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77–991CC 2002

THE FINANCIAL COLLAPSE OF ENRON—Part 3

HEARING

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS

OF THE

COMMITTEE ON ENERGY AND 

COMMERCE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

FEBRUARY 14, 2002

Serial No. 107–89

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

2

COMMITTEE ON ENERGY AND COMMERCE 

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman 

MICHAEL BILIRAKIS, Florida 

JOE BARTON, Texas 

FRED UPTON, Michigan 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

JAMES C. GREENWOOD, Pennsylvania 

CHRISTOPHER COX, California 

NATHAN DEAL, Georgia 

STEVE LARGENT, Oklahoma 

RICHARD BURR, North Carolina 

ED WHITFIELD, Kentucky 

GREG GANSKE, Iowa 

CHARLIE NORWOOD, Georgia 

BARBARA CUBIN, Wyoming 

JOHN SHIMKUS, Illinois 

HEATHER WILSON, New Mexico 

JOHN B. SHADEGG, Arizona 

CHARLES ‘‘CHIP’’ PICKERING, Mississippi 

VITO FOSSELLA, New York 

ROY BLUNT, Missouri 

TOM DAVIS, Virginia 

ED BRYANT, Tennessee 

ROBERT L. EHRLICH, Jr., Maryland 

STEVE BUYER, Indiana 

GEORGE RADANOVICH, California 

CHARLES F. BASS, New Hampshire 

JOSEPH R. PITTS, Pennsylvania 

MARY BONO, California 

GREG WALDEN, Oregon 

LEE TERRY, Nebraska 

JOHN D. DINGELL, Michigan 

HENRY A. WAXMAN, California 

EDWARD J. MARKEY, Massachusetts 

RALPH M. HALL, Texas 

RICK BOUCHER, Virginia 

EDOLPHUS TOWNS, New York 

FRANK PALLONE, Jr., New Jersey 

SHERROD BROWN, Ohio 

BART GORDON, Tennessee 

PETER DEUTSCH, Florida 

BOBBY L. RUSH, Illinois 

ANNA G. ESHOO, California 

BART STUPAK, Michigan 

ELIOT L. ENGEL, New York 

TOM SAWYER, Ohio 

ALBERT R. WYNN, Maryland 

GENE GREEN, Texas 

KAREN MCCARTHY, Missouri 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

THOMAS M. BARRETT, Wisconsin 

BILL LUTHER, Minnesota 

LOIS CAPPS, California 

MICHAEL F. DOYLE, Pennsylvania 

CHRISTOPHER JOHN, Louisiana 

JANE HARMAN, California 

DAVID V. MARVENTANO, Staff Director 

JAMES D. BARNETTE, General Counsel 

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

JAMES C. GREENWOOD, Pennsylvania, Chairman 

MICHAEL BILIRAKIS, Florida 

CLIFF STEARNS, Florida 

PAUL E. GILLMOR, Ohio 

STEVE LARGENT, Oklahoma 

RICHARD BURR, North Carolina 

ED WHITFIELD, Kentucky 

Vice Chairman 

CHARLES F. BASS, New Hampshire 

W.J. ‘‘BILLY’’ TAUZIN, Louisiana 

(Ex Officio) 

PETER DEUTSCH, Florida 

BART STUPAK, Michigan 

TED STRICKLAND, Ohio 

DIANA DEGETTE, Colorado 

CHRISTOPHER JOHN, Louisiana 

BOBBY L. RUSH, Illinois 

JOHN D. DINGELL, Michigan, 

(Ex Officio) 

(II) 

3

C O N T E N T S 

Page

Testimony of: 

Watkins, Sherron, Vice President of Corporate Development, Enron Corporation .......................................................................................................... 14

(III) 

(1)

THE FINANCIAL COLLAPSE OF ENRON—Part 3

THURSDAY, FEBRUARY 14, 2002

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON ENERGY AND COMMERCE, 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 11 a.m., in room 

2322, Rayburn House Office Building, Hon. James C. Greenwood 

(chairman) presiding. 

Members present: Representatives Greenwood, Bilirakis, 

Stearns, Largent, Burr, Tauzin (ex officio), Deutsch, Stupak, Strickland, DeGette, John, Rush, and Dingell (ex officio). 

Also present: Representatives Ganske, Markey, Green, and Jackson-Lee. 

Staff present: Tom DiLenge, majority counsel; Mark Paoletta, 

majority counsel; Michael Geffroy, majority counsel; Peter Kielty, 

legislative clerk; Will Carty, legislative clerk; Brendan Williams, 

legislative clerk; Edith Holleman, minority counsel; Consuela 

Washington, minority counsel; Jonathan Cordone, minority counsel; 

and Chris Knauer, minority investigator. 

Mr. GREENWOOD. Good morning. This hearing of the Oversight 

and Investigations Subcommittee of the Energy and Commerce 

Committee will come to order. 

The Chair recognizes himself for an opening statement. 

‘‘I wish we could get caught. We’re such a crooked company.’’ Of 

all of the words in the now famous memo our witness sent to Kenneth Lay in August of last year, these might be the most chilling. 

According to this morning’s witness, the person who uttered 

those words was a management level employee of Enron, a team 

player, a person who probably stood to lose a great deal in any financial collapse at Enron. What is the truth behind Enron’s precipitous collapse? 

This morning we have before us, as our sole witness, Ms. 

Sherron Watkins, Enron’s Vice President of Corporate Development. Ms. Watkins has become known as the lone voice who sought 

to warn Enron Chairman and CEO Ken Lay that Enron was in 

danger of imploding ‘‘in a wave of accounting scandals.’’ Subsequent events have proved the truth of that unvarnished assessment. 

But we now understand from evidence this committee has gathered in its investigation, from the materials contained in the Powers Report, and from testimony of senior Enron officials at last 

week’s hearing, that these so-called aggressive accounting practices 

were used to hide an even larger business failure. 

2

Last week we took testimony from two senior Enron officials, 

Jordan Mintz and then treasurer, now Enron President and Chief 

Operating Officer, Jeffrey McMahon. They, too, anguished that 

something was terribly wrong at Enron, but were unable to determine the full extent of the problems or the dangers ahead. 

Unlike them, our witness this morning was privy to substantially 

more evidence of the accounting practices used to hide various related party transactions between Enron and what are known as the 

Raptor entities—special purpose entities owned by LJM2, the limited partnership set up and run by Enron and its former Chief Financial Officer, Andrew Fastow. She will testify today that, in her 

opinion, these transactions were outright manipulations of Enron’s 

income statements, booking fictitious income, and hiding actual 

losses. 

Ms. Watkins took her concerns right to the top. She wrote a 

memo to Mr. Lay on August 15 that set forth in stark terms the 

seriousness of Enron’s situation and the dire consequences that 

would inevitably result if corrective action were not taken, and 

soon. 

We now know that Ms. Watkins also met with Mr. Lay not just 

once, as has been previously disclosed, but on two additional times 

in late October of last year, to further share her concerns and to 

urge that Enron restate its income statements for the past 2 years 

due to the deceptive transactions with the Raptors special purpose 

entities. Yet, until the Powers Report came out 2 weeks ago affirming her analysis of the Raptors, no one at Enron, or Andersen ever 

sought to address these concerns. 

Indeed, the actions taken by Enron in October and November of 

last year to revise its earnings and shareholder equity numbers 

still fail to address many of the concerns raised by Ms. Watkins 

and confirmed by the Powers Report. 

Ms. Watkins also will describe today her meetings and conversations with others throughout Enron’s corporate hierarchy, as well 

as with outside advisors. This included Mr. McMahon, Associate 

General Counsel, Rex Rogers, Vice President for Human Resources 

Cindy Olson, James Hecker, an Andersen audit partner, and Vinson & Elkins managing partner Joe Dilg. 

Her initial meeting with Mr. Lay in August prompted an investigation by Vinson & Elkins, assisted by Andersen, the very two 

parties Ms. Watkins urged Mr. Lay and others not to include in the 

review because of clear conflicts of interest. Not surprisingly, the 

report that Vinson & Elkins issued on October 15 was so flawed 

that Ms. Watkins seriously considered leaving the company. 

Instead, she persisted in her attempts to convince Mr. Lay of the 

enormity of the challenge facing Enron and the failure of outside 

experts to clearly state the facts. It wasn’t until October 31 that 

Ms. Watkins learned that a Special Committee of the Board of Directors would examine Enron’s questionable business practices. 

This investigation has since become known as the Powers Inquiry. 

Ms. Watkins’ appearance and testimony before us today will be 

the first time anyone has had the opportunity to question her publicly about her own actions and how individuals at the highest level 

in the company responded to her warnings. 

3

Let me point out that Ms. Watkins is not a whistleblower in the 

conventional sense. She was, and is, a loyal company employee, 

who sought valiantly, and sadly in vain, to get the people in charge 

to face the facts and make the hard choices needed to save the company. Ms. Watkins is still an Enron employee, and because of this 

fact has requested a subpoena compelling her testimony today. 

I want to point out, however, that she has been responsive to and 

very cooperative with our investigators. And I look forward to her 

sharing with the subcommittee and the American public, in her 

own words, how it came to be that, at the end, a once faithful employee concluded that her company was cooking the books. 

Ms. Watkins, thank you for your help. We welcome your testimony. 

[The prepared statement of Hon. James C. Greenwood follows:]

PREPARED STATEMENT OF HON. JAMES C. GREENWOOD, CHAIRMAN, SUBCOMMITTEE

ON OVERSIGHT AND INVESTIGATIONS

‘‘. . . I wish we would get caught. We’re such a crooked company.’’

Of all the words in the now famous memo our witness sent to Kenneth Lay in 

August of last year, these might be the most chilling. 

According to this morning’s witness, the person who uttered those words was a 

management level employee of Enron, a team player . . . a person who probably stood 

to lose a great deal in any financial collapse of Enron. 

What is the truth behind Enron’s precipitous collapse? 

This morning we have before us, as our sole witness, Ms. Sherron Watkins, 

Enron’s Vice President of Corporate Development. Ms. Watkins has become known 

as THE LONE voice who sought to warn Enron Chairman and CEO Ken Lay that 

Enron was in danger of imploding ‘‘. . . in a wave of accounting scandals.’’

Subsequent events have proved the truth of that unvarnished assessment. 

But we now understand, from evidence this Committee has gathered in its investigation, from the materials contained in the Powers’ Report, and from testimony 

of senior Enron officials at last week’s hearing, that these so-called ‘‘aggressive’’ accounting practices were used to hide an even larger business failure. 

Last week, we took testimony from two senior Enron officials, Jordan Mintz and 

then treasurer, now Enron President and Chief Operating Officer Jeffrey McMahon. 

They too anguished that something was terribly wrong at Enron, but were unable 

to determine the full extent of the problems or the dangers ahead. 

Unlike them, our witness this morning was privy to substantially more evidence 

of the accounting practices used to hide various related-party transactions between 

Enron and what are known as the Raptor entities—special purpose entities owned 

by LJM2, the limited partnership set up and run by Enron and its former Chief Financial Officer Andrew Fastow. She will testify today that, in her opinion, these 

transactions were outright manipulations of Enron’s income statements, booking fictitious income and hiding actual losses. 

Ms. Watkins took her concerns right to the top. She wrote a memo to Mr. Lay, 

on August 15th that SET FORTH IN STARK TERMS the seriousness of Enron’s 

situation and the dire consequences that would inevitably result if corrective action 

were not taken... and soon. 

We now know that Ms. Watkins also met with Mr. Lay, not just once—as has 

been previously disclosed—but two additional times in late October of last year, to 

further share her concerns and to urge that Enron restate its income statements 

for the past two years due to the deceptive transactions with the Raptors special 

purpose entities. Yet, until the Powers Report came out two weeks ago, affirming 

her analysis of the Raptors, no one at Enron or Andersen ever sought to address 

these concerns. 

Indeed, the actions taken by Enron in October and November of last year to revise 

its earnings and shareholder equity numbers still fail to address many of the concerns raised by Ms. Watkins and confirmed by the Powers Report. 

Ms. Watkins also will describe today her meetings and conversations with others 

throughout Enron’s corporate hierarchy as well as with outside advisors. 

This included Mr. McMahon, Associate General Counsel Rex Rogers, Vice President for Human Resources Cindy Olson, James Hecker (an Andersen audit partner) 

and Vinson & Elkins managing partner Joe Dilg. 

4

Her initial meeting with Mr. Lay in August prompted an investigation by Vinson 

& Elkins, assisted by Andersen—the very two parties Ms. Watkins urged Mr. Lay 

and others NOT to include in the review, because of clear conflicts of interest. 

Not surprisingly, the report that Vinson & Elkins’ issued on October 15th was so 

flawed that Ms. Watkins seriously considered leaving the company. Instead, she 

persisted in her attempts to convince Mr. Lay of the enormity of the challenge facing Enron and THE failure of outside experts to clearly state the facts. It wasn’t 

until October 31 that Ms. Watkins learned that a special committee of the Board 

of Directors would examine Enron’s questionable business practices. This investigation has since become known as the Powers Inquiry. 

Ms. Watkins appearance and testimony before us today will be the first time anyone has had the opportunity to question her publicly about her own actions and how 

individuals at the highest level in the company responded to her warnings. 

Let me point out that Ms. Watkins is not a ‘‘whistleblower’’ in the conventional 

sense. She was—and is—a loyal company employee, who sought valiantly and sadly, 

in vain, to get the people in charge to face the facts and make the hard choices 

needed to save the company. Ms. Watkins, indeed, is still an Enron employee, and 

because of this fact, has requested a subpoena compelling her testimony today. 

I want to point out, however, that she has been responsive to and very cooperative 

with our investigators. 

And I look forward to her sharing with the Subcommittee and the American public, in her own words, how it came to be that, at the end, a once faithful employee 

concluded that HER COMPANY WAS COOKING THE BOOKS. 

Ms. Watkins, thank you for your help and we welcome your testimony today.

Mr. GREENWOOD. The Chair recognizes the gentleman from Florida, Mr. Deutsch, for his opening statement. 

Mr. DEUTSCH. Thank you, Mr. Chairman. 

And thank you, Ms. Watkins, for being here. You know, this is 

obviously our continuation of trying to understand what happened 

at Enron and really looking at it and looking at the future. 

And I really want to take a couple of seconds just thanking the 

chairmen of the subcommittee and the full committee, but also the 

staff. I think our staff has really done an incredible job over the 

last about 8 weeks or so. This subcommittee has a long history in 

the Congress of looking at issues of really cases of failures, of corruption. 

And Chairman Dingell, who led this subcommittee for so many 

years, created almost a historic reputation for this subcommittee. 

And I believe that this hearing and this process that we are doing 

is part of that. 

You know, I’ve tried to put in perspective what we’re doing and 

where we hope to lead. And it’s not just an investigation for an investigation’s sake. But I think all of us at this point, we know a 

lot more than we knew a week ago, a lot more than 2 weeks ago. 

The issues I think are much broader than just Enron. The issues 

really are our capital systems and the transparency in the accounting system. 

And I think what we all understand is that our economy, which 

is the strongest economy in the history of the world, one of the reasons that we have that economy is transparency in the capital markets and the public accounting system. And I don’t think there’s a 

question that that totally abysmally failed in the case of Enron. I 

mean, I think it’s factually accurate that it failed. That trying to 

understand Enron from its public documents I think was close to 

impossible. That those documents did not fairly represent the actual state of the company. 

And the Secretary of the Treasury, when Enron initially filed for 

bankruptcy, said that, ‘‘Well, this is not a big deal. Companies go 

5

bankrupt. They don’t go bankrupt. They’re successful.’’ I take great 

exception to that. There have been several major companies in 

America that have gone bankrupt since Enron. Kmart has gone 

bankrupt, Global Crossing has gone bankrupt. But there is a fundamental difference. 

Public markets knew what was going on in those companies. It 

was transparent. It was reflected in equity value. People could understand what was going on. In the case of Enron, that was not the 

case. The seventh largest company in America vaporized in literally 

a matter of weeks, and the house of cards fell. 

And as we’re looking at transaction after transaction after transaction—and, again, the number at this point—our understanding is 

there were 4,000 of these partnerships, and the Raptors were probably the largest, but just several—that the methods seemed to be 

continuously used again and again. 

I guess the concern we have, and I have—but I think all of my 

colleagues share—is, No. 1, you know, how do we protect our capital markets from, No. 1, this never happening again? Because I 

think that is clearly our goal. That when people try to understand 

public companies they can understand. That is the whole point. 

But, No. 2, who else is doing this? 

And, obviously, I don’t think you are going to be able to tell us 

that today. But I think that is clearly, you know, a critical component that you, as someone who was watching what was going on, 

understood what was going on, and if there are other companies 

out there that are out there doing this, obviously people in those 

companies know it as well. 

And I guess one of the things that hopefully will happen is that 

it will immediately be reflected in statements in their filings to the 

SEC. 

Thank you, Mr. Chairman. 

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the Chairman of the full committee, the gentleman from Louisiana, Mr. Tauzin, for an opening statement. 

Chairman TAUZIN. Thank you, Mr. Chairman. Let me first thank 

you, Mr. Chairman, and the incredible work of the Democratic and 

Republican joint investigatory staff. You have done, I think, our 

country a great service, and you continue to do so with these hearings. And I deeply appreciate—I know I speak for all of the members—your personal commitment to this task. 

Let me first observe that as a result of these hearings and the 

incredible new information that our witness will provide us with 

today, I think America is learning what went wrong at Enron. 

More importantly, corporate executives across America are reassessing corporate management, and board members across America 

are beginning to ask hard questions and to become significantly 

more involved and concerned in the operations of their companies. 

The SEC has announced planned reforms. FASB has announced 

planned reforms. This subcommittee and the committee that we 

have assigned the job of jurisdiction over FASB and the accounting 

standards in America, shared by Cliff Stearns of Florida, is beginning the process of recommending legislation to our full committee. 

Yesterday, the Subcommittee on Energy and Air Quality of our 

committee examined the aspects of the Enron collapse on the enVerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00009 Fmt 6633 Sfmt 6602 W:\DISC\77991 pfrm17 PsN: 77991
6

ergy markets of America, and we are investigating allegations of 

potential damage done. Generally, the news is good. The energy 

markets held up. Electricity flowed. Gas flowed. Somehow companies worked around the financial collapse of Enron and continued 

to deliver energy at reasonable prices—in fact, lower prices—to the 

American public during this crisis. 

And today we will hear from an officer of the Enron Corporation 

who really knew and who really understood who the culprits were 

within her own company, and who did her best to make sure that 

those in control of her company, if they had been kept in the dark, 

were no longer in the dark, and understood the problems the company faced. 

There is a doctrine in law called the last clear chance. It is a doctrine that says that even if you are totally in the right on the highway, if you had the last clear chance to avoid the accident, you can 

still be responsible for what happened. 

Our witness today will talk about how she attempted to give the 

leadership at Enron a last clear chance, not just to do what was 

right in correcting its filings with the American public and the investors in this company, but to do what was right in getting rid of 

culprits, in assigning responsibility, in accepting responsibility, and 

in correcting the problems, in the hope that there was still a 

chance to save the corporation from the bankruptcy that it now 

faces. 

We will learn whether the company took that last clear chance. 

I don’t think there’s anything more prophetic in the document we 

have now received from our witness describing her evaluation of 

the culprits, of what had happened, who was responsible for it, and 

what had to be done if the company was going to have a chance 

to be saved. 

In the last paragraphs of that memo which our witness handed 

Mr. Ken Lay on October 30, I quote, ‘‘My conclusions if Ken Lay 

takes these steps. The bad news, this is horrific. Plaintiff attorneys 

will be celebrating. The trouble facing the company will be obvious 

to all. The good news, the wild speculations will slow down, if not 

cease. Nobody wants Ken Lay’s head. He is very well respected in 

business and the community.’’

And then she identifies the culprits. ‘‘The culprits are Skilling, 

Fastow, Glisan, Causey, as well as Arthur Andersen, and V&E.’’

In the final paragraph, we find, ‘‘My conclusions if we don’t come 

clean and restate. All these bad things will happen to us anyway. 

It is just that Ken Lay will be more implicated in this than is deserved, and he won’t get the chance’’—I might add, the last clear 

chance—‘‘to restore the company to its former stature.’’

What we are learning and what will be confirmed today, I believe, by this witness is that we have witnessed an incredible—an 

incredible collection of not only miscreants and potential criminal 

behavior, but a series of abuses, of accounting standards and practices, a series of abuses of the American public investing—the investing public in its confidence in this company, in its knowledge 

about its income and its debt, abuse that led to a horrible loss to 

its employees, not only their jobs but of their pensions, and abuses 

that have rocked Wall Street and the investment communities and 

the corporate boards of America. 

