Like most lawsuits, many cases settle for undisclosed amounts. Nevertheless, of almost 1,000 whistleblower cases filed under the Sarbanes-Oxley Act (SOX), not a singe whistleblower has survived the various company appeals and “won” the case formally. The case that might have otherwise been the first employee victory was just overturned.
SOX Section 806 was intended to protect employees of public companies from retaliation for reporting financial misdeeds. SOX Section 806 states that the employee must merely have “a reasonable belief” that the company was violating a securities law or hurting shareholder value. That low standard was originally thought to be the broadest protection of any other rule.
SOX’s whistleblower litigation process is administered by the Department of Labor’s (DOL) Occupational Health & Safety Administration (OSHA), which handles similar provisions of other laws. An employee complaint is initially addressed by an OSHA official, then appealed to a DOL administrative law judge (ALJ), and then appealed to the DOL’s Administrative Review Board (ARB). ARB members are appointed by the Secretary of Labor and typically have law degrees. ALJs, by contrast, are career judges. However, these judicial officers typically do not have accounting backgrounds since they hear a variety of whistleblower cases and the vast majority of whistleblower cases have nothing to do with accounting.
David Welch was the first whistleblower to win reinstatement and other remedies from a DOL administrative law judge. But, his employer appealed to the ARB, where his victory was reversed. Welch now plans to take his case to the Fourth Circuit U.S. Court of Appeals.
Here are some of the facts in this case:
- Welch was his employer’s Chief Financial Officer.
- Welch complained that (i) accounting authorized by his employer’s CEO was not in accordance with generally accepted accounting principles, and (ii) his efforts to fix matters and install better internal accounting controls were circumvented by the CEO and others that the CEO controlled.
- Welch refused to sign a standard audit representation letter required under generally accepted audit standards. Welch also said that he would not be signing the upcoming Form 10Q for his employer because of his concerns.
Reading the case facts, there seems little doubt that:
- Welch “reasonably believed” that his employer was not paying proper attention to his concerns.
- As the company’s Chief Financial Officer, Welch’s concerns involved accounting and internal control matters that fall within the four corners of the whistleblower stature contained in
SOX Section 301(4) for “questionable accounting or auditing matters.
- In this author’s opinion, at least some of Welch’s complaints were either not a big deal, or were caused by Welch’s own recalcitrant and negative conduct toward his co-workers.
- Welch and his employer’s relationship had deteriorated to the point where Welch was no longer a contributing member of management.
A strict reading of the statute and items 1 and 2 above would seem to require a ruling against the employer, regardless of items 3 and 4 above. Anything less would not provide the clear protection envisioned by Congress and SOX. Nevertheless, the ARB ignored the standard contained in SOX, and substituted a different standard involving whether Welch was actually correct, and/or whether the terminated employee was someone that the employer would reasonably want to keep. In a bizarre conclusion, the ARB concludes that none of the following have anything to do with securities laws:
- The application of generally accepted accounting principles in financial statements filed with the SEC
- A CEO overriding accounting controls established by the CFO by creating new entries and policies, and
- A CFO not signing a 10Q because of fear that the 10Q is not correct.
While the employer-friendly standard adopted by the ARB may be the “better” standard, it is not the standard contained in existing SOX law.
Specifically, the ARB ruled:
“Welch’s concerns that Cardinal[Welch’s employer] misclassified the loan recoveries and consequently misled investors do not constitute protected activity because Welch could not have reasonably believed that Cardinal misstated its financial condition. Likewise, Welch’s complaints about access to Larrow & Co [the outside audit firm] and about Cardinal’s internal accounting controls are not SOX-protected activity because they do not relate to federal securities laws. Therefore, since Welch has not demonstrated that he engaged in protected activity, an essential element of his case, we deny his complaint.”
Until the ARB rules differently in other cases, or is overturned by federal courts, would-be whistleblower litigants need to give a second thought to the process of attempting to obtain relief through the DOL. The broad protections contained in SOX are illusionary.
Fulcrum Inquiry is a forensic accounting firm that performs fraud and accounting investigations. We use this experience in operating whistleblower collection mechanisms that improve governance processes for both businesses and nonprofit organizations.