Enron Corp executive Sherron Watkins told lawmakers that Chairman Kenneth Lay was duped by top executives and didn't understand the company's perilous financial state before it slid into bankruptcy.
Watkins, who accused the company of intentionally misleading Enron investors in an anonymous letter to Lay in August, compared ex-Chief Executive Officer Jeffrey Skilling and Andrew Fastow, the company's former chief financial officer, to the "swindlers in `The Emperor's New Clothes' discussing the fine material that they were weaving."
She joined other Enron officials who disputed testimony by Skilling that he didn't know that the partnerships set up by Fastow were used to hide Enron's debt and inflate profits.
"It's my opinion that Mr. Skilling would be very well briefed about these transactions" she told a House subcommittee.
It was common knowledge among company executives that special partnerships used to hedge against losses from the company's investments were backed by Enron's own stock, she said. "I was shocked that people could explain this to me with no concern in their voice," Watkins, an Enron vice president, said.
Yet "the saying around Enron was that heads, Mr. Fastow wins, tails Enron loses," she said. Few questioned the partnerships because Skilling and Fastow "intimidated a number of people into accepting some structures that were not truly acceptable."
A spokesman for Fastow declined to comment. Skilling's lawyer and spokeswoman didn't immediately return calls.
Watkins blamed Enron's accountants at Arthur Andersen LLP and lawyers at Vinson & Elkins LLP for endorsing the transactions.
"I do believe that Mr. Skilling and Mr. Fastow along with two well respected firms did dupe Ken Lay and the board," Watkins said. When she told Lay about her concerns last August, "it is my opinion he did not understand the gravity of the situation the company was in."
Enron's restatement of earnings in early November triggered a collapse of its stock that forced the seventh-largest US company to seek bankruptcy protection on Dec. 2. On Tuesday, the company said shares would be worthless once a reorganization is approved.
Watkins said she was reluctant to confront the two executives because she feared she would lose her job. Fastow had tried to get her fired after learning she had spoken to Lay, Watkins said. Lay transferred Watkins from Fastow's office to another division.
Even so, Watkins said she became concerned about her personal safety. A copy of her Aug. 15 memo to Lay warning of an impending "wave of accounting scandals" was kept in a bank lockbox.
Although she could cite no specific threat, Watkins said she consulted company security. "I did not feel like I had very much support" within the company for questioning the financial statements, she said.
Watkins met three times with Lay, who didn't fulfill his promise to "get to the bottom of my concerns" about the accounting practices, she said. Lay's choice of Vinson & Elkins to conduct a review left her "more than slightly disappointed."
When Vinson & Elkins lawyers briefed her on Oct. 16 they said they used Andersen to review their own audit work for the sake of expediency and had concluded that the accounting on the partnership transactions was appropriate.
"I was highly concerned not only had the Titanic hit the iceberg, but we were already tilting," she said.
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