Office of Administrative Law Judges 800 K Street, NW, Suite 400-N Washington, DC 20001-8002
Issue Date: 28 January 2004 CASE NO.: 2003-SOX-15
In the Matter of:
DAVID E. WELCH,
Complainant,
v.
CARDINAL BANKSHARES CORPORATION,
Respondent.
APPEARANCES:
Bruce Shine, Attorney
For Complainant
Laura Effel, Attorney
Douglas W. Densmore, Attorney
Joseph M. Rainsbury, Attorney
For Respondent
BEFORE:
Stephen L. Purcell
Administrative Law Judge
RECOMMENDED DECISION AND ORDER
This case arises under the whistleblower provisions of Public Law 107-204, Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002, 18 U.S.C. §1514A ("Sarbanes-Oxley") enacted on July 30, 2002. This statutory provision prohibits any company with a class of securities registered under §12 of the Security Exchange Act of 1934, or required to file reports under §15(d) of the same Act, or any officer, employee, or agent of such company, from discharging, harassing, or in any other manner discriminating against an employee in the terms and conditions of employment because the employee provided to the employer or Federal Government information relating to alleged violations of 18 U.S.C. §§1341, 1343, 1344 or 1348, any rule or regulation of the Securities and Exchange Commission ["SEC"], or any provision of Federal law relating to fraud against shareholders.
Procedural Background
David Welch, Complainant, filed an appeal with the Office of Administrative Law Judges on April 29, 2003, from a February 4, 2003 denial of his complaint by the Occupational Safety and Health Administration, U.S. Department of Labor.
A formal hearing was originally scheduled to commence June 25, 2003 at the United States District Courthouse, Roanoke, Virginia. The hearing date was later changed at the request of the parties to August 25, 2003, and the hearing took place as scheduled on August 25th and 26th, 2003. All parties were afforded a full opportunity to adduce testimony, offer documentary evidence, submit oral arguments, and file post-hearing briefs. The following exhibits were admitted into evidence: Complainant's Exhibits ("CX") 1-32, Joint Exhibits ("JX") 1-22, Respondent's Exhibit ("RX") 1-8, and ALJ Exhibit ("ALJX") 1. Post-hearing briefs were received from both Complainant and Respondent on October 20, 2003.
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I. ISSUES
1. Whether Complainant engaged in activities which are protected by the Sarbanes-Oxley Act?
2. Whether Respondent, actually or constructively, knew of, or suspected, such activity?
3. Whether Complainant suffered an unfavorable personnel action?
4. Whether Complainant's activity was a contributing factor in the unfavorable personnel action taken against him?
5. Whether Respondent has demonstrated by clear and convincing evidence that it would have taken the same unfavorable personnel action irrespective of Complainant's having engaged in protected activity?
II. SUMMARY OF THE EVIDENCE
David Welch
During his direct examination, David Welch testified that he holds both a Bachelor's degree and a Master's degree (since 1986) in Business Administration from East Tennessee State University (Tr. 24). He passed a Certified Public Accountant exam in 1993 and is currently licensed as a CPA in Virginia. Ibid. He began his career in 1991 at Quebecor Printing in Kingsport, Tennessee as a Cost Accountant, was subsequently promoted to a Financial Analyst and, in 1996, became a Senior Cost Estimator (Tr. 25). He left Quebecor during a downsizing in January 1997. Ibid. From June, 1997 until August, 1998, he worked as a Controller for a physicians' group at Wellmont Health Systems. Ibid. From September, 1998 until February, 1999, Welch worked as a Staff Accountant for Larrowe and Company ("Larrowe & Co."), a CPA firm in Galax, Virginia where he was responsible for bank audits and other accounting matters, and preparing tax returns for corporations and individuals. Ibid. Welch also served as an Adjunct Professor at Tusculum College, where he taught finance and strategic planning classes, and at Northeast State Community College, where he taught payroll accounting classes (Tr. 25-26). In February, 1999, he was offered a position as Chief Financial Officer ("CFO") at Cardinal Bankshares, a bank holding company, and its subsidiary Bank of Floyd (hereinafter collectively referred to as "Cardinal" or "Respondent").1 He continued to work in this position until October 1, 2002 when his employment by Respondent was terminated. Ibid. Welch testified that at the time of this hearing, he was employed as a business manager of a physicians' group in Grundy, Virginia and was also designing courses for an on-line accounting program at Liberty University in Lynchburg, Virginia (Tr. 26).
