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'Enron employee warned of problems in August'

An Enron Corp employee warned the company's chairman in August of accounting problems and a "veil of secrecy" around certain partnerships that later contributed to the collapse of the world's largest energy trader, congressional investigators said on Monday.

"I am incredibly nervous that we will implode in a wave of accounting scandals," the employee wrote, according to House Energy and Commerce Committee Chairman Rep Billy Tauzin and investigations subcommittee head Rep James Greenwood.

In a sign that employees were worried long before Enron filed the largest bankruptcy in US history on December 2, the female global finance unit employee wrote to Enron chairman Kenneth Lay of several concerns, said Tauzin and Greenwood.

The committee found the letter by combing through thousands of Enron documents as part of one of six congressional probes of the company's collapse. The Justice Department has launched a criminal probe of Enron. The Securities and Exchange Commission and Labor Department are also investigating.

Enron, once ranked No 7 on the Fortune 500 list of large corporations, slid in just weeks from Wall Street stardom to bankruptcy court, throwing thousands out of work and stirring controversy from Washington to Wall Street.

The unnamed employee questioned the ownership stake of former Enron chief financial officer Andrew Fastow in one of several off-balance-sheet partnerships set up to help support Enron's highly leveraged capital structure. The employee also questioned the accounting for the complex partnerships.

"Is there a way our accounting gurus can unwind these deals now?" the employee asked Lay, said Tauzin and Greenwood.

"EVIDENCE" OF INSIDER TRADING

Enron used partnerships known as special-purpose entities to keep debt off its books. After deals involving these entities went sour and parts of the core business slumped, the company posted its first quarterly loss in more than four years on October 16, took charges of $1 billion against earnings and cut shareholders equity by $1.2 billion.

Further reversals followed and investors began asking questions. A crisis in investor confidence ensued and a series of credit downgrades led speedily to bankruptcy court.

In a letter to Lay, Tauzin and Greenwood said the House committee found Enron ordered an inquiry by the law firm of Vinson & Elkins into the employee's concerns. But the inquiry found no reason for "widespread investigation by independent counsels or auditors," the congressmen said.

They said Vinson & Elkins recommended no further inquiry of the employee's concerns was needed because she had "raised no facts that had not either been known or disclosed." The firm's report warned, however, of "a serious risk of adverse publicity and litigation" from problems with the partnership deals and the drop in Enron's stock price, Tauzin and Greenwood said.

While the powerful Senate Banking Committee set a February 12 hearing on Enron, the ranking Democrat on the House Energy and Commerce Committee said on Monday there was "pretty strong evidence" of insider trading and false accounting at Enron.

Rep John Dingell of Michigan, whose committee is investigating, told CBS, "There's pretty strong evidence of insider trading" and "clear evidence of failure to file honest and correct annual reports" as required by the SEC.

Robert Bennett, the attorney representing Enron, complained on Monday that a scandal mentality was taking over the case, with some officials rushing to judgment.

Bennett made his comments after Dingell's televised remarks. "We're getting into this Washington scandal mentality, where people are not going to wait until all the evidence is in," said Bennett, who defended former President Bill Clinton in the Paula Jones sexual harassment case. "It's very critical that the people who investigate, whether the Justice Department or Congress, be fair about this."

HOUSTON JUDGE RECUSES HERSELF

In Houston, the judge overseeing shareholder lawsuits against Enron recused herself from the case in an order made public on Monday. The order affects four dozen lawsuits claiming Enron breached its fiduciary duty to shareholders and employees. US District Judge Lee Rosenthal disclosed she had personal relationships with two defense lawyers in the case.

Enron and its top executives were major campaign supporters of President George W Bush and other lawmakers in Washington.

As the company was falling apart, Enron executives contacted Bush administration officials, including Treasury Secretary Paul O'Neill and Commerce Secretary Donald Evans.

Evans said on Sunday that he talked to Enron Chairman Lay on October 29 and that he told White House chief of staff Andrew Card about it. But he said Card did not inform President Bush.

On Monday, California Democratic Rep Henry Waxman wrote a letter to Card asking him whether he or his deputy, Joshua Bolton, talked to Bush or Vice President Cheney about their conversations with Evans on Enron.

Waxman also wrote to White House economic adviser Lawrence Lindsey asking him whether he had recused himself from discussions about Enron, since Lindsey's financial disclosure report said he got $50,000 from Enron in 2000 as an advisor.

Accounting firm Andersen said last week its employees had destroyed documents related to its audits of Enron's books. Andersen said on Monday it reminded employees going over Enron's books on October 12 of a policy of destroying documents, voice mails and other materials not part of a final audit.

A dizzying fall in the Enron stock price sapped the life savings of many Enron employees with 401(k) plans heavily invested in Enron stock, while top executives allegedly pocketed fat profits by selling ahead of the fall.

Trading in shares of Enron was halted news pending on the New York Stock Exchange on Friday morning at 67 cents a share, off an August 2000 high of $90.56.

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