Enron Corp. whistle-blower Sherron Watkins testified she knew things were getting bad at the company when ex-CEO Jeffrey Skilling resigned in August 2001. “He knows it, he knows it’s bad, and he’s getting out,” she told jurors as she testified Wednesday in the trial of Skilling and Enron founder Kenneth Lay.

Watkins joined Enron in 1993, hired by former CFO Andrew Fastow after working for Arthur Andersen LLP and trading conglomerate Metallgesellschaft in New York. Among her duties at Enron, Watkins, a vice president, examined assets in the Raptors partnerships, which were run by Fastow’s staff and created to hedge Enron investments. She left Enron in November 2002 and now is a consultant on corporate governance issues.

Watkins may be best known for writing “the” memo to Lay on Aug. 15, 2001, which described accounting fraud within the company. Named “Co-Person of the Year” by Time magazine in 2002 for her actions at Enron, Watkins also co-authored Power Failure: The Inside Story of the Collapse of Enron. A copy of the now-famous memo is available at https://energycommerce.house.gov/107/news/layletter.pdf.

Watkins, animated and comfortable on the stand, said when she heard Skilling was abruptly leaving in August 2001, it gave her a sense of urgency to leave the company as quickly as possible, and she began interviewing at Enron’s competitors, including Reliant Energy, Dynegy Inc. and El Paso Corp. Skilling’s resignation, meant that what she knew about internal problems at Enron was only the “tip of the iceberg,” Watkins testified.

The day after Skilling resigned, Watkins sent Lay an anonymous memo via a drop box for an all-employee meeting Lay was going to hold. The memo was introduced as evidence Wednesday as “information communicated to Mr. Lay” and not as fact, under a ruling by presiding U.S. District Judge Sim Lake. In part, the memo read, “I am incredibly nervous we will implode in a wave of accounting scandals.” She wrote the business world, in retrospect, would consider Enron’s considerable successes “as nothing more than an accounting hoax.”

Asked by prosecutor John Hueston why she didn’t put her name on the original note, Watkins said, “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…” After telling Lay she had authored the memo, Watkins described a meeting with him in late August 2001 to discuss her concerns. For about 30 minutes, she discussed the seven-page memo with Lay, including a page titled, “Summary of Raptor Oddities,” which she considered the most important information.

“He seemed surprised that these things could be problematic,” Watkins, 47, testified of Lay’s response. But “accounting just doesn’t get that creative.” She wanted to leave the meeting with Lay with one question answered: How was Enron going to pay for the off-the-book partnerships?

“With loans, Enron stock?” Watkins said she asked. “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 [Securities and Exchange Commission] or investors.”

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, which is part of the memo, “slapped him in the face more than anything else.”

Watkins told the jury that Lay “seemed to take me seriously. He asked me whether I went outside the company with my concerns,” and while admitting she had told her mother and a few others, she assumed Lay was talking about the government or the media.

“I said, ‘No, I have not gone outside…’ He asked me whether I would give him a chance to look at these [special purpose entity (SPE)] 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 said Lay told her the company’s general counsel would investigate her claims. However, days later, she said she was shocked to hear Lay’s statements to employees about the solid state of the company.

Following his meeting with Watkins, Lay oversaw an all-employee meeting on Aug. 22, 2001, in which he told employees that “no other shoe” would drop at the company, referring to Skilling’s departure.

Did Lay’s statements alarm you? Hueston asked. “If my allegations were true, then those statements were very false,” Watkins replied.

Within two days of meeting with Lay, Enron sought legal advice “on the consequences of terminating you,” Hueston told her. “I found out in February 2002 [following Enron’s bankruptcy]. It was very shocking,” Watkins said.

Hueston asked Watkins about a conference call Lay and other Enron executives held with the financial community on Oct. 23, 2001 to address concerns over an SEC inquiry into Enron’s SPEs. On the call, Lay told analysts that the Enron board of directors had put in place “controls and procedures” to ensure there was no conflict of interest in Fastow’s dual role as CFO and manager of the SPEs. However, Watkins testified that a review by Enron’s outside counsel Vinson & Elkins had found Fastow’s role posed a conflict of interest.

“Vinson & Elkins had just told me that was the one thing they found that had not been followed,” Watkins testified. She told jurors she listened to the conference call from her office phone and took notes, which were entered into evidence. Watkins also said Richard Causey, Enron’s chief accountant, played down the $500-700 million in quarterly losses tied to an SPE.

Asked by a financial analyst during the conference call what the impact would be to Enron’s earnings if LJM were not included in the numbers, Causey said there would be no impact. “It was a blatant lie,” Watkins testified. “You can’t make statements like that. They’re misleading… They’re lying.”

Watkins admitted under questioning by Hueston that she sold about $30,000 in Enron stock at the end of August 2001, then two more blocks of stock in the first week of October 2001 that earned her $17,000. The stock transfers were not proper, Watkins said. “I had more information than the marketplace did.”

Under cross-examination, Lay lawyer Chip Lewis asked Watkins about her request to Lay to bring in another accounting firm to review Enron’s SPEs. Did she realize it took the Enron board audit committee to hire a new accounting firm? Lewis asked. Watkins replied that she wasn’t talking about hiring a new accounting firm. Instead, she thought another firm should review the partnership issues.

Did she realize Lay could not bring in another accounting firm? Lewis asked.

“That is not a true statement,” Watkins replied. “He could hire whatever accounting firm he wanted.”

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