the litigation. We also see no reason why a similar rule would not apply with respect to disputes that have not yet resulted in litigation.

Ibid. (emphasis added).

   In this case, Cardinal clearly knew, as evidenced by the discussions reflected in the minutes of the September 17th and September 25th meetings, that Welch was potentially an adversary in litigation against it involving allegations that Cardinal violated his rights under Sarbanes-Oxley by retaliating against him for engaging in protected activity. Furthermore, the communications which were to occur would clearly relate to the subject matter of any lawsuit brought by Welch under the Act. Finally, Welch played no part in making Cardinal's decision with respect to the circumstances which it knew could, and indeed did, lead to this litigation. The communications made by or to Densmore in Welch's presence would thus not be protected by the attorney-client privilege from disclosure to Welch's own attorney.

    b. Waiver of attorney-client privilege.

   As noted above, the burden is on the proponent of the attorney-client privilege to demonstrate its applicability, and to show "that the particular communications at issue are privileged and that the privilege was not waived." United States v. Jones, 696 F.2d at 1071. There is no question that the attorney-client privilege attaches to corporations as well as individuals. Upjohn Co. v. United States, 449 U.S. 383 (1981). However, as the Supreme Court has noted, application of the privilege in situations involving corporations presents special problems. Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 348 (1985). The Court wrote:

As an inanimate entity, a corporation must act through agents. A corporation cannot speak directly to its lawyers. Similarly, it cannot directly waive the privilege when disclosure is in its best interest. Each of these actions must necessarily be undertaken by individuals empowered to act on behalf of the corporation. . . .
. . . .
[F]or solvent corporations, the power to waive the corporate attorney-client privilege rests with the corporation's management and is normally exercised by its officers and directors. The managers, of course, must exercise the privilege in a manner consistent with their fiduciary duty to act in the best interests of the corporation and not of themselves as individuals.

Id. at 348-49.

   Welch, as Cardinal's CFO, was a corporate officer of Respondent. As such, he had a fiduciary duty to Cardinal and its shareholders to ensure, inter alia, that Respondent complied with all applicable laws and regulations governing the administration of financial institutions such as Cardinal, and to disclose any failure of Cardinal to do so. In furtherance of those duties, he raised a number of issues regarding various events which occurred at Cardinal during the Summer and early Fall of 2002, which events he reasonably believed constituted violations of Federal law. Each of the issues raised by Welch concerned matters under the direct auspices of the CFO and involved a variety of documents and information to which he had legitimate access.

   Clearly, the disclosure of perceived financial improprieties is in the best interests of a corporation's shareholders so they may ensure that the corporation's officers and directors are complying with, inter alia, their duties of due care, good faith, and loyalty. Furthermore, 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. When ordered by Moore to meet with Densmore and Larrowe to discuss the issues he had raised, Welch was clearly acting in furtherance of his fiduciary duty to disclose possible wrongdoing. Allowing him to have his own counsel present during the meeting would not only promote Welch's fulfillment of that duty, it would further the purposes of Sarbanes-Oxley by protecting Welch from retaliation for disclosing improprieties governed by the Act. As an officer of Cardinal, it thus was within his power to waive the attorney-client privilege consistent with his fiduciary duty to act in the best interests of Respondent. Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. at 348-49.

   As noted previously, in light of the fact that Complainant has met his burden of proof, it is Respondent's burden to demonstrate by clear and convincing evidence that it would have fired Welch absent the above-described protected activity. Yule v. Burns Int'l Security Serv., supra.That evidentiary standard is higher than a preponderance of the evidence and less than beyond a reasonable doubt. Id. at 4. For the reasons stated above, Respondent has failed to meet that burden, and Complainant is thus entitled to relief under the Act.

   Whether Respondent actually violated, or intended to violate, any federal fraud statute or SEC rule or regulation is not, and never has been, at issue in this case. All that Sarbanes-Oxley requires is that the Complainant reasonably believed Respondent engaged in such conduct, he disclosed that conduct to the Federal government or his employer, and, as a result, he suffered an adverse employment action. 18 U.S.C. § 1514A(a)(1); 29 C.F.R. § 1980.102(b)(1). For all the reasons set forth above, Complainant has demonstrated by a preponderance of the evidence that he was fired by Respondent because he complied with his duty to disclose information governed by the Act. In its attempt to rebut that evidence, Respondent has relied exclusively on Complainant's refusal to attend a meeting with its outside counsel and external accountant as justification for terminating his employment. However, the rationale it has provided for demanding Welch attend that meeting without his attorney is simply not convincing. Respondent has thus failed to produce sufficient evidence to clearly and convincingly demonstrate that its motive for firing Welch was unrelated to his protected activity.

