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From its inception, AABD has striven to help assure that bank directors are given reasonable protections against personal liability and the tools with which to meet their duties and responsibilities.

The Cardinal Bankshares Corporation case pending in the Fourth Circuit Federal Court of Appeals and at the Department of Labor has the potential of eroding these protections and therefore the AABD has filed amicus briefs in the case.

Cardinal, an SEC reporting company, fired its CFO. The CFO claims that he was fired because he threatened to not sign off on Sarbanes-Oxley financial certifications, allegedly because of concerns about accounting irregularities. Cardinal asserts that he was fired because he refused to meet the investigators retained by Cardinal’s board looking into his allegations under procedures established by the board.

The CFO filed an action with the Department of Labor under Section 806 of Sarbanes-Oxley. Section 806 states that no public company may discharge or in any manner discriminate against an employee because of a lawful act done by the employee to provide information regarding any conduct which the employee reasonably believes constitutes a violation of any SEC rule or regulation.

A Department of Labor investigator found that there was no reasonable cause to believe that Cardinal had discharged the CFO for a legitimate non-retaliatory reason. The CFO then appealed to an administrative law judge, who made an initial determination that the CFO was fired because he was a whistleblower and recommended reinstatement. The Department of Labor has not made a final determination but has asked the Fourth Circuit Court of Appeals to order the CFO’s reinstatement.

The Department of Labor tried to force the CFO’s reinstatement in the Federal District Court for the Western District of Virginia last Fall, but the Court dismissed the case. AABD filed an amicus brief before that court in support of dismissal.

Cardinal’s Board of Directors does not believe that it can reasonably rely of the CFO to perform his duties or on his work product. If the Board cannot reasonably rely on a senior officer but accepts the numbers prepared by the CFO and if the numbers turn out to be wrong, the Board can be held personally liable for the injury suffered as a result of accepting the CFO’s numbers.

Virginia statutes, like virtually all state statutes, provides a “safe harbor” to directors who rely reasonably on officers and others. But directors lose that safe harbor if they rely on those of whom they have knowledge or information that makes reliance unwarranted. Given the key role of a CFO, losing this safe harbor is of immense consequences to bank directors.

AABD is concerned that Cardinal’s board may be faced with the prospect of being ordered to rehire a CFO in whom they have no confidence. It is exacerbated by the fact that the order may be based on an interim decision of an administrative law judge.

AABD is also concerned with the fact that Section 806 grants the Department of Labor the administrative power, subject to only limited review by a court of law, to order reinstatement of an officer in whom the board has no confidence. AABD believes that the Board of Directors (and its Audit Committee) of a public company should only hire those in whom they can reasonably rely, and to force a public company to hire someone in whom the board has no confidence violates a fundamental fiduciary standard that is accepted by all or virtually all of the 50 states. Therefore, AABD will work toward having Congress amend Section 806 to remove jurisdiction from the Department of Labor, and to eliminate the possibility that a company will be forced to rehire a person in whom they cannot reasonably rely.