7

If there is any good news in all of this, it is that we are finding 

out what went wrong. We are really getting to the bottom of it, and 

we are learning how we might turn the corner and begin to make 

improvements in our laws and our rules to help make sure that no 

other company ever experiences this again. 

If there is other good news—and I say this with deep appreciation, Ms. Watkins—it is the knowledge that there are people like 

you in this world who are willing to try to make it right, who understand their fiduciary responsibility to their company, and are 

willing to go out on a limb, as you did, to make sure that people 

who could make a difference, who could change things, who could 

make it right, and who could save that company, did have at least 

a last clear chance to do it. 

And there is one other good news. I have a perspective that I 

think more and more members are beginning at least to share. 

There may be other problems in other companies in America. This 

is incredibly an aberration. I have never, in all of our years of 

watching companies succeed and fail and bankruptcies—and there 

have been some mighty big bankruptcies in this country—seen anything like this. 

When we are through examining it and responding to it, I think 

the American public will be well served by the process of learning 

from this experience and the changes we’re going to make. And the 

witness who comes before us will deserve, again, the appreciation 

of the American public for doing what she did and for standing out 

the way she has. 

And I deeply appreciate your being here, Ms. Watkins. 

Thank you, Mr. Chairman. 

Mr. GREENWOOD. The Chair thanks the gentleman and, before 

recognizing the ranking member of the full committee, would announce that we have apparently two votes before us now. So after 

Mr. Dingell’s opening remarks, we will recess and make these two 

votes and come back. 

Mr. DINGELL. I am willing to do it whichever way you like, Mr. 

Chairman—go now or go later. 

Mr. GREENWOOD. Well, I would welcome the gentleman’s opening 

statement right now, and the other members—— Mr. DINGELL. Very well. 

Mr. GREENWOOD. [continuing] are free to go. 

Mr. DINGELL. Mr. Chairman, thank you for holding this hearing, 

and I commend you and the committee for continuing the investigation into the actions that caused Enron, once the seventh largest company in the country, to become the largest bankruptcy in 

the history of the country. 

Each hearing that we have held, and I expect we will be holding 

more, reveals more of the internal corruption that destroyed Enron. 

This corruption swept in Enron’s top management as well as its inhouse and outside accountants and lawyers, all of whom reviewed 

and approved the transactions we discuss today. All of them apparently knew that Enron was pledging its stock to guarantee its own 

hedges with an alleged outside party. 

This is clearly a violation of all accounting procedures and principles, and apparently one that the Houston office of Arthur Andersen approved over the opposition of its Chicago office. It led directly 

8

to a $1.1 billion reduction in Enron’s equity and a $700 million reduction in earnings. These same people knew that a partnership 

run by Enron’s chief financial officer was benefiting greatly from 

these transactions. All of them, and an unquestioning Board of Directors, did nothing. 

I want to thank Ms. Watkins for the heroic efforts she made to 

help Enron avoid this, in her own words, ‘‘implosion in a wave of 

accounting scandals.’’ Ms. Watkins took the actions that should 

have been taken months before by many others, both inside and 

outside Enron, with fiduciary duties to the company and to its 

shareholders. I applaud her. It is never easy to be a whistleblower, 

particularly in a company where the mentality did not encourage 

negative news and negative views. Bearers of bad news are often 

punished. 

Today, we are going to concentrate on the Raptor transactions, 

which have been described in the Report of the Special Committee 

as ‘‘extremely complex Raptor structured finance vehicles’’ designed 

to allow Enron to ‘‘avoid reflecting losses in the value of some merchant investments in its income statement.’’ We cannot fully understand the structure of these vehicles, but we know they are breathtaking in scope and breathtaking in audacity and in their impact. 

These four vehicles resulted in a write-down of equity, the restatement of earnings, and the credit rating reduction that sank 

Enron. Although the Raptors were supposed to take the risk of 

losses in merchant investments, they actually guaranteed by 

Enron’s stock and used the appreciation in Enron’s stock value to 

increase earnings. This is a violation of all basic accounting principles. 

The accounting shenanigans that permitted such returns were 

instigated and/or approved by Andrew Fastow, Enron’s Chief Financial Officer; Richard Causey, Enron’s Chief Accounting Officer; 

Rick Buy, Enron’s Chief Risk Management Officer; Arthur Andersen; and by Vinson & Elkins, Enron’s outside counsel. 

The Raptors also benefited greatly LJM2, a special purpose entity run by Mr. Fastow. Although they were supposed to hedge potential losses in some of Enron’s merchant investments, they actually repaid LJM2’s total investment plus some very generous returns with Enron taking the total risk. As described in an LJM2 

presentation to its partners in October of 2000, Raptor III, for example, paid out $41 million on a $30 million investment in just 8 

days. This is an amazing 2,503 percent annual return for those investors. 

I think it is important to note for the record, Mr. Chairman, that 

Mr. Fastow, Mr. Causey, Mr. Buy, and Arthur Andersen have all 

been removed from their positions, perhaps too late, but gone anyway. 

But Enron has supported Vinson & Elkins, which approved every 

single one of these deals for Enron, and then papered over Ms. 

Watkins’ allegations in a report finding not a single transaction 

with LJM was ‘‘contrary to Enron’s best interests,’’ to this day. The 

law firm’s written report was issued just 1 day before Enron announced its equity write-down and earnings reductions based on 

the very Raptor transactions that Ms. Watkins brought to Kenneth 

Lay’s attention. 

9

I think it would be quite appropriate to devote a hearing to the 

role Enron’s legal counsel played in this fiasco that took $70 billion 

from the pockets of unsuspecting shareholders and employees. And 

I note that their role in this does no credit to the profession of 

which I take pride in being a part. 

But today I look forward to hearing from an extraordinarily courageous woman who has been a bright spot in an otherwise sorry 

and outrageous saga. Ms. Watkins, we thank you. 

Mr. Chairman, I thank you. 

[The prepared statement of Hon. John D. Dingell follows:]

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

Mr. Chairman, thank you for holding this hearing as the Committee continues its 

investigation into the actions that caused Enron, once the seventh largest company 

in the country, to become the largest bankruptcy in history. Each hearing that we 

have held—and I expect that we will hold several more—reveals more of the internal corruption that destroyed Enron. This corruption swept in Enron’s top management, as well as its in-house and outside accountants and lawyers, all of whom reviewed and approved the transactions that we are discussing today. All of them apparently knew that Enron was pledging its stock to guarantee its own hedges with 

an alleged outside party. 

This was a violation of all accounting procedures and apparently one that the 

Houston office of Arthur Andersen approved over the opposition of its Chicago office. 

It led directly to both a $1.1 billion reduction in Enron’s equity and a $700 million 

reduction in earnings. These same people knew that a partnership run by Enron’s chief financial officer was benefitting greatly from these transactions. All of them, 

and a unquestioning board of directors, did nothing. 

I want to thank Ms. Watkins for the heroic efforts she made to help Enron avoid 

this—in her own words—‘‘implosion in a wave of accounting scandals.’’ Ms. Watkins 

took the actions that should have been taken months before by others both inside 

and outside Enron, with fiduciary duties to the company and its shareholders. I applaud her. It is never easy to be a whistleblower, particularly in a company where 

the mentality did not encourage negative news. Bearers of bad news are often punished. 

Today we are going to concentrate on the Raptor transactions, which are described on the report of the special committee as ‘‘extremely complex Raptor structured finance vehicles’’ designed to allow Enron to ‘‘avoid reflecting losses in the 

value of some merchant investments in its income statement.’’ We cannot today fully 

understand the structure of these vehicles, but we know that they are breathtaking 

in their scope and audacity—and in their impact. These four vehicles resulted in the 

write-down of equity, the restatement of earnings, and the credit rating reduction 

that sank Enron. Although the Raptors were supposed to take on the risk of losses 

in merchant investments, they were actually guaranteed by Enron stock and used 

the appreciation in Enron stock’s value to increase earnings. 

This is a violation of basic accounting principles. The accounting shenanigans that 

permitted such returns were instigated or approved by Andrew Fastow, Enron’s chief financial officer; Richard Causey, Enron’s chief accounting officer; Rick Buy, 

Enron’s chief risk management officer; Arthur Andersen; and Vinson & Elkins, 

Enron’s outside counsel. 

The Raptors also benefited greatly LJM2, a special purpose entity run by Mr. 

Fastow. Although they were supposed to hedge potential losses in some of Enron’s 

merchant investments—they actually repaid LJM2’s total investment plus some 

very generous returns with Enron taking the total risk. As described in an LJM2 

presentation to its partners in October 2000, Raptor III, for example, paid out $41 

million for a $30 million investment in just eight days. This was an amazing 2,503 

percent annual return for the investors. 

I think it is important to note for the record, Mr. Chairman, that Mr. Fastow, Mr. 

Causey, Mr. Buy, and Arthur Andersen have all been removed from their positions. 

Perhaps too late but gone anyway. But Enron has supported Vinson & Elkins, 

which approved every single one of these deals for Enron and then papered over Ms. 

Watkins’ allegations in a report finding that not a single transaction with LJM ‘‘was 

contrary to Enron’s best interests,’’ to this day. The law firm’s written report was 

issued just one day before Enron announced its equity write-down and earnings reductions based on the very Raptor transactions that Ms. Watkins brought to KenVerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00013 Fmt 6633 Sfmt 6621 W:\DISC\77991 pfrm17 PsN: 77991
10

neth Lay’s attention. I think it would be quite appropriate to devote a hearing to 

the role Enron’s legal counsel played in this fiasco that took $70 billion from the 

pockets of unsuspecting shareholders and employees. 

But today, I look forward to hearing from an extraordinarily courageous woman 

who has been a bright spot in an otherwise sorry and outrageous saga.

Mr. GREENWOOD. The Chair thanks the gentleman, and the committee will recess for approximately 20 minutes. 

[Brief recess.] 

Mr. GREENWOOD. The committee will come to order. The Chair 

recognizes the gentleman from Florida, Mr. Stearns, for an opening 

statement. 

Mr. STEARNS. Thank you, Mr. Chairman. 

And, Ms. Watkins, obviously, like other members, we would like 

to take the opportunity to welcome you to our committee, and we 

are pleased that you are willing to testify. 

Your status is perhaps not, as the press might outline, that you 

are a whistleblower. You are not the traditional whistleblower in 

the sense that you are still working for the company. And the way 

you did it was commendable, in the sense that you went to different people and talked to them, and you asked for a transfer to 

another part of the company. But in a sort of semantic way, you 

are not a whistleblower in the traditional sense, and I am not sure 

if we have a word for—which describes when you stay within the 

company and work as you did, but it is—I think it was very effective and helpful for us. 

I believe that employees such as yourself in no small measure 

contribute to the integrity of our commercial system by insisting 

that all participants play by the rules. And I think all Americans 

thank you for what you did. 

Second, I want to explore a number of substantive issues which 

you raise in your August 15, 2001, memo to Mr. Lay that touched 

upon the efficacy of our financial accounting standards. As part of 

the full committee’s Enron investigation, Chairman Tauzin has 

asked my subcommittee, which is Commerce, Trade, and Consumer 

Protection, to examine our accounting standards in light of the 

Enron collapse. 

As a matter of fact, my subcommittee just concluded a hearing 

which examined the adequacy and responsiveness of existing accounting standards. I believe, as it seems you may have believed 

also when you wrote the memo to Mr. Lay, that there is ample evidence that Enron, at a minimum, confused, obfuscated its true financial health from the investing public by using or possibly misusing financial accounting standards. 

I now think there is enough evidence to suggest that Enron did 

not use special purpose entities such as Raptor as Generally Accepted Accounting Principles would authorize it, but they used it 

to hide poor performing merchant investments, so that Enron 

would not have to show the declining values that existed on their 

income statement. 

Moreover, it appears that Enron reported the transfer of assets 

to SPEs as a sale and recognize them as such in its income statement, while it held the third party investors in the SPE harmless 

against the risk associated with those assets by pledging its stock 

as collateral. 

11

I believe this is what you alluded to in your memo when you 

wrote, and I am quoting, ‘‘If adequately explained, the investor 

would know that the entities described in our related party footnote’’—and I assume you meant footnote number 16 of Enron’s 

2000 annual report—‘‘are thinly capitalized, the equity holders 

have no skin in the game, and all of the value in the entities come 

from underlying values of the derivatives. Unfortunately, in this 

case, there is a big loss in Enron stock and NP.’’ So during the question and answer period, I hope we can further 

explore that. I, again, thank you very much for testifying. 

Mr. GREENWOOD. The Chair thanks the gentleman, and would 

urge each of the members, if they could, to keep their opening remarks as brief as possible, so that we can move forward with the 

witness in view of the fact that we have votes and members will 

be leaving. 

The Chair recognizes the gentleman, Mr. Stupak, for an opening 

statement. 

Mr. STUPAK. Thank you, Mr. Chairman. 

I want to thank you, Ms. Watkins, for coming here today. Many 

of my colleagues and I truly appreciate your brave actions in informing Mr. Lay about the shady accounting that was going on in 

Enron. It is a shame that he and others on the Board, and in leadership positions at Enron, did not see these problems much earlier. 

Even now, there is a denial and a lack of acceptability of responsibility by Enron officials in all of the hearings we have had thus far 

to date. 

It is also a shame that even after you provided Mr. Lay with a 

road map of what was going on in Enron, as the Powers Report put 

it, they decided to hire inside counsel to do the investigation into 

the allegations. That counsel, Vinson & Elkins, was the very law 

firm that was responsible for providing advice on many of the questionable transactions. 

It was no surprise that Vinson & Elkins, in summarizing their 

findings, stated that Ms. Watkins’ concerns were thoroughly investigated but, quoting now, ‘‘found not to raise new or undisclosed information.’’

Mr. Chairman, we know that once a truly independent firm, one 

from outside the Enron family, was allowed to review the transactions, they came to a very different conclusion. 

Ms. Watkins, you mentioned in your interview with committee 

staff that when you met with Mr. Lay to discuss your memo you 

felt like the child who tells the emperor that he has no clothes. So 

I went out and got the book ‘‘The Emperor’s New Clothes.’’ And 

while you are to be commended for coming forward in August of 

2001, there was another emperor then, Jeffrey Skilling, who was 

running Enron prior to your August 15 letter. And I have a feeling 

he knew he had no clothes, and that is why—or that is what 

prompted his resignation. 

I would like to take just a moment to read you, if I may, the final 

page of Hans Christian Andersen’s story. I don’t believe he is any 

relation to Arthur Andersen. 

But the last page of the story goes like this. It says, ‘‘The emperor shivered for it seemed they were right. But what could he do? 

After all, he was the emperor, and people expected him to be digVerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00015 Fmt 6633 Sfmt 6602 W:\DISC\77991 pfrm17 PsN: 77991
12

nified. I must continue to end the procession, he thought. So the 

emperor stood up just as tall, and his servants went on carrying 

the train that wasn’t there.’’

Mr. Chairman, reading this, I can’t help but think of our last 

hearing last week with Mr. Skilling in his own parade, and his 

servants, Mr. Winokur and Mr. Jaedicke, following behind him carrying his non-existent robe. 

I know we are all anxious to hear Ms. Watkins’ testimony. So I 

am going to take your advice. I look forward to your answering the 

questions we will put to you today. 

So, Mr. Chairman, with that, I will yield back my time. 

Mr. GREENWOOD. The Chair thanks the gentleman, and thanks 

him for not showing the picture of the unclothed emperor. 

The Chair recognizes the gentleman from North Carolina, Mr. 

Burr, for an opening statement. 

Mr. BURR. I thank the Chairman. 

Mr. Chairman, we have before us today a witness who I can—

I believe can provide the most insight and helpful testimony we 

have yet to hear in piecing together this affair. With her background as a CPA and a former employee of Andersen, many have 

described Sherron Watkins as being unique in her ability to bring 

light on this charade. 

I would add one more uniqueness about Ms. Watkins that was 

lacking in all of the other individuals who have chosen to come before this committee—to stop the bleeding at Enron, to moral compass. In her now famous August memo, she brought to light what 

she saw as accounting improprieties, most noticeably in the Raptor 

transactions. 

Today she will share with us her observations and concerns that 

she raised with Enron executives, most notably Ken Lay, concerns 

that fell on deaf ears at the top of the company, while simultaneously this one-time Giant fell to its knees. 

Mr. Chairman, I can detail, but others have done that. I think 

what best details the situation at Enron were the list of songs by 

the Texas native who just passed away, Waylon Jennings. One 

song might be ‘‘I Ain’t Living Long Like This,’’ ‘‘Wanted: The Outlaws,’’ ‘‘Momma Don’t Let Your Babies Grow Up to be Cowboys,’’

or just ‘‘Some Good Ole Boys.’’

And Andersen could best be described as ‘‘Are You Sure Hank 

Done it That Way?’’

However, Waylon’s ballad ‘‘A Good-Hearted Woman’’ could not 

better describe the witness we have before us today. In all seriousness, thank you, Sherron, for appearing before us. You are doing 

this committee and your fellow Enron employees a great service. 

In the New Testament, when Peter stepped out of the boat and 

walked on water, the miracle wasn’t the fact that he walked on 

water. No, the miracle was that he chose to put his faith in God 

and step out of the boat, a boat which was his protection but was 

bound to sink in troubled water. 

Thank you for choosing to step out of the boat today. 

I yield back. 

[Additional statements submitted for the record follow:]

13

PREPARED STATEMENT OF HON. STEVE LARGENT, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OKLAHOMA

Thank you Chairman Greenwood. As many of you know, this is my last day in 

Congress and I want to again, very briefly, thank the Chairman and the other members of the committee for their hard work and friendship over the years. Serving 

with you has been a high honor and privilege. 

When I ran for Congress in 1994 I believed, and still believe, that oversight was 

one of the most important functions of Congress. Much of the business of making 

sure our government is responsive and efficient happens in this committee. Over the 

years, this committee has dealt with many serious issues, but few have been more 

distressing, unexpected—and even shocking—than the scandal surrounding the collapse of Enron, the seventh largest corporation in the United States. 

This committee has a duty to displaced Enron workers, and to the American people, to connect as many dots as possible so we can determine what happened in this 

collapse and take whatever steps are necessary to ensure that something like this 

does not happen again. In the course of these hearings, as we try to untangle what 

appears to be a web of deceit, we may determine that this drama is nothing more 

than a story of simple robbery. It does appear, at this point, that Enron’s collapse 

was not brought about by anything other than those in the company who carefully 

constructed their own house of cards. Yet, I have full confidence that this committee 

will, in a careful and measured way, scour the laws that may have been circumvented or disobeyed and tighten them so this type of fiasco can be avoided in 

the future. 

Again, I thank the Chairman and the other members for their friendship and 

dedication to serving the public on this committee. I look forward to hearing today’s 

testimony and, in particular, I want to commend Mr. Sherron Watkins for her courage in coming forward with her statement. 

PREPARED STATEMENT OF HON. W.J. ‘‘BILLY’’ TAUZIN, CHAIRMAN, COMMITTEE ON

ENERGY AND COMMERCE

Chairman Greenwood, your and the staff’s diligence in conducting these hearings 

must be commended. Although we have much more hard work ahead of us, there 

should be no question that this Subcommittee’s investigation into Enron’s financial 

collapse has begun to reveal what happened here and is serving a great public service. 

Let me also note that the Committee continues to move on other fronts to examine whether legislative remedies are in order. 

Earlier this morning we began our Commerce, Trade, and Consumer Protection 

Subcommittee hearing, which is examining whether current financial accounting 

standards sufficiently protect investors. Yesterday, we held an Energy and Air Quality Subcommittee hearing that examined the impact of Enron’s collapse on energy 

markets. 

Yesterday’s energy hearing revealed a fact that underscores a point I want to 

make about today’s hearing. In the energy hearing, we learned that, for all its size 

and market power, Enron ultimately had little effect on energy markets when it 

dramatically failed; the marketplace quickly adjusted, supplies were not significantly disrupted, neither were energy prices. This was some good news amidst all 

the sad news. 

Our O&I hearing, which today marks its third day of testimony focused on Enron, 

has revealed a deceptively simple lesson: that self-interested individuals—working 

in an ill-managed environment—were able to construct self-enriching schemes that 

effectively destroyed a company. This, in many respects, was an aberration, certainly not representative of how most companies and corporations operate in America, and certainly not representative of everybody who works in such companies. 

