Sherron Watkins takes the stand

Sherron Watkins, best known for her whistleblowing memo just before Enron imploded, testified today in the trial of Kenny Boy Lay and Jeff Skilling.

A very talkative Watkins took the jurors step by step through her discovery of what she considered to be fraud at Enron, her meeting with Lay and her subsequent feeling she became a pariah at the company where she felt her job was in peril.

Watkins told jurors how she trusted Lay before she went to him with her memo in August 2001. But she said he later lied to analysts in a conference call in October 2001 about the Raptors hedging structures established through Fastow’s LJM side company.

“It was a blatant lie . . . to say these could have been done with anyone else,” Watkins said of the many overvalued Enron assets hedged in Fastow’s financial vehicles. “You don’t make statements like that, they’re misleading.”

She said Lay also misled employees that same day.


In June 2001, Watkins went to work for then-Chief Financial Officer Andrew Fastow and was assigned to examine assets the company might sell. What she found, she said, was that Fastow’s LJM had already gotten its money back with profit, leaving the failing Raptors owing Enron $500 million it didn’t have to pay out.

“Accounting just doesn’t get that creative,” she said.

Her concern was mounting, she said, when in mid-August Jeff Skilling resigned as the company’s CEO.

“It told me he was a smart man … this stuff I stumbled across, he knows it. He knows it’s bad and he’s getting out,” Watkins said.

Testifying in the conspiracy and fraud trial of Skilling and Lay, Watkins’ testimony reflected most directly on Lay.

On questioning by prosecutor John Hueston, she said she trusted Lay and thought he didn’t know about the Raptors, so she decided to warn him. She wrote her famous memo Aug. 15, 2001, leaving it anonymous at first, then met with Lay Aug. 22.

Her memo stated: “It sure looks to the layman on the street that we are hiding losses in a related company.”


She had about 30 minutes with Lay in which the vice president asked the then-CEO and chairman of the company to “come clean” about Fastow’s side deals for the company’s sake.

“I did most of the talking, He seemed kind of surprised these things could be problems,” she said.

Watkins said Lay winced when he read that an employee said: “‘I wish we would get caught, we are such a crooked company.'”

She said she thought Lay took her seriously. He asked if she’d told anyone outside the company about her concerns and she said no.

Watkins said she asked Lay to investigate without using Houston law firm Vinson & Elkins and Enron auditors Arthur Andersen, because those professionals had already signed off on questionable deals. But Lay did use Vinson & Elkins for the investigation.

Here’s an earlier AP wire report. That story gave me the impression that while Watkins’ testimony established that Lay knew, at least at some point in time, that things were not right at Enron, it also allowed for the possibility that it was the first Lay had heard of any of it, and that it was well after the real lawbreaking (done by Andy Fastow) had already occurred.

Lay’s lawyer Chip Lewis focused on Watkins’ sales of Enron stock during this tumultuous period. She sold around $47,000 worth of stock and acknowledged she had insider information that public did not know.

Watkins said she wishes she had not sold the stock but did not admit she had committed insider trading.

“You didn’t commit any crimes at Enron, did you?” Lewis asked.

“I’m not an expert at that,” she replied.

Lewis asked her why prosecutors never charged her with insider trading.

“Maybe because I wasn’t the leader of the company,” Watkins said. “I wasn’t making statements to the public … contrary to my knowledge.”

Lewis also asked whether she knew that when Lay sold millions of dollars worth of stock back to the company in the fall of 2001, whether she knew it wasn’t “voluntary” and he had to to make margin calls.

“(If) you’ve got Aspen homes to sell, you’ve got other ways to raise cash,” she said in response to the idea Lay was forced to sell his stock back to Enron.

Loren Steffy thinks the defense scored a “haymaker” on that part of the cross. I don’t recall that bit of information from previous accounts; if it came as a surprise to the jury, it may well have had a big effect. At least she’s not testifying under some kind of duress from the federal Task Force, which ought to make Tom happy. On a side note, Tom asks a good question: Will the Feds call Rick Causey to bolster Andy Fastow’s testimony, or will they hope it stands on its own? I have to agree that the latter seems like a risky choice. The Legal Commentary blog thinks some corroboration of Fastow is needed, but not a “mountain” of it.

The TrialWatch blog has quite a bit on Watkins’ testimony – start here and work your way back. There will now be a four day break, thanks to a combination of some scheduling problems for witnesses and the desire by the judge to give the jurors a little R&R.

UPDATE: Tom was not impressed with Sherron Watkins.

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