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).
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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).
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.
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(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.
1 As noted below, Cardinal Bankshares is a parent holding company of the Bank of Floyd. However, because the distinction between these two entities is largely immaterial for the purposes of this decision, the two entities will be referred to collectively as "Cardinal," except on those few occasions when such distinction becomes significant.
2 In this memorandum, Welch also stated that Moore and Gardner had misinterpreted Cardinal's participation agreement which stated that the service charge would be ".25% of Interest Earned by Participant hereunder" to mean .25% of the interest rate charged rather than the interest actually earned, which Welch maintained was the correct interpretation. Ibid. He also asked to be consulted whenever a decision was made to change any of his entries. Ibid. He further added he told Moore in his memorandum that when Moore hired him, "[y]ou told me . . . you did not want a "Yes man" and I have found it impossible to be one. While we are not an Enron Corporation, we have some similarities. Their management did not listen to their accounting employees either. I keep hoping this will change" (CX 1).
3 In this memorandum, Welch also quoted a number of court cases which define insider trading and concluded that "none of the definitions and none of the court cases mention �final' numbers as you referred to the FR Y-9C numbers yesterday. All refer to �material nonpublic information.' This would include internally generated financial statements such as the board reports or projections based on internally generated reports" (CX 6 at 2). He also stressed that Fred Newhouse did not make any offer or bid, but simply agreed to the seller's price, "which was based on what the internet showed as the latest trade price." Ibid.
4 Welch explained that the April 19th date actually relates to the issuance of the stock certificate by the Morgan Keegan Company to Moore. Ibid.
5 Welch noted, however, that no more trades in Moore's name went through him, although he was responsible as transfer agent for the cancellation of the old stock certificates and the issuance of the new stock certificates. Ibid. He added that he had previously told Moore that he could not monitor trades if stocks were traded in "street name" only, rather than through Welch as Cardinal's transfer agent (Tr. 40). Welch explained that by "trade in street name" he meant trade accomplished through stock brokers in stock held in the name "CEDE and Company" by the Depository Trust Company in New York (Tr. 40-41).
6 He acknowledged that, as the CFO, he was responsible for ensuring that any shareholder who reached the ten percent ownership threshold filed a report with the SEC, with the exception of stock owed in street name, since he could not determine its ownership (Tr. 134-35). He testified that he had no knowledge as to what percentage of J.P. Morgan Chase stock is held in a street name (Tr. 135).
7 This document was not offered in an email format (CX 12). Although the document makes it clear that it was authored by Cardinal's CFO, it does not contain Welch's name or signature. Ibid. Also, for unexplained reasons, the document starts with the name, title and contact information for Leon Moore. Ibid. Welch also offered into evidence what appears to be a form letter from the SEC, which was apparently transmitted over the Internet, confirming the receipt of a complaint and thanking Welch for reporting his concerns (CX 13).
8 Welch also testified that, after his discharge on October 1, 2002, he met with a representative of the Federal Bureau of Investigation, the Assistant Attorney General of the State of Virginia and, by telephone conference, with the Atlantic Region Counsel for the SEC in Abingdon, Virginia (Tr. 123-24).
You may have gathered from my "hypothetical" questions today . . . that I was leading somewhere. . . . Unfortunately, Bon's [sic � Leon?] entrance kept the conversation from being completed.
If my being your source of this information becomes known, I will be fired by Leon before the sun sets. So, please review the info I'm going to give you and if you think there is anything to it, you can just "stumble across" some odd looking journal entries on your own and be a hero. . . .
I have fretted long enough about some of the things that have gone on at the bank that I do not think are on the up and up. I just have to let someone know. It drives me mad when I think someone is being dishonest and my conscience won't rest until I speak up.
Hopefully, I am just being paranoid, but I'm afraid that is not the case.
If you go into my office and get the Board Reports binder for 2002, there is a folded set of T accounts in the flap on the inside front cover for your review.
(CX 14). Doyle did not meet with Welch in response to this email.
10 The Act required that this certification be filed no later than August 14, 2002. Ibid.
11 Hereinafter, the underlined language corresponds to those portions of the two certifications that Welch underlined and highlighted with bold type in his memorandum (CX 23 at 2, 8).
