Enron Employee Warned Chairman Lay

A high-ranking Enron corporate officer warned Chairman Kenneth Lay in August of last year that the energy-trading giant was headed for disaster, two congressmen investigating the financial scandal revealed Monday.

"I am incredibly nervous that we will implode in a wave of accounting scandals," Sherron Watkins, Enron's vice president of corporate development, wrote Lay in a seven-page unsigned letter. "It sure looks to the layman on the street that we are hiding losses."

A "veil of secrecy" shrouded Enron's complicated partnerships, Watkins wrote, shifting huge amounts of Enron's debt off the company's accounts, even as Lay was telling the 20,000-strong workforce that Enron's growth "has never been more certain."

Watkins wrote that several other high-ranking employees shared her concerns, "consistently and constantly" questioning the company's accounting practices — among them CEO Jeffrey Skilling, who resigned in August.

In a telephone interview Monday night, Watkins' attorney, Philip Hilder, said Enron had responded to the warning letter, but he provided no details.

Reps. Bill Tauzin, R-La., chairman of the House Energy and Commerce Committee, and James Greenwood, R-Pa., a member of the committee, released excerpts from the letter after having demanded Enron's records relating to Watkins' allegations. Four other congressional committees are also probing the Enron collapse.

Houston-based Enron, once the seventh-largest American company with a market capitalization of $70 billion, filed for bankruptcy on Dec. 2 after a takeover deal by a much smaller rival fell through, ending six weeks of financial turmoil. It was the largest corporate bankruptcy in American history.

High-ranking officers had recently sold off millions in stock as the share price slid from about $90 to under a dollar, but employees whose 401(k) retirement accounts were heavily invested in company stock were barred from divesting, wiping out thousands of life savings.

The case has taken on political implications in the past two weeks as Enron's connections to prominent elected officials of both parties, but especially to the administration of President George W. Bush, who shared a friendship with Lay, have been scrutinized.

Attorney General John Ashcroft recused himself from the Enron investigation last Friday, citing a company donation to his failed 2000 campaign to retain his Senate seat from Missouri.

Later last Friday, it was also revealed that Lay had called Treasury Secretary Paul O'Neill and Commerce Secretary Don Evans during the crisis preceding the bankruptcy declaration, asking for federal help to rescue the company.

O'Neill and Evans refused to help, despite Lay pointing out that the government in 1998 had stepped in to save Long-Term Capital Management, an investment group whose imminent collapse was seen by Clinton administration as a threat to the national financial system.

"Companies come and go," said O'Neill on Fox News Sunday this weekend, saying that bailing out Enron had never been a serious possibility.

Enron's collapse has hurt both individual investors and big pension funds around the country. Florida's fund, for example, has lost more than $300 million. Also roiling the financial system was the impact on major banks, which had lent billions to the high-flying company that had been a darling of Wall Street and viewed as a technological innovator.

In related developments:

• Reps. Tauzin and Greenwood said senior Enron officials instructed the law firm of Vinson & Elkins to review Watkins' allegations, but told the outside attorneys not to second-guess accounting advice and not to analyze the questioned transactions in detail.

• Enron's auditing firm, Arthur Andersen LLP, said an in-house lawyer spelled out Andersen's document destruction policy for auditors on Oct. 12, four days before Enron announced third-quarter losses of hundreds of millions of dollars. The Andersen lawyer, Nancy Temple, e-mailed the policy to a partner in the firm's office in Houston, where Enron is based.

Andersen is under scrutiny for destroying thousands of documents related to Enron last fall.

• Enron's Washington attorney, Robert Bennett, who defended President Clinton during the Whitewater investigation and the Monica Lewinsky scandal, said Lay will testify Feb. 4 before Congress.

— The Associated Press contributed to this report.