Enron whistle-blower takes stand

HOUSTON — Whistle-blower Sherron Watkins testified Wednesday that she tried to alert Enron Chairman Kenneth Lay that the company was in trouble. But he didn't fully respond to her warnings.

After meeting with her, she said, Lay kept making upbeat public statements that were inconsistent with her perception of deep financial troubles.

"I was surprised that ... he could make those statements," she told a federal court jury. "If my allegations were true, then those statements would be very, very false."

Rather than being pulled in to help solve the problem, Watkins testified, she became "a pariah" within Enron — even with people she thought might be allies.

A former Enron financial executive, Watkins raised some of the earliest concerns about improper off-balance-sheet financial arrangements before the energy giant collapsed into bankruptcy in December 2001.

She testified at the trial of Lay and former Chief Executive Jeffrey Skilling on conspiracy and fraud charges arising from the debacle that lost investors billions of dollars and cost thousands of employees their jobs and retirement savings.

Watkins spoke confidently, having testified before Congress, given numerous interviews and co-authored a book on the company's implosion. She made faces and turned cross-examination questions against defense lawyers, stirring laughter among reporters in an overflow room.

"My nickname was buzz-saw," she acknowledged at one point.

After her testimony, the trial recessed until Monday. U.S. District Judge Sim Lake said the break was necessary because the trial is picking up speed and no witness was available today. He predicted the trial would finish by the end of next month.

Watkins' testimony focused on Lay, although she said that when Skilling suddenly resigned in August 2001, she thought it meant he knew the company was in big trouble.

She acknowledged having little direct knowledge of Skilling's involvement. But she disputed his assessment that Enron's fall amounted to a misguided run on a bank. False statements by executives and "scandals cause runs on the bank," she said.

Watkins had much more to say about Lay, though in reference to specific financial vehicles called Raptors — the focus of much her testimony — she acknowledged he had no role in creating them.

She said that after she became aware of problems, she sent Lay a now-famous memo in August 2001 and he agreed to meet with her. He appeared to take her concerns seriously, she said.

Ultimately, though, she became skeptical of his response.

He went against her advice and referred her complaints in an August 2001 memo to the company's law firm, Vinson & Elkins, and its accounting firm, Arthur Andersen, she said.

These were the same firms that helped create the financial vehicles that she was concerned about, she said.

When the report came back saying the problems were mostly "cosmetic," Watkins said she learned they didn't talk to everyone she recommended and did what she called a "bogus" search of employee comments for similar complaints.

After that report, she said Lay chose to try to put the best face on correcting the problems rather than "coming clean."

He decided to "unwind" the vehicles, declaring a loss and writing down equity in a single quarter to resolve the issue.

But she said that wasn't enough. Enron needed to restate earnings back several years, not in one quarter, she said.

"This was a disastrous course of action," she said. "I was stressing throughout these memos that we need to restate the entirety of the financial statements ... I asked him to restate and come clean."

Enron later issued a restatement of earnings back to 1997, but not in response to the particular off-balance-sheet problem she was concerned about.

She said she was not surprised that her memo to Lay and meeting with him enraged Chief Financial Officer Andrew Fastow. Once he learned she was the source of complaints, he wanted her fired and her laptop seized, she said.

Watkins said she had worked with Fastow and decided "he lacked a moral compass." And she thought contacting Lay would protect her.

But she said she was "shocked" to learn that Enron lawyers started investigating the implications of firing her two days after her meeting with him.

On cross-examination, Watkins stuck to her story but had to acknowledge that Lay did some things she asked, including moving her out from under Fastow and doing something — even if she thought it wrong — about off-balance-sheet vehicles.

Conversational when led through her story by prosecutors, Watkins turned combative when challenged by defense lawyers.

Prosecutor John Hueston made a point of asking whether she knew Lay was selling Enron stock as the company spiraled downward.

On cross-examination, defense lawyer Chip Lewis asked her whether she knew that Lay was forced to sell when margin loans were called in.

There were other things Lay could have sold, she replied. "You've got Aspen homes to sell, other assets," she said.

Lewis pointed out that she sold some Enron stock at the same time Lay did and asked whether she thought it was insider trading. She said she hoped not but didn't know. Lewis suggested that maybe Lay didn't know either.

"You didn't commit any crimes at Enron, did you?" Lewis asked.

"I'm not an expert at that," she replied.

Watkins acknowledged that she's made $20,000 to $30,000 each for several dozen lectures since Enron went bankrupt. She denied that her future income depends on helping to convict Lay and Skilling.

"Whether or not they convict in this court, I will still be hired to speak on the leadership failures at Enron," she said. "They remain failed business leaders."

Jason Whitely of KHOU-TV contributed to this report.