This morning, we have before us Sherron Watkins, one of several senior Enron 

employees we have come across in our investigation who attempted to call attention 

to these questionable partnerships and sham dealings. This, too, is a good news 

story, because it shows that, even among the culture of greed and corruption that 

appears to have permeated so many within Enron’s management, there were loyal, 

honest employees who attempted to stand up and put matters right. It seems, in 

the case of Enron, that there were not enough of these people in positions of influence. Clearly those at the top, or in senior management, did not stand up. 

But I believe we should acknowledge that some senior employees did not try to 

hide matters; they did not shirk their duty to the company; they did not work to 

deceive the investing public. To the contrary, they stood up for their company, their 

14

fellow employees, and the investing public, at great personal risk. They did the right 

thing, when it would have been so easy to close their eyes to it all. 

Ms. Watkins, as Chairman Greenwood pointed out, was so concerned about what 

she saw in Enron’s dealings with these related partnerships that she went to the 

person in charge of it all, Chairman and CEO Ken Lay, believing that would save 

the company. 

Her communication did set off action and inquiry within the company, but these 

were not enough to correct matters—indeed some action aimed to hide matters further from public view. This morning I look forward to learning more about the people involved in these decisions. These are people who, we now understand, did not 

believe Ms. Watkins, or who minimized her complaints. I look forward to discussing 

some of this with her this morning. 

In an interview with Committee investigators, Ms. Watkins has indicated that 

there are more widespread financial shenanigans that have yet to be reported. Also, 

it turns out she was more active in communicating concerns to the top than had 

previously been realized. I look forward to learning more about her late October conversations with Mr. Lay and other individuals—conversations on the eve of Enron’s collapse. 

Ms. Watkins, welcome. I appreciate your cooperation with this Committee and 

hope your testimony will help us get even closer to the truth.

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes himself for 10 minutes for questions. 

Ms. Watkins, when you and I—oh, I am sorry. I am sorry. It is 

a good thing we have staff here. Ms. Watkins, you are aware that 

this committee is holding an investigative hearing, and when holding an investigative hearing it is our practice to take testimony 

under oath. Do you have any objections to taking your testimony 

under—giving your testimony under oath today? 

Ms. WATKINS. No, I don’t. 

Mr. GREENWOOD. Okay. The Chair then advises you that under 

the rules of this committee, and the rules of the House, you are entitled to be advised by counsel. Do you choose to be advised by 

counsel today? 

Ms. WATKINS. Yes, I do. 

Mr. GREENWOOD. And would you identify your counsel for me? 

Ms. WATKINS. Mr. Philip Hilder. 

Mr. GREENWOOD. Okay. Sir, would you spell your last name, 

please? 

Mr. HILDER. Hilder, sir. H-I-L-D-E-R. 

Mr. GREENWOOD. Thank you. 

In that case, if you would please rise and raise your right hand, 

I will give you the oath. 

[Witness sworn.] 

Mr. GREENWOOD. You may be seated. You are under oath, and 

you are recognized for your opening remarks. You probably want 

to pull that microphone over to you, and it is fairly directional. 

TESTIMONY OF SHERRON WATKINS, VICE PRESIDENT OF 

CORPORATE DEVELOPMENT, ENRON CORPORATION 

Ms. WATKINS. Okay. Good morning, Mr. Chairman, members of 

the subcommittee. I am Sherron Watkins. And thank you for the 

opportunity to address the subcommittee this morning. 

Mr. GREENWOOD. Pull it up a little closer and speak right into 

it. There you go. 

Ms. WATKINS. I am currently employed at Enron Corporation as 

a Vice President. By way of background, I hold a master’s degree 

in professional accounting from the University of Texas at Austin, 

and I have been a certified public accountant since 1983. 

15

I began my career in 1982 at Arthur Andersen as an auditor. I 

spent 8 years at Andersen in both the Houston and New York offices. I joined New York-based MG Trade Finance in 1990 to manage their portfolio of commodity-backed finance assets. I held that 

position until October 1993. 

In October 1993, I was hired by Mr. Andrew Fastow and moved 

back to Houston to manage Enron’s newly formed partnership with 

CalPERS, the California Public Employee Retirement System. The 

partnership was the Joint Energy Development Investments Limited Partnership, or JEDI. I held the JEDI management portfolio 

position until the end of 1996. 

From 1997 until early 2000, I worked for Enron International, 

primarily in the mergers and acquisitions group, which is also 

known as the corporate development group. In early 2000, I transferred to Enron Broadband Services. I worked there until June of 

2001 in a variety of roles. 

In mid to late June of 2001, I went to work directly for Mr. 

Fastow, assisting in the corporate development work that had been 

put under his supervision after Cliff Baxter resigned in May of 

2001. I worked for Mr. Fastow in this new role until late August 

2001. I have since been reassigned into the human resources group 

with a variety of assignments. 

While working for Mr. Fastow in 2001, I was charged with reviewing all assets that Enron considered for sale and determining 

the likely economic impact of sale. As part of the sale analysis, I 

reviewed the estimated book values and market values of each 

asset. 

A number of assets were hedged with an entity called Raptor. 

Any asset that was hedged should, for the most part, have a 

locked-in sales value for Enron, meaning that despite current market prices Enron should realize the hedged price with Raptor. It 

was my understanding that the Raptor special purpose entities 

were owned by LJM, the partnership run by Mr. Fastow. 

In completing my work, certain Enron business units provided 

me with analyses that showed certain of the hedged losses that had 

been incurred by Raptor were actually coming back to Enron. The 

general explanation was that the Enron stock backstopping the 

Raptor hedge had declined in value such that Raptor would have 

a shortfall and would be unable to fully cover the hedge price that 

it owed to Enron. 

I was highly alarmed by the information I was receiving. My understanding as an accountant is that a company could never use 

its own stock to generate a gain or avoid a loss on its income statement. I continued to ask questions and seek answers, primarily 

from former co-workers in the global finance group, or in the business units that had hedged assets with Raptor. I never heard reassuring explanations. 

I was not comfortable confronting either Mr. Skilling or Mr. 

Fastow with my concerns. To do so I believed would have been a 

job terminating move. 

On August 14, 2001, I was informed of Mr. Skilling’s sudden resignation and felt compelled to inform Mr. Lay of the accounting 

problems that faced Enron. I sent Mr. Lay an anonymous letter on 

August 14, 2001, in response to a request for questions for an upVerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00019 Fmt 6633 Sfmt 6602 W:\DISC\77991 pfrm17 PsN: 77991
16

coming all-employee meeting to be held August 16 to address Mr. 

Skilling’s departure. 

At the all-employee meeting, Mr. Lay commented that our visions and values had slipped, and that if any employee was truly 

troubled by anything at Enron, please bring those concerns to him 

or any number of the top management, including Cindy Olson, 

Steve Kean, and others. 

On August 16, I met with Ms. Olson to show her a copy of the 

letter and discuss it with her. She encouraged me to meet with Mr. 

Lay personally. Since Mr. Lay was traveling through the rest of the 

week, she said the meeting would probably take place the week of 

August 20. 

I was concerned that Mr. Lay was planning to fill the Office of 

the Chair over the weekend and that he might choose Mr. Fastow 

or Rick Causey, the Chief Accounting Officer. To voice my concerns, 

I met with Rex Rogers, Enron’s Associate General Counsel, on Friday, August 17, 2001. I provided Mr. Rogers with a version of the 

anonymous letter as well as two additional memos, all of which are 

part of the seven pages that this committee discovered in mid January 2002. 

On Monday, August 20, 2001, Mr. Lay’s assistant scheduled a 

meeting for me to meet with Mr. Lay that following Wednesday, 

August 22, 2001. I subsequently held discussions with a former 

mentor at Andersen, James Hecker, and a long time friend and coworker, Jeffrey McMahon, to vet my concerns before my meeting 

with Mr. Lay. 

I met with Mr. Lay on the afternoon of Wednesday, August 22, 

2001. The meeting lasted just over one half hour. I provided him 

with five memos I had drafted to help explain the problems facing 

the company. These five memos constitute the seven pages this 

committee discovered and subsequently disclosed on January 14, 

2002. Additionally, I provided Mr. Lay an analysis of the Raptor 

entity economics and a presentation prepared by Enron’s risk assessment and control group. 

I primarily used the memo titled ‘‘Summary of Raptor Oddities’’

as talking points with Mr. Lay. My main point to Mr. Lay was that 

by this time Raptor owed Enron in excess of $700 million under 

certain hedging agreements. My understanding was that the 

Raptor entities basically had no other business aside from these 

hedges. Therefore, they had collectively lost over $700 million. 

I urged Mr. Lay to find out who lost that money. If he discovered 

that this loss would be borne by Enron shareholders via an 

issuance of stock in the future, then I thought we had a very large 

problem on our hands. I gave Mr. Lay my opinion that it is never 

appropriate for a company to use its stock to effect its income statement. 

At the conclusion of the meeting, Mr. Lay assured me that he 

would look into my concerns. I also requested a transfer as I was 

uncomfortable remaining as a direct report to Mr. Fastow. 

I intend to fully cooperate with the subcommittee, and I now welcome the opportunity to answer any questions the members may 

have at this time. 

Mr. GREENWOOD. Thank you very much for your testimony, Ms. 

Watkins. We all thank you again for being here. 

17

The Chair recognizes himself for 10 minutes for inquiry. 

Ms. Watkins, when we spoke yesterday you described that in 

your earlier days working for Mr. Fastow, the special purpose entities were basically legitimate. They seemed to be garden variety, 

securitized entities that were designed to serve legitimate financial 

purposes with which you had no qualms. And as you explained, 

Condor was one of those early SPEs that fit that category. 

As you described your time with the company, it seemed to me 

that it was like the story of the frog in the pot on the stove. That 

gradually, largely directed by Mr. Fastow, the rules of the game 

began to change, and the legitimacy of these entities and partnerships began to be stretched until finally we end up with something 

like the Raptors, which seem to serve no legitimate, and perhaps 

not even a legal, purpose. It seemed to me that the difficulty was 

that the corporate culture was slowly acclimated to this transition 

from what was quite legitimate, to what was clearly not legitimate. 

Let me ask you this specific question. Is it your opinion that the 

Raptor transactions were nothing more than sheer income statement manipulation? And if you do think that, why do you say so? 

Ms. WATKINS. That is my opinion, and it is my opinion because 

true economic risk was not passed to a third party. Raptor owed 

Enron in excess of $700 million, and there was not an outside third 

party that bore that loss. It was going to be borne by Enron’s 

shareholders by an issuance of stock in the future. 

Mr. GREENWOOD. Explain how that affected the income statements. 

Ms. WATKINS. The Raptor hedges were locking in, supposedly, 

sales value that Enron had on equity investments that it had 

made. The investments that were probably the more volatile was 

the tech investment in Avici and the New Power Company, a startup that Enron had done. 

Those investments were hedged with Raptor. They had dropped 

significantly in value, and in the related party footnote in 2000 it 

mentions that Enron had recognized $500 million of revenue from 

the special entities’ offsetting of corresponding writedown in the equity investment portfolio of Enron. 

I think that tended to make readers think that it was a $500 

million gain offset by a $500 million loss. Therefore, zero impact on 

the income statement. However, without the Raptor transactions, 

Enron would have had a $500 million loss not covered by any gains 

running through the 2000 income statement. 

Mr. GREENWOOD. As you came to understand this, prior to your 

first meeting with Mr. Lay, did you discuss these concerns with 

other employees at Enron? 

Ms. WATKINS. As I was doing my work and looking at these assets hedged by Raptor, my concern was that it seemed to be just 

common knowledge that the Raptor losses were backstopped by 

Enron stock. And an analysis was always looked at, what’s the 

value of Enron stock compared to the money Raptor owes us? And 

I was shocked that people could explain this to me with no concern 

in their voice, like there was some magic structure that Enron and 

Andersen had come up with to make this work. 

18

Mr. GREENWOOD. Did you get the impression, or was it said to 

you by others that they thought that this was perfectly legitimate, 

or that it was shaky, but everyone is going along with the deal? 

Ms. WATKINS. There were people like Mr. McMahon and others 

that had expressed concerns about LJM and the transactions 

Enron was doing with LJM. But for the most part, people seemed 

to think there was some accounting rule that was allowing this to 

be acceptable. It was very common knowledge. It wasn’t hidden. 

Mr. GREENWOOD. Did you watch Mr. Skilling’s testimony before 

this subcommittee last week? 

Ms. WATKINS. Yes, I did. 

Mr. GREENWOOD. Would you care to comment on how you reacted 

as you heard Mr. Skilling describe his awareness or lack of awareness or understanding of these transactions? 

Ms. WATKINS. Well, I would like to use Mr. Skilling’s own words 

to describe what I thought about his testimony. He was interviewed by Enron’s in-house newsletter in 2001. In the interview, 

Mr. Skilling was asked, ‘‘What is the best advice you ever received?’’ And his reply was, ‘‘If it doesn’t make any sense, don’t believe it.’’ Mr. GREENWOOD. Did you confront Mr. Skilling himself with this 

concern? 

Ms. WATKINS. No, sir, I did not. 

Mr. GREENWOOD. And why did you not? 

Ms. WATKINS. I did not want to do that without the safety net 

of a job in hand. I felt like it would be an immediate job terminating move. Frankly, I thought it would be fruitless, that nothing 

would happen. 

Mr. GREENWOOD. Did you have other experiences, or the experiences of others that led you to believe you might be putting your 

job on the line if you were to confront Mr. Skilling, or Mr. Fastow 

for that matter, with these concerns? 

Ms. WATKINS. Basically, it appeared that the Raptor transactions 

had been going on for a number of years. My understanding was 

that Mr. Skilling was fully aware of them. He is a very hands-on 

manager. I had also heard rumors that people as close to him as 

Mr. Baxter had complained to him, and he had done nothing. So 

I really felt it was fruitless to go to Mr. Skilling. 

Mr. GREENWOOD. Do you think it is possible that Mr. Skilling 

was unaware of the nature of these transactions? 

Ms. WATKINS. No, I do not. 

Mr. GREENWOOD. Could you tell us why you think that is not 

possible? He seemed to have forgotten about them. 

Ms. WATKINS. He is a very intense, hands-on manager. He was 

very involved in Mr. Fastow’s endeavors, and I find it very hard to 

believe that he was not fully aware of transactions with Mr. 

Fastow’s partnerships. 

Mr. GREENWOOD. Now, did Mr. Fastow learn that you had communicated your concerns to Mr. Lay? 

Ms. WATKINS. I did find out that he found out I was the writer 

of the anonymous letters, and that I had also met with Mr. Lay. 

I found that out August 30, 2001. 

Mr. GREENWOOD. And how did he respond? Did he name you Employee of the Month? 

19

Ms. WATKINS. Well, Ms. Olson told me that she and Ken Lay 

were both highly alarmed by Mr. Fastow’s reaction. He wanted to 

have me fired. He wanted to seize my computer. 

Mr. GREENWOOD. He wanted to have you fired? He told people 

he wanted to have you fired? 

Ms. WATKINS. That is what Ms. Olson told me. 

Mr. GREENWOOD. Okay. And he wanted your computer? 

Ms. WATKINS. Yes. 

Mr. GREENWOOD. And did he obtain your computer? 

Ms. WATKINS. He did, but Ms. Olson basically said, ‘‘Let me send 

you to your office with an IT person. Here is a new laptop. Transfer 

whatever files you want on to the new one. Delete whatever ones 

you want to on the old one. We will just hand him the hardware.’’

She said, ‘‘You don’t mind doing that, do you?’’ And I said, ‘‘No, I 

don’t.’’

Mr. GREENWOOD. So you pulled a fast one on Andy. Let us get 

to your face-to-face meeting with Mr. Lay. Could you describe for 

the committee how he reacted and what your impression of his reaction is, and particularly with regard to what extent it seemed to 

you, based on his comments, his reactions, that the news that you 

were bringing to him was surprising or not surprising, was alarming or not alarming, and to what extent it seemed to you that he 

had an appropriate response that would have convinced you, given 

you some comfort that he was, in fact, going to deal with this. 

Ms. WATKINS. Well, he tried to put me at ease. He knew this was 

probably difficult for me to do, and he recognized that. I handed 

him my set of documents and directed him to the Summary of 

Raptor Oddities document as a talking point. He seemed to take it 

very seriously. In fact, when he read the quote that I put in that 

memo about the manager level employee saying we are such a 

crooked company, he winced. You know, that seemed a painful 

comment to him. 

He was aware that these Raptor transactions had been presented 

to the Board, but I said my understanding of the way these things 

are generally presented, it is high level summaries, and I am not 

so certain that the true nature was fully disclosed. And he contended that I might be right, and by the end of the discussion, you 

know, he certainly said he would look into it and order an investigation, and asked me, you know, what could he do for me, which 

is when I requested the transfer out of Mr. Fastow’s group. 

Mr. GREENWOOD. Okay. My time has expired. 

The Chair recognizes the gentleman, Mr. Dingell, for 10 minutes 

for purposes of inquiry. 

Mr. DINGELL. Mr. Chairman, I thank you. Again, I commend you. 

Ms. Watkins, I want to commend you also. I hope you understand these questions are friendly, but our time is limited, so I, 

therefore, have to ask them in a way that gives you an opportunity 

to answer, where possible, yes or no. 

I will be working from a document which is entitled ‘‘Outlines of 

Points to Discuss with Ken Lay and Jim Derrick.’’

Ms. Watkins, you specifically asked that Vinson & Elkins not do 

this investigation. That was because they had approved many of 

the LJM deals as attorney for Enron, is that correct?

20

Ms. WATKINS. Yes, sir, it is. 

Mr. DINGELL. Now, I want to refer you to the document that I 

have just mentioned. This is a document which was prepared by 

Vinson & Elkins on the result of their investigation, and Jim Derrick is Enron’s General Counsel, is he not? 

Ms. WATKINS. Yes, he is. 

Mr. DINGELL. Ms. Watkins, and in this document it says that 

Jim Derrick decided not to engage an independent accountant as 

you had recommended. Is that correct? 

Ms. WATKINS. Yes. 

Mr. DINGELL. The caveat on the investigation was that they 

should not second-guess the accounting treatment. They would not 

do a detailed transaction analysis, and there would be no discoverystyle investigation. Did you know that at this particular time or at 

some later time? 

Ms. WATKINS. I was not aware that the investigation was being 

limited. I met with Vinson & Elkins on September 10 for roughly 

3 hours and had no indication that it was a limited investigation. 

I only discovered that it was limited when I read their October 15 

response, which was not provided to me. I read it off of this committee’s web page. 

Mr. DINGELL. It is fair to say that this, then, was not much of 

an investigation, was it? 

Ms. WATKINS. I don’t think so. 

Mr. DINGELL. Vinson & Elkins said that with all of these caveats 

there is no problem, except a cosmetic one, is that correct? 

Ms. WATKINS. That is what they concluded. 

Mr. DINGELL. And on page 7, Vinson & Elkins tells Ken Lay that 

Enron stock is being used to support transactions with Condor and 

Raptor. Enron was getting earnings through transactions with 

Raptor when it could be argued that there was no third party involved. And because of the falling value of both Enron stock and 

asset value, the question was raised as to who bears the loss. 

These are exactly the same questions you had asked earlier. Isn’t 

that so? 

Ms. WATKINS. Yes, sir. 

Mr. DINGELL. Now, then, Vinson & Elkins says at page 8 of the 

document, ‘‘Notwithstanding these bad cosmetics, Enron representatives uniformly stated that Condor and Raptor vehicles were clever, useful vehicles that benefited Enron.’’ What this says to me, 

that everyone—Vinson & Elkins, Ken Lay, Jim Derrick, and all of 

the people they interviewed—knew that these were not special purpose vehicles that bore risk. Is that correct? 

Ms. WATKINS. It would appear to be so, yes. 

Mr. DINGELL. And they knew that they were in bad financial 

shape, did they not? 

Ms. WATKINS. Yes. 

Mr. DINGELL. And they had approved them, had they not? 

Ms. WATKINS. Yes. 

Mr. DINGELL. So when high level officials say they didn’t know 

about these vehicles, can that be true? 

Ms. WATKINS. No, they knew about the vehicles. 

Mr. DINGELL. Now, what do you think all of these people expected to happen at this point in September 2001? 

21

Ms. WATKINS. I think what is interesting to note is that it says 

here, ‘‘The Raptor vehicles were clever, useful vehicles that benefited Enron.’’ I think that there was an understanding that Andersen and Vinson & Elkins had blessed these things. When I met 

with Rex Rogers on August 17, he said, ‘‘Sherron, how could you 

possibly be right? Andersen and Vinson & Elkins would not risk 

their firms giving us wrong advice. They have blessed these structures.’’ And so I think that certain people at Enron thought that 

these were complex but clever, and that they were legitimate. 