12 Welch testified that prior to the September 13th memorandum, he had written another memorandum to Moore explaining his refusal to sign this certification and that he wrote the September 13th memorandum pursuant to Moore's request for a more detailed explanation (Tr. 45; CX 23 at 3-7). Welch stated that his original memorandum contained page 2 of CX 23, while the September 13th memorandum contained page 2 as well as pages 3-7 of CX 23, which further detailed Welch's comments found on page 2 (Tr. 45-46).
13During his direct examination, Welch further explained that in June, 2001 (second quarter), residual payments on lease assignments in the amount of $45,000 were recorded as "Other Income" and in July, 2001 (third quarter), a $150,000 settlement received from a "Sully Tech" judgment on a charged off loan was improperly recorded as "Income From Other Real Estate" (Tr. 55, 315-16; JX 1, 12).According to Welch, Moore told him that these entries were recoveries for losses that had been previously written off (Tr. 54). Welch testified that he believed the entries were improper based on the Federal Reserve's instructions for the preparation of a quarterly call report submitted to the Federal Reserve, which is similar to Form 10-QSB (Tr. 52). According to these instructions, any recoveries must go directly to the allowance account (which is a balance sheet account), and loan losses and recoveries can never go directly against income. Ibid. Welch explained that "some people would argue that if a recovery like this had been taken to the . . . balance sheet account, then the expense account could have been reduced accordingly . . . . In other words, at September 30th we could have reduced the expense put into that account through October, November, December, but the federal call reports prohibit you [from] going back and [reducing the expenses to offset a recovery that was put in the allowance account]. Once those entries are made July, August and September you can't just reverse those, you have to reduce future expenses to offset that. So, at this point in time the financials were inaccurate" (Tr. 52-53).
14 Welch acknowledged that the bank's management, not the auditors, were responsible for preparing financial statements and periodic SEC filings (Tr. 129).
15 Welch indicated that this conference was organized by the Virginia Bankers Association (Tr. 74, 95-96).
16 Welch stated that at that time he had not yet attended the September CFOs' conference and knew about the Act only from reading "whatever material [he] could find" Ibid.
17 The memorandum stated that Welch had discussed this problem with Welch and Larrowe & Co. "on several occasions over the past three and one half years" (CX 23 at 5).
18 "Dual control" means that two signatures are required for each entry (Tr. 61).
19 In particular, Welch stated that Annette Battle, Moore's secretary, credited $4,500 to sundry credits, and made other similar entries that were approved by Moore, including a number of debits made to expense accounts such as officer expenses, transportation and education (Tr. 64; CX 15). According to Welch, Moore had told him that when year-end earnings exceed target earnings, "[y]ou have the opportunity to set aside some money to cover expenses in the following year." Ibid. Welch testified that such entries decreased income for the year when they were made, but had a major effect on the financials for the next year since they artificially inflated mid-year earnings for the next year by understating the expenses (Tr. 64-65).
20 Financial Accounting Statement Standard No. 140 (Tr. 335).
21 Welch explained that the call reports are reviewed by the Federal Reserve with copies going to the Virginia State Corporation Commission (Tr. 116). He stated that some reports were for the parent company only, while others were consolidated reports for both the parent company and its subsidiary (RX 8).
22The call report contained the following attestation: "I, Dave Welch, CFO . . . of the named bank do hereby declare that the Reports of Condition and Income . . . for this report date, have been prepared in conformance with the instructions issued by the appropriate Federal regulatory authority and are true to the best of my knowledge and belief" (Tr. 69; RX 8 at 1-2).
23 Hereinafter, all citations to this exhibit refer to its un-redacted version offered into evidence at the hearing as Complainant's Exhibit 33 (the redacted version was introduced into evidence as Joint Exhibit 1).
24 On the issue of the quality of his performance, Welch also testified that Beth Worrell had incorrectly concluded that he had made erroneous journal entries for $23,868.71 (RX 4). According to Welch, he was not at fault because he was merely following Larrowe & Co.'s instructions attached to the relevant order (Tr. 360-62).
25Welch testified that he intended to discuss the "journal entries [for the] sundry credits and officer expenses, the topic of insider trading, the topic of internal controls being overridden and the fact that on a number of occasions these issues had been addressed with Mr. Moore and with other officers in the company and no action had been taken to correct those issues" (Tr. 74).
