Risk & Compliance

Defense Tries to Discredit Watkins

A lawyer reportedly testifies that the famed whistle blower's charges were based on "office gossip."
Stephen TaubApril 5, 2006

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A lawyer who had investigated claims of accounting problems at Enron made by Sherron Watkins reportedly disparaged her testimony today during the trial of Ken Lay and Jeff Skilling.

Max Hendrick III, a lawyer with Vinson & Elkins LLP, said many of the famed whistle blower’s assertions were based on “office gossip” and rumors, according to Bloomberg. Defense attorneys called on Hendrick to testify in order to cast doubt on Watkins’s testimony that Lay was skeptical about her accounting warnings and hired Vinson & Elkins to do a “bogus” investigation, the wire service reported.

In late summer 2001, Watkins reportedly had said, she raised questions about the Raptor off-balance-sheet partnerships and was concerned the company would implode from its accounting problems. She said she asked Lay to hire independent lawyers and accountants to review the financial structures. Watkins also recounted her skepticism of Enron’s decision to hire Vinson & Elkins to conduct the review, since the firm had signed off on the Raptors when they were created.

Hendrick said Wednesday that he was hired to do a “preliminary investigation” of Watkins’s allegations. The lawyer testified that he warned Lay that Enron could expect questions about why it would use its stock to support the off-balance-sheet entities, according to the Houston Chronicle, “We wanted to forewarn that this could potentially look bad,” Hendrick said.

The Vinson & Elkins investigation unearthed no accounting irregularities, according to Hendrick, who noted that the Raptors were later unwound. Further, former CFO Andrew Fastow no longer held posts at both Enron and the LJM partnerships, thus ending a conflict of interest, the lawyer reportedly testified.

Defense attorneys contend that Lay relied on advice from others and never misled Wall Street or his employees about the company’s health, the Chronicle explained.

During his cross examination of Hendrick, however, prosecutor John Hueston suggested that Lay used the law firm, which was allegedly close to Enron, to essentially perform a whitewash investigation. Hendrick admitted that because of its prior relationship with the company, Vinson & Elkins “could not be considered independent” in conducting a full-blown investigation, according to The Chronicle.

The paper also noted that Hueston challenged Hendrick for not having the accounting expertise needed to conduct the probe adequately. Hendrick replied that he is a litigator.