For Financial Whistle-Blowers, New Shield is an Imperfect One

posted on:
October 4, 2004

author:
Staff

 Amid the spate of corporate scandals two years ago, Congress passed legislation to protect the jobs of whistle-blowers who are critical to exposing fraud. Among the first to seek the bills shelter was David Welch, chief financial officer of tiny Cardinal Bankshares Corp. 

Mr. Welch suspected his employer of cookie jar accounting: stowing cash in an account to be dipped into if earnings need a boost in a future quarter. Among things Mr. Welch said he found suspicious were a mysterious fall in the chief executive officers company-paid expenses, which had been on the upswing, and a catch-all reserve account labeled sundry credits.

Mr. Welch refused to certify the financial statements, and wrote notes to the chief executive and the companies external auditor. Summoned to a meeting in October 2002 to discuss his concerns, he asked for a one-day delay so he could consult his attorney. Cardinal refused and fired him.

It was just two months after passage of the Sarbanes-Oxley law to improve corporate governance. The law gave employees who shine a light on financial wrongdoing a way to gain reinstatement if they are fired, as well as back pay and legal fees. At the time, whistle-blowers such as Cynthia Cooper at WorldCom Inc. and Sherron Watkins at Enron Corp. were winning praise and gracing magazine covers. In this national mood, Mr. Welch expected vindication.

Little noticed, though, was that the new law didn't assign the job of protecting whistle-blowers to experts on financial malfeasance, such as the Securities and Exchange Commission. Instead, the task went to the Labor Departments Occupational Safety and Health Administration. OSHA, the laws drafters reasoned, had a record of helping workers penalized for voicing concerns.

But OSHA investigators are trained in health and safety issues, such as claims of retaliation for reporting faulty equipment or illegal dumping of chemicals. Now they were asked to understand sophisticated financial stratagems a task whose difficulty is clear from the failure of regulators and investors to spot fraud at Enron, WorldCom and elsewhere for many years. How OSHA handles the whistle-blower assignment is crucial to efforts to improve corporate governance, because unless workers feel protected, many will keep quiet about improprieties they see.

There are other varieties of whistle-blowers besides those who claiming to have uncovered fraud at their employers file for protection under Sarbanes-Oxley. OSHA enforces 13 additional whistle-blower statutes covering truckers, airline mechanics, nuclear-power-plant employees and others. There are also whistle-blower cases that fall under the False Claims Act. In those cases, people claiming to know that a company has defrauded the U.S. government may sue on the governments behalf, and share in the proceeds of the suit.

In the Sarbanes-Oxley cases, OSHA investigators don't have to determine whether activity cited by a complainant really was fraudulent. But they must decide if it was reasonable for the claimant to believe there was fraud.

OSHA handed out books on securities law to the investigators, who earn $53,000 to $85,000 a year, and had them meet with people from the SEC and Justice Department. It encouraged them to contact SEC offices if they had questions. There was no new money in the law for increasing staff.

Besides the lack of expertise in finance or accounting, OSHA is hamstrung by limited authority. It has no subpoena power. It cant force companies to turn over documents or require witnesses to testify. It cant place anyone under oath.

Moreover, in some cases, complainants and their lawyers say that OSHA investigators havent given them a full chance to make their case, sometimes not even interviewing the complainant.

Since Sarbanes-Oxley passed in 2002, more than 300 workers have filed claims of being penalized for drawing attention to what they considered financial impropriety. They have the burden of proof, not the employer. Its impossible to know how good these claims were, and no doubt many lacked merit. But so far, not a single complainant under Sarbanes-Oxley has returned to his or her old job.

OSHA has dealt with 253 workers complaints so far. It has dismissed 176, and 39 were withdrawn by employees. In the other 38 instances, OSHA found in favor of the employee.

Its probably grossly unfair to ask OSHA to investigate Sarbanes-Oxley complaints because thats not their training or their background, says Bruce Shine, a lawyer representing Mr. Welch.