26 The outline of Welch's presentation also stated that over the past year, the CEO appeared to be interested in getting rid of Welch (and cited some examples), and that "our relationship" had been damaged beyond repair (CX 26 at 3). It also stated that, on the advice of his attorney, Welch intended to offer an option that would be "best for all parties," but which had to be "done prior to quarter's end" because "[i]f I am here when the G/L is closed for the 3rd quarter and all issues have not been addressed and fixed, I must certify that the financials are not accurate nor are they fairly presented." Ibid. Welch's outline reflects that the "option" included, among other, a demand for a "fair severance package" and a letter of recommendation, so that Welch would "quietly leave the bank." Ibid.
27 Welch testified that this transcript from the audio tape he made at the September 20, 2002 meeting accurately represents what occurred during the meeting (Tr. 75).He denied that he willfully withheld the tape from Respondent, and testified that he was unable to provide the tape prior to his termination on October 1 because it was in the possession of his then-attorney Terry Kilgore, who was out of town (Tr. 82-83).
28 Welch testified that in making his presentation, he relied on information concerning the Sarbanes-Oxley Act he received at a meeting of the Virginia Bankers Association for CFOs he attended on September 9 and 10, 2002 (Tr. 74, 95-96). Welch also testified that, after the conference, he corresponded via email with George P. Whitely, a Richmond attorney who made a presentation during the conference, regarding the Sarbanes-Oxley Act (Tr. 99; CX 32).
29 Welch had never heard of this purported policy, and Cardinal never satisfied his request to produce any documentation reflecting the existence of such a policy (Tr. 72-73).
30 Welch testified that he made a statement about three individuals being parties to fraud "after Mr. Moore had become very angry and very disruptive" (Tr. 149).
31 Welch noted that the memorandum was delivered by Cardinal's employee who was in charge of collections from delinquent debtors (Tr. 83).
32 Welch clarified that any references to his attorney concerning the period between September 20th and October 1 referred to Terry Kilgore, not Bruce Shine, his trial counsel. Ibid.
33 This memorandum reiterated that no outside lawyers would be allowed at the meeting (JX 4).
34 Welch testified that this request was never satisfied (Tr. 94).
35 Welch testified that the Audit Committee and the Board of Directors normally met in the boardroom at the bank, rather than in the Profit House (Tr. 92).
36 Hereinafter, all citations to this exhibit refer to its un-redacted version offered into evidence at the hearing as Complainant's Exhibit 34 (the redacted version was introduced into evidence as Joint Exhibit 12).
37 As noted above, on September 17, 2002, Moore met with Densmore, Larrowe, and Gardner to discuss Welch's September 13th memorandum, in which Welch related his concerns with the Forms 10-QSB for the second and third quarters of 2002 and the certifications required by the Sarbanes-Oxley Act (JX 12).
38 Welch testified, contrary to Larrowe's representation to the committee, that he had never asked to be given authority to approve bank's contracts (Tr. 357).
39 The record contains no other mention of this complaint allegedly made by Welch, and Complainant offered no evidence on this issue.
40 An April 1, 2002 memorandum to Welch's personnel file, which is also part of that exhibit, notes that Welch approached Shelby Rutherford that day, was "very upset," and said he was taking a vacation day to "think things through and decide whether he would be bringing his resignation in tomorrow." (CX 31 at 1).
41 Moore explained that after the September 11th terrorist attack, "there was a requirement by the federal government that banks be able to retrieve [information] on a short term basis" (Tr. 104). Welch testified that the Excel spreadsheet allowed him to sort data and to retrieve it "within a matter of minutes" (Tr. 104-05). He added that the process was underway of incorporating into the worksheet the historic data that predated this novel retrieval requirement (Tr. 101).
42 This report was copied to the Audit Committee, Moore, Vice President of Compliance Office Diane Ham, Data Processing Manager Betty Whitlock, and Welch (Tr. 101; CX 24).
43 Welch testified that he does not know whether it would be a violation of the Act for Moore to tell him not to report his concerns to the Audit Committee or the Board (Tr. 125).
44 More specifically, Welch listed the following reasons why this option would not be desirable for Moore: 1) the failure to comply with the Act with regard to the second quarter certification, 2) the issues surrounding the upcoming third quarter certification, 3) the evidence that would "tell a jury that [Welch] was let go because [he] stood up for what [he] believed to be right in spite of the cost of [his] job," 4) the jury being sympathetic towards him, and because 5) the Act afforded Welch whistle blower protection.
