- The Washington Times - Sunday, February 15, 2004

FLOYD, Va. - Lawmakers probably never imagined that their efforts to protect investors from another Enron would produce results — and controversy — at this one-stoplight town’s namesake bank.

The Bank of Floyd’s board of directors amounts to a who’s who of local farmers. Many days, not a single share of its stock changes hands. There are no corridors of power — bank President Leon Moore’s office is just down from the tellers’ windows.

But a fight between the no-profile bank and a former employee is the unlikely first test of an effort by Congress to protect corporate insiders who blow the whistle on financial trickery.

David Welch, fired from his $60,000-a-year job as the bank’s chief financial officer, is the first whistleblower granted protection under the Sarbanes-Oxley Act, thanks to a little-noticed decision by a Department of Labor judge two weeks ago.

“I’m just a person who wanted to stand up and be counted, to stand up for what’s right,” Mr. Welch says. “And when I stood up, I got shot.”

On the surface, Mr. Welch’s accusations of accounting fraud and insider trading at a company with just 600 shareholders shouldn’t matter to most people. But the issue is intensely important to people at its center. To hear them talk, it should matter to others, too.

After all, they say, what happens the next time an ordinary worker at an ordinary company comes across figures and actions that just don’t seem to add up? When that happens, what is that worker, or his boss — or the government, for that matter — supposed to do?

Mr. Welch worked at an accounting practice in 1999, when his boss asked if he would be interested in an opportunity at a small bank the firm audited. Two weeks later, Mr. Welch started at the Bank of Floyd.

At 49, Mr. Welch saw the chief financial officer job as a big step up. With little training for such a role, it was “more or less a swim or drown kind of thing,” he would tell a judge later.

Mr. Welch’s new commute winded for half an hour from his home in Meadows of Dan, Va., through the twisting back roads and pastures of southwest Virginia’s Blue Ridge Mountains to Floyd’s tiny business district.

Until the early 1990s, the bank did business only in Floyd. Then its leaders began pursuing a grander vision, opening four branches and making the bank the sole subsidiary of a new holding company, Cardinal Bankshares.

Despite the bank’s growth, its annual profits still average just more than $2 million — about as much in a year as Citigroup has made in an hour.

It is hard to know precisely when things starting going wrong between Mr. Welch and the men who run Cardinal. Bank President Leon Moore would not be interviewed for this article, referring questions to an attorney for the bank.

But it’s clear the relationship between Mr. Moore and his chief financial officer took a sharp dive after a verbal scuffle late in 2001, according to court papers and interviews with Mr. Welch, bank attorney Laura Effel and the bank’s external accountant, Michael Larrowe.

Cardinal Bankshares’ stock trades on the “bulletin board,” a listing run by Nasdaq that is a haven for mostly small and unknown companies seeking a market for their shares. Most of the bank’s stock is owned by people around Floyd.

In October 2001, one such shareholder walked into the bank and asked about selling her shares.

Mr. Welch and Mr. Moore agreed the accountant could send an e-mail to bank employees asking if they were interested. A bank vice president soon responded and Mr. Welch approved the sale of 26 shares.

Mr. Moore criticized Mr. Welch for allowing a transaction with a top executive so close to the end of the bank’s financial quarter, fearing the appearance of insider trading.

That needled Mr. Welch, who suspected Mr. Moore of having done worse. Mr. Welch says he had noticed what he thought was a pattern of stock purchases by Mr. Moore and a few of his friends that appeared to be timed shortly before key announcements sent the bank’s stock up.

“I asked Leon about this and I didn’t get an answer,” Mr. Welch says.

Miss Effel, the bank’s attorney, said Mr. Welch was wrong about the timing of the stock purchases and denied Mr. Moore was engaged in insider trading.

Mr. Welch “made a lot of assumptions about things he didn’t know,” she says.

Mr. Welch’s doubts went beyond Mr. Moore’s stock purchases. He also informed Mr. Moore about what he thought were problems in the way the bank kept its books. In one such case, the bank had written off two real estate loans for a total of $195,000, assuming it never would get back the money. Later, when the loans were repaid, Mr. Moore had them recorded as income.

Mr. Welch also objected to the way expenses sometimes were recorded in one quarter, then later shifted. The practice appeared to be an unethical attempt to make profits look bigger at times, or at others, setting aside profits for later, Mr. Welch said.

While tensions in the tiny bank began to boil, Congress was crafting a new law in the wake of Enron and other accounting scandals. The principal measure requires top executives of publicly traded companies to personally vouch for the soundness of their financial reports.

But the law also offers new protection for whistleblowers, to encourage workers to shine a light on accounting problems without fear of losing their jobs. Mr. Welch says the parallels between the debate in Washington and his work in Floyd were becoming uncomfortably obvious.

“While we are not an Enron Corp., we have some similarities,” Mr. Welch wrote in a memo to Mr. Moore in January 2002, a copy of which he provided to a reporter. “Their management did not listen to their accounting employees either. I keep hoping this will change.”

When the law went into effect, Mr. Welch told Mr. Moore he would not sign off on financial documents he believed to be deliberately misleading.

Mr. Moore was equally steadfast.

“You must understand,” the bank president wrote in a September 2002 memo to Mr. Welch, “that these reports will be certified.”

On Sept. 17, the bank board’s audit committee — three farmers, a dentist and a local school official — met to hear about the Welch matter. They instructed Mr. Larrowe, the bank’s external accountant, and their attorney to sit down with Mr. Welch and hash out his accusations.

The sit-down was timed for a week later in the bank president’s office. But it was shifted by a few hours, then canceled, after Mr. Welch told the audit committee’s emissaries he would not meet without his attorney present.

Shortly afterward, the board of directors agreed Mr. Welch was guilty of insubordination for refusing to meet without his attorney. David Welch was out of the job.

He filed a complaint with a Labor Department that had not seen anything quite like the 30 or so Sarbanes-Oxley cases on its docket.

Most whistleblower cases before the department’s administrative law judges involve workers in industries like airlines or mining, who claim they were fired for bringing safety concerns to light.

Indeed, as the law required, the case was first assigned to an Occupational Safety and Health Administration investigator. He ruled that although Mr. Welch’s concerns may have been legitimate, the firing was justified because he was insubordinate.

But Stephen L. Purcell, the Labor Department administrative law judge who heard Mr. Welch’s appeal, saw it differently.

“Sarbanes-Oxley was expressly enacted by Congress to foster the disclosure of corporate wrongdoing and to protect from retaliation those employees, officers and directors who make such disclosures,” the judge wrote in a Jan. 28 decision.

He ordered Mr. Welch be awarded back pay and be reinstated in his job at the 50-employee bank, a notion both sides have difficulty envisioning.

The bank plans an appeal, saying Congress’ good intentions have gone awry.

The law “was never intended to protect employees from a dispute with management. We know what it was intended to do. It was really intended to root out corruption in big companies that employ a lot of people,” says Miss Effel, the bank’s attorney.

Mr. Welch sees it differently. Maybe, he says, this is a test from God. If so, it is a test any employee at a company with shareholders — no matter how few — must meet, he says.

“Even if there are three shareholders, or one shareholder, is that shareholder any different from one Enron shareholder or one WorldCom shareholder?” he said. “Somebody has to do it for them and protect their interests.

“And that was my job.”

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