In a closely watched test case of the whistleblower provision of Sarbanes-Oxley, a Department of Labor administrative law judge recently ordered a small Virginia bank to reinstate its former CFO despite claims of a rancorous relationship between the two.

Last year, the CFO was the first ever claimant to prevail under Sarbanes-Oxley following his challenge to the bank’s accounting practices.

The claimant, David Welch, also won $65,000 in back pay and damages, plus attorneys’ fees of $108,000.

The order of reinstatement by Judge Stephen Purcell was an eye-opener in view of the history of acrimony between Welch and his former employer, Cardinal Bankshares, which is based in the small town of Floyd in southwestern Virginia.

“It is a very significant ruling,” says Welch’s Kingsport, Tenn.-based attorney D. Bruce Shine. “This is the only Sarbanes-Oxley whistleblower case in which reinstatement has been ordered. The other two claimants who received favorable decisions [so far under the Act] did not seek reinstatement.”

Cardinal’s Roanoke, Va.-based attorney Laura Effel questioned Purcell’s “extraordinary” order of reinstatement.

“Such orders are not usually issued for senior-level executives,” Effel said. “When reinstatement is ordered, it is generally for lower-level employees.”

Shine disagreed.

“When defense counsel says reinstatement is very unusual, she’s talking about other statutes,” he said. “What [she’s] saying is that senior executives shouldn’t be entitled to reinstatement. If that is the case, why did Sarbanes Oxley provide for it? Congress knew the people making the charges would in many instances be senior executives. To deny the remedy of reinstatement would gut the very core of the remedy provided by the Act.”

Even so, Boston management attorney Bret A. Cohen said reinstatement could be unworkable in this case.

“Ordering reinstatement is not a remedy often applied in discrimination cases,” Cohen explained. “The reality of it is that you are putting a person right in the middle of a hornet’s nest. By ordering the reinstatement of Welch, the judge seems to dismiss the practical realities of the situation.”

But Robert P. Riordan, an Atlanta-based attorney with Alston & Bird who handles SOX whistleblower cases for management, said he was not surprised by the ruling.

“Actually, the remedy is very common in the employment law world. The major employment discrimination and retaliation statutes provide for the remedy of reinstatement,” Riordan said. “If the party opposing reinstatement can prove it isn’t workable, a judge will award front pay instead.”

New York City-based attorney Michael Delikat added, “[SOX] specifically speaks of reinstatement as an important remedy. I did not think the arguments available to Cardinal Bankshares would result in reinstatement not being ordered under the facts of that case as found by the ALJ.”

Supplemental Decision

Purcell last year ruled that Cardinal violated the SOX whistleblower protection provisions by terminating Welch after he complained about the company’s accounting practices and other internal financial procedures.

The bank had asserted that they fired Welch for failing to cooperate in an investigation of his allegations, but Purcell disagreed, finding that the real reason for the termination was Welch’s “protected activity” under Sarbanes-Oxley.

Cardinal Bankshares appealed that decision, although the 4th U.S. Circuit Court of Appeals subsequently ruled that the appeal was premature.

“My view of this decision is that the ALJ was disturbed at the respondents’ [Cardinal] approach to his first decision in appealing the case prematurely,” Cohen said. “It appears from reading his latest decision he was not pleased.”

In his supplemental decision issued Feb. 14, Purcell noted that SOX and accompanying federal regulations specifically provide for reinstatement. He described it as “the default or presumptive remedy in wrongful termination cases.”

The bank argued reinstatement was inappropriate because:

• after his discharge, Cardinal learned of facts that made Welch unfit for his position;

• the shareholders of the bank supported the bank’s termination decision;

• the relationship between Welch and Cardinal had deteriorated into enmity;

• reinstatement would cause the displacement of an innocent employee hired to replace Welch.

Purcell rejected each argument.

He found that the company knew of certain errors in a report generated by Welch well before the termination decision. He also said shareholders’ position was irrelevant to the remedy of reinstatement.

As for the bad blood between the bank and Welch, Purcell noted that there was “little doubt” hostility existed and that reinstatement would be difficult.

However, the bank “should not be allowed to profit from its unlawful conduct by preventing Welch from returning to his former position as CFO,” Purcell wrote. “Indeed, doing so would send a clear message to other corporate officers that the Act, which was passed by Congress for the express purpose of encouraging employees to disclose conduct which they reasonably believe to be unlawful, does not apply to them.”

Purcell added that while reinstatement poses some difficulties, they are not insurmountable.

“[R]einstatement offers Welch the best opportunity to be made ‘whole’ and is the presumptive remedy. [O]ther remedies, such as front pay, would not adequately redress Welch’s injury,” the judge wrote.

As for the “innocent employee” bar to reinstatement, Purcell noted that other courts had held that “bumping [a replacement employee] is the appropriate remedy when the employer has knowledge of an aggrieved employee’s rights.”

Effel said the DOL’s Administrative Review Board granted Cardinal’s petition for review and that a briefing schedule for the parties.

Purcell’s decision can be found in the “important documents” section of Atlantic Coast In-House’s website: www.atlanticcoastinhouse.com.

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