OSHA investigators acknowledge they are struggling with the new mandate. But Tom Marple, director of its Office of Investigative Assistance, says investigators are handling cases effectively and helping negotiate settlements. To date, OSHA says, 13 employees have received more than $3 million as part of settlements OSHA helped broker. Seventeen others settled for undisclosed amounts.
First Crack

Labor Department officials say OSHAs investigations are simply the first crack at the whistle-blower cases. More than 100 complainants, including some whose cases OSHA dismissed, have appealed beyond the agency to Labor Department administrative-law judges. In addition, roughly 20 cases that began at OSHA have since been removed to the federal courts, where they're pending.

Mr. Welch at Cardinal Bankshares felt confident he would get his chief financial officer job back once he told an investigator what happened. He put together a dossier describing accounting he had observed and how the banking company, based in Floyd, Va., responded when he raised concerns. He filed a claim with OSHA on Dec. 19, 2002, and was given the name of an investigator assigned to his case.

Hearing nothing, he says, he left a message for the investigator saying he'd be happy to answer questions. I kept expecting him to call me, he says. Instead, the investigator, Jack Rudzki, spoke briefly once to Mr. Welchs attorney, Mr. Shine. A few weeks later, Mr. Rudzki faxed the lawyer Cardinals response, which said Mr. Welch had been fired for refusing to meet the banks auditor and lawyers without his attorney.

The OSHA investigator added a note saying he'd be on vacation for a week, but we will need to discuss the merits of Cardinals response. He asked Mr. Welchs lawyer for any additional evidence/documentation. … I would like to have reviewed all pertinent evidence prior to interviewing any witnesses, including your client. Mr. Welch says he sent the investigator a binder with more information but never heard from him.

On Jan. 29, 2003, Mr. Rudzki asked Cardinals attorney for a copy of corporate policy which prohibited David Welch from having personal counsel available for a meeting. Cardinals response dated Feb. 4, according to a document reviewed by The Wall Street Journal said that no written policy prohibited David Welch from having personal counsel present.

That same day, however, Mr. Rudzki denied Mr. Welchs claim. In a determination letter dated that day, he ruled that Cardinal had a right to fire the finance chief because he refused to meet with the banks lawyers and auditor without counsel. While Mr. Welch reasonably believed he had found fraud, the investigator wrote, the reason for the termination constitutes legitimate business reasons.

OSHA declined to comment on the case or make Mr. Rudzki available for comment. As a general rule, investigators are supposed to do a face-to-face interview with a claimant, says OSHAs enforcement director, Richard Fairfax. They sometimes do interviews by phone or written questionnaire because of time or travel constraints, he adds.

Mr. Welch appealed to a Labor Department administrative-law judge. Judge Stephen Purcell did an investigation of his own, complete with hearings, and a year later issued a 72-page decision overturning the investigators ruling. The judge said the proximity of Mr. Welchs firing to his whistle-blowing was sufficient to
create an inference of unlawful discrimination. He ordered that Mr. Welch be reinstated, given back pay and reimbursed for legal fees.

Laura Effel, an outside attorney for Cardinal, said Cardinal hadn't violated any securities laws and Mr. Welch didn't understand the accounting. Theres nothing to the claims that there were securities-law violations, Ms. Effel said. She added she was concerned about the process because neither the investigator nor the administrative-law judge had a background in accounting or securities law. Cardinal plans to appeal the ruling further.

Mr. Welch says he reported his concerns to the SEC. Ms. Effel says the SEC has asked Cardinal for information, but she doesn't believe anything will come of it. The SEC declines to comment.

In the rules it has set up for these cases, OSHA gives companies the right to meet with the agency and challenge its findings but doesn't spell out the same right for employees. Agency officials say that although its not explicit in the rules, complainants do get the opportunity to challenge an investigators findings.

The rules also require that an investigator provide a company with a copy of an employees complaint, but they don't require investigators to show the employee the companies response. OSHA lets companies claim confidentiality for information they give the agency and request that it be withheld from the complainant. In most cases, OSHA says, the investigator will orally communicate the companies response to the employee and ask for feedback.

Those rules hurt the case of Stacy Platone, former manager of labor relations at Atlantic Coast Airlines, according to her lawyer.

Ms. Platone told OSHA she was fired for telling a manager about activities she considered fraudulent. She said the airline was paying the salaries of pilots on days when they had dropped scheduled flights in order to attend to union business. Ms. Platone said the union was supposed to bear the cost of those days salaries, but the airline was doing so, in a bid to win concessions during tough labor negotiations.

