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Lay 'winced' at whistle-blower's words

After meeting, Enron CEO said to have sought advice on terminating Watkins

Associated Press

HOUSTON -- Sherron Watkins, the former Enron Corp. vice-president who warned higher-ups the company was a house of cards ready to fall, testified yesterday she discussed her concerns with company founder Kenneth Lay only to learn months later that her job was threatened for speaking up.

Taking the stand at the fraud and conspiracy trial of Mr. Lay and former chief executive officer Jeffrey Skilling, Ms. Watkins told how she met with Mr. Lay after taking to heart his encouragement that Enron employees could bring any problems directly to him.

"He seemed surprised that these things could be problematic," the 47-year-old accountant told jurors about her Aug. 22, 2001, meeting with Mr. Lay, during which she assailed the veracity of crumbling financial structures that were intended to lock in values of investments and assets.

The off-the-books structures, known as Raptors, were intertwined with partnerships run by then-chief financial officer Andrew Fastow, who was Ms. Watkins' boss. Ms. Watkins said she feared the structures would harm the company because they owed Enron hundreds of millions of dollars and contained only falling Enron stock to repay the debt.

"Accounting just doesn't get that creative," she testified.

She said she wanted to leave Mr. Lay with one question answered: How are they going to pay for it?

"With loans, Enron stock?" she said. "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 or investors."

The meeting came in the wake of an anonymous memo she sent days earlier to Mr. Lay. She subsequently acknowledged her authorship.

"I am incredibly nervous we will implode in a wave of accounting scandals," she said, reading yesterday from the memo hailed later by the U.S. Congress as prescient, adding that the business world in retrospect would consider Enron's considerable successes "as nothing more than an accounting hoax."

At that meeting, Mr. 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, she said, "slapped him in the face more than anything else. I did most of the talking," she added.

Within two days after her session with Mr. Lay, Enron sought advice "on the consequences of terminating you," federal prosecutor John Heuston told her.

"I found out in February, 2002. It was very shocking," she said.

Ms. Watkins also said she sold some $30,000 (U.S.) in Enron stock at the end of August, 2001, then two more blocks of stock in the first week of October that garnered her $17,000, transactions she acknowledged were not proper.

"I had more information than the marketplace did," she said under questioning from Mr. Heuston.

Ms. Watkins joined Enron in 1993, hired by Mr. Fastow after working for Arthur Andersen LLP. She examined assets in the Raptors, run by Mr. Fastow's staff and created to hedge Enron investments, that were bleeding hundreds of millions of dollars at the company's expense.

Mr. Watkins, who gained public adulation for testimony before a congressional committee probing the Enron collapse, appeared confident yesterday, speaking quickly and gesturing to the jury.

The Fastow-run partnerships, Mr. Watkins said, had "no skin in the game. They've gotten money out. They've got no legal obligation to put more money in." She said her understanding also was the structures were "under water."

She said Mr. Lay asked her to give him a chance to "look into these structures." She later talked to Enron's law firm and in-house legal counsel. "I probably did most of the talking," she said of her three-hour session with lawyers. "I brought with me the same memos I gave Ken Lay."

She left in November, 2002, and now is a consultant for corporate governance issues.

© The Globe and Mail

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