Enron Whistleblower Testifies Against Ex-Chairman

Enron whistleblower Sherron Watkins testifies against former chairman Kenneth Lay. Watkins met with Lay four months before the company went bankrupt, and warned him about accounting problems. Prosecutors hope her testimony will show that Lay made intentionally misleading statements to investors.

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MICHELE NORRIS, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Michele Norris.

ROBERT SIEGEL, host:

And I'm Robert Siegel.

In Houston, Enron whistleblower Sherron Watkins has taken the stand to testify against the company's former chairman, Kenneth Lay. Watkins met with Lay four months before the company went bankrupt. She says she warned the chief executive that Enron would implode in a wave of accounting scandals if he didn't take action.

Prosecutors are seeking to use her testimony to show that Lay knew that his company was in serious trouble, yet he continued to make misleading statements to investors and analysts. NPR's Wade Goodwyn is at the federal courthouse in Houston and he joins us now.

Wade, last week's star witness, Andrew Fastow, gave testimony that implicated former Enron CEO Jeffrey Skilling, but this week's star witness, Sherron Watkins, is giving testimony that's aimed at Ken Lay, that's a difference.

WADE GOODWYN reporting:

Yeah, Ken Lay is the target this week because Sherron Watkins thought that she might be able to talk to him after Jeff Skilling kind of suddenly resigned as CEO in the summer of 2001. Watkins had been reviewing Enron's assets and while she was doing that, she came across a spreadsheet where the numbers didn't add up and she began to investigate and what she uncovered was the maze of off- balance sheet partnerships that Fastow had created to inflate Enron's earnings.

Watkins said she was so alarmed by what she'd found that she immediately began to look for another job, but when Skilling resigned later in August she decided to take a professional risk and voice her concerns to Ken Lay, who was then taking over as CEO again. First, she sent him an anonymous memo, a memo that was so full of detail that it could only have come from a top executive and then a couple of days later, Watkins decided to take the plunge, identify herself and get a personal meeting with Ken Lay.

SIEGEL: So she sits down one-on-one with Ken Lay after he had taken control back of Enron. What did she say she told him at that meeting?

GOODWYN: Well, she prepared a seven-page presentation that outlined why Enron was in such trouble and then she showed him how it was in trouble. Her presentation was connected to these off-the-books entities called the Raptors and Watkins showed Lay how the Raptors owed Enron hundreds of millions of dollars and that the only way Enron would ever get its money back was to sell its own stock.

And she specifically warned him that although Arthur Anderson and Enron's own accountants had signed off on all of these deals, that nevertheless these deals were wrong and that they could not stand up to the light of day. She told Lay that she believed that these were very serious accounting problems, were the real reason that Skilling left, that it wasn't personal reasons.

And she briefed Lay that it was widely known that Skilling had made numerous secret side deals with Fastow. She told Lay that one executive had told her that although it would be devastating for Enron, that he wished Enron would get caught because it was such a crooked company.

SIEGEL: Now this was Sherron Watkins's testimony today in court.

GOODWYN: That's right.

SIEGEL: According to her testimony, what did Ken Lay say to her in that meeting?

GOODWYN: Well, she said that Lay seemed to take her pretty seriously, that at one point he actually winced in pain as she took him through these questionable deals. She drove the point home to him that these were questionable transactions, there'd be no legal cover. At one point, Lay asked her if she'd taken her concerns to anybody outside of Enron and she said she'd kept everything in-house.

Watkins said that Lay said he'd initiate an investigation into her allegations, he seemed generally concerned, but then within two days of her meeting with Lay, the company began investigating whether it could fire Sherron Watkins and what the legal consequences would be if they did fire her. I think prosecutors hope that testimony is going to undermine the defense's position that Ken Lay was an honest and caring executive who was simply doing the best he could under the circumstances.

SIEGEL: So this is potentially very important testimony for the government and dangerous testimony for the defense?

GOODWYN: Yeah, the problem her testimony creates for his defense is that Lay continued to reassure employees and investors that Enron was in great shape, the best shape ever, and that there were no serious accounting problems with the company and Lay made these statements after these detailed warnings from Sherron Watkins.

SIEGEL: Okay, thank you Wade.

GOODWYN: You're quite welcome.

SIEGEL: NPR's Wade Goodwyn speaking to us from the Federal Courthouse in Houston.

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