The Fourth Circuit Rejects ReInstatement for First Sox Whistleblower
August 12, 2008
The first claimant to win a Sox Whistleblower case suffered another setback in a federal appeals court last week. The 4th U.S. Circuit Court of Appeals refused to reinstate David Welch to his job, ruling that he failed to explain how his employer’s alleged shoddy accounting practices could be considered a violation of federal law. Welch was dismissed as chief financial officer of Cardinal Bankshares Corp. in 2002 after reporting what he said were misclassifications in financial reports that essentially overstated the bank’s earnings by $195,000. Cardinal is the holding company for a bank in southwestern Virginia.
In the case, styled Welch v. Chao, Judge Diana Gribbon Motz wrote that a SOX whistleblower doesn’t have to cite code sections to make out a claim, but he has to identify the specific conduct he “reasonably believes” is illegal. Judge Motz wrote that communications about misclassifications in financial statements could form the basis of a SOX whistleblower claim, but that Welch’s SOX claim failed because his citation of accounting treatises and later-passed laws and regulations could not show how the bank’s accounting practices reasonably could have been perceived as a violation of federal securities laws.
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