Atlantic Coast, now called Independence Air, said Ms. Platone was fired for a different reason: concealing a personal relationship with a pilot who was an official with the pilots union, the Air Line Pilots Association. Ms. Platone denied concealing the relationship.

Ms. Platones attorney, Michael York, says he asked to see whatever information the airline submitted to OSHA. He knew it would rebut her fraud claim and wanted her to be able to point to information that bolstered her claim. He says he never received any of the airlines documents, leaving Ms. Platone unsure what information the investigator lacked.

OSHA rejected Ms. Platones claim after a three-month probe. An investigator, without discussing why Ms. Platone was fired, said she had failed to establish that it was reasonable to believe she had found fraud.
Different Ruling

As in the Welch case, an administrative-law judge later issued a different ruling. After a four-day hearing, the judge found Ms. Platone had good grounds to believe that a fraud was being perpetrated and was fired for shining a light on it, not for concealing a relationship. In July, the judge ordered the airline to pay her back wages and $169,381 in legal fees. She didn't seek job reinstatement. The airline has appealed to the Labor Departments Administrative Review Board, where the case is pending.

The airline declined to discuss the case. Eugene Scalia, a labor lawyer who represents employers, including Atlantic Coast, said he has found that in most circumstances, the OSHA investigators have been impressively thorough and dogged in attempting to get to the bottom of the factual and legal questions.

Under Sarbanes-Oxley, OSHA cant consider any claim filed more than 90 days after the alleged retaliation. OSHA has also taken the position that the law doesn't cover claims involving retaliation abroad. OSHA decided that its investigators, in weighing cases, can exclude any alleged harassment that occurred before Sarbanes-Oxley was enacted in mid-2002.

That policy evidently tripped up F. Barron Stone, a financial analyst at Duke Energy Corp., who complained about Dukes accounting to a Duke hot line and to South Carolina regulators. Mr. Stone said Duke was underreporting profits so regulators wouldn't cut the utilities electricity rates. A subsequent audit by North and South Carolina found $124 million of underreporting, and Duke paid $25 million to settle the complaint.

A few months after Mr. Stones hot-line calls, Duke eliminated his job in a reorganization and gave him an undefined role outside of financial planning. He says he lost his office and his access to Duke financial data and began to get poor performance reviews. When he applied in August 2002 for an opening similar to the position he'd lost, he says, he didn't get an interview. Mr. Stone filed a complaint with OSHA two months later.

But his calls to regulators and the ethics hot line had occurred in 2001. The job reassignment was in February 2002, several months before Sarbanes-Oxley passed. OSHAs investigator on the case, Dale Boyd, made clear he wouldn't consider those events. In an e-mail to the complainant and his lawyer, Mr. Boyd said he would cut off a meeting if either of you attempt to further force upon me discussions about those alleged adverse actions prior to July 30, 2002.

Soon after, OSHA dismissed the claim. A spokesman for Duke said the agency conducted a very thorough investigation and concluded there was no evidence that indicated any management retaliation.

Mr. Stone didn't bother with an appeal inside the Labor Department but filed a suit in federal court in North Carolina, which is pending. Sarbanes-Oxley allows employees to bring claims in federal court if the Labor Department doesn't issue a final decision in 180 days, a deadline routinely missed.

For Mr. Welch, the former Cardinal finance chief, even a favorable ruling by an administrative-law judge, including a reinstatement order, hasn't brought an end to his troubles. Cardinal hopes to get the case reversed either by the Labor Departments Administrative Review Board or by a federal appellate court. The case is still in the hands of the administrative-law judge, who hasn't yet said how much back pay and legal costs Mr. Welch should get. Whatever he decides, Cardinal plans to appeal the case further.

Mr. Welch found work as a business manager of a physicians group but then was laid off. In July, he and his wife sold their family farm in rural Virginia and moved to a small home in Bedford, Va., closer to where his wife works. He says the two have drained their retirement accounts and owe $90,000 in legal fees.

The wheels of justice grind exceedingly slowly, Mr. Welch says.

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