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Lay duped by Skilling and Fastow, says Enron exec

Enron Corp internal whistle-blower Sherron Watkins told Congress on Thursday that top officers fooled former chairman Kenneth Lay, and frightened her and others who waved red flags as the financial crisis deepened at the energy trader.

Watkins described Enron's corporate culture as aggressive and tinged with fear. She calmly recounted how she first approached Lay in August about problems that, months later, drove the company to file the largest US bankruptcy ever.

A vice president of the Houston-based energy company, Watkins said she came away from meetings with Lay convinced he had been misled. She blamed former chief executive Jeffrey Skilling and former chief financial officer Andrew Fastow, as well as Enron's auditor Andersen and law firm Vinson & Elkins.

"I do believe that Mr Skilling and Mr Fastow along with two very well-respected firms did dupe Mr Lay and the board," Watkins said. "It is my humble opinion that he did not understand the gravity of the situation."

Watkins testified before the same House Energy and Commerce subcommittee that last week heard Fastow invoke his right to remain silent. The same panel also grilled Skilling after he professed no knowledge of Enron's problems. Lay refused to testify to a Senate panel on Tuesday.

She expressed disbelief at how Enron accepted the tangled web of partnerships, managed by Fastow, that served to pad profits, hide losses and enrich a handful of executives.

"Mr Skilling and Mr Fastow are highly intimidating, very smart individuals. I think they intimidated a number of people," she said. "The saying around Enron was heads, Mr Fastow wins, tails, Enron loses."

Facing a battery of cameras, Watkins capped off the most intense of 10 congressional probes into Enron's collapse with soft-spoken but occasionally angry testimony. The focus now shifts to the Justice Department's criminal probe and the Securities and Exchange Commission's look into possible securities law violations.

Committee Chairman Rep Billy Tauzin said Watkins backed up previous testimony portraying Lay as detached and unaware.

"We have a better sense of Lay's perspective," he said.

An Enron internal inquiry report, released earlier this month, faulted Lay and Skilling for failing to monitor the Fastow partnerships with names such as LJM and Chewco. When these ventures unraveled, so did Enron, wiping out thousands of jobs and billions of dollars in shareholder equity.

Watkins said she first expressed her concerns about the partnerships to Lay anonymously in mid-August. She told him she was nervous Enron would implode in a wave of accounting scandals. Colleagues told her Fastow was angry when he learned she had written to Lay.

"He wanted to have me fired. He wanted to seize my computer," Watkins testified.

She said she even consulted Enron security personnel, concerned that "MrFastow might do something vindictive."

A spokesman for Fastow declined to comment.

Kelly Kimberly, spokeswoman for Lay, said he saw Watkins as "sincere and credible" when she raised her concerns. "We are pleased she stood up to a difficult situation," Kimberly said.

Watkins said she found it hard to believe Skilling's testimony that he was unaware of problems involving the Fastow partnerships. Skilling resigned from Enron as CEO on August 14, citing personal reasons.

"It's my opinion he could foresee these problems and he wanted to get as far away from it as possible," Watkins said.

Skilling attorney Bruce Hiler said Watkins' comments were not based on fact. "Everything Ms Watkins said about my client is based on hearsay, rumour, or her opinion," he said.

Patrick Dorton, spokesman for accounting firm Andersen, said "While she is clearly well intentioned, Ms Watkins is not in a position to form judgments about Andersen." He said she did not attend meetings where the auditor discussed the risks of the partnerships with Enron executives.

Watkins met with Lay on August 22 and gave him five memos expressing her concern that $700 million had been lost in partnership deals known as the Raptor transactions.

In October, she wrote a memo suggesting Enron should come clean and restate its earnings. She urged Lay to say he wrongly trusted other executives and bad advice from Andersen and Vinson & Elkins.

"I felt it was a truthful public relations strategy and it was something I felt should be said," she told lawmakers.

Hiler slammed Watkins' October 30 strategy note, saying: "Her memo is not the memo of a whistleblower; it's the memo of someone trying to initiate spin control and a scapegoating."

Enron did restate its earnings on November 8, saying it had overstated earnings since 1997 by $600 million.

Lay, subjected to blistering criticism when he refused to testify before a Senate committee on Tuesday, was spared more angry words on Thursday.

His scheduled appearance before the House Financial Services Committee was canceled by the panel's leadership, since their only witness would once again exercise his constitutional right against self-incrimination.

At a Senate hearing, former Fed chief Paul Volcker, recently tapped to review procedures at embattled Andersen, said auditors had been "infected" by greed during the financial boom. He called for stronger oversight of auditors.

Volcker also said the SEC was not sufficiently funded to review companies' accounting statements.

Senate Banking Committee chairman Sen Paul Sarbanes echoed that view. The Maryland Democrat wrote to President George W Bush on Thursday, seeking more funding for the SEC.

Volcker also called for an audit oversight board with "teeth" and the authority to punish misconduct.

"You have a great brew of greed, and hubris, and excesses, and financial wishful thinking, and that adds up to a weakening of the auditing process. They've been infected. We've got to reverse that process," he said.

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