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Watkins: Lay was duped
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February 14, 2002: 5:42 p.m. ET
Whistleblower sold $31,000 Enron stock after told Lay of Enron problems.
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NEW YORK (CNN/Money) - Congressional investigators hailed Enron Corp. executive Sherron Watkins as a heroine Thursday as she accused two top company officials, along with Enron's auditors and law firm, of duping former Chairman Kenneth Lay about the company's risky accounting practices.
Watkins, who blew the whistle on Enron after trying to alert Lay about problems last summer, told a House panel that former Enron CEO Jeff Skilling and former chief financial officer Andrew Fastow, deceived Lay and the board of directors about improper -- and possibly illegal -- partnerships that allegedly concealed over $1 billion in debt.
"I do believe that Skilling and Fastow along with these two respected firms did dupe Lay and the board," Watkins said, referring to Enron's law firm, Vinson & Elkins, and its accounting firm, Arthur Andersen.
Watkins told the panel that she tried to tell Lay of her worries about the company's accounting last August, after he reassumed the role of CEO following the resignation of Skilling, who said he was leaving personal reasons.
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Enron executive Sherron Watkins told Congress she warned former Chairman Kenneth Lay about the company's finances. | |
"Lay was back at the helm as CEO and in my opinion he didn't understand the gravity of the situation the company was in," she said.
Asked by Rep. Billy Tauzin (R-La.) if Lay just didn't get it, Watkins replied: "No, he didn't."
Lay relied on Skilling to manage the details of Enron's many partnerships, which a key report from the company's independent directors found were used to inflate profits and improperly hide debts.
"From all the record and presentations that I ever viewed, Mr. Skilling was supposed to be an integral part of the controls and the review process with the LJM transactions," she said. LJM is one of Enron's many off-the-books partnerships.
Congressional investigators praised Watkins, unlike other Enron executives who were met with scorn.
"Ms. Watkins is not a whistleblower in the conventional sense," said Rep. James Greenwood, R-Pa., chairman of the House Energy and Commerce investigative subcommittee. "She was and is a loyal company employee who sought valiantly and, sadly, in vain to get the people in charge to face the facts and make the hard choices needed to save the company."
Watkins, self-assured and very detailed as she answered a barrage of questions, has been with Enron since 1993 when Fastow hired her to work at the Houston-based company, once the nation's seventh biggest before it collapsed under its debts and filed for bankruptcy last December.
Watkins, a CPA who worked at Andersen for 11 years before joining Enron, said she met with Lay a total of three times in 2001. Last August, Watkins gave the CEO five memos that expressed her concerns with Enron's accounting practices, she said. Lay promised he would "get to the bottom" of Enron's problems.
Lay also later said he was going to fire Vinson & Elkins and Andersen. Instead, Lay asked Vinson & Elkins to investigate the matter, Watkins said.
In her testimony, Watkins said Andersen was culpable since the accounting firm had approved Enron's partnerships.
"Andersen signed off on something they shouldn't have," she said. "They should have known if (they were) signing off on it."
Watkins's August letter to Lay initiated an investigation into its partnerships. Another Watkins memo to Lay, from October, outlined "disclosure steps to rebuild investor confidence" in which she said he should "come clean and admit problems."
But Watkins never went outside Enron, to either the Securities and Exchange Commission or other federal agencies, with her concerns because "I didn't want to hasten our demise," she said.
In fact, Watkins sold $31,000 in Enron stock in late August - after sending Lay her memo - and cashed in $17,000 in Enron cash option in October.
Enron's questionable accounting eventually led to its collapse. In December, Enron filed the biggest bankruptcy in U.S. history and fired Andersen as its auditors in January.
Enron is under scrutiny from the Justice Department, the Securities and Exchange Commission and numerous congressional committees, and the company is being sued by scores of former employees. Thousands of those workers lost their retirement savings because they invested heavily in Enron stock.
Last June, Watkins began working under Fastow in corporate development. Within weeks, Watkins, who was charged with reviewing all assets Enron considered for sale, realized the impropriety of certain transactions, she said.
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The atmosphere was electric. It was fun. You were surrounded by bright people, energized to change the world. You felt somewhat invincible.
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Sherron Watkins |
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Watkins said she was "highly alarmed" by the information she was seeing as Enron was using its own stock, in effect, to generate gains or avoid losses on its income statement. Under one transaction, an Enron "special purpose" partnership called "Raptor" owed the company $750 million. But Raptor had no viable business and because it was a partnership, Enron shareholders would bear the brunt of the loss, Watkins said.
"Raptor owed Enron $750 million and (it wasn't) a third party that bore the loss," she said.
Some Enron employees, such as current chief operating officer Jeff McMahon, had complained about the questionable accounting practices and the fact that Fastow had a stake in some of the partnerships, she said.
"I was shocked that people could explain this to me with no concern in their voice," she said. "For the most part, people seemed to think there was an accounting rule that made this acceptable."
However, Watkins said she never went to Skilling with her concerns because she was afraid she would lose her job. Last week, Skilling testified before Congress that he did know that the partnerships were used by Enron to inflate profit and hide debt.
But Watkins countered that Thursday, saying Skilling was a very hands-on manager. "People close to [Skilling] ... had complained [to him] and he had done nothing," Watkins said.
When she told Lay of her concerns, she added, Fastow found out and wanted her fired and her computer seized.
She said that while Enron was known as a fun and innovative company, it had some very competitive people who, at times, made it a difficult place to work.
"Enron was voted one of the best places to work. It was the job to have in Houston. The atmosphere was electric. It was fun. You were surrounded by bright people, energized to change the world. You felt somewhat invincible," she told the lawmakers.
But she also said that some of her co-workers were "arrogant." (301KB WAV)(301KB AIFF)
Months before Enron filed for bankruptcy, Watkins declared in a memo that she was "incredibly nervous that we will implode in a wave of accounting scandals." She added in that August memo -- sent to Lay -- "It sure looks to the layman on the street that we are hiding losses." 
Associated Press contributed to this report.
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