45 This "option" also involved Moore making "no comments to anyone that might lead them to believe anything about me except that I did a good job." Ibid.
46 Welch denied that he had met with Kilgore to discuss his exit strategy, but rather to address "how to approach doing a presentation to the staff of Cardinal . . . in such a way that hopefully it wouldn't backfire on me" (Tr. 146).
47 Welch acknowledged that on September 18th he met with his then-attorney Mr. Kilgore, who agreed that Welch was facing a choice between leaving Cardinal or "stay[ing] in there and fight[ing] the battles that I fought" (Tr. 146; JX 2 at 13).
48 Welch testified that he wanted Newhouse to be present because he was second in command at the bank and, thus, Welch wanted him to know of the accusations made against him and hear his side of the story (Tr. 152). Welch also wanted him to serve as a witness to his conversation with Thomas (Tr. 151-52).
49 Welch denied that a severance package was the main subject of this discussion, since neither Newhouse, nor Thomas was in a position to make this decision (Tr. 152).
50 Bolt testified that the unredacted portions of the minutes of these two meetings accurately reflect what took place during the meetings (Tr. 169-70).
51 This report was addressed from the Audit Committee and the Board of Directors to the Board of Directors. Ibid.
52 A copy of the investigation report was part of the minutes of the October 1st Audit Committee meeting as well as the minutes of the October 1st Board Meeting (Tr. 303; JX 20, 21). Accordingly, this document appears as part of JX 20 as well as JX 21; however, the last page of this document was mistakenly omitted from JX 20. Id.
53 Bolt testified that these minutes accurately reflect what transpired during this meeting (Tr. 172).
54 The minutes state that because of the subject matter of this meeting, "Annette Battle was excused from attendance as secretary and Moore was appointed to act in her place." Ibid. Accordingly, the minutes were prepared and signed by Moore and attested to by Bolt. Ibid.
55 The minutes reflect that Welch was directed to stay off Cardinal's property without the prior consent of Moore, and that he later requested, and was given, permission to enter the premises for the meeting, which he eventually chose not to attend (JX 20 at 1).
56 According to the minutes of this meeting, "[t]he Committee members were each polled and each stated that he understood and agreed with the report and its conclusions" (JX 20 at 2).
57 The minutes also reflect that, at the conclusion of the meeting, Dr. Conduff asked Committee members if they would like to keep the "information packets" they were given during the meeting and noted that they would have to assure absolute confidentiality (JX 20 at 2). No member of the Committee chose to keep their packet and "they were turned over to the Corporate Secretary to be destroyed." Ibid. Bolt testified that he could not recall what these packets contained, did not know that the packets would be destroyed, and hoped that a copy of the information contained in the packets would be preserved by Cardinal (Tr. 200-01). He further testified that Cardinal did not have a practice of turning in and destroying paperwork used by the Board and the Audit Committee to make material decisions (Tr. 202).
58 It appears from Venson Bolt's testimony that he believed Moore showed him this document at the September 25th meeting (Tr. 182). However, the minutes of the September 25th meeting contain no attachments and make no reference to any exhibits handed out during this meeting (CX 34). By contrast, the minutes of the September 17th meeting state that "Mr. Moore read a memo dated September 13, 2002, addressed to him from Dave Welch, CFO. He also read his response to Mr. Welch's memo, also dated September 13, 2002 (See Exhibit A and B attached)" (CX 33 at 1). However, neither the redacted version of these minutes offered into evidence as JX 1, nor the un-redacted version offered into evidence as CX 33 contain these purported exhibits A and B.
59 The minutes of the October 1st Audit Committee meeting reflect only the time when the meeting started (4:37 p.m.), but do not reflect when it ended (JX 20). However, the minutes of the meeting of the full Board of Directors show that it started on the same day at 5:59 p.m., leaving. at most. one hour and twenty two minutes for the Audit Committee meeting (JX 21 at 1). The minutes of the Board of Directors' meeting reflect that it lasted approximately thirty minutes (from 5:59 p.m. 6:29 p.m.). Id. at 1-2.
60 As noted above, following the September 25th meeting, Welch was prohibited from entering Cardinal's property without the prior consent of Moore, and was later given permission to enter the premises specifically for the purpose of meeting with Densmore and Larrowe, which he chose not to do (JX 20 at 1).
61 She added that this requirement existed since 1996, and Cardinal's retrieval procedure was first put in place around the same time (Tr. 220).