   The Sarbanes-Oxley Act provides that any employee who prevails in an action under the whistleblower provision of the statute "shall be entitled to all relief necessary to make the employee whole." 18 U.S.C. § 1514A(c)(1). Relief under the Act includes reinstatement, back pay with interest, and compensation for any special damages sustained, including litigation costs, expert witness fees, and reasonable attorney fees. 18 U.S.C. § 1514A(c)(2)(A)-(C). Similarly, the applicable regulation provides:

If the administrative law judge concludes that the party charged has violated the law, the order will provide all relief necessary to make the employee whole, including reinstatement of the complainant to that person's former position with the seniority status that the complainant would have had but for the discrimination, back pay with interest, and compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorney's fees.

29 C.F.R. § 1980.109(b).

    A. Reinstatement.

   In his complaint in this matter, Welch seeks, inter alia, reinstatement with Cardinal without loss of seniority and benefits. Inasmuch as Complainant has established he was discriminated against by Cardinal because of his having engaged in protected activities, he is entitled to be reinstated to his former position as Cardinal's CFO without loss of seniority and without loss of any benefits to which he was entitled prior to his discharge.

   B. Back Pay.

   In his post-hearing brief, Complainant's counsel states: "Assuming arguendo that Welch is the prevailing party in this cause, respective counsel should be able to mutually resolve the details surrounding the [relief authorized by the Act]. Absent passing upon what constitutes �his reasonable attorney fees' there should be little need to call upon the Court's adjudicatory powers to resolve the precise amount of relief sought." Comp. Br. At 42.

   The statute and applicable regulation expressly provide that a prevailing complainant is entitled to back pay with interest. Based on my determination that Respondent has violated the whistleblower provision of the Act, Complainant is therefore entitled to back pay with interest payable at the rate established by section 6621 of the Internal Revenue Code, 26 U.S.C. § 6621. Since no evidence with respect to Complainant's compensation was introduced during the formal hearing in this matter, the record will be held open for thirty days to allow Complainant to produce evidence upon which an award of back pay may be calculated. Respondent may respond to any evidentiary submission made by Complainant within fifteen days from the date upon which it receives Complainant's evidence. To the extent the parties believe that an evidentiary hearing is necessary with respect to the award of back pay, they should inform me of their desire for such a hearing immediately.

   C. Special Damages.

   As a prevailing party, Complainant is entitled to recover his litigation costs and expenses, including expert witness fees, and reasonable attorney's fees. An itemization of such costs and expenses, including supporting documentation, must be submitted by Complainant within thirty days from the date of this order. Respondent shall thereafter have fifteen days within which to challenge payment of the costs and expenses sought by Complainant.

   IT IS HEREBY ORDERED that Respondent, Cardinal Bankshares Corporation:

    1. Reinstate Complainant, in accordance with the conditions discussed above.

    2. Purge Complainant's personnel file of all references to his engaging in protected activity and the discipline emanating therefrom, as discussed in the opinion above, and such references shall not be used against Complainant in the event he applies for any future employment opportunities with Respondent, or in providing a reference concerning Complainant to any other potential employers.

    3. Pay to Complainant back pay and interest in an amount to be determined by supplemental decision and order based on the parties' submissions as described above.

    4. Pay to Complainant all costs and expenses, including attorney fees, reasonably incurred by him in connection with this proceeding in an amount to be determined by supplemental decision and order based on the parties' submissions as described above. A service sheet showing that service has been made upon Respondent must accompany Complainant's application. The petition for services and costs must clearly state (1) counsel's hourly rate and supporting argument or documentation therefor, and (2) a clear itemization of the complexity and type of services rendered.

      STEPHEN L. PURCELL
      Administrative Law Judge

Washington, D.C.

   This decision shall become the final order of the Secretary of Labor pursuant to 29 C.F.R. § 1980.109(c) and § 1980.110(a) unless a petition for review is timely field with the Administrative Review Board ("Board"), U.S. Department of Labor, Room S-4309, 200 Constitution Avenue, NW, Washington, D.C. 20210. Any party desiring to seek review, including judicial review, of a decision of the administrative law judge must file a written petition for review with the Board, which has been delegated the authority to act for the Secretary and issue final decisions under 29 C.F.R. Part 1980. To be effective, a petition must be filed with the Board within 10 days of the date of the decision of the Administrative Law judge and specifically identify the findings, conclusions or orders to which exception is taken. Any exception not specifically urged ordinarily will be deemed to have been waived by the parties. If a timely petition for review is filed, the decision of the administrative law judge will become the final order of the Secretary unless the Board, within 30 days of the filing of the petition, issues an order notifying the parties that the case has been accepted for review. If a case is accepted for review, the decision of the administrative law judge will be inoperative unless and until the Board issues an order adopting the decision, except that a preliminary order of reinstatement will be effective while review is conducted by the Board. The Board will specify the terms under which any briefs are to be filed. Copies of the petition for review and all briefs must be served on all parties and on the Chief Administrative Law Judge at the time it is filed with the Board. Copies of the petition for review and all briefs must also be served on the Assistant Secretary, Occupational Safety and Health Administration, and on the Associate Solicitor, Division of Fair Labor Standards, U.S. Department of Labor, Washington, DC 20210. See 29 C.F.R. § 1980.109(c) and § 1980.110.