Watkins sheds light on saga today
Writer of memo that warned Lay of company's doom will take the stand
By TOM FOWLER, Houston Chronicle

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"Has Enron become a risky place to work?"

With that question in an August 2001 memo, Sherron Watkins set herself on the path from being one of many vice presidents at Enron to one of its best-known.

Watkins asked the question in her now-infamous memo to then-Enron Chairman and CEO Ken Lay on Aug. 15, the day after Jeff Skilling left the company.

In the memo, she fretted that the company would "implode in a wave of accounting scandals" because of a laundry list of concerns. The memo proved prophetic, as the company's bankruptcy followed a few months later and Lay and Skilling now face charges related to some of the issues.

No 'whistle-blower'
When she takes the stand as a government witness today Watkins, 46, is likely to describe both her perspective on the troubled deals as they relate to Skilling as well as her interactions with Lay in late 2001 and how he reacted to her information.

The former Arthur Andersen accountant is often labeled a "whistle-blower," but it's a description she technically didn't fit when she wrote the memo, and one she has said she never sought.

Rather she was just an employee who approached her superiors about activity she thought was illegal and potentially damaging to the company.

Her memo was discovered by investigators sifting through Enron documents after the bankruptcy and released by a congressional committee in early 2002. The media put the whistle-blower label on her as a shorthand to describe her role in the unfolding drama. It stuck.

Deals raised concern
An Enron employee since the early 1990s, Watkins found her way into the heart of the saga in mid-2001 when she left the company's troubled Internet division to go back to work for a former boss, Chief Financial Officer Andrew Fastow. She was asked to look for Enron assets that Fastow's LJM partnerships could purchase when in July 2001 she began to see problems with some of the existing deals.

This included issues that have already come up in trial, such as the Raptor transactions. She also noticed problems with trading positions held by Enron's retail division, Enron Energy Services and Enron's international assets.

When Skilling left the company unexpectedly in mid-August, Watkins decided to take Lay up on his offer for employees to submit questions or concerns in writing that he would address in an all-employee meeting. She submitted her concerns anonymously, but later decided to come forward. Watkins met with Lay on Aug. 22 and brought several more pages of detailed concerns.

Watkins told Congress in early 2002 that she thought Skilling and Fastow "did dupe Lay and the board," but that when she told Lay of the problems "he did not understand the gravity of the situation."

Lay had the law firm Vinson & Elkins investigate Watkins' claims, but the firm later said in a statement it was told "not to conduct a detailed examination of relevant transactions and not to second-guess Enron's accountants."

The government contends that Lay was well-aware of the problems the company faced in late 2001 but that he made misstatements to employees and analysts in September, October and November 2001.

tom.fowler@chron.com

Watkins: I Tried to Warn Lay About Enron
By MICHAEL GRACZYK, Associated Press Writer
Wed Mar 15, 3:19 PM ET

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Sherron Watkins, the former Enron accountant who warned higher-ups the company was a house of cards ready to fall, testified Wednesday she discussed her concerns with company founder Kenneth Lay only to learn months later that her job was threatened for speaking up.

Taking the stand at the fraud and conspiracy trial of Lay and former Chief Executive Jeffrey Skilling, Watkins told how she met with Lay after taking to heart his encouragement that Enron employees could bring any problems directly to him.

"He seemed surprised that these things could be problematic," the 47-year-old accountant told jurors about her meeting with Lay, during which she assailed the veracity of crumbling financial structures that were intended to lock in values of investments and assets.

The off-the-books structures, known as Raptors, were intertwined with partnerships run by then-Chief Financial Officer Andrew Fastow, who was Watkins' boss. Watkins said she feared the structures would harm the company because they owed Enron hundreds of millions of dollars and contained only falling Enron stock to repay the debt.

"Accounting just doesn't get that creative," she testified.

She said she wanted to leave Lay with one question answered: How are they going to pay for it?

"With loans, Enron stock?" she said. "If they're going to pay us from our shares, then I don't think we'd have a fact pattern that would look good to the SEC or investors."

The meeting came in the wake of an anonymous memo she sent days earlier to Lay. She subsequently acknowledged her authorship.

"I am incredibly nervous we will implode in a wave of accounting scandals," she said, reading Wednesday from the memo hailed later by Congress as prescient, adding that the business world in retrospect would consider Enron's considerable successes "as nothing more than an accounting hoax."

At that meeting, Lay "winced" when she read him comments she received from an unnamed fellow Enron employee who wrote her: "I wish we would get caught. We're such a crooked company."

That message, she said, "slapped him in the face more than anything else."

"I did most of the talking," she added.

Within two days after her session with Lay, Enron sought advice "on the consequences of terminating you," federal prosecutor John Heuston told her.

"I found out in February 2002. It was very shocking," she said.

Watkins also said she sold some $30,000 in Enron stock at the end of August 2001, then two more blocks of stock in the first week of October that garnered her $17,000, transactions she acknowledged were not proper.

