Enron officials `duped' Lay on finances, Congress told

Skilling and Fastow called main culprits

February 15, 2002|By Marego Athans | Marego Athans,SUN NATIONAL STAFF

WASHINGTON - Former Enron Chairman Kenneth L. Lay was "duped" by key executives who set up illegitimate partnerships that inflated profit statements, deceived investors and ultimately brought down the energy giant, a company vice president testified yesterday.

Sherron C. Watkins, the Enron vice president and accountant who warned Lay in a now-famous August memo that the company would "implode in a wave of accounting scandals," testified that Jeffrey K. Skilling and Andrew S. Fastow were the main culprits in the accounting schemes that allowed the company to claim inflated profits of more than $1 billion.

Skilling was Enron's chief executive officer and Fastow was chief financial officer.

Lay, who invoked his Fifth Amendment right against self-incrimination before a Senate committee Tuesday, as did Fastow last week, did not aggressively pursue her warnings and relied instead on bad advice, Watkins said.

"It is my humble opinion that [Lay] did not understand the gravity of the situation the company was in," she said.

Watkins also blamed the company's auditors, Arthur Andersen - where she once worked - and Enron's law firm, Vinson & Elkins, for approving transactions that hedged positions with Enron's own stock, essentially meaning that Enron was dealing with itself.

"I do believe that Mr. Skilling and Mr. Fastow, along with two very well respected firms, did dupe Ken Lay and the board," Watkins told members of the House Energy and Commerce subcommittee.

"I think Mr. Skilling and Mr. Fastow are highly intimidating, very smart individuals," said Watkins, Enron's former vice president of corporate development. "And I think they intimidated a number of people into accepting some structures that were not truly acceptable."

Plainspoken, earthy and at times sharp in her criticism of her former bosses, Watkins testified that when Fastow learned that she had taken her complaints to Lay, he had wanted her fired and her computer seized.

When asked by committee members what she thought of Skilling's testimony last week that he knew of no inappropriate transactions at Enron and thought the company was in good financial shape when he quit Aug. 14, she quoted Skilling's statement in a company newsletter last year.

Asked to repeat the best advice he had ever received, his reply was, "If it doesn't make any sense, don't believe it," Watkins said.

Skilling's testimony has been contradicted by a number of Enron officials who testified before congressional committees and spoke with board investigators for a recent report that detailed the improprieties.

Watkins added to that chorus yesterday, testifying that a friend of J. Clifford Baxter, Enron's former vice chairman who committed suicide last month, told her that Baxter had warned Skilling in March about serious problems at the company. According to the friend, Baxter told Skilling that the company was "headed for a train wreck, and it is your job to go out in front of it and try to stop it."

Skilling's attorney, Bruce Hiler, said yesterday that Watkins' testimony was based on "hearsay, rumor or her opinion."

"Ms. Watkins is entitled to her opinions," Hiler said. "She is not entitled to her own facts."

However, congressmen lined up to praise her courage. Rep. Billy Tauzin, a Louisiana Republican, wished her a happy Valentine's Day.

"You've demonstrated for us ... a different definition of corporate loyalty," Tauzin said. "That is ... responsibility to shareholders. I hope the sons and daughters of American citizens follow your example."

Watkins, 42, an accountant from a small Texas town who trained in New York, became a central figure in the Enron investigation last month when investigators found her memo raising concerns about the transactions known as Raptors, made by one of Fastow's partnerships.

She subsequently met with Lay on Aug. 22 and twice in October. Taking her concerns to Skilling or Fastow would have been a "job-terminating move," she said.

"My main point to Mr. Lay was that, by this time, Raptor owed Enron in excess of $700 million under certain hedging agreements. My understanding was that the Raptor entities basically had no other business aside from these hedges; therefore, they had collectively lost over $700 million. I urged Mr. Lay to find out who lost that money.

"There was not an outside party that bore that loss."

Lay seemed to take the matter seriously, Watkins said. "In fact, when he read the quote that I put in that memo about the manager-level employee saying, `We're such a crooked company,' he winced. You know, that seemed a painful comment to him."

Lay asked Watkins if she had shared the information with the Securities and Exchange Commission or the press - which she had not - and asked her for time to investigate. He granted her request for a job transfer so she would no longer work for Fastow.

She did not go public with the information, she testified, because she didn't want to hasten the company's demise.

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