Risk & Compliance

Watkins: Lay Lied

Enron's CEO misled investors, the author of the famous Enron whistleblower memo testified.
Stephen TaubMarch 15, 2006

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Celebrated Enron Corp. whistleblower Sherron Watkins didn’t disappoint onlookers when she took the stand in the trial of former Enron executives Kenneth Lay and Jeffrey Skilling, dropping bombshell after bombshell.

It was Watkins who wrote the now-famous memo to Lay on Aug. 15, 2001, describing her concerns about the company’s accounting practices. After the company filed for bankruptcy, she resigned and co-wrote a book, Power Failure: The Inside Story of the Collapse of Enron. In 2002, she was named Time magazine’s Person of the Year.

Watkins told the jury she was concerned when Skilling chose to leave after serving as CEO for only six months, and said she felt she needed to leave quickly too, according to trial coverage by the Houston Chronicle.

Watkins reportedly said she already had serious concerns about what she perceived as “accounting fraud” going on at Enron. “He knows it, he knows it’s bad and he’s getting out,” she said she recalled thinking on Aug. 15, 2001, the day Skilling left for what he described as “personal reasons,” according to the Chronicle.

“It confirmed to me that there were problems at Enron and when the captain of the ship abandons Enron there are more problems,” she added, according to the paper.

The following day, she testified, she sent an anonymous memo to Lay via a drop box at an all-employee meeting he held that day, according to the Chronicle.

Asked why she didn’t identify herself in the memo, Watkins reportedly replied:
“All of this was happening very fast and I knew I was delivering some very alarming information and didn’t want to risk putting my name on it.” That memo, the Chronicle notes, warned Lay that Enron was likely to “implode” as a result of the accounting scandals.

After a bench conference, the paper reported, Judge Sim Lake warned that the memo should be treated as “information communicated to Mr. Lay” and not as fact.

Watkins then went through the seven-page memo she discussed with Lay during a late August 2001 meeting, including a page she said she placed on top entitled “Summary of Raptor Oddities,” because she considered it to be the most important, according to the Chronicle.

Lay “winced” at some of her presentation, she reportedly told jurors, including a quote from another employee that she included in the memo, which read “I wish we would get caught, we are such a crooked company.”

Watkins also expressed to Lay her concerns about the Raptor deals created by then-CFO Andrew Fastow. She reportedly told jurors that during the meeting, “I did most of the talking. He seemed surprised that these things could be a problem, given that Arthur Andersen (approved them).”

Watkins also told the court that Lay “seemed to take me seriously.”

“He asked me whether I went outside the company with my concerns,” she added, noting that she also told her mother and a few others about the problems. However, she said she assumed Lay was more concerned whether she had gone to the press or governmental authorities.

“I said ‘No, I have not gone outside,’” Watkins testified. “He asked me whether I would give him a chance to look at these structures. I said ‘Yes,’ I was here to have him look at it … and he said, ‘What can I do for you?’ I was uncomfortable working with Andy (Fastow) and asked him could I be transferred to human resources until another job came up.”

Watkins then said that Lay assured her he would have the general counsel’s office investigate her claims, according to the Chronicle. However, several days later, at an all-employee meeting, Lay told employees that “no other shoe” was to drop, according to her account.

Asked whether Lay’s statements alarmed her, Watkins reportedly responded, “If my allegations were true than those statements were very false.”

She also said that Fastow tried to get her fired and have her computer destroyed after learning about her memo. Watkins said the head of human resources suggested she copy her files to another computer and give Fastow “an empty laptop,” according to the paper.

Later, Watkins reportedly discussed an Oct. 23, 2001 conference call with analysts to soothe investor concerns over an SEC inquiry into Fastow and his LJM partnerships, calling statements made by Lay “a blatant lie.”

She recalled that Lay told analysts that the energy company’s board put in place “controls and procedures” that assured no conflict of interest in Fastow’s role as both CFO and manager of the partnerships, according to the Chronicle.

“Vinson & Elkins [Enron’s outside law firm] had just told me that was the one thing they found that had not been followed,” Watkins said, according to the paper.

And, although she said she told Lay in her meeting with him in August 2001 that the losses for Enron tied to the LJM partnerships were $500 million to $700 million, she said that on the conference call, Enron chief accountant Rick Causey said there would be no impact to Enron’s earnings if the partnership were not included in Enron’s numbers.

“It was a blatant lie,” Watkins reportedly testified, adding that “you can’t make statements like that … they’re misleading, they’re lying.”

According to the Chronicle’s coverage, Chip Lewis, an attorney for Lay, questioned Watkins about how she presented the information to Lay, suggesting she did make it clear that the activity she had described was illegal.

“He (Lay) asked you if there was anything that you uncovered that indicated an accounting fraud?” Lewis reportedly asked.

“I don’t recall him using the word fraud,” Watkins replied to Lay’s lawyer.

According to the Chronicle, Watkins said she told Lay that if the partnership deals came to light, they “wouldn’t look good to the SEC or investors” because the accounting “was problematic.”

Lewis countered: “Did he ask you about fraud?” And she responded, “He did not ask that question.”

Lewis then asked, “Did he ask you if you found anything illegal?”

“He did not ask that question,” Watkins reportedly replied.

“I did not use the word fraud in that meeting,” she said in a reportedly testy exchange. “I was sure indicating that I thought Skilling and Fastow had crossed the line.”

Watkins testified that her goal of the meeting with Lay was to get an outside firm to investigate Enron, but told him “not to use Vinson & Elkins,” the firm which Enron ended up using, according to the report.

When Lewis asked Watkins whether Vinson & Elkins was one of the top firms around, she replied, “Not anymore.”