The latest and final decision was issued recently in a longstanding dispute involving the reinstatement of a claimant under Section 806 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. § 1514A (the “Act” or “SOX”), commonly known as the “whistleblower provision” of the Act. On May 31, 2007, the U.S. Department of Labor’s (“DOL”) Administrative Review Board (“ARB”) ruled that the CFO of Cardinal Bankshares who complained to his employer about its financial reporting was not engaged in protected activity under the Act because he did not have a reasonable belief that the bank violated federal securities laws. Welch v. Cardinal Bankshares, DOL ARB NO. 05-064 (May 31, 2007).
In addition, a federal court in Pennsylvania ruled recently that a plaintiff was precluded from bringing her age and gender discrimination claims when a final decision by the DOL dismissed a separately-asserted SOX claim based on a finding that she was terminated for falsifying sales call reports, rather than because of a SOX-protected complaint.
Welch v. Cardinal Bankshares
The Cardinal Bankshares case has spawned a series of interesting opinions, particularly regarding the reinstatement rights of whistleblowers. In this most recent decision, the ARB addressed the merits of Welch’s claims.
Section 806 of the Act prohibits retaliation against an employee who reports any conduct the employee reasonably believes constitutes a violation of (i) federal criminal law provisions prohibiting mail, wire or bank fraud; (ii) any rule or regulation of the Securities and Exchange Commission; or (iii) any provision of federal law relating to fraud against shareholders. 18 U.S.C. § 1514A(a)(1). To qualify as having engaged in “protected activity” under the Act, a whistleblower must establish by a preponderance of the evidence that he or she had a reasonable belief that the acts complained of violated the laws specified in the Act.
The ARB held that Welch did not engage in SOXprotected activity. It found that, even if the bank misclassified certain loan recoveries, a reasonable CPA and CFO could not have concluded that there was an overstatement of income. Consequently, it found Welch could not have reasonably believed that Cardinal misstated its financial condition. The ARB also rejected Welch’s argument that he engaged in protected activity by reporting the Company’s alleged violation of generally accepted accounting standards in its reporting of loan recoveries.
Further, the ARB held that Congress enumerated the specific statutes and rules covered by SOX and there was no authority for extending whistleblower protection to employees who report violations of generally accepted accounting principles. Finally, the ARB determined that Welch’s complaints — that he was not granted access to the Company’s external auditors and that the Company maintained inadequate internal controls — did not relate “definitely and specifically” to the enumerated securities laws.
Tice v. Bristol-Myers Squibb Co.
A federal court in Pennsylvania dismissed age and gender discrimination claims based on a preclusive ruling by the DOL, which found in an earlier SOX proceeding that the employee was terminated for falsifying sales reports and not in retaliation for her supposed whistleblowing. Tice v. Bristol-Myers Squibb, No. 06-1719, 2007 WL 2702689 (Sept. 13, 2007). The court found that the parties litigated the issue of the termination before the DOL, the employee did not appeal the DOL findings (it thus was a final decision), and the SOX proceeding had “all the trappings of a judicial proceeding.” In addition, the court ruled that Congress intended that final orders of the DOL for which review could have been obtained by appeal cannot be collaterally attacked. Therefore, the plaintiff could not relitigate the truthfulness of her employer’s stated reasons for her termination.
The final decision on the Welch v. Cardinal Bankshares matter confirms that the DOL and courts will scrutinize evidence carefully to determine whether a complainant has shown that he or she held a reasonable belief that a SOX violation occurred and whether the complaint specifically related to any of the categories of violations identified in the text of the Act. Tice v. Bristol-Myers Squibb indicates that claimants may be collaterally estopped from re-litigating in other contexts — most notably, in connection with discrimination claims — issues determined by ALJs in SOX proceedings.