Enron Corp., the energy trading company after which many competitors tried to model themselves, was being run by “swindlers,” namely former CEO Jeffrey Skilling and ex-CFO Andrew Fastow, a top-level Enron executive told House subcommittee members Thursday.

Skilling and Fastow were the “culprits” behind the questionable off-the-book partnerships that concealed more than $1 billion in debt and led to Enron’s swift collapse last fall, but then-Chairman Kenneth L. Lay didn’t grasp the enormity of what was going on, said Sherron Watkins, who warned Lay last August that the now-bankrupt company was about to “implode” in a wave of accounting irregularities.

Skilling and Fastow were “swindlers in…Emperor’s…clothes,” she told the House Energy and Commerce Committee’s oversight and investigations subcommittee, in her first public appearance on Capitol Hill. “It is my…opinion he [Lay] did not understand the gravity of the situation that the company was in.” She described Lay as “a man of integrity.”

Both men “did dupe Ken Lay and the board,” according to the 42-year old vice president for corporate development. Fastow and Skilling “are highly intimidating,” she testified. “I think they intimidated a number of people into accepting” the otherwise questionable partnerships, which, in addition to hiding debt, inflated corporate earnings and made several Enron executives wealthy.

Barring any other major disclosures about Lay, Watkins’ testimony may be enough to spare Lay from being charged with criminal securities fraud. The law requires prosecutors to show that Lay intended to commit criminal fraud, but Watkins’ testimony clearly disputes such intent on Lay’s part.

When asked who at Enron had the power to withhold details about the partnerships from the board of directors and other top company officials, Watkins told the House subcommittee, “in my opinion, that would be Mr. Skilling.”

Skilling resigned in August 2001, she said, because “in my opinion, he could foresee these problems [with the partnerships], and he wanted to get as far away as possible.” Before Congress last week, Skilling disavowed knowing that the partnerships were intended to hide debt and inflate earnings, and he claimed that Enron was in sound financial shape when he left it.

Watkins further disputed Skilling’s claim that he had not signed off on partnership deals. “Skilling was an intense hands-on manager,” she said, adding that a deal wasn’t considered done if it did not have the requisite signatures. “There was never an instance where approvals were not obtained. While a transaction might be agreed to over the phone, it had to be followed up with an approval sheet. No deal could be done without those approvals.”

Subcommittee Chairman James Greenwood (R-PA) said Watkins’ testimony was an “unvarnished assessment” of what went on inside Enron. While he called her the “lone voice” of doom at Enron, he said Watkins was “not a whistle blower in the conventional sense.” Rather, he called her a “loyal employee” of Enron, who appeared before Congress only after being subpoenaed.

Pressed about why she hadn’t turned whistle blower and reported her concerns about Enron’s finances to the Securities and Exchange Commission, the Federal Bureau of Investigation or the Treasury Department, Watkins said she was afraid that going public “would hasten our demise. I was concerned about Enron’s 20,000 employees, that they might think it was something I had caused.” She said she believed if company executives addressed the problem internally, they “could come clean, but with some contingency plans,” so that the damage would be contained.

Under questioning Watkins said she had placed a copy of her memo to Lay (identifying the problem areas) in a safe deposit box out of concern for her personal safety. Because she had in some measure been responsible for Fastow being fired, “I was concerned he might be vindictive.” House Energy and Commerce Chairman W.J. “Billy” Tauzin (R-LA) advised Watkins to notify the committee if there were reprisals at Enron or as a result of her testimony.

In her last meeting (in January) with former Enron Vice Chairman J. Clifford Baxter, Watkins said he indicated that he had spoken to Skilling “quite often” about the inappropriateness of the partnerships. He particularly complained about the impropriety of Enron’s involvement in Fastow’s Raptor partnership transactions, she noted. During a March 2001 meeting, Baxter told Skilling that Enron was “headed for a train wreck, and it is your job to get out in front of the train [to] try to stop it,” Watkins said. Baxter was found dead last month from a self-inflicted gunshot wound in Houston.

She estimated that Fastow walked away with about $30-$35 million as a result of his dual roles — manager and investor — in the Raptors’ transactions. “The saying around Enron was ‘heads Mr. Fastow wins, tails Enron loses.'”

She described Enron as a “very arrogant place, with a feeling of invincibility.” Watkins said she “never heard any discussions” from top Enron executives about how the partnerships would negatively affect the company’s shareholders.

Watkins also faulted Enron’s ex-auditor Arthur Andersen LLP and former outside corporate counsel, Houston-based Vinson & Elkins (V&E), for not spotting the problems with the controversial partnerships much sooner. “I think they [partnership problems] were very easy to discover,” she said, but the experts were blind to them. Watkins noted that she identified the problems fairly quick.

Following her meeting with Lay last August, during which he vowed to “try to get to the bottom” of Watkins’ concerns, Lay directed Vinson & Elkins to conduct an investigation of the partnerships that was “very limited [in] scope,” according to Watkins. As part of the effort, Vinson and Elkins turned to Arthur Anderson to do a review of the accounting treatment.

“I was more than slightly disappointed” by Lay’s decision, she said, especially since Andersen had signed off on things that it should not have.

Watkins met again with Lay in late October, at which time he told her that he planned to fire both Vinson & Elkins and Anderson, and would establish an internal special investigative committee to look into the partnerships. Watkins told House lawmakers that she thought someone else within the company had made these decisions.

Her testimony paralleled the comments she made in a key Oct. 30 e-mail to Lay in which she recommended that the chairman take a number of steps to do damage control. She urged him to inform the SEC that he and Enron’s board “were duped by a COO [Skilling] who wanted the targets met no matter what the consequences, a CFO [Fastow] motivated by personal greed and two of the most respected firms, AA&Co. and V&E, who had both grown too wealthy off Enron’s yearly business and no longer performed their roles” in compliance with the minimum standards for accountants and attorneys. Skilling was COO before being named CEO.

If Lay failed to follow her advice, she warned him he “will be more implicated in this than is deserved and he won’t get the chance to restore the company to its former stature,” according to the e-mail, which was released by the House Energy and Commerce Committee. “Nobody wants Ken Lay’s head. He’s very well respected in business and the community. The culprits are Skilling, Fastow, [Ben] Glisan and [Richard] Causey, as well as Arthur Andersen and V&E,” Watkins wrote. Glisan was Enron’s former treasurer, and Causey was fired Thursday as the company’s chief accounting officer.

In that e-mail, Watkins recommended that Lay restate the company’s earnings. Last October, the former chairman adjusted Enron’s earnings by $577 million. This subsequently led to a writedown in shareholder equity of more than $1.2 billion.

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