62 She added that when she audited Moore's personal stock transactions around the middle of 2001, she did not discuss it with Moore beforehand (Tr. 220).
63 Gardner acknowledged that neither Middleton nor Spangler was a CPA or held a degrees in accounting from any institution of higher education, but stated that the subject of her audit "didn't have anything to do with being a CPA" (Tr. 229-30).
64 She further testified that she discussed Welch's July 29, 2002 response to her audit report with Moore before going to the Audit Committee (Tr. 235-36; CX 24 at 1-2). Gardner stated that Moore made a handwritten notation on Welch's memorandum responding to the audit stating "Dave � Your response should deal with issues in the audit and reported to Wanda � She will report findings to audit comm. Thanks" (CX 24 at 5). Gardner added, however, that Moore never told her that he wanted her to be the conduit for Welch's communications with the Audit Committee (CX 24 at 5).
65 Gardner acknowledged that Moore "wore two hats" as Chairman of the Board of Directors and as President, an employee of Cardinal (Tr. 231).
66 She testified that Venson Bolt presided at the Audit Committee meetings, and that, although Moore was present when she reported the results of her audits, she addressed her comments to the Committee itself (Tr. 243). She also stated that sometimes the meetings continued after she left, and on some occasions Moore left the meetings prior to the conclusion of her report (Tr. 244).
67 Gardner testified that there were eight or ten senior managers located at the main office of the Bank of Floyd (Tr. 233).
68 Dr. Conduff, who had previously occupied this position, was not an employee of Cardinal. Ibid.
69 Moore stated that he received no compensation for serving in this capacity. Ibid.
70 In particular, Moore testified that, contrary to the memorandum, he did not talk with Welch on the day before it was produced, but rather earlier in the month (Tr. 262-63). He further testified that it also incorrectly stated that Moore purchased 420 shares of stock on October 1, 2001, while he actually purchased 200 shares on September 18, 2001 (Tr. 263). Finally, Moore added that when Welch informed him that a shareholder (Jenny Lane) wanted to sell her stock for $10 a share, he told Welch that that would be completely inappropriate because that price was lower than the market price. Ibid. Moore added that Welch could have "simply asked to see my certificate or see my information I'd been happy to provide them for him" (Tr. 264).
71 However, Moore later stated that he first talked to his broker "as early as late February or early March" (Tr. 250, 253)
72 Moore defined a "trade date" as the "actual date that the investment company executed that order for purchase of stock" (Tr. 249).
73 The full list of state bank examiners who examined Cardinal's operations in the summer of 2002 is found in CX 14 at 1 (Tr. 274). According to Moore, the state examination continued approximately through August 15, 2002 (Tr. 279).
74 Moore added that as a witness in this case, he was not testifying on behalf of the Board of Cardinal as to why Mr. Welch was terminated (Tr. 280).
75 Cardinal had made an investment in Virginia Bankers Insurance and was considering forming an insurance company (Tr. 259).
76 Moore added that "all of them are listed in the telephone directory . . . [and] on our report that we do after the annual meeting." Ibid.
77 The Liability Committee also included Fred Newhouse and Moore. Ibid.
78 "Just before lunch, just after lunch and then at 3:00 o'clock in the afternoon" (Tr. 290).
79 This name is misspelled in the record as "Jeff Endorf." Ibid.
80 Larrowe explained that this provision represented the management's best estimate of the reserve necessary to account for the losses in the portfolio (Tr. 313).
81 He added, however, that "audit contracts" language would be "nonsensical to me because the only person that would approve an audit contract would be the audit committee itself" (Tr. 317).
82 Larrowe clarified that there is a difference between the disclosure controls relating to Sarbanes-Oxley and internal controls in that the former are essentially a sub-set of the latter. He further clarified that
Internal controls, by and large, are those controls that are there . . . to ensure the accuracy of the financial statements and the safety and soundness of the assets under control of the institution. The disclosure controls, on the other hand, are essentially tools that are in place to assure that whoever the preparer of the financial statements and related disclosures happens to be, that that individual has all of the relevant information available to them.
(Tr. 351).
83 According to Larrowe, "on at least September 25th," the Audit Committee affirmed that Welch had this responsibility (Tr. 327).
84 He acknowledged that Worrell was a CPA and a managing partner on Cardinal's account (Tr. 298).
85 He added that because in 2001 he "wasnot the partner in charge on the engagement so I normally would not talk with either" (Tr. 338).
