Enron Whistle-Blower to Be Star Witness Before House Subcommittee

The Enron Corp. executive who warned the company's chairman of dubious accounting practices last summer is appearing before Congress as a willing and knowledgeable witness following a parade of top Enron officials who have refused to answer questions.

Sherron Watkins told Kenneth Lay she worried about the fate of her company and her own career as word spread in Enron's glass tower in Houston about financial improprieties that ultimately pushed the huge energy trading company into the biggest bankruptcy in U.S. history on Dec. 2.

Now members of a House investigative subcommittee want to know whether Watkins was brushed off after she alerted Lay and others that the company was mired in dodgy accounting practices. Lay resigned following Enron's collapse.

She questioned the use of a complex web of partnerships, run by Enron executives who profited hugely from them, to keep hundreds of millions of dollars in debt off the company's balance sheet and hidden from investors and federal regulators.

Watkins was testifying Thursday under a "friendly subpoena" before the House Energy and Commerce subcommittee on oversight and investigations.

"I think she's going to tell everything she knows," her sister, Julie Reagan, said in an interview Wednesday. "She doesn't beat around the bush a lot. She says what she thinks."

Watkins, 42, is a vice president for corporate development at Enron.

Months after her initial plea to Lay, when Enron was crumbling as she had predicted, Watkins again warned him. She told Lay on Oct. 30 that "we need to come clean" and disclose the heavy financial losses from the partnerships.

She also advised Lay on how to shift blame to others, naming Enron's then-chief executive officer Jeffrey Skilling, chief financial officer Andrew Fastow and chief accounting officer Rick Causey.

She wrote that Lay should "admit that he trusted the wrong people," that he relied on Skilling, his hand-picked successor, Fastow and Causey "to manage the details."

Her warning came a little more than a week before Enron reported the huge losses, which prompted an inquiry by the Securities and Exchange Commission. The Justice Department is pursuing a criminal investigation as Congress presses a wide-ranging probe of Enron and its longtime auditor, the Arthur Andersen firm, which blessed Enron's accounting and whose employees destroyed numerous Enron-related documents sought by federal regulators.

Earlier, Watkins' six-page memo dated Aug. 22, 2001, which she hand-delivered to Lay, was rich in detail about problems with the partnerships, with which she was familiar. She warned that the company could "implode in a wave of accounting scandals" around the time Lay was telling employees that growth of the company "has never been more certain."

"My eight years of Enron work history will be worth nothing on my resume, the business world will consider the past successes as nothing but an elaborate accounting hoax," she worried in the memo.

"Best case: Clean up quietly, if possible," she told Lay.

Skilling had resigned abruptly a week earlier. Watkins was transferred to another department.

Her October memo, which was released Wednesday by the Energy and Commerce panel, detailed a strategy of what she called "disclosure steps to rebuild investor confidence."

Lay has refused to testify before Congress, invoking his Fifth Amendment right against self-incrimination at a Senate hearing on Tuesday. Doing the same last Thursday were Fastow, who reaped at least $30 million from the partnerships. Causey and two other Enron officials also have taken the Fifth.

Lay's scheduled appearance Thursday before a second panel, a House Financial Services subcommittee, was canceled on Wednesday.

In her Oct. 30 meeting with Lay, Watkins told investigators, the chairman promised her he would fire longtime auditor Arthur Andersen and the Vinson & Elkins law firm. Lay reversed himself the next day, telling Watkins a special committee would be established within the company to investigate, she said.

Lay's spokeswoman, Kelly Kimberly, declined to comment Wednesday night.

"We've seen none of these documents ... so clearly it's inappropriate for us to speculate," she said from Houston. She also declined comment on Watkins' statements to committee investigators.

Watkins told investigators in a four-hour meeting Wednesday "how her efforts to raise red flags were ignored," said Ken Johnson, spokesman for the House Energy and Commerce Committee.