"I had more information than the marketplace did," she said under questioning from Heuston.

Watkins joined Enron in 1993, hired by Fastow after working for Arthur Andersen LLP and German trading conglomerate Metallgesellschaft in New York. She examined assets in the Raptors, run by Fastow's staff and created to hedge Enron investments, that were bleeding hundreds of millions of dollars at the company's expense.

Watkins, who gained public adulation for her whistleblowing, testified before a congressional committee investigating the Enron collapse and later collaborated on a book about the Enron collapse, appeared confident Wednesday, speaking quickly and gesturing to the jury.

The Fastow-run partnerships, Watkins said, had "no skin in the game. They've gotten money out. They've got no legal obligation to put more money in." She said her understanding also was the structures were "under water."

She said Lay asked her to give him a chance to "look into these structures." She later talked to Enron's law firm and in-house legal counsel.

"I probably did most of the talking," she said of her three-hour session with lawyers. "I brought with me the same memos I gave Ken Lay."

She said her job prospects outside Enron, which seemed bright and which she pursued because she wanted out of Enron, dried up after the company's third-quarter 2001 earnings showed losses of over $600 million, included a $1.2 billion writedown and heightened questions about its accounting practices.

"I was shocked this was happening," she said.

Meanwhile, at Enron, "I was kind of being bounced around a lot," she said.

She left in November 2002 and now is a consultant for corporate governance issues.

AP Business Writer Kristen Hays contributed to this story.

Enron whistleblower Watkins says internal probe was 'bogus'

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The famed "whistleblower" in the Enron scandal, Sherron Watkins, testified that top executives launched a "bogus" internal investigation just before the company's implosion.

Watkins, author of the now famous memo that warned Enron would "implode in a wave of accounting scandals," appeared as a prosecution witness in the fraud and conspiracy trial of her former bosses, Jeffrey Skilling and Kenneth Lay.

Looking notably more nervous than in previous appearances on television and before Congress, Watkins detailed how she investigated accounting irregularities at Enron and presented her findings to Lay four months prior to the energy giant's collapse in 2001.

Watkins' testimony could be damaging to the defense because it corroborated much of what Andrew Fastow, Enron's disgraced chief financial officer, said on the stand last week.

Unlike Fastow, Watkins, an executive and certified accountant who was one of Time Magazine's Persons of the Year in 2002, has never been charged nor confessed to a crime.

Watkins is a prominent witness against Lay and Skilling, both former CEOs at Enron who face lengthy prison terms if convicted in the trial that began in January.

Skilling faces 31 counts of conspiracy, securities fraud and insider trading. Lay, the Enron chairman who took back the CEO post after Skilling's departure in mid-2001, faces seven counts of conspiracy and securities fraud.

Wide-eyed with a determined delivery, Watkins told jurors that Enron's accounting was not just aggressive but outright fraudulent.

Referring to shady financing vehicles such as LJM and Raptors that hedged Enron's investments using the company's own stock, she said, "We were doing business with ourselves and you just don't do that."

Consulting copies of memos and spreadsheets she carried into a private meeting she had with Lay in August 2001, Watkins recounted how she expressed her dismay that Enron's off-the-books partnerships had lost close to 500 million dollars -- half Enron's profits that year.

Watkins said she thought Lay "took my concerns seriously" and would launch an investigation.

Lay hired the law firm Vinson and Elkins to look into her allegations. However, Watkins said "the investigation was bogus" because the attorneys had helped create the shady partnerships and did not interview Enron employees knowledgeable about them.

She added it was not until she testified before Congress two years later that she learned Lay had also sought the advice of Enron's in-house counsel about firing her.

"I was nauseous," she said, because she never "thought he'd try to fire me and dump me in the street."

In her meeting with Lay, Watkins said she told him that he couldn't count on Enron auditor Arthur Andersen's blessing of the off-the-books partnerships because the now-defunct firm "had problems with shoddy standards," in reference to another accounting failure at a company called Waste Management.

Furthermore, she said Lay visibly winced when she told him that an upper level manager had told her he hoped Enron would get caught for its crooked accounting.

The prosecution also introduced into evidence records that showed Lay sold millions of dollars of Enron stock in the days following his meeting with Watkins. At the same time, Lay gave glowing reports of the company's financial health to employees, investors and stock analysts.

During often querulous cross-examination, Lay's lawyer, Chip Lewis, tried to mitigate the damage by getting Watkins to admit that she had not used the word "illegal" when she told her boss about her concerns. Lewis also pressed her to acknowledge that his client never fired her.

But the heated exchanges between the two may work against the defense because of Watkins' popularity.

Under questioning from Skilling's lawyer, Watkins acknowledged that she had little direct contact with his client at Enron. She also admitted that some of her Enron colleagues referred to her as the "Buzzsaw" because she was abrasively forthright.

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