Mr. DINGELL. Now, so here we have a situation where Vinson & 

Elkins does—I think they had to—some kind of due diligence, or 

gave legal advice to Enron on these matters. Is that not so? 

Ms. WATKINS. Yes, sir. 

Mr. DINGELL. The accountant was in the similar position, both 

as accountant and as consultant, is that not so? 

Ms. WATKINS. Yes, that is right. 

Mr. DINGELL. So am I fair in inferring from this that their statements about the character of these devices as being of benefit to 

Enron was in error? 

Ms. WATKINS. Well, a benefit to Enron, if you consider that we 

were meeting financial statement targets that we had told investor 

analysts, but you can’t meet those targets falsely. 

Mr. DINGELL. So they were essentially representing them as 

being a benefit in the meeting of targets which could not be met. 

Ms. WATKINS. Yes, sir. 

Mr. DINGELL. Mr. Chairman, in the interest of time, I would like 

to just ask unanimous consent to introduce the document to which 

I have referred. 

Again, Ms. Watkins, you are a woman of extraordinary courage. 

We thank you for your assistance. 

Mr. GREENWOOD. Without objection, the document to which the 

gentleman from Michigan refers, and all of the other documents in 

the binder, will be made a part of the record. 

The Chair recognizes the gentleman, Mr. Tauzin, for 10 minutes. 

Chairman TAUZIN. Thank you, Mr. Chairman. 

First, Ms. Watkins, I apologize that we scheduled this hearing on 

Valentine’s Day. We want to wish you Happy Valentine’s Day. 

Ms. WATKINS. Thank you. 

Chairman TAUZIN. I want to refer to the document which you 

handed Ken Lay on October 30. That document has been widely 

publicized in the last several days. Some have characterized it as 

an attempt to describe a public relations effort to help the company 

through this problem. 

I want you to tell me whether the facts outlined in that document, to your best knowledge and belief, are true. 

Ms. WATKINS. Yes, sir. I was providing this to Mr. Lay as a concept on public relations. However, I felt it was a truthful public relations strategy, and it was something I felt should be said. 

Chairman TAUZIN. The things you recommended that Mr. Lay 

say and do are based upon facts in this document that you believe 

to be true. 

Ms. WATKINS. Yes, I do believe that Mr. Skilling and Mr. Fastow, 

along with two very well respected firms, did dupe Ken Lay and 

the Board. 

22

Chairman TAUZIN. You say that, ‘‘As CEO, Mr. Lay relied upon 

his COO, Mr. Skilling, as well as CFO Fastow and CAO Causey, 

to manage the details.’’ Is that correct? 

Ms. WATKINS. Yes. 

Chairman TAUZIN. Is that accurate? Was Mr. Skilling expected 

to manage the details of these transactions? 

Ms. WATKINS. From all the records and the presentations that I 

have reviewed, Mr. Skilling was supposed to be an integral part of 

the controls and the review process with the LJM transactions. 

Chairman TAUZIN. Did you see Mr. Skilling’s testimony last week 

before this committee? 

Ms. WATKINS. Yes, sir, I did. 

Chairman TAUZIN. Did you specifically hear his testimony regarding the LJM approval sheets? 

Ms. WATKINS. Yes, I did. 

Chairman TAUZIN. Now, he testified that he never saw these 

sheets and he was not required to sign them. That is why he didn’t 

sign them. Is it your testimony that he, in fact, knew about these 

sheets? 

Ms. WATKINS. Well, all I can speak to is that it was Enron’s very 

strict policy, when completing transactions and deals, to have deal 

approval sheets, and there was never a name put on the approval 

block that was not required. And I don’t ever remember an instance where signatures were not obtained for every person listed. 

Chairman TAUZIN. So that if Mr. Skilling’s name consistently appears on the sheets, but it remains unsigned, it was not because 

he was not obligated to sign it. It was because he just didn’t sign 

it. 

Ms. WATKINS. That is correct. 

Chairman TAUZIN. Is that correct? 

Ms. WATKINS. That would be my understanding of our very strict 

procedures, yes. 

Chairman TAUZIN. Were those procedures that Mr. Skilling 

would have understood? 

Ms. WATKINS. Yes. 

Chairman TAUZIN. You say also in the memo that Mr. Lay 

should admit that he trusted the wrong people. Are you saying that 

Mr. Lay was wrong to trust Mr. Skilling and Mr. Fastow and Mr. 

Causey with these details? 

Ms. WATKINS. Yes, sir. I do believe they misserved Mr. Lay, the 

Board, Enron, and its shareholders. 

Chairman TAUZIN. In fact, you go on to say that Ken Lay and 

his Board were duped by a COO who wanted the targets met no 

matter what the consequences, a CFO motivated by personal greed, 

and two of the most respected firms—Arthur Andersen and Company and Vinson & Elkins—who had both grown too wealthy off 

Enron’s yearly business and no longer performed their roles as Ken 

Lay, the Board, and just about everybody on the street would expect as a minimum standard for CPAs and attorneys. Do you believe that statement to be true? 

Ms. WATKINS. Yes, sir, I do. 

Chairman TAUZIN. You say further on the culprits are Skilling, 

Fastow, Glisan, Causey, as well as Arthur Andersen and Vinson & 

Elkins. Do you believe that statement to be true? 

23

Ms. WATKINS. Yes, sir, I do. 

Chairman TAUZIN. Now, in Mr. Skilling’s testimony, he very specifically denied any knowledge that in these transactions Enron 

Corporation had not properly transferred the risk to cover the 

losses. Do you believe that statement to be true? 

Ms. WATKINS. No, I do not. Mr. Skilling was a great proponent 

of looking to the markets to make sense of a transaction. And I 

doubt we could have hedged these volatile stocks with any true unrelated third party at the prices that we were actually able to obtain from Raptor. 

Chairman TAUZIN. Is it your testimony, then, that Mr. Skilling 

must have known about the details of the Raptor transaction to 

know that risk had not transferred? 

Ms. WATKINS. It is my opinion that he was probably aware that 

we could not have transacted at those prices with an unrelated 

third party, and the only reason Mr. Fastow was transacting with 

Enron through the Raptor transactions at those prices for volatile 

stocks was that Mr. Fastow could not lose money and he was backstopped by Enron stock. 

Chairman TAUZIN. Now, Ms. Watkins, you made it as clear as I 

have ever seen anybody make it. You basically outlined for Mr. Lay 

what would happen if he did the right thing—he cleaned up this 

mess, reported correctly to his stockholders and investors, if he got 

rid of the culprits, and if he made these public statements on behalf of the corporation that he, in fact, was going to do everything 

to say his company. 

And that if he didn’t take that advice, you told him, ‘‘The worst 

is going to happen. It is going to happen anyhow. And Mr. Lay will 

be more implicated in this than is deserved.’’ What did you mean 

by that? 

Ms. WATKINS. Mr. Lay was back at the helm as CEO, and it is 

my humble opinion that he did not understand the gravity of the 

situation the company was in. 

Chairman TAUZIN. Now, you explained to him, as the Chairman 

has outlined, in rather detailed form, what you thought was wrong 

with Raptors, what you thought was wrong with these transactions. Did he understand the gravity, the implications, of what 

you were telling him, in your opinion? 

Ms. WATKINS. In my opinion, I don’t think he did. And I have 

that opinion because at an October 23 all-employee meeting to discuss the writedowns that had occurred in the third quarter there 

were several questions about Raptor and about the LJM transactions. 

And Mr. Lay likened the problem the company was now facing 

to a 1980’s problem when the Peruvian government nationalized an 

oil company Enron had to a J-block problem Enron had in 1997. 

And I don’t think an accounting manipulation problem is in any 

way related to a—— Chairman TAUZIN. You are saying he didn’t get it. 

Ms. WATKINS. No, I don’t—— Chairman TAUZIN. He didn’t get it. Now, as I understand your 

memo to him, you are basically telling him that these officials of 

his corporation were engaging in improper activities, were doing it 

in a way that he and his Board were being duped, kept in the dark. 

24

Who had the power to protect those people from discovery from Mr. 

Lay and his Board? Who had the power to allow these activities to 

go forward, by all of these employees, including investing themselves in some of these outside partnerships and entities at great 

profit? Who had the power to let all of that happen and keep that 

information from the Board and Mr. Lay all that while? 

Ms. WATKINS. My opinion would be that would be Mr. Skilling. 

Chairman TAUZIN. And, finally, Ms. Watkins, I refer you to the 

document entitled ‘‘Lessons Learned,’’ Tab 8. In that document 

there are three points—recognize the accounting hedge versus an 

economic hedge, corporation should consider hedging assets in 

Raptor to minimize credit capability/volatility, the new Raptor 

structure transferred risk in the form of stock dilution. Did you 

show this document to Mr. Lay? 

Ms. WATKINS. Yes, I did. 

Chairman TAUZIN. Now, it contains some handwriting. Whose 

handwriting is that? 

Ms. WATKINS. That is my handwriting. 

Chairman TAUZIN. The handwriting basically says to the final 

point, there it is. That is the smoking gun. You cannot do this. 

What did this mean? 

Ms. WATKINS. Well, my concern was that this was a document 

Enron had produced. It was well known. What that bullet point is 

trying to say in plain English is that the new Raptor structure 

transferred income statement equity investment risk in the form of 

stock dilution. And you can never use your stock to affect the income statement. 

Chairman TAUZIN. You just——

Ms. WATKINS. You can’t do that. 

Chairman TAUZIN. [continuing] can’t do that legitimately, legally. 

Ms. WATKINS. That is correct. 

Chairman TAUZIN. Where did you get this document? 

Ms. WATKINS. From the risk assessment and control group run 

by Mr. Richard Buy. 

Chairman TAUZIN. And if I may, what was Mr. Lay’s reaction to 

this document when you showed it to him? 

Ms. WATKINS. He was concerned. He was concerned with everything I was telling him. 

Chairman TAUZIN. There is another note you wrote on the second 

point. ‘‘The corporation isn’t Raptor. How could corporation consider anything at Raptor?’’ What did you mean by that? 

Ms. WATKINS. Well, the bullet point just says the corporation 

should consider hedging assets in Raptor to minimize, you know, 

some problems. And if Raptor is supposed to be Mr. Fastow’s company, then it is Mr. Fastow’s problem. Why should Enron Corporation——

Chairman TAUZIN. Not the corporation. 

Ms. WATKINS. [continuing] consider anything there? Exactly. 

Chairman TAUZIN. Even with this, you still say he didn’t get it? 

Ms. WATKINS. I don’t think so. 

Chairman TAUZIN. Thank you, ma’am. 

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentleman from Florida, Mr. Deutsch, for 10 minutes. 

25

Mr. DEUTSCH. Thank you, Ms. Watkins. Someone reading 

through Enron’s statements, would they have a perspective that 

those statements fairly represent the status of the company prior 

to the bankruptcy? 

Ms. WATKINS. I don’t think so. I think that related party footnote 

is wholly inadequate in describing the transactions with Mr. 

Fastow’s partnerships. 

Mr. DEUTSCH. Okay. So I think all of us would probably agree 

with what you just said. How was that able to happen? How were 

we able to get to the seventh largest company in America under 

what we consider general accounting principles that those statements are supposed to fairly represent what is going on in the company? And you and me and I think anyone who has looked at this 

would come to the same conclusion that they do not. How did that 

happen? 

Ms. WATKINS. It is inconceivable, and I don’t understand how it 

happened. 

Mr. DEUTSCH. I mean, obviously, it happened. I mean, at some 

point in time someone had to have had discussions between people 

at Enron and their accountants, Arthur Andersen, and their attorneys, Vinson & Elkins. I mean, are you aware of discussions that 

would have allowed it to happen? 

Ms. WATKINS. I can really just point to what Mr. Stupak said in 

the emperor’s new clothes. There were swindlers in the emperor’s 

new clothes discussing the fine material that they were weaving. 

And I think Mr. Skilling and Mr. Fastow are highly intimidating, 

very smart individuals, and I think they intimidated a number of 

people into accepting some structures that were not truly acceptable. 

Mr. DEUTSCH. This is somewhat of a side light, but I think something significant. At the time that you were obviously aware of 

what was going on, I mean, that the statements of the company did 

not reflect, in fact, huge losses in the billions of dollars, so what 

the value of Enron was was—as reflected in its stock price was not 

its true value. And there were people, obviously, in Enron that 

knew about this. 

And, apparently, what we know—and I am trying to get a copy 

at this point, but it is a public domain at this point—that effectively dozens of management people were selling hundreds of millions of dollars worth of stock at this period of time. 

So, obviously, people knew what was going on, because my recollection is that there was only one actual purchase with, you know, 

dozens of sales. Was that the sort of culture of what was going on 

in terms of the inside management at this point in time? Understanding, in fact, what you uncovered and what we know now, that 

the value was not—that the liability of these Raptors was not reflected in the statements. 

Ms. WATKINS. It is hard for me to say about executives who sold 

stock, because so many of them thought that somehow or other this 

was legitimate. I am——

Mr. DEUTSCH. Legitimate, but they also knew that there was an 

actual loss out there, and legitimate also that it seems as if everyone understood that the partnership could never make good on that 

loss. So there was—so people who actually understood the partnerVerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00029 Fmt 6633 Sfmt 6602 W:\DISC\77991 pfrm17 PsN: 77991
26

ships understood that eventually that loss was going to come back 

to Enron. 

I mean, it might have been legal, but as a practical matter, in 

terms of the value of the company, I can’t imagine how they 

wouldn’t know that that—there was going to be a day of reckoning 

at some point in time. 

Ms. WATKINS. You could be right. I can’t really speculate. Enron 

is a very arrogant place, with a feeling of invincibility. And I am 

not certain people felt like it was that imminent. They just felt like 

Mr. Fastow, along with the accountants, would come up with some 

magic in the future. 

Mr. DEUTSCH. Was there any thought at all—I mean, because, 

again, I guess what I am hearing you say and when I look at it 

at this point, is that anyone—and I don’t think you had to be a 

Harvard MBA at this point or an Arthur Andersen partner to understand that there were liabilities that were not reflected in the 

balance sheet of the company, huge liabilities, in the billions of dollars. 

And if you knew that and the market and the transparency in 

the public markets, you knew the stock was going to go down at 

some point. Was there any concern at all for shareholders for employees that 100 percent of their life savings in 401Ks to retired 

people throughout the country who had investments in Enron stock 

who really have been devastated by this collapse of Enron? And 

was there any thought, any discussion, what this would mean to 

actual shareholders? 

Ms. WATKINS. I never heard any discussions. 

Mr. DEUTSCH. Did you have any sense at all that there was any 

concern for shareholders at all? 

Ms. WATKINS. I don’t recall any discussions of concerns like that. 

Mr. DEUTSCH. You have testified, and, you know, you have used 

the word I guess ‘‘improper.’’ I feel comfortable using the word ‘‘illegal,’’ because—and, you know, I guess sometimes I debate whether 

to go into, you know, what level of detail in terms of these transactions. But I think we have to go into some detail really to understand them and also for—just to have it on the record in this sense. 

The hedging, okay, Avici—all right. That would have been a normal business decision. What was the original investment of Avici? 

Do you know the detail? 

Ms. WATKINS. I don’t have exactly what was originally——

Mr. DEUTSCH. Do you have a ballpark number? 

Ms. WATKINS. I really don’t. I think it was under $10 million. 

Mr. DEUTSCH. Okay. And what was it—what was the price when 

the hedge was put into effect, the value, the——

Ms. WATKINS. I believe around $166 or $170 a share. 

Mr. DEUTSCH. So the value was $166 million at that point? Or 

more? 

Ms. WATKINS. Enron’s value was probably in excess of $150 million by then. 

Mr. DEUTSCH. Okay. So the idea was to hedge that increase. And 

what you have said and what you have testified to is, first of all, 

could they have gone to a legitimate third party, an investment 

bank, to buy—a derivative to buy a put for that—for the strike 

price? I mean, was that available? 

27

Ms. WATKINS. I believe we had some hold restrictions on the 

stock, but probably there were some transactions, derivative transactions, that were available to us from unrelated parties. 

Mr. DEUTSCH. Okay. And, again, just to kind of walk through 

this specific transaction, so in a ballpark number, what would an 

unrelated third party ask for to sell that type of put to lock in that 

gain? Just a ballpark number. 

Ms. WATKINS. Well, I don’t think you could have locked it in at that $170 price. 

Mr. DEUTSCH. Right. 

Ms. WATKINS. There would have been a significant haircut to 

that price. 

Mr. DEUTSCH. Right. Can you use real numbers? 

Ms. WATKINS. As much as, I would say, 30 or 40 percent. 

Mr. DEUTSCH. Okay. And that strike price would be at what 

number? 

Ms. WATKINS. Probably more like $120 or $110, maybe even 

lower. I am—— Mr. DEUTSCH. Okay. And then, what was the price that was sold 

by the partnership, by the Raptor? 

Ms. WATKINS. I don’t believe that we have sold it. I believe Avici 

is selling for somewhere—— Mr. DEUTSCH. No, no. The put. The—— Ms. WATKINS. Oh, I think $170 a share. 

Mr. DEUTSCH. No, no. But what was the—what did it cost Enron 

to buy it from this partnership? 

Ms. WATKINS. I am not familiar exactly what those details. 

Mr. DEUTSCH. Ballpark about? 

Ms. WATKINS. Well, I don’t know exactly how the Raptor puts or fees were paid. I do know that approximately $35 million went to 

Mr. Fastow or went to LJM out of the Raptors, and that that was 

supposedly representing fees. But that was for all of the hedges. 

Mr. DEUTSCH. Right. And I guess this is where, you know, I 

think that, you know, we have crossed the line of illegal activity, 

because what I hear you saying is that that transaction that you 

just described, which was one of many transactions, and basically 

there was this sort of cookie cutter of locking this in, and what appears to have happened is Arthur Andersen and Vinson & Elkins 

basically gave approval for this cookie cutter in terms of basically 

locking in value. You lock in the gain on the balance sheet as a 

gain. Then you basically have this sham transaction, and that’s the 

whole point. 

What you seem to be absolutely, I think, convinced of, and what 

I am as well, is that if a third party would have sold it at a market 

price, and this sort of partnership which was headed by the CFO 

of the company, Mr. Fastow, as, you know, head of the general 

partnership, as the general partner, basically selling it to yourself. 

And it is at a different price than a third party price. 

By definition, you know, it is not an arms length transaction. I 

mean, by definition. If the price is so significantly different, that 

is No. 1. And, No. 2, what is absolutely clear—and I think, you 

know, just trying to elaborate on this a little bit, getting into some 

of the details—that there really—the transaction never really existed, because as opposed to guaranteeing the gain this general 

28

partnership—no one in this transaction ever—I mean, ever contemplated that the general partnership could ever guarantee the 

gain. 

I mean, it could only guarantee the gain if the stock went up and 

Enron’s stock went up. Is that accurate? 

Ms. WATKINS. Yes, it is. The saying around Enron was that 

heads Mr. Fastow wins, tails Enron loses. 

Mr. DEUTSCH. And that obviously is not a transaction. 

Ms. WATKINS. No. 

Mr. DEUTSCH. That is not a business transaction. I mean, that 

is not a transaction that—I mean, could you contemplate in any 

shape, manner, or form that there was a business purpose? 

Ms. WATKINS. No. Other than making sure those losses were not 

borne by Enron’s financial statements, which is not economic. 

Mr. GREENWOOD. The time of the gentleman has expired. 

The Chair would note the presence of the gentleman from Oklahoma, Mr. Largent, and would also note that this is his last day 

as a member of the U.S. House of Representatives. He has long 

been a valued, respected, and I would say admired member of this 

committee. We have valued his contribution. I understand that the 

gentleman does not have time to inquire, or he does? 

Mr. LARGENT. Mr. Chairman, all I wanted to do is ask unanimous consent to submit my opening statement for the record. 

Mr. GREENWOOD. Without objection, the gentleman’s opening 

statement will be part of the record, and the Chair and the committee wishes him well in his future endeavors and recognizes the 

gentleman from North Carolina, Mr. Burr, for 10 minutes to inquire. 

Mr. BURR. I thank the Chair. We will miss Steve Largent. 

Sherron, once you started to look for the problems, how long did 

it take you to identify the degree of problems that existed in some 

of these transactions? 

Ms. WATKINS. Actually, not very long. I did know from the footnote that Enron had recognized $500 million of revenue in 2000 

from the Raptor hedging transactions. $500 million is a significant 

number when you look at our net income for 2000. As soon as I 

discovered that the losses at Raptor were backstopped by Enron, 

and that is the way the structure worked, I knew we had a very 

large problem. 

Mr. BURR. Could anybody charged with a review of what took 

place in these partnerships have missed it? 

Ms. WATKINS. I don’t think so, and I was highly alarmed that 

this had occurred and been allowed to go on for so long. 

Mr. BURR. Did you feel like the letter that you had sent to Mr. 

Lay really did lay out a blueprint of what people should look at if 

they were outside concerns looking in at these transactions? 

Ms. WATKINS. Yes, I did. 

Mr. BURR. Let me go to the Vinson & Elkins—I think this was 

a preliminary outline that they used that Mr. Dingell just put in 

the record. It was used to discuss—to be a discussion draft with 

Mr. Lay and Mr. Derrick. And, specifically, I want to go to item D, 

caveats, first one. And in that it says, ‘‘No second-guessing of accounting treatment by AA.’’ Interpret that for me if you will. 

29

Ms. WATKINS. That they did not want Vinson & Elkins to make 

any—or give any opinions regarding whether the accounting treatment was proper, just assume that it was. 

Mr. BURR. Let me move to your meeting with Mr. Lay I think 

on August 22. You said you spent almost an hour. He seemed surprised by a lot of the things. But he made some commitments to 

you to look into it, didn’t he? 

Ms. WATKINS. Yes, he did. 

Mr. BURR. Having left that meeting, was there ever an exception 

that Mr. Lay made relative to these accounting discrepancies that 

you raised, that he wasn’t going to look at those but he might look 

at something else? 

Ms. WATKINS. No. I understood that he was going to try to get 

to the bottom of my concerns. 

Mr. BURR. Is there any way that what you shared with him could 

have been heard in a way that you could do an independent review 

of these transactions, leaving out second-guessing accounting treatment and believe that you could fully understand what you had 

raised with him? 

Ms. WATKINS. No. The point is the accounting treatment. The 

point is the accounting disclosures in the footnotes to the financial 

statements. 

Mr. BURR. When you left that meeting with Ken Lay, did it ever 

cross your mind that they would turn to somebody who already had 

a relationship with Enron, be it Vinson & Elkins or Andersen, to 

actually do the review of their own work? 

Ms. WATKINS. I didn’t think they would choose V&E. I was 

slightly—well, more than slightly disappointed to find out that they 

subsequently did choose Vinson & Elkins to conduct the investigation. 

Mr. BURR. Did Mr. Lay stress with you that he would have a review done that was independent or that was thorough? 

Ms. WATKINS. He stressed that he would get to the bottom of it. 

He would look into my concerns. He didn’t really go into detail as 

to what he was going to do to do that. 

Mr. BURR. Well, I think that this discussion outline for the meeting really lays out the no second-guessing of accounting treatment 

by Arthur Andersen, no detailed transaction analysis. And it seems 

that V&E was given very specific instructions, ‘‘We need you to 

produce a report. We need you to stamp it okay. But don’t raise 

any questions about any of these things that have been brought to 

our attention.’’ Is that pretty much what he did? 

Ms. WATKINS. Well, it appears from this V&E document that 

they had a very limited scope. 

Mr. BURR. Sherron, prior to the release of V&E’s final report, 

they briefed you orally, I think on 10/16. Is that correct? 

Ms. WATKINS. I think they had issued their report. I had not 

seen it. I didn’t see it until this year. They briefed me after the 

earnings release that morning. 

Mr. BURR. And was that the first time that you knew that Vinson & Elkins had turned to Arthur Andersen to play a part in their 

review of the accounting discrepancies that you had raised that 

they had already signed off on? 

30

Ms. WATKINS. Yes, that is—it was roughly a 2-hour meeting 

where Joe Dilg and Max Hendrick went through how they had conducted their investigation. The reason they said that they chose to 

have Arthur Andersen relook at their own work was in the interest 

of time, that the company wanted a speedy response, and no other 

accounting firm could get up to speed on these transactions very 

quickly. 

But they also told me other things that—where they had limited 

their investigation despite suggestions that I had given them on 

September 10 when we had initially met for 3 hours at the beginning of the investigation. 

Mr. BURR. What was your reaction to that? 

Ms. WATKINS. I was highly alarmed. I did not think it was good 

advice for Mr. Lay. They told me that, you know, the conclusion 

was the accounting was appropriate when done. The cosmetics 

were bad, but it was appropriate. And I felt like that was—especially since I knew that we had unwound these transactions and 

written off $1.2 billion in shareholder equity that very morning, we 

happened to close that day at $33 a share, about the same price 

we had opened with that morning. But my concern was that wasn’t 

going to stick. 

I gave it less than a 5-percent probability that this was going to 

go quietly, and I was highly concerned that not only had the Titanic hit the iceberg, but we were already tilting. 

Mr. BURR. Is it safe to say you didn’t feel like the commitment 

that Mr. Lay had made to you to get to the bottom of it had successfully been accomplished? 

Ms. WATKINS. Yes, that is correct. I did not feel that. 

Mr. BURR. Sherron, one last question if I can, and it really deals 

with Enron management and their interaction between themselves 

and their audit firm. Are you aware at any point in that relationship, as these partnerships were created or as they fell, where 

Enron management in any way, shape, or form used anything persuasive to encourage Andersen to turn their head or shut their 

eyes at the structure or the outcome of these partnerships? 

Ms. WATKINS. I don’t think it was a turn the head kind of deal. 

Mr. Rogers, when I met with him August 17, he did say, ‘‘Well, you 

know, we push our internal accountants quite hard.’’ He mentioned 

we probably push our outside auditors pretty hard. So he seemed 

to indicate that there was probably a lot of pressure that Enron put 

on Andersen to accept the structures that Enron was developing 

around the Raptor vehicles. 

Mr. BURR. And given the timing of the V&E briefing with you, 

which was 10/16, which was close to that financial reporting period, 

can you share with me what V&E said about the 10/16 earnings 

release? 

Ms. WATKINS. About the earnings release itself? 

Mr. BURR. About that current earnings release, what they said 

on 10/16. Did they address the earnings release? 

Ms. WATKINS. Well—— Mr. BURR. I think it was a press statement that went out, and 

I think there was the announcement of the $577 million——

Ms. WATKINS. We had a press release that we had unwound 

some of the LJM transactions and taken these writeoffs and reducVerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00034 Fmt 6633 Sfmt 6602 W:\DISC\77991 pfrm17 PsN: 77991
31

tions of shareholders equity in the third quarter. It was my opinion 

that we should restate, and Mr. Dilg responded, ‘‘Do you really 

think Mr. Lay should ignore the advice of his counsel in this matter?’’

Mr. BURR. Given that you are going through a release from Enron with a $577 million adjustment, and a writedown of $1.2 billion in shareholder equity, how is that consistent with the report 

that V&E’s briefing you on that there is no problems? 

Ms. WATKINS. Well, it was very surprising to me. I said, ‘‘Well, 

if you told Mr. Lay that the accounting was appropriate, why did 

we unwind these deals? Why take $1.2 billion writedown to equity 

if these deals are okay?’’ And their reply to me was that, ‘‘Well, 

that was a business decision. I believe Mr. Lay felt like that these 

transactions were a distraction from core business, and he just decided to unwind them.’’ Mr. BURR. Sherron, thank you very much. I yield back. 

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentleman from Michigan, Mr. Stupak, for 10 minutes. 

Mr. STUPAK. Thank you, Mr. Chairman. 

Ms. Watkins, thanks again for coming. Let me pick up a little bit 

where Mr. Burr just left off. In the financial statement, there was 

pressure there to approve these special SPEs and these transactions. And you said—the question about Enron putting pressure 

and you said, ‘‘Well, I am sure there is pressure on the internal 

auditors and external auditors.’’ But before a financial statement goes public, doesn’t Arthur Andersen have at least a fiduciary responsibility to say, ‘‘This ain’t 

right. It is not going in a financial statement before it is put out 

to the public?’’ Ms. WATKINS. My understanding as a former accountant is that 

it is an odd situation. The accounting industry is paid by companies requesting their services, but an accounting firm is supposed 

to keep their eye on who is relying on their opinions. Outside investors are relying on their opinions. That is who they are there to 

protect, and they make an opinion that these financial statements, 

including the footnotes, fairly represent the financial condition of 

the company. 

Mr. STUPAK. And if these transactions are questionable, that may 

not fairly accurately represent the financial condition of the company. And they really have the ultimate responsibility before it is 

released to the public to say yes or no to putting this in. Is that 

a fair statement? 

Ms. WATKINS. Yes, that is correct. 

Mr. STUPAK. How about Vinson & Elkins, would they have the 

same kind of responsibility on the financial statements? 

Ms. WATKINS. I don’t think law firms necessarily have the same 

responsibility. 

Mr. STUPAK. Okay. Let me take you back a few years. Eight 

years ago—you said for 8 years you worked with Arthur Andersen. 

While there are Arthur Andersen, did you have any document retention policy back then? 

Ms. WATKINS. I am sure we did. 

Mr. STUPAK. Okay. Then let me ask the question this way. While 

at Arthur Andersen, how often did you see a memo or correspondVerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00035 Fmt 6633 Sfmt 6602 W:\DISC\77991 pfrm17 PsN: 77991
32

ence from the higher-ups saying, ‘‘Just want to remind you all of 

our retention policy, i.e. destruction policy?’’

Ms. WATKINS. I don’t recall a lot of information about that. That 

was, of course, 14 or so years ago. 

Mr. STUPAK. Sure. 

Ms. WATKINS. And I am sure the policies have changed. 

Mr. STUPAK. Well, during your 8 years, did you ever remember 

receiving or seeing one of these memos saying, ‘‘Just want to remind you of our retention policy’’? 

Ms. WATKINS. I don’t recall necessarily——

Mr. STUPAK. Okay. 

Ms. WATKINS. [continuing] any specific memo on that. 

Mr. STUPAK. In your 8 years at Arthur Andersen, or while you 

were based in Houston, did you work on the Enron account then? 

Ms. WATKINS. No, I did not work on the Enron account. 

Mr. STUPAK. Okay. You took Cliff Baxter’s position as Vice President under Mr. Fastow, correct? 

Ms. WATKINS. Well, no. When Mr. Baxter resigned, the whole 

corporate development function was assigned and put under Mr. 

Fastow. So I went to work directly for Mr. Fastow helping him in 

that corporate development area. 

Mr. STUPAK. Did you work under Mr. Baxter before then? 

Ms. WATKINS. Indirectly, yes, I did. 

Mr. STUPAK. Do you know why he retired? 

Ms. WATKINS. It was to spend more time with his family. 

Mr. STUPAK. Okay. He wasn’t forced out of the company or anything like that? 

Ms. WATKINS. Oh, no. No. 

Mr. STUPAK. Okay. Is it fair to say that these questionable transactions, the LJM and Raptor, would they possibly be discovered by 

the next Vice President who went in there? 

Ms. WATKINS. I think they were very easy to discover. 

Mr. STUPAK. Okay. 

Ms. WATKINS. The facts weren’t really hidden. 

Mr. STUPAK. Okay. In response to a question from Mr. Dingell, 

if I heard you correctly, you said Cliff Baxter complained to Mr. 

Skilling. What did he complain to Mr. Skilling about? 

Ms. WATKINS. My understanding is that Mr. Baxter complained 

that it was inappropriate for a company of our size, of our stature, 

to do transactions with the CFO’s partnership. It was inappropriate. It didn’t look good. We shouldn’t be doing transactions with 

the CFO’s partnership. 

Mr. STUPAK. And the CFO at this time was Mr. Fastow. 

Ms. WATKINS. Mr. Fastow. 

Mr. STUPAK. Okay. In your opinion, why did Mr. Skilling then 

leave Enron on August 14, 2001? 

Ms. WATKINS. It is my opinion that he could foresee these problems, and he wanted to get as far away from it as possible. 

Mr. STUPAK. Okay. Again, some questions from Mr. Dingell. You 

indicated when asked about Raptor and LJM, the hedging, it was 

common knowledge how they were doing this. And that it really 

wouldn’t stand up, because they weren’t—their assets weren’t 

there. Common knowledge by whom? 

33

Ms. WATKINS. The different business units that were hedging 

their assets with Raptor, as well as the global finance staff under 

Mr. Fastow. 

Mr. STUPAK. Okay. Mr. Dingell actually read a little bit from this 

one document which he placed in the record. I believe it is on page 

8. And it said, ‘‘Notwithstanding these bad cosmetics, Enron representatives uniformly stated that the Condor and Raptor vehicles 

were clever, useful vehicles that benefited Enron.’’ So my question—if they are pledged 100 percent with Enron stock, and then 

they couldn’t meet the hedges as the stock started to fall, therefore, 

they didn’t benefit Enron, the employees, or the shareholders of 

Enron, did they? 

Ms. WATKINS. No, they did not. 

Mr. STUPAK. I mean, clever but not legal and not benefiting 

Enron. 

Ms. WATKINS. Yes, that is correct. 

Mr. STUPAK. Who did they benefit? 

Ms. WATKINS. You could possibly say that they benefited Enron, 

because it allowed Enron to meet projected financial targets, which 

kept Enron’s stock price inflated. 

Mr. STUPAK. Okay. So, then, that benefit then would go to Enron, 

but that benefit was then taken out of Enron, was it not? 

Ms. WATKINS. The problem I have with it is it keeps the stock 

price inflated. And you had Mr. Skilling saying our stock price was 

going to go to $120 per share. So you have people buying that inflated stock price, thinking the stock price is going to go higher. 

Those are now new shareholders of Enron that certainly are not 

benefited by these transactions. 

Mr. STUPAK. Okay. Let me ask you this question, and by no 

means do I mean anything negative by it. But we have had testimony throughout about how certain employees benefited handsomely financially from some of these transactions and being part 

of these SPEs. Were you ever offered an opportunity to join in one 

of these, or to be part of one? 

Ms. WATKINS. No, I was not. 

Mr. STUPAK. So it is fair to say, then, you didn’t invest in any 

of these SPEs like some did, like what, put $5,800 in and they end 

up coming back with a million within 2 months or 3 months? 

Ms. WATKINS. No, I did not. 

Mr. STUPAK. Okay. You indicated—well, let me go to this question. In number 8 here, it was in our book here, number 8, was the 

Raptor hedging strategy analysis risk and assessment control? And 

the Chairman asked you some questions about it. In fact, on one 

page, lessons learned, the new Raptor structure transferred risk in 

one—in the form of stock dilution. It is in your handwriting. There 

it is. That is the smoking gun. You cannot do this. And that is your 

handwriting. 

Ms. WATKINS. Yes, it is. 

Mr. STUPAK. Okay. Who produced this document? 

Ms. WATKINS. Mr. Rick Buy’s risk assessment and control group. 

Mr. STUPAK. Okay. Do you know when he would have produced 

it? 

34

Ms. WATKINS. I believe that this was produced during the first 

quarter of 2001 to address the fact that the Raptor structures were 

under water. 

Mr. STUPAK. Okay. So risk assessment or Mr. Buy produced this 

in the first quarter of 2001. Who would this be distributed to? 

Ms. WATKINS. I am not completely certain of that. I believe it 

might have gone as high as the Finance Committee of the Board, 

but from reading the Powers Report, they do not appear to have 

seen this analysis. 

Mr. STUPAK. Okay. This was an internal document. 

Ms. WATKINS. It certainly went to Mr. Fastow, and I would imagine that it also went to Mr. Skilling. 

Mr. STUPAK. How about Vinson & Elkins? Would they probably 

receive this? 

Ms. WATKINS. Probably not. 

Mr. STUPAK. Arthur Andersen? 

Ms. WATKINS. Probably not. 

Mr. STUPAK. Okay. But you thought probably the Board of Directors may have received this? 

Ms. WATKINS. I thought so at the time when I was meeting with 

Mr. Lay. But from reading the Powers Report, it appears that they 

did not see this. 

Mr. STUPAK. So when you put in here your comments, or even 

the new Raptor structure transferred risk in the form of stock dilution, not knowing anything about this, before I get—before all of 

this whole Enron thing, even I can pick it up now. Anyone who received this in the company should have realized there were serious, 

serious problems, and any accountant worth their weight in salt 

would certainly pick this up. Would they not? 

Ms. WATKINS. It would certainly seem so. But it was so well understood and so prevalent. That is why I called Mr. Hecker at Andersen. I was about to meet with Mr. Lay, and I thought—well, I 

called him—but since I had not been in accounting for over 10 

years—to say, you know, could this ever be okay? And he said it 

didn’t sound right, and his words to me were, ‘‘Sherron, any accounting treatment must be clearly defensible if fully exposed. So 

if this is not clearly defensible when fully exposed, you are probably correct and you should go see Mr. Lay.’’

Mr. GREENWOOD. The time of the gentleman has expired. The 

Chair thanks the gentleman. 

The Chair recognize the gentleman from Florida, Mr. Stearns, for 

10 minutes for inquiry. 

Mr. STEARNS. Thank you, Mr. Chairman. And, again, let me commend you and also the staff for the prodigious amount of work they 

have done here. 

Just to get on the record that—it is more applicable to the committee that I chair dealing with FASB—I just wanted to ask you 

some questions. There is ample evidence, as I noted, that Enron at 

a minimum used/abused financial accounting standards to confuse 

its true financial condition. In your view, is Enron indicative of a 

failure to implement GAAP, Generally Accepted Accounting Principles? Or failure of the Generally Accepted Accounting Principles—in other words, failure of the GAAP itself or the failure to 

implement these principles? 

35

Ms. WATKINS. I think Enron had a failure to implement them, 

correct. 

Mr. STEARNS. So you don’t think there is anything generally 

wrong with GAAP itself? Do you think GAAP works? 

Ms. WATKINS. It should work. In my opinion, I think somehow 

in this country our financial accounting system has morphed into 

the Tax Code. In tax accounting if you follow the codes, whatever 

result you get, you are justified in using that treatment. 

And financial accounting—a number of my accounting friends 

have said, ‘‘If you follow the rules, even if you get squirrelly results, you have a leg to stand on.’’ And I am surprised that the financial accounting system has morphed into that, because you 

should still fairly represent your financial condition. 

Mr. STEARNS. This is, to me, a very important point. You know, 

what you are saying is that Enron’s problem was a flawed corporate strategy and simple old-fashioned bad assets, and that the 

accounting problems did not precipitate its collapse. Is that what 

you are saying? 

Ms. WATKINS. No, I do think the accounting problems precipitated the collapse, because when the investing community was uncertain about our numbers, when they were driving the stock price 

down, almost everyone was aware that if the stock price dropped 

too low, if our investment grade rating fell away, there would be 

additional debt coming due. And we did have an old-fashioned run 

on the bank. 

Mr. STEARNS. Okay. So, but you are saying that the GAAP 

worked, and it was—GAAP was not the problem. The accountants—it was more the business strategy and how they used the accounting principles, how they implemented it. 

Ms. WATKINS. They did not implement them correctly. 

Mr. STEARNS. Okay. So if you went to the American Institute of 

Accountants and talked to them, you wouldn’t recommend that 

they change anything with Raptor partnerships or LJM1 or 2 or 

anything? You would say that is not the problem. 

Ms. WATKINS. The accounting of these transactions I think was 

inappropriate. We should not have been able to——

Mr. STEARNS. But that was because of the people—that was 

Fastow and his people. 

Ms. WATKINS. Yes. 

Mr. STEARNS. But it wasn’t Arthur Andersen. 

Ms. WATKINS. Well, Andersen also signed off on the way we were 

implementing these accounting——

Mr. STEARNS. But if Arthur Andersen was told something, and 

it was not the truth, they might accept it. Is it possible that Arthur 

Andersen has some culpability here because they signed off on it? 

Ms. WATKINS. Well, I think so, because they are charged with auditing the results. And a sensitive related party transaction should 

get a lot of scrutiny and——

Mr. STEARNS. So Arthur Andersen, in your opinion, signed off on 

something they shouldn’t have. 

Ms. WATKINS. Yes. 

Mr. STEARNS. Do you think they knew what they were signing 

off on? 

36

Ms. WATKINS. They sure should have known what they were 

signing off on. 

Mr. STEARNS. Okay. Okay. So, you know, you have been an accountant, you told me in your opening statement, for 19 years. And 

yet you are the only one here out of this huge organization we have 

here. And, you know, we have talked to Jeffrey McMahon, who is 

President and Chief Operating Officer. He said he went to Skilling. 

We talked to Jordan Mintz, who is Vice President and General 

Counsel of Corporate Development. He tried to get Skilling to sign 

documents. 

Both Richard Buy, the Chief Risk Officer, and Richard Causey, 

the Chief Accounting Officer, all somehow were aware of this, and 

yet you are the only one standing here. And so when you went to 

Mr. Lay, and he came back and said he was going to—V&E was 

going to do an analysis, I think it was on October 31. Did he say 

anything to you about maybe firing Vinson & Elkins? 

Ms. WATKINS. Well, I met with Mr. Lay on October 30 and 31, 

and I was concerned that we needed to restate, come clean, 

and——

Mr. STEARNS. Because this is a key point. The report came back 

and everybody is ready to act on it and clean house and get this 

thing straightened out, right? 

Ms. WATKINS. Yes. 

Mr. STEARNS. Isn’t that your impression? 

Ms. WATKINS. Well, he had said at the time, ‘‘Well, we have fired 

Vinson & Elkins and Arthur,’’ which I was a little bit surprised. 

When I met with him the following day, he corrected that and said, 

no, that we had formed the Special Committee and hired a new law 

firm and a new accounting firm to look into my concerns. 

Mr. STEARNS. What was the new law firm’s name that he said 

he was going to hire after he replaced Vinson & Elkins? 

Ms. WATKINS. He first said it was Milner and something, which 

sort of surprised me because when the announcement came out it 

was Wilmer, Cutler. And that is an easy name to remember, and 

it gave me the impression that Mr. Lay was not making these decisions, someone else was. And they were just informing him of the 

decisions. 

Mr. STEARNS. So he told you earlier, though, that he was going 

to fire Arthur Andersen and V&E, right? 

Ms. WATKINS. Yes. And I think he misunderstood, though, 

the——

Mr. STEARNS. And who was telling him that, do you think? 

Ms. WATKINS. I don’t know. I am not privy to the inner workings. 

Mr. STEARNS. I talked to Mr. Skilling, and I talked to him briefly 

about Cliff Baxter. And I just want to ask you a question on this. 

In your memo, you said, ‘‘He complained mightily to Mr. Skilling, 

and all who would listen, about the inappropriateness of the transaction with LJM.’’ Did Mr. Baxter discuss his concerns about these 

transactions with you? 

Ms. WATKINS. Actually, the last time I spoke with Mr. Baxter 

was January 15 of this year. I phoned him to give him the heads 

up that my memo had been discovered and was in the press, and 

that it mentioned that executives had warned Mr. Skilling. So I 

37

told Mr. Baxter that I had mentioned him specifically, and I read 

to him over the phone exactly what I had written about him. 

And he said, ‘‘Well, Sherron, you are right. You know, I was very 

concerned about these transactions.’’ He said, ‘‘But I tell you what. 

If I had known there was anything illegal about it, I would have 

pushed it further.’’ Mr. STEARNS. Did Mr. Baxter tell you that he talked to Skilling 

frequently about this? I mean, you say mightily. Did he actually 

say, ‘‘I talked to him 10 times, 3 times, 1 time?’’ Ms. WATKINS. I mean, he told me he spoke to him quite often 

about the inappropriateness of a company—— Mr. STEARNS. Okay. 

Ms. WATKINS. [continuing] of our stature—— Mr. STEARNS. Did Mr. Baxter ever tell Ken Lay—did Baxter ever 

say to you, ‘‘I also mentioned it to Kenneth Lay, because I was 

frustrated with Mr. Skilling?’’ Ms. WATKINS. No. The way the culture worked, I don’t think anyone would have gone around Mr. Skilling to talk to Mr. Lay. 

Mr. STEARNS. Okay. What about Jeff McMahon? Did you actually 

ever talk to him about any of these problems? 

Ms. WATKINS. I did meet with Mr.—— Mr. STEARNS. Were you aware that Mr. McMahon—he was—he 

met with Skilling. He was the President and Chief Operating Officer, former Treasurer of the company. He recently became President. He said he told Mr. Skilling of his concern over the company’s 

many complex partnerships. Did you ever talk to him? 

Ms. WATKINS. On August 21, I met with Mr. McMahon for roughly 11⁄2 hours, and that is when he told me that he found the conflicts to be something that—you know, too great for Enron. 

Mr. STEARNS. Too great for Enron? 

Ms. WATKINS. Mr. McMahon did not characterize it as a bonus 

discussion with me. He characterized it as more of an ultimatum 

that he was giving Mr. Skilling; ‘‘Make these changes or I can’t 

stay as Treasurer.’’ And as I recall Mr. McMahon telling me, he felt 

like that was a strong statement to Mr. Skilling. And, you know, 

a few days or weeks later he gets a call saying—from Mr. Skilling 

that Mr. Skilling wanted him to go join a new venture, Enron Networks. And Mr. McMahon told me that he felt like Mr. Skilling was 

setting him up for a fall. 

Mr. STEARNS. I asked Mr. Skilling about Mr. McMahon and this 

conversation. He said, ‘‘We talked nothing about what you mention, 

Congressman. All we talked about was compensation.’’ I don’t know 

if you heard Mr. Skilling say that. 

Ms. WATKINS. Well, it sounds like that is the truth but not the 

whole truth. 

Mr. STEARNS. Right. So Mr. Skilling is trying to convince me they 

are talking about the bonus for Mr. McMahon, and that is all they 

talked about. Yet it was clear to me, in all of the information we 

had, that Mr. McMahon was telling him all about the stuff that 

you just know about. And that is what you are saying. When you 

talked to Mr. McMahon, he told you the same thing, that he talked 

to him all about these partnerships. 

Ms. WATKINS. The Raptor transactions had not been done, I don’t 

think, or I am not completely aware. Mr. McMahon told me he did 

38

not talk about accounting issues as much as there were—these 

deals were likely not benefiting Enron shareholders. They were 

likely benefiting Mr. Fastow and not Enron shareholders. 

Mr. STEARNS. Okay. So that is directly opposite to what Mr. 

Skilling to us. And you are telling us that Mr. McMahon told you 

that, and Mr. McMahon has also told us that is what he told him. 

So I think it is clear at this point that there is two witnesses here 

that do not agree with what Mr. Skilling has said. 

I think my time is up, Mr. Chairman. Unless Ms. Watkins would 

like to clarify. 

Mr. GREENWOOD. The time of the gentleman—— Mr. STEARNS. Did you want—Ms. Watkins, did you want to clarify anything? 

Ms. WATKINS. Well, I just wanted to add that I also heard from 

one of Mr. Baxter’s close friends that he had a conversation with 

Mr. Skilling in March of 2001. Mr. Baxter’s recollection of the 

meeting was that he told Mr. Skilling, ‘‘We are headed for a train 

wreck, and it is your job to get out in front of the train and try 

to stop it.’’ Mr. STEARNS. Thank you, Mr. Chairman. 

Mr. GREENWOOD. The Chair recognizes the gentlelady from Colorado, Ms. DeGette, for 10 minutes, and would note that at the end 

of her questioning we will recess for approximately 20 minutes for 

the vote. 

Ms. DEGETTE. Thank you, Mr. Chairman. 

Ms. Watkins, before I ask my questions, I just want to welcome 

you and let you know how impressed I was by your memos and by 

your testimony. And when I was reading this, I felt sort of a bond 

with you. First, I thought, well, maybe it was because we were both 

women of about the same age working in the male-dominated 

fields. I thought, no, it is not that. 

Then I said maybe it is because we are both moms, because 

moms tend to get—you know, you can figure out if someone is telling the truth. But then I realized, no, it is not that. What it is is 

both of our mothers were teachers, as I understand. Your mother 

taught accounting. My mother taught kindergarten. And then I realized that both perfectly prepared us for the careers we were going 

to embark on. 

And I really want to thank you for coming. 

I want to ask you, did you write these memos, Ms. Watkins, all 

by yourself? 

Ms. WATKINS. Yes, I did. 

Ms. DEGETTE. So if someone said that you ghost—that someone 

else, like Mr. McMahon, ghostwrote these memos, that would not 

be true? 

Ms. WATKINS. That is not true. 

Ms. DEGETTE. And you wrote these because you were concerned 

about the future of the company and the future for the shareholders, didn’t you? 

Ms. WATKINS. Yes. 

Ms. DEGETTE. Were you aware that Mr. Fastow told the Vinson 

& Elkins investigators that it was his belief that you were acting 

in conjunction with a person who wanted Mr. Fastow’s job? 

Ms. WATKINS. I think that is ludicrous. 

39

Ms. DEGETTE. Do you think—it is not true, is it? Are you surprised Mr. Fastow might think that? 

Ms. WATKINS. I am not surprised he would think that. 

Ms. DEGETTE. Why not? 

Ms. WATKINS. I understand that he and Mr. McMahon had a 

rather contentious relationship. 

Ms. DEGETTE. And so you think he was referring to Mr. 

McMahon. 

Ms. WATKINS. Yes. 

Ms. DEGETTE. Okay. Now, you worked for Arthur Andersen for 

8 years, but it was a long time ago, right? 

Ms. WATKINS. Yes. 

Ms. DEGETTE. And you are a CPA, right? 

Ms. WATKINS. Yes, I am. 

Ms. DEGETTE. Now, let me ask you this. How long had you been 

working for Mr. Fastow before you figured out that there were 

problems with the Raptor SPEs? 

Ms. WATKINS. I would say about 3 or 4 weeks. 

Ms. DEGETTE. So all these people who said these were very complex transactions, and there wasn’t much transparency, it didn’t 

take an accounting genius, although I am sure you are one, but, 

I mean, you figured it out in 3 or 4 weeks, right? 

Ms. WATKINS. Well, I had the advantage of hindsight where 

these structures were clearly under water, and also I was never 

shown the complex transactions. I just knew what the facts were. 

Raptor owed us $700 million. No one had lost that money. Enron 

shareholders were going to pay for it in the future. So I didn’t need 

to see the structure. I knew that——

Ms. DEGETTE. Right. 

Ms. WATKINS. [continuing] that wasn’t kosher. 

Ms. DEGETTE. Even Congresspeople like us can figure that out. 

So, now, you said that information—in your testimony you said the 

information gathered from co-workers helped you come to the conclusion that the Raptor SPEs were finally untenable. It was pretty 

common knowledge in discussion among the co-workers about these 

entities, correct? 

Ms. WATKINS. Yes, it was. 

Ms. DEGETTE. Can you tell me how widespread the concern was? 

Ms. WATKINS. The Enron global finance staff knew about it, and 

various business units that had sold assets to Raptor knew about 

it. There were whole sections of Enron, the pipeline group, the 

trading group, that had no idea about it. But in a handful of groups 

it was widespread knowledge. 

Ms. DEGETTE. But what about your group? I mean, did people 

talk about this commonly? How many people are we talking about? 

Ms. WATKINS. I think a fair number. One of the things I asked 

Vinson & Elkins to do was to look at a—a survey had been conducted by Mr. Lay over the Labor Day weekend. And I knew of at 

least a dozen people who had typed in serious concerns about our 

accounting. 

Ms. DEGETTE. You knew a dozen people who had typed in concerns. 

Ms. WATKINS. Yes. 

40

Ms. DEGETTE. Ms. Watkins, would you be willing to share those 

names with this committee? 

Ms. WATKINS. I can share certainly at least two, because they are 

in the documents that you are releasing today. 

Ms. DEGETTE. Would you be willing to, as part of our investigation, to share the rest of them? 

Ms. WATKINS. Well, I can share Jeff Donahue, who was the Managing Director in Charge of Corporate Development. 

Ms. DEGETTE. Okay. 

Ms. WATKINS. Tim Detmering, a Managing Director in Corporate 

Development; Michelle Nezi Marvin, one of the business unit people who had hedged assets with Raptor. 

Ms. DEGETTE. Jeff McMahon. 

Ms. WATKINS. I don’t know whether he typed in comments. 

Ms. DEGETTE. Oh, he didn’t type—but he was concerned, right? 

Ms. WATKINS. Yes. 

Ms. DEGETTE. Cliff Baxter was concerned. 

Ms. WATKINS. Yes. 

Ms. DEGETTE. If you have other names, perhaps you could work 

with your counsel and with our staff, because that would help us 

in our investigation. 

I am wondering if you can try to characterize the atmosphere in 

the global finance group and maybe elsewhere in Enron. Did everybody know what was going on, but everybody was too afraid to do 

anything about it? 

Ms. WATKINS. It was rather widespread knowledge that Mr. Ray 

Bowen was complaining about the Raptor structures and LJM. And 

Mr. Fastow called him in and gave him, as Mr. McMahon puts it, 

a high decibel grilling. And so that I think made others—it was 

like an off limits subject. You just didn’t even want to discuss it 

around the water cooler. 

Ms. DEGETTE. So it wasn’t that everybody certainly at your level 

knew but didn’t care. It is that they were afraid to come forward. 

Would that be a fair characterization? 

Ms. WATKINS. Yes. 

Ms. DEGETTE. Now, why is it that you think Mr. Skilling knew 

about these issues? 

Ms. WATKINS. Because he was an intense, hands-on manager. 

Ms. DEGETTE. What is that? Can you give us a couple of examples of financial transactions you saw Mr. Skilling get involved in 

hands-on? 

Ms. WATKINS. Well, for instance, in 1996 when I was still managing the JEDI partnership, we had equity investments in various—primarily oil and gas-related companies. That was the year 

we adopted fair value accounting, which meant that, as an example, if we paid $100 million for an investment, an oil and gas company, and they drilled a dozen wells that were all successful, if our 

models showed us that we now thought that company was worth 

$150 million, we would write that company up by $50 million and 

recognize $50 million in the income statement. 

Well, a lot of the models were based off the multiples at which 

E&P companies trade. They were based off comparable analysis in 

the public marketplace. Mr. Skilling was very concerned that if the 

multiples that might have been at a high of seven or eight 

41

cyclically moved down to, say, three or four, then our own models 

would force us to take a writedown. He sat in on a number of meetings where I was present, where we were trying to devise a real 

hedging strategy to avoid placing those losses on the income statement. 

Ms. DEGETTE. So he was involved hands-on——

Ms. WATKINS. Yes. 

Ms. DEGETTE. [continuing] personally in——

Ms. WATKINS. Yes. 

Ms. DEGETTE. [continuing] accounting meetings talking about accounting treatments of transactions. Now, you saw the transaction 

sheets that the Chairman showed you before that had the signature sheet, signature line for his approval. Would it, in your experience, be like Mr. Skilling to not sign those? 

Ms. WATKINS. No. The procedures around our approval sheets 

were cast in stone. 

Ms. DEGETTE. And were they used in many transactions? 

Ms. WATKINS. Yes. Any capital expended at Enron above a certain amount had a deal approval sheet, and the procedures were 

very well identified, and I never recall an instance where the approvals indicated via the approval signature block were not obtained. And no approvals——

Ms. DEGETTE. So if someone sent those to Mr. Skilling, and he 

didn’t sign them, in your opinion that would be intentionally? 

Ms. WATKINS. No deal could be done without all of those approvals. And quite often it was a verbal approval over the phone, and 

then it was always followed up by a signature. 

Ms. DEGETTE. Great. Thank you very much. Thank you for coming today. I really appreciate it. 

Mr. GREENWOOD. In the gentlelady’s remaining time, Mr. 

Skilling’s testimony here last week was that while there was a line 

provided—his term was there was a line provided for his signature, 

the form provided for his signature, that he was advised that his 

signature was not required. Are you aware of any such distinction 

with regard to those deal sheets? 

Ms. WATKINS. No. Those deal sheets were cast in stone. If it was 

an either/or, it would say one of the following two signatures are 

required. If the name was listed in the signature block, it was required. 

Mr. GREENWOOD. It was required. And there was never any provided for, as if he could sign it if he felt like it? 

Ms. WATKINS. No, it was a requirement. 

Mr. GREENWOOD. Do you know anything about Jordan Mintz’s efforts to get him to sign the sheet? 

Ms. WATKINS. I did not know of those until I heard his testimony 

here last week. 

Mr. GREENWOOD. Okay. The Chair thanks the gentlelady. 

The committee will recess for approximately 15 minutes. 

[Brief recess.] 

Mr. GREENWOOD. The committee will come to order. 

The Chair recognizes Mr. Strickland for 10 minutes for purposes 

of inquiry. 

Mr. STRICKLAND. Thank you, Mr. Chairman. 

42

Ms. Watkins, toward the end of 1999, while you were working for 

Enron International representing the Caribbean region, you negotiated the sale of Promigas, an Enron asset, to a special purpose 

entity known as White Wing. Is that correct? 

Ms. WATKINS. Yes. It is also known by its project name, which 

is Condor. 

Mr. STRICKLAND. Okay. Enron’s Caribbean region decided to sell 

Promigas to White Wing because Enron’s risk and finance departments had put out the word that all divisions should sell merchant 

assets to White Wing by the end of the third and fourth quarters 

of 1999. Besides that mandate, was there any other reason for 

Enron to sell Promigas to White Wing at that time? 

Ms. WATKINS. No, there was not. 

Mr. STRICKLAND. Ms. Watkins, would you please briefly explain 

what a merchant asset is for the benefit of this committee? 

Ms. WATKINS. Enron has both merchant assets and strategic assets. Merchant assets are assets considered held for sale, that we 

have bought for investment purposes and that we generally do not 

intend to hold on to for any length of time. Merchant assets could 

be fair valued, meaning they could be written up to estimated market value, while strategic assets, if they were worth more than 

Enron had paid for them, those gains could not be recognized until 

we sold or disposed of the asset. 

Mr. STRICKLAND. Okay. Now, Enron decided to sell its merchant 

assets to White Wing in order to increase its cashflow. Was there 

any other reason for this decision? 

Ms. WATKINS. I believe that the assets sold to Condor White 

Wing, the merchant assets, generated—I know they generated 

funds flow from operations for Enron, and I believe that to be one 

of the sole purposes for selling assets into Condor White Wing. 

Mr. STRICKLAND. Okay. In fact, cashflow had become a big concern for Enron, had it not? 

Ms. WATKINS. Yes, that is correct. 

Mr. STRICKLAND. Now, Wall Street analysts began to distrust 

Enron’s increasingly complex earnings statements, so they started 

examining the company’s cashflow. After all, cash is cash. However, since Enron had been manipulating its earnings, its cashflow 

would appear inadequate compared to its inflated earnings statements. This was a problem for Enron, was it not? 

Ms. WATKINS. Well, I am not certain that Enron was manipulating its earnings at that point in time. But for a commodity trader where you would routinely mark-to-market positions, you can 

have earnings that represent the discounted fair value of 10 years 

worth of profits. You recognize that in the first year, but you would 

only have cashflow of, say, one-tenth of that profit in that year. 

That is probably not an unheard of phenomena with trading companies, but trading companies have PE multiples in the 12 to 14 

range. Enron enjoyed a much larger price to earnings multiple and 

did not want to be characterized as a normal trading company. 

The analysts were concerned that our funds flow from operations 

was significantly lower than our earnings. It was a financial performance statistic that they were concerned about, and Enron attempted to fix that first, fairly legitimately, by securitizing contracts and selling them out to outside third parties. 

43

I might want to correct a statement that Congressman Greenwood made earlier. I do think that the Cactus vehicles, the contract 

to asset securitization vehicles that we did in the early 1990’s and 

1995/1996 were legitimate, were legitimate securitizations. 

Condor, however, I think was one of the first special purpose vehicles that was backstopped by Enron stock that was kept off balance sheet, and I think one of the main purposes of Condor White 

Wing was to generate funds flow from operations for Enron. 

Mr. STRICKLAND. So, and correct me if I say something that you 

think is factually inaccurate, but it seems that Enron planned to 

increase its cashflow by selling these merchant assets to White 

Wing during the third and fourth quarters of 1999. 

Ms. WATKINS. That is correct, yes. 

Mr. STRICKLAND. Did Enron provide any guarantees to White 

Wing for these transactions that you know of? 

Ms. WATKINS. The White Wing structure was set up such that 

if the assets that were sold to White Wing were not liquidated and 

were not sufficient to repay the investors in White Wing, then that 

structure was backstopped by Enron stock. 

Mr. STRICKLAND. So this was a transaction where Enron guaranteed an investment with its own stock? Is that a factually correct 

statement? 

Ms. WATKINS. These vehicles have been schematically depicted in 

The Wall Street Journal and in the Houston Chronicle and a number of press. It supposedly is legitimate. I don’t quite understand 

how these things can be off balance sheet when you have a claw 

back to the company and to the company’s own stock, but somehow 

or other they appear to be available for use. 

Mr. STRICKLAND. And I am impressed with your background and 

your training, and I sit here and I hear you say that. And I am 

wondering at what point is there some authority that has the ability to explain why something that appears to be illegitimate may 

be legitimate. Is that a puzzle to you as a professional CPA and 

a person who is deeply knowledgeable about financial transactions? 

Ms. WATKINS. Well, the Condor structure troubled me. The fact 

that it was off balance sheet troubled me. The fact that we were, 

you know, getting funds flow from operations, the financial performance statistic from this structure troubled me. And while I was 

working in the Caribbean business unit, we were instructed that 

we now had new targets. They were funds flow targets, and we 

needed to find a way of selling our merchant assets into Condor 

White Wing. 

It was almost like something that was on paper, not real, because the business unit continued to manage the asset. The 

counterparty never understood that we had supposedly sold it. And 

there was an unspoken understanding that we could buy it back 

at some point in the future. 

Mr. STRICKLAND. Now, after Enron sold Promigas to White Wing, 

who managed and operated that company? 

Ms. WATKINS. The Caribbean business unit. It stayed with the 

Caribbean business unit. 

Mr. STRICKLAND. And that was Enron? 

Ms. WATKINS. Yes, that is Enron. But it was not White Wing personnel that managed it. It was Enron personnel who managed it. 

44

Mr. STRICKLAND. In fact, the people involved in the day-to-day 

functioning of Promigas didn’t even know they had been—that it 

had been sold, is that——

Ms. WATKINS. That is correct. 

Mr. STRICKLAND. Is that correct? 

Ms. WATKINS. That is correct. 

Mr. STRICKLAND. Ms. Watkins, who was the general partner of 

White Wing? In other words, who ran White Wing? 

Ms. WATKINS. I believe it was something called an Osprey, or 

something, but it was an Enron entity that was the general partner 

of White Wing. 

Mr. STRICKLAND. Would it be possible for you to identify for the 

committee the individuals who were involved in running this? 

Ms. WATKINS. The administrative running of White Wing was 

under Mr. Andrew Fastow, and I believe he had Cheryl Lipschutz 

running the Condor White Wing structure. 

Mr. STRICKLAND. Okay. Enron sold these assets to White Wing 

at book value. 

Ms. WATKINS. Yes. 

Mr. STRICKLAND. Compared to market value, is book value a reliable indicator of an asset’s true worth? 

Ms. WATKINS. The transactions were supposed to be sold into 

White Wing at market value. I believe they were all transacted at 

book value, and we documented the fact that book values were 

close approximations of market values at that time. 

Ms. DEGETTE. Will the gentleman yield for 1 second? 

Mr. STRICKLAND. I would yield. 

Ms. DEGETTE. Cheryl Lipschutz was the secretary to the Board 

of Directors of Enron at that time, right? 

Ms. WATKINS. No. 

Ms. DEGETTE. Was she employed by Enron? 

Ms. WATKINS. She was employed by Enron under Mr. Andy 

Fastow. 

Ms. DEGETTE. Okay. I just wanted to clear that up, that Mr. 

Fastow was in charge and Cheryl Lipschutz was running it, and 

they were both working for Enron. 

Ms. WATKINS. Yes. 

Ms. DEGETTE. Thank you. 

Thank you. 

Mr. STRICKLAND. Thank you. I have just a couple more questions, 

Ms. Watkins. 

Mr. GREENWOOD. You have just a couple more seconds. 

Mr. STRICKLAND. One more question, Mr. Chairman. 

Wall Street analysts were beginning to doubt Enron’s deceptively 

complex earnings statements, so they began to look at Enron’s 

cashflow as a more reliable indicator of the condition of the corporation. To make sure its cashflow appeared proportional to its 

earnings, Enron decided to increase its cashflow. Is that correct? 

Ms. WATKINS. Yes. 

Mr. GREENWOOD. The time of the gentleman has expired. 

Mr. STRICKLAND. Thank you, Mr. Chairman. 

Mr. GREENWOOD. Ms. Watkins, when you were involved in this 

transaction to sell assets to Condor, was there discussion or agreeVerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00048 Fmt 6633 Sfmt 6602 W:\DISC\77991 pfrm17 PsN: 77991
45

ment about whether or not those assets could be sold back, and 

whether there were documents that would reflect that? 

Ms. WATKINS. As I recall, there were extensive conversations because Promigas was an important asset for the region. We were legally selling it to this White Wing structure. Legally, we were losing control of the asset, and there was a lot of discussion that we 

wanted it back, we drafted some documents that would be trigger 

points where the business unit could buy it back. 

My understanding was that Mr. Causey instructed our business 

unit that there could be nothing in writing that the business unit 

could buy it back, or Andersen would not let us have the sale treatment that we were getting in the funds flow statement. 

Mr. GREENWOOD. And that was the purpose of that, because you 

would—— Ms. WATKINS. Yes. 

Mr. GREENWOOD. If the charade was evident, you wouldn’t be 

able to get a tax trade. 

Ms. WATKINS. Yes. 

Mr. GREENWOOD. The Chair recognizes the gentleman from Illinois, Mr. Rush, for 10 minutes. 

Mr. RUSH. I want to thank you, Mr. Chairman, and Ms. Watkins. 

This is certainly very pleasing that you are here. Your testimony 

has been forthright, and I would say without any kind of value in 

terms of Ms. Temple’s testimony. I am diametrically opposed to the 

kind of testimony that Ms. Temple presented to this committee, 

and it is certainly appreciative by the committee, at least one member of the committee, and I believe that it is appreciative—your 

testimony is appreciative—is appreciated by the American public. 

On what date did you first speak with Cindy Olson or communicate with her in any way about your concerns about the natural 

condition of Enron? 

Ms. WATKINS. On the afternoon of August 16, following the allemployee meeting that had been held that day. 

Mr. RUSH. And how many times did you speak with her about 

your concerns, and approximately during what time period? 

Ms. WATKINS. She encouraged me to meet with Mr. Lay, which 

I did do. I then subsequently transferred into Ms. Olson’s group. 

I did not have lengthy conversations with her after that about my 

concerns. I had expressed them to Mr. Lay, and I thought that was 

the best place to discuss them. 

Mr. RUSH. So did you read your various letters—or did Ms. 

Olson, rather, read your—the various letters that you sent to Mr. 

Lay and the attachments? 

Ms. WATKINS. I only showed her the anonymous letter, the one 

page. I did not provide her with copies of the other memos. If she 

obtained them elsewhere, I don’t know. 

Mr. RUSH. And what was her response when you showed her the 

anonymous letter? 

Ms. WATKINS. She clearly understood that this was a serious 

problem, and she said that it would be best if I explained it personally to Mr. Lay. 

Mr. RUSH. Okay. At what time did you—in your earlier testimony, you indicated that you had a discussion with Ms. Olson 

about Mr. Fastow’s desire to have you terminated. At what point 

46

in the aforementioned series of discussions did you have that—express that concern to Ms. Olson? 

Ms. WATKINS. When I met with Mr. Lay on the 22nd, I was leaving for a small vacation that Friday, coming back the following 

Thursday. When I came into the office August 30, I had messages 

to immediately go see Ms. Olson, and that is when she told me that 

Mr. Fastow had wanted to have me fired, and wanted to seize my 

computer. 

Mr. RUSH. Okay. Did she in any way indicate to you the attitude 

displayed by Mr. Fastow? I mean, was he—his demeanor, or how 

did she exactly—how did she relate to you what he had said? What 

was his frame of mind? If you can—— Ms. WATKINS. She didn’t give me a lot of details. She just said 

that he was behaving in a way that was somewhat shocking to her 

as well as Mr. Lay. 

Mr. RUSH. And what is Ms. Olson’s relationship with the Enron 

Corporation? 

Ms. WATKINS. I believe she is a Senior Vice President or an Executive Vice President. 

Mr. RUSH. Is she associated at all with the stock fund at Enron? 

Ms. WATKINS. I was not aware of it. I have since seen, in some 

testimony, that she is a trustee. But I was not aware of her position with regards to the 401K plan. 

Mr. RUSH. And if she was a trustee at the time when this all was 

occurring, do you think that she had any fiduciary obligation to at 

the very least make an investigation into your claims, pursuing 

your claims? 

Ms. WATKINS. I think she probably understood that they were 

being investigated and by a professional law firm. I am sure she 

was waiting to see the results of that investigation. 

Mr. RUSH. And can you be more specific about your concern— about what you said to her about your concerns about Enron’s financing? I mean, what was her response to you? Did you—how did 

she respond? And did she indicate in any way that she had heard 

these same kind of concerns from other Enron employees? 

Ms. WATKINS. Well, after Enron declared bankruptcy, or even as 

we were heading up to it, she seemed to indicate that no one could 

have seen this coming. She said, in fact, that I was the only one 

that had any kind of inkling that we were in the bad condition that 

we were in. So I don’t think she had evidence from anyone else, or 

opinions from anyone else, about our condition. 

Mr. RUSH. Yes. My time is running down, but I am really—I 

want to—if you could just explain to the committee about the culture there at Enron. It seems to me that everybody from the President to the parking lot knew that there was—parking lot attendant 

knew that there was something going on there. I mean, explain to 

us about the culture that was prevalent there in the company. 

Ms. WATKINS. Well, I certainly think it was fairly well known 

about the Raptor transactions within the global finance unit and 

within the business units that hedged with Raptor. I don’t think 

it was well known throughout the company. 

And the culture in Enron was voted most innovative. It was 

voted one of the best places to work. It was the job to have in 

Houston. The atmosphere was electric. It was fun. You were surVerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00050 Fmt 6633 Sfmt 6602 W:\DISC\77991 pfrm17 PsN: 77991
47

rounded by bright people, energized to change the world. You felt 

somewhat invincible. And, yes, people were arrogant, and it was— did have a trader kind of mentality that was sometimes tough to 

live with. But it was always a fun place to work. 

Mr. RUSH. And most people were conscious about their upward 

mobility in the company, and they thought that the company would 

be a place to move up fairly quickly, is that—— Ms. WATKINS. Everyone was very conscious of what they were 

contributing in the last 6 months. The performance ranking system 

judged you on what you contributed to the company in the last 6 

months. No old tapes. In that sense, it was very competitive. 

Mr. RUSH. And Mr. Fastow and Mr. Skilling and others could 

very easily manipulate that type of concern to have people to overlook some of the transgressions that they—that we are looking into 

right now? Is that your opinion? 

Ms. WATKINS. Enron paid its people very well. The stock had 

been performing very well. I think there was a concern by most 

people that you didn’t want to rock the boat. 

Mr. RUSH. Do you have any relationship, any subsequent relationship to the bankruptcy, to some of the Enron employees who 

had been fired from Enron, some of the lower level employees? 

Ms. WATKINS. I know several people who have been let go. 

Mr. RUSH. And do you—there is the issue regarding their severance pay. Are you familiar with those—— Ms. WATKINS. Or lack thereof. 

Mr. RUSH. Or lack thereof, right. Can you expound on what you 

think is the problem with their severance pay, and what is the— why is it at this point in time there are some former Enron employees who have made tremendous amounts of money, and who have 

very generous severance pay, and then there are others who have 

been forced to live in ways that they never imagined that they 

would have to live because of the fact that they don’t have the severance pay? Do you see a problem there? And what is the nature 

of the problem? And how would you recommend that we go about 

resolving the issue? 

Ms. WATKINS. Well, recently it was disclosed, maybe at 

Salon.com, the retention bonuses that were paid the week before 

the bankruptcy. Some of the amounts I find shocking for 90 days’ retention, and I do not believe that it was in the best interest of 

creditors to—yes, we should retain certain people, but I don’t think 

they needed to be paid, 3 and 4 times their base salary to stay for 

90 days. 

I think it is an insult to the 4,000 people that were let go with $4,000 checks that there are a handful of people, more than a 

handful, that were paid $600,000, $1.5 million, $2 million, 

$450,000. I mean, gargantuan sums of money to agree to stay at 

Enron for 90 days. I am appalled by that list. 

Mr. RUSH. Thank you. 

I yield back, Mr. Chairman. 

Mr. GREENWOOD. The Chair thanks the gentleman and recognizes the gentleman from Iowa, Mr. Ganske, for 10 minutes. 

Mr. GANSKE. Thank you, Mr. Chairman. 

And thank you, Ms. Watkins, for coming to the committee. You 

know, I am outraged at what has happened with Enron. EmployVerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00051 Fmt 6633 Sfmt 6602 W:\DISC\77991 pfrm17 PsN: 77991
48

ees, pensioners, investors, they have seen their nest eggs disappear, and they speak about unbearable grief. In Iowa, we had—

I have spoken to a lot of former employees of the natural gas company that was based in Omaha, merged with the Houston Natural 

Gas Company, became Enron, and they have lost everything. 

I mean, there was even a suicide when a former executive who 

left the company with millions couldn’t deal with the collapse of the 

company. So this is really serious. I do not think this is—that the 

problems we are seeing with Enron are just an issue of corporate 

greed in one company. I think that, you know, we are seeing problems with companies like Global Crossing, Elon. They took—you 

know, gave the money to someone else, took some of it back, counted the income as revenue without counting the outgo as expense. 

Amazon has resorted to pro forma accounting. Shares in Tyco 

dropped 50 percent on questions of its accounting. So this is a big, 

big deal, the biggest bankruptcy in our Nation’s history. 

I applaud the full chairman—the chairman of the full committee 

and the chairman of this investigative committee on doing this. 

Now, Ms. Watkins, just briefly, in a minute, tell me, what was 

your job around the time that you went to Ken Lay? What were 

you supposed to be doing for the company? 

Ms. WATKINS. I was gathering a list of all assets that we might 

consider for sale and looking at the economic impact of sale. So I 

was looking at the book value, the market value, what kind of gain 

or loss we might get if we were able to sell that asset for its market 

value. 

Mr. GANSKE. So you started—with that information, you started 

to piece together this whole scenario. Is that what happened? 

Ms. WATKINS. Well, yes, because a number of assets were hedged 

with Raptor. And my understanding of a hedge is that means you 

have got a locked in sales value. And so some of these assets, most 

notably Avici and New Power, the market values were significantly 

below our book value. But since we had the assets hedged, that 

should have been really no concern of Enron’s. It should have been 

hedged with Raptor. 

And the business units that were helping me pull together this 

information kept showing me losses, that should have been 

Raptor’s, coming back to Enron. 

Mr. GANSKE. Okay. Were you also hearing, you know, scuttlebutt 

around the company about some of these things that you were seeing? 

Ms. WATKINS. Not accounting impropriety scuttlebutt, just pretty——

Mr. GANSKE. Did you ever hear, you know, at the water cooler 

about somebody who made an investment of $10,000, $15,000——

Ms. WATKINS. No. 

Mr. GANSKE. [continuing] and got millions? 

Ms. WATKINS. No, I did not. 

Mr. GANSKE. Okay. So you are gathering all of this information 

together. Did you ever have any trouble getting the information? 

Ms. WATKINS. On the structures and the way they actually 

worked, no, I did not. It was readily apparent people had various 

analyses and presentations that they provided me. 

49

Mr. GANSKE. So then you write this letter to Ken Lay and you 

say, ‘‘I am incredibly nervous that we will implode in a wave of impending scandals.’’ I want to read this full paragraph. ‘‘Is there a 

way our accounting gurus can unwind these deals now? I have 

thought and thought about how to do this, but I keep bumping into 

one big problem. We booked the Condor and Raptor deals in 1999 

and 2000. We enjoyed a wonderfully high stock price while many 

executives sold stock. ‘‘We then try and reverse and fix the deals in 2001, and it is a 

bit like robbing the bank in 1 year and trying to pay it back 2 

years later. Nice try, but investors were hurt. They bought at $70 

to $80 a share looking for $120, and now they’re at $38 or worse. 

We are under too much scrutiny, and there are probably one or two 

disgruntled pre-deployed employees who know enough about the 

funny accounting to get us into trouble.’’ When you wrote this letter to Mr. Lay, what was going through 

your mind? Were you afraid? 

Ms. WATKINS. Well, I wanted to impress upon him that this was 

something that was likely to happen. We were downsizing. We had 

at this point maybe let go at least 400 or 500 people and—— Mr. GANSKE. But this is bad news. Okay? And you are writing 

this—you know, you originally wrote this anonymously. 

Ms. WATKINS. Yes. 

Mr. GANSKE. Okay. This is really bad stuff. I mean, were you 

worried that if you go to the President with this type of stuff that 

this could affect you personally? 

Ms. WATKINS. I certainly was not going to go to Mr. Skilling. I 

believed, and I still believe, that Mr. Lay is a man of integrity. He 

didn’t shoot the messenger. I am still at Enron. And I felt like I 

could bring the concerns to him. 

Mr. GANSKE. Did you put a personal copy of this somewhere outside of the company? Did you keep this—a copy of this memo somewhere else? 

Ms. WATKINS. I did. And the day I sent it to Mr. Lay anonymously I also sent it in an envelope to Mr. McMahon with my 

name on it. And I talked to him about it that day. 

Mr. GANSKE. Did you keep a copy for your own personal files? 

Ms. WATKINS. Yes, I did. 

Mr. GANSKE. And where did you keep those files? At home? 

Ms. WATKINS. No. 

Mr. GANSKE. At work? 

Ms. WATKINS. No. In a lock box. 

Mr. GANSKE. In a lock box. So you were enough concerned about 

this that you wanted to put this somewhere where it couldn’t be 

destroyed. 

Ms. WATKINS. Yes. 

Mr. GANSKE. Were you worried about your own personal safety? 

Ms. WATKINS. At times. Just because the company was a little 

bit radio silent back to me, so I didn’t know how they were taking 

my memos, or the investigation. 

Mr. GANSKE. Why would you be worried about your personal 

safety? 

Ms. WATKINS. Because it was the seventh largest company in 

America. 

50

Mr. GANSKE. And you were dealing with really—a really powerful problem. 

Ms. WATKINS. Yes. 

Mr. GANSKE. And a really powerful company. I just have to ask 

you this. When you first learned about this problem at Enron, did 

you own stock? 

Ms. WATKINS. I have stock in the 401K plan, and I have stock 

options. 

Mr. GANSKE. Did you sell any of that stock? 

Ms. WATKINS. Yes, I did. 

Mr. GANSKE. When did you sell it? 

Ms. WATKINS. I routinely diversified and did not hold that much 

Enron stock or stock options. I did sell $31,000 worth of stock in 

late August, and then I sold net to myself around $17,000 of stock 

options in early October. 

Mr. GANSKE. And you sent this first—these memos to Mr. Lay 

when? 

Ms. WATKINS. August 15. 

Mr. GANSKE. So around the time that you sent these memos, 

after you had gathered this data and gotten to know the financial 

situation of the company, you sold some stock. Why did you sell it? 

Ms. WATKINS. I could have sold in July at $45. I actually sold 

in October more out of a knee-jerk reaction to September 11. When 

the markets reopened after the terrorist attacks, most stocks did 

decline. Enron declined into the low 20’s. I had virtually no stock 

options that were in the money in the low 20’s. 

In early October, we moved into the mid 30’s and even high 30’s, 

and I had two blocks of stock options that were then in the money. 

And I just, I think as many others, I felt some panic and need to 

get cash because you just felt like, you know, when was the next 

attack? What would that impact be on the stock market? 

Mr. GANSKE. So you sold $30,000 at one time and $17,000 at another time? 

Ms. WATKINS. Yes. 

Mr. GANSKE. So $47,000. When you found out—when you gave 

the second memo and had the meetings with Mr. Lay, and then as 

we have heard from testimony today, you know, you were concerned that, you know, it was going back to the same law firm, 

kind of looked like it was a cover up, things weren’t happening too 

much. Did you ever think about, you know, going to Treasury, Justice, the SEC, blowing the whistle on this? This is—you know, you 

have outlined potentially criminal behavior. 

Ms. WATKINS. A co-worker of mine asked whether I had done 

this, and she asked whether or not I would consider going to the 

SEC on this. And I said I don’t want to hasten our demise. There 

are 20,000 employees here whose livelihood is at risk. If it appears 

that I hastened the demise of the company, I might be targeted by 

them. They might confuse the problem as something I caused. I did 

not want to hasten the demise. 

Mr. GANSKE. When you had your conversations with Mr. Lay, did 

he ask you not to share this information with anyone? 

Ms. WATKINS. He did ask me had I taken it outside; had I taken 

it to the SEC or the press, and I said no, I had not done so. And 

51

he said, ‘‘Can you please give us time to investigate?’’ And I said, ‘‘Oh, most definitely.’’ Mr. GANSKE. Did he give you a timeline? Did you ask him for a 

timeline? 

Ms. WATKINS. I did not ask him for a timeline. But he seemed 

to indicate that they would look into it rather quickly. 

Mr. GANSKE. Well, we all know, and you as an accountant could 

see the problems coming. I mean, you wrote about it an impeding 

implosion. This must have weighed quite heavily on your mind in 

terms of thinking about what would happen both to your fellow employees as they were locked in, and investors around the country. 

Tell me what you were feeling about that time, specifically on 

whether you had an ethical obligation to let this be known. 

Ms. WATKINS. I wasn’t thinking legally. I really felt like I could 

not go outside of the company. Enron was full of bright people. 

There were maybe calm ways of addressing this. Having it hit the 

press in an inflammatory way would definitely hasten the demise. 

And I wanted to make sure that we had researched everything 

thoroughly, because what I wanted to do was restate, come clean, 

but with some contingency plans how to make sure our trade 

counter parties had confidence in our survival, maybe shore up 

some equity and finance deals, knowing that we were going to face 

hard times. 

But to go to the press, or to go to the SEC, would not have given 

Enron a chance to try to fix it calmly. And most definitely this 

news would have been inflammatory, and we would be in the same 

position we are in right now. 

Mr. GREENWOOD. The time of the gentleman has expired. 

Mr. GANSKE. Thank you, Mr. Chairman. 

Mr. GREENWOOD. Before I recognize Mr. Markey for questions, I 

just wanted you to clarify something, Ms. Watkins. The Powers Report indicated that you had not cooperated, or had not participated 

in that investigation. Is that the case? 

Ms. WATKINS. Well, not actually. They called me for the very 

first time December 13 and wanted to interview me the following 

week. I was actually a little surprised that it took them so long 

to——

Mr. GREENWOOD. It took them 2 months. Is that right? 

Ms. WATKINS. [continuing] to call me, yes. 

Mr. GREENWOOD. Any indication why it took them 2 months, 

since you were so essential? 

Ms. WATKINS. I had just hired Mr. Hilder. Enron was offering an 

attorney to represent me that was also representing Mr. Causey 

and Mr. Buy. I was not comfortable using that attorney, so I had 

spoken with Mr. Hilder. He was not up to speed yet on the issues. 

So we did meet with the Special Committee the week before Christmas, but just to say that we needed to reschedule. They indicated 

that they were trying to look at evidence first before they conducted interviews. 

Mr. GREENWOOD. The Chair recognizes the gentleman from Massachusetts, Mr. Markey, for 10 minutes. 

Mr. MARKEY. Thank you, Mr. Chairman. 

Thank you, Ms. Watkins. Pinocchio had a conscience called 

Jiminy Cricket. Every time Pinocchio ignored Jiminy Cricket his 

52

nose grew longer and longer. You were the conscience of this corporation. You warned them. And when they ignored your advice, 

they had to tell more lies. And the longer they told those lies was 

the more jeopardy that investors and employees of Enron were 

placed in. 

Now, what you have done is really very courageous. You are a 

hero. But being a whistleblower is something that can test the 

strength of the strongest person. It can buckle their knees. And I 

have a feeling that this is just the beginning of a process for you 

in terms of the stress that you are going to be under. 

I just want you to know that for my part, and I think I speak 

for every member of this committee, that if actions that you feel 

are unwarranted are being taken against you because of what you 

are doing here that you should let us know. They did the same 

thing to the Morton Thiokol whistleblowers that spoke of the Oring. They demoted them. They punished them. But once Congress 

intervened, that was rectified within a day. So you should let us 

know that. 

Now, in both your August 15 and August 22 letters to Mr. Lay, 

you warned that, ‘‘We do have valuation issues with our international assets and possibly some of our Enron Energy Services 

and mark-to-market positions.’’ Now, we know that Enron has created thousands of special purpose entities. Do you believe that there may be some mark-to-market valuation problems involving transactions with any of these 

other special purpose entities that were constructed? 

Ms. WATKINS. I don’t believe so. A number of the special purpose 

entities that Enron has are somewhat routine. Enron did hire the 

best and the brightest, and a lot of them were structures so if we 

did want to sell an international powerplant, we had a number of 

subsidiaries that might appeal to a European buyer, an Asian 

buyer. Some of them were very legitimate, just to provide us all the 

options we might want to pursue some time in the future. 

Mr. MARKEY. How about Enron’s international assets? Do you 

think there could be some mark-to-market valuation problems 

there? 

Ms. WATKINS. Not so much mark-to-market, but in accounting if 

you have a long-term asset on your balance sheet that you feel is 

permanently impaired, you must write that down. And I believe 

there may be some problems with some of Enron’s international assets. 

Mr. MARKEY. And how does that problem manifest itself? 

Ms. WATKINS. If it appears that you will not achieve over time 

the value you have paid for a particular asset, you must write it 

down. So that would be an income statement impact when you realize you have got the valuation problem. 

Mr. MARKEY. So, in other words, if they mark to the model, and 

it turns out the model is not working——

Ms. WATKINS. That is on our fair value assets. 

Mr. MARKEY. Right. 

Ms. WATKINS. Most of the international assets were not necessarily fair value assets. Those tended to be the domestic ones. We 

do have some domestic assets that are fair value that are marked 

to a model that is somewhat subjective. 

53

Mr. MARKEY. Okay. Now, Mr. Skilling has told us that he wasn’t 

involved in the March 2001 Raptor transactions. The Powers Committee reports that others at Enron say he was. And Powers is critical of Mr. Skilling’s failure to assure that the Raptor losses were 

properly accounted for in the first quarter of 2001. Do you have any 

knowledge of Mr. Skilling’s involvement with or participation in 

the Raptor vehicles? 

Ms. WATKINS. No, I do not. 

Mr. MARKEY. You do not. Now, in October of 2000, Mr. Fastow 

convened a meeting of the LJM partners to review their activities. 

Mr. Skilling is listed as a guest speaker. On page 7 of the presentation document for this meeting, Mr. Fastow says that the reason 

Enron needs private equity is because ‘‘energy and communications 

assets typically do not generate earnings or cashflow within the 

first 1 to 3 years, and investments dilute Enron’s current earnings 

per share and its credit rating ratios.’’ Do you agree with that? 

Ms. WATKINS. Some energy and communication assets generate 

cashflow. But I guess he means our—Enron’s energy and communication assets—— Mr. MARKEY. Yes. 

Ms. WATKINS. [continuing] were not generating cashflow. 

Mr. MARKEY. And you agree with that. 

Ms. WATKINS. Yes. 

Mr. MARKEY. Now, the proposed solution in that document was ‘‘to deconsolidate assets’’ and ‘‘create structures which accelerate 

projected earnings and cashflows.’’ Now, you had run the JEDI 

partnership and had sold a Colombian asset to White Wing to increase cashflow. Would you agree that this was the purpose of 

Enron’s SPE? 

Ms. WATKINS. The purpose of the Condor SPE appeared, in my 

opinion, to be to generate funds flow. As far as LJM, I am mainly 

familiar just with Raptor and the Raptor special purpose entities. 

And it does appear that that—that those were created solely to ensure that certain losses that should flow through our income statement were masked. 

Mr. MARKEY. All right. If you could turn to page 9, where it says 

that private equity can also be used for ‘‘earnings generation.’’ You 

found that to be true on the Raptors SPEs, didn’t you? 

Ms. WATKINS. Yes. 

Mr. MARKEY. You did. Now, Mr. Skilling told us under oath that 

while he was at Enron he was not aware of—and this is what he 

told the committee—‘‘any financing arrangements designed to conceal liabilities or inflate profitability,’’ and that, again, ‘‘the off balance sheet entities or SPEs that have gotten so much attention are 

commonplace in corporate America, and, if properly established, 

they can effectively shift risk from a company’s shareholders to others who have a different risk-reward preference. As a result, the 

financial statements issued by Enron, as far as I know’’—this is 

Mr. Skilling speaking—‘‘accurately reflected the financial condition 

of the company.’’ So, in your option, was Raptor IV ‘‘a financing arrangement designed to conceal liabilities or inflate profitability?’’ Ms. WATKINS. Well, I would focus in on his comment that we did 

these deals to shift risk and return to an entity that wanted to bear 

54

that differing risk and return. The risk and return scenario that 

Enron didn’t want to bear transferred to a special purpose entity. 

We know from the Powers Report that there was no real economic 

risk transferred to Raptor. 

Mr. MARKEY. Do you believe that he knew the actual financial 

condition of the company? Mr. Skilling, that is. 

Ms. WATKINS. Yes, I do. 

Mr. MARKEY. You do. Here on the LJM2 approval sheet, we have 

Skilling signing off at Tab 2. Doesn’t that mean to you that Mr. 

Skilling was involved in Raptor? 

Ms. WATKINS. On these transactions where he is signing off, he 

should be. I am looking at one that says Jeff Skilling, Joe Sutton, 

with no signature. But maybe it was—oh, I don’t know who that 

is that signed it. But if there was a signature block on these sheets 

it had to be filled. 

Mr. MARKEY. Okay. So, yes, that would be back on the first, second, page 3, fourth page. It says LJM approval sheet, page 3. And 

the bottom is Executive Jeff Skilling, with his signature next to it, 

March 12, 2001. Can you see that? 

Ms. WATKINS. March 12, 2001. That is under Tab 2? 

Mr. MARKEY. Yes. It is in Tab 2, page 3. 

Ms. WATKINS. Yes. 

Mr. MARKEY. Now, what does that indicate inside the corporate 

structure, as you know it, when a signature like that is under——

Ms. WATKINS. Well, he is approving Raptor IV. And I am sure 

he was well versed with what this meant. 

Mr. MARKEY. Are you sure? 

Ms. WATKINS. He typically was very well versed. 

Mr. MARKEY. So in your opinion, then, at the very top of the company these men were well briefed with regard to what was going 

on inside of these special purpose entities. 

Ms. WATKINS. It would be my opinion that Mr. Skilling would be 

very well briefed about these transactions. 

Mr. MARKEY. Well, again, I thank you. 

And, Mr. Chairman, I thank you for your——

Mr. GREENWOOD. The Chair thanks the gentleman. 

Mr. MARKEY. [continuing] the last couple of years, and I thank 

you for your courage. 

Mr. GREENWOOD. Before recognizing the gentleman from Texas, 

the Chair is going to exercise the prerogative because the Chair 

has to turn the gavel over to someone else. 

Ms. Watkins, in your interview with V&E, you discussed that 

Fastow was, in effect, blackmailing banks to become investors in 

LJM. What did you mean by that? 

Ms. WATKINS. I had heard from friends that worked at Chase 

and Credit Suisse and Bank of America that Mr. Fastow was almost somewhat threatening, that if you didn’t invest in LJM, 

Enron would not use you as a banker or an investment banker 

again. That he was threatening the institutions, that to get Enron 

business they should invest in LJM. 

Mr. GREENWOOD. Did that appear to be a successful strategy? 

Ms. WATKINS. By the investors that are in LJM2, yes, it appeared to work. 

55

Mr. GREENWOOD. And how about Mr. McMahon. He told us 

about promises that were made to the banks. Did he participate in 

that? 

Ms. WATKINS. Well, I just remember from his testimony last 

week that he was—— Mr. GREENWOOD. Did he—— Ms. WATKINS. [continuing] he was asked about—— Mr. GREENWOOD. Did you discuss this issue with McMahon? 

Ms. WATKINS. He and I discussed that Mr. Fastow used strongarm tactics occasionally. 

Mr. GREENWOOD. Okay. The Chair recognizes the gentleman 

from Texas, Mr. Green, for 10 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. 

And, Ms. Watkins, I have some questions. But, first, I had somebody from Houston send me an e-mail. Well, it actually came from 

another Member of Congress, and the young lady actually worked 

in Houston. And she said this, ‘‘Capitalism is if you have two cows, 

and you sell one and buy a bull, and your herd multiplies, and the 

economy grows and you sell them to retire on the income.’’ And now you have Enron capitalism. You have two cows. You 

sell three of them to your publicly listed company using letters of 

credit opened by your brother-in-law at the bank, and then execute 

a debt equity swap from an associated general offer so that you get 

all four cows back with tax exemptions for five. 

The milk rights of the six cows are transferred via an intermediary to a Cayman Island company secretly owned by your CFO 

who sells the rights to all seven cows back to your listed company. 

And the annual report says the company owns eight cows with an 

option for six more. 

When I saw this late last night, of course, we ran until 3, and 

I thought after hearing all of the testimony that we have heard before today, that is about what it sounds like. And your testimony 

is very refreshing, in all honesty. And like a lot of members, I, you 

know, respect you and admire you for being willing to put your job 

on the line to go up to the CEO and say, you know, ‘‘We have a 

problem.’’

And, you know, after reading Vinson & Elkins’ response, they 

didn’t respond like it should have been, and your testimony has already showed that. 

Let me turn, if you could, to Tab 2 in your book. And what it 

is it is your memo that you sent to Mr. Hecker, because at our first 

hearing we actually had Arthur Andersen here and talked about 

your memo. Were you surprised—I know as a former Arthur Andersen employee—how quickly Mr. Hecker communicated your concerns to Andersen’s management? 

Ms. WATKINS. Yes, I am looking at Tab 16, and it is a memo from 

Mr. James Hecker dated August 21. I phoned him as he——

Mr. GREEN. Okay. Yes, it is Tab 2 on mine. It is Tab 16 on yours. 

Okay. 

Ms. WATKINS. I phoned him, as it says, more like a sounding 

board to talk to him about my concerns before I met with Mr. Lay. 

I was thinking it was just something between us. In hindsight, I 

realized the severity of what I was concerned about was something 

that probably would induce him to do something about it. And I 

56

read this when this committee released this document a few weeks 

ago. 

Mr. GREEN. Okay. And when you spoke with him, you said—and 

you told me you thought it would be confidential, or just between 

you and him, or——

Ms. WATKINS. Well, I didn’t say confidential necessarily, but I 

was just trying to run some things by him. I did not realize he had 

written a memo until this year. 

Mr. GREEN. I guess in most organizations, though, if somebody 

brings something to my attention that impacts my company, or 

partnership in this case, you know, I would expect him to be able 

to go to someone else and say, ‘‘By the way, there is a problem that 

has been brought up, and it is my job to pass this on, so somebody 

in a decisionmaking capacity higher than mine can do it.’’

How long did you work with Arthur Andersen? 

Ms. WATKINS. Eight years. 

Mr. GREEN. Oh. So it was a number of years. Was it your experience that the practice groups tended to be sensitive about internal 

allegations of accounting irregularities during your 8 years? 

Ms. WATKINS. If I was still an auditor at Arthur Andersen, and 

I got a call like mine, I would be highly concerned with the conversation and the topics that I brought up with Mr. Hecker. 

Mr. GREEN. So it would circulate in the office and——

Ms. WATKINS. It doesn’t surprise me that he, after reading this, 

talked to the people that he did, and that he did try to bring a lot 

of attention to my concerns. 

Mr. GREEN. Yes. And were you surprised that it actually made 

it all the way up to Chicago? 

Ms. WATKINS. Not really. Mr. Hecker indicated to me during our 

call that he hoped I wasn’t right, because he didn’t think their firm 

could stand another scandal following Waste Management and 

Sunbeam. 

Mr. GREEN. Yes. And we have discussed that before at our hearings. I guess the Andersen folks who are here developed some type 

of ‘‘I don’t remember’’ and ‘‘I don’t recall’’ illnesses it seems like 

people get when they come into our committee room. 

When you worked at Arthur Andersen—and I appreciate your insights on what has happened—but it seems like they weren’t as 

forthcoming as maybe they should have been, having been notified 

last August, and maybe even questions before your memo to Mr. 

Hecker. 

In most of your memos, you have almost always provided a list 

of additional people to speak with about collaborating your views. 

And you have been documenting, saying, ‘‘This is just my opinion, 

but here is other folks that can collaborate.’’ Are there people in 

the Enron food chain that—who would be helpful to our subcommittee to talk to that maybe if we haven’t had the opportunity—our investigators—is there anyone that you know of that 

you may not have shared with our committee staff? 

Ms. WATKINS. I think I have mentioned most of the names to the 

staff—and also here today—that would be useful. 

Mr. GREEN. Okay. Let me—another question. If you will turn to 

page 37. Okay. I am sorry. If you will—I am sorry, Tab 26. The 

57

agenda for the LJM investments from October 26, 2000, annual 

partnership meeting. 

Ms. WATKINS. Okay. 

Mr. GREEN. I know that you haven’t seen this document before. 

But I think you can shed some light on this for us. Now, on page 

37 of this report, sample investments, Raptor I, their first bullet 

points to—or reads in relevant part that Raptor is a structured finance vehicle, capitalized with Enron stock, derivative in LJM equity, that will enter into derivative transactions with Enron related 

to investments in Enron’s merchant investment portfolio. 

How can an entity that is capitalized with Enron stock derivative 

legitimately enter into a derivative transaction with Enron? And 

how can Enron book that income from these transactions? 

Ms. WATKINS. Well, the main issue, too, is that it was primarily 

capitalized with an Enron stock derivative. And the LJM equity 

had been completely offset by a cash fee paid to LJM. Under that 

structure I don’t see how it could have been legitimate. 

Mr. GREEN. Okay. And, again, this is the annual partnership 

meeting of October of 2000. In your memo in August, and what we 

have seen from the Powers Report that there was even information 

in the spring of 2001—so, you know, it was before your memo—and 

now we have the original—the annual partnership meeting—and I 

have to admit, I was a business major. But I couldn’t make heads 

or tails about how you could quantify this. I appreciate your answer. 

On page 38, sample investments, Osprey. The first bullet point 

reads to relevant part that Osprey is a partner in an investment 

vehicle that purchases merchant assets from Enron. It is capitalized with 50 million shares of Enron stock. If an entity were capitalized with Enron stock, and Enron stock sold assets—Enron sold 

assets to that entity, is Enron essentially selling assets to itself 

again? 

Ms. WATKINS. Osprey and Condor and White Wing are all the 

same vehicle. And this is the Condor that I was referring to in my 

memos that I was uncomfortable with. 

Mr. GREEN. So the answer to the question is, if an entity were 

capitalized with Enron stock, and Enron sold assets to the entity, 

is Enron essentially selling assets to itself? 

Ms. WATKINS. In this instance, there were significant outside investors. 

Mr. GREEN. Okay. 

Ms. WATKINS. And they could fall back on the assets for repayment. 

Mr. GREEN. Okay. 

Ms. WATKINS. But it was also structured that if the assets were 

not sufficient to repay the debt investors, they also had the stock. 

Supposedly, this is a legitimate accounting structure. I am not 

happy with it. I think if there is a claw back to the company, to 

its own stock, it should not be off balance sheet. And the debt that 

came into Condor or White Wing or Osprey was used to purchase 

assets, and Enron got funds flow from operations treatment from 

that. 

And I think if it had been a consolidated special purpose entity, 

it would have been funds flow from borrowings. And those are two 

58

very different funds flow items, in terms of how an analyst would 

evaluate the company. 

Mr. GREEN. Okay. The second bullet points out that this structure created a synthetic, multi-billion dollar balance sheet for 

Enron that deconsolidated assets to generate funds flow. If, in fact, 

these structures created synthetic balance sheets for Enron that indicated an increase in funds flow, would this be intentionally deceptive to investors, in your opinion? 

Ms. WATKINS. Yes. In my opinion, it would. 

Mr. GREEN. Ms. Watkins, you said earlier that the push to sell 

assets and increase cashflow began in the third and fourth quarters of 1999? 

Ms. WATKINS. Yes, sir. 

Mr. GREEN. So now 11⁄2 years later, in its continued effort to artificially increase its cashflow, Enron is selling its assets at inflated 

prices to partnerships of which its senior executives are the general 

partners. These partnerships are either capitalized with or guaranteed by Enron stock, and this was done to improve the optics of 

Enron’s balance sheet in order to deceive Wall Street analysts and 

investors. 

I know that is a long phrase. But do you think these—in your 

opinion, these partnerships were either capitalized or guaranteed 

this was done to improve the optics. And I love the terminology, 

‘‘the optics of Enron’s balance sheets to deceive Wall Street analysts and investors.’’

Ms. WATKINS. It appears that some of these vehicles were used 

for financial statement manipulation. 

Mr. GREEN. Thank you. 

Thank you, Mr. Chairman. 

Again, thank you for being here, and I have been proud to read 

the articles about a Texas lady who is willing to do that. 

Chairman TAUZIN. I thank the gentleman. 

I think we have gone through the roster of members who are 

qualified to ask questions. I want to acknowledge for the record, 

however, the presence, once again, of Congresswoman Sheila Jackson-Lee, who is not a member of our committee, and, therefore, not 

entitled to participate with questions but who has been an extraordinary participant through all of these hearing processes on behalf 

of the citizens of her community who have been so devastated by 

this collapse. 

And again, Congresswoman Lee, we welcome you and thank you 

for your attendance and your participation, physically and I know 

emotionally, in these hearings. Thank you. 

Let me, before we wrap, put a few questions into the record, Ms. 

Watkins, that I think are important as well because the answers 

will tell us a little bit about who was taking responsibility for what 

was going