86 Later, however, Larrowe provided conflicting testimony when he stated that
87 As noted above, in this copy of the representation letter Welch had incorporated references to his August 2, 2002 letter to Worrell under three specific representations (CX 17).
88 He added that he is certain that Worrell did not receive these attachments either because she would have showed them to him (Tr. 334).
89 Larrowe acknowledged that he knew about the existence of the Financial Accounting Statement Standard No. 140, but did not know what it states regarding the entry of sundry accounts (Tr. 335).
90 He noted that this certification: "says, initially, that management is responsible for the fair presentation of the financial statements, results of operations and cash flows. It further indicates that all financial records and related data have been made available, all minutes have been made available . . . . It says . . . there have been no irregularities involving other employees that could have a material effect on the financial statements" (Tr. 352).
91See, e.g., Energy Reorganization Act, 42 U.S.C. § 5851 (protecting, inter alia, employees from retaliation by licensees of nuclear power facilities from discharge or other discrimination because of reporting suspected safety violations); Clean Air Act, 42 U.S.C. § 7622 (protecting, inter alia, employees from retaliation by employers for participating or assisting in the administration, implementation, or enforcement of the Clean Air Act); Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR21), 49 U.S.C. § 42121 (protecting, inter alia, employees of air carriers from discharge or other discrimination from reporting safety violations). Indeed, the Act expressly provides that proceedings under Sarbanes-Oxley are to be governed by the rules and procedures, as well as burdens of proof, of AIR21, 49 U.S.C. § 42121(b). 18 U.S.C. § 1541A(b)(2)(A),(C). Similarly, DOL's Interim final rule governing the employee protection provisions of Sarbanes-Oxley notes that the role federal agencies are to play in cases brought under the Act is the same as their role set forth in the AIR21 and ERA regulations. Fed. Reg., Vol. 68, 31860, 31861 (May 28, 2003).
92 Welch testified that, in June, 2001 (second quarter), residual payments on lease assignments in the amount of $45,000 were recorded as �other income' and in July, 2001 (third quarter), a $150,000 settlement received from a "Sully Tech" judgment on a charged off loan was improperly recorded as "Income From Other Real Estate" (Tr. 55, 315-16; JX 1, 12).
93 Welch noted that "some people would argue that if a recovery like this had been taken to the . . . balance sheet account, then the expense account could have been reduced accordingly . . . . In other words, at September 30th we could have reduced the expense put into that account through October, November, December, but the federal call reports prohibit you [from] going back and [reducing the expenses to offset a recovery that was put in the allowance account]. Once those entries are made July, August and September you can't just reverse those, you have to reduce future expenses to offset that. So, at this point in time the financials were inaccurate" (Tr. 52-53).
94 Welch's expert, Wynne E. Baker, also agreed that the bank's recording of the $195,000 was improper. He wrote:
It is a long standing bank industry practice that if a loan is charged off the bank books, the recovery of that charge off should be recorded as an increase to the allowance for loan and lease losses. After the entry is made to the allowance for loans and lease losses, and before a quarterly reporting period, the Board of Directors is to determine if the allowance for loan and lease losses is adequate to meet the possible risks in the portfolio of loans.
(CX 30 at 2). Baker is a CPA and the member in charge of KraftCPAs financial institution industry group. Id. at 4. His resume notes that he earned the chartered bank auditor certificate awarded by the Bank Administration Institute, is a preferred examiner under the American Bankers Association Preferred Audit Program, and is a certified financial services auditor awarded by NAFSA. Ibid.
95 Welch insisted that these figures had to be restated in the income statement, balance sheet, and cash flow statement for the third quarter of 2001, since all these documents would be included in the Form QSB filed with the SEC (CX 23; Tr. 42).
Again, if Mr. Welch legitimately believes his access to Larrowe & Company has been restricted, he should have informed the Committee of this in a timely fashion. He has made no effort to do so. Nonetheless, the Committee has reaffirmed to Larrowe & Company that the Company's chief financial officer is to have unrestricted contract with them.
(CX 21 at 6).
97 Welch made this allegation in his August 2, 2002 letter to Beth Worrell (CX 17) and during the September 20th meeting (JX 2 at 7-8). He also reiterated it in his August 14th and September 13th memoranda to Moore as grounds for his refusal to sign Cardinal's third quarter certification (CX 20; CX 23 at 2-7; Tr. 49).
98 In his August 14th memorandum to Moore, Welch wrote: "as I have stated to you on numerous occasions in the past, when there are so many people making journal entries without my knowledge or approval, I cannot give any assurances that our financials are fairly presented" (CX 20).
99 Financial Accounting Statement Standard No. 140 (Tr. 335).
100 Welch helped develop a job description for the CFO position about a year after he started working at Cardinal (Tr. 28). Excerpts from the job description are included in Welch's September 13, 2002 memorandum to Leon Moore. They include:
"Compiles 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."
"Monitors compliance with generally accepted accounting principles and company procedures."
"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).
101 Baker, as noted above, is a CPA and the member in charge of KraftCPAs financial institution industry group (CX 30 at 4).
102 Thus, there is no need to decide the contested issue of whether or not Respondent was aware of Welch's e-mail to Fred Doyle, a state bank examiner.
103 William Gardner is unrelated to Wanda Gardner, the bank's internal auditor (Tr. 21).
104 Howard Conduff, William Gardner, C.W. Harman, Kevin Mitchell, and Dorsey Thompson.
105 Notably, this discussion is not recorded in the minutes (CX 33).
106 He recalled, however, that Moore showed him his response to Welch's September 13th memorandum. Ibid.
107 Although the minutes of the September 17th meeting reference "Exhibit A and B attached" (CX 33 at 1), Respondent never submitted any such exhibits into evidence and the minutes state only that Moore read Welch's September 13th memorandum and his response to that memorandum during this meeting (CX 33 at 1).
108 Some of the Board members also appear to lack any substantial education or experience with respect to the financial affairs of banks. For example, Doctor Conduff is a dentist, Mr. Miller is a dairy farmer, and Mr. Thompson is a farmer (Tr. 173).
109 Densmore's and Larrowe's repeated claim that Welch failed to report his concerns sooner and that he should have reported them directly to the Audit Committee was unwarranted. Larrowe acknowledged that Welch wrote a letter to Larrowe & Co. expressing his concerns three days after Sarbanes-Oxley was enacted (Tr. (Tr. 331-32). During the months of August and September, Welch repeatedly reported his concerns to Moore (CX 20, 23). He explained that he reported his concerns to Moore because Moore "had the responsibility to report to the Board of Directors or the Audit Committee" (Tr. 139) and because he feared termination and losing his career in banking (Tr. 125). Venson Bolt confirmed that, as the President and Chairman of the Board, Moore was expected to report any significant developments to the Committee, but he never reported Welch's complaints against him until September, 2002 (Tr. 194-95). Moore acknowledged that he did not show Welch's August 14th memorandum to the Board of Directors for approximately thirty days after he had received it (Tr. 267; CX 20).
110 Those same minutes reflect that Van Doren, an attorney with Densmore's firm, stated "Mr. Welch has no right to have a third party attorney present for a discussion of internal bank matters, particularly since they are sensitive and confidential and relate to publicly traded securities." CX 12 at 7. None of the Committee members expressed any similar misgivings about Welch attending such a meeting with his personal attorney.
111 Respondent's suggestion that Complainant's activities were in furtherance of a desire to force Cardinal to "buy his silence with a �fair' severance package . . . ." is not credible. Resp. Br. At 25. Complainant testified, and the record adequately demonstrates, that he had legitimate concerns regarding the accuracy and adequacy of Cardinal's disclosures of various financial information. The record further establishes that he reported his concerns to Cardinal's management and others, not so he could extort from Cardinal a favorable severance package, but out of a genuine desire to force Cardinal's compliance with the new and more stringent reporting requirements of Sarbanes-Oxley. Furthermore, as explained above, Complainant credibly explained why, prior to Sarbanes-Oxley, he was willing to sign financial statements which may not have been completely accurate but, in light of the significant penalties imposed by the Act, he could not do so thereafter. While Complainant's concerns with respect to his continued employment at Cardinal were genuine, and, under the circumstances presented here, understandable, I find those concerns were not the motivating factor behind the complaints he raised regarding Cardinal's financial information.
112See September 20, 2002 memorandum from Moore to Welch stating "You are directed to meet with the Company's legal counsel . . . and will be asked to present all information you have relating to your allegations of fraudulent conduct by Company officers or employees or any other serious matters you think need to be addressed." (JX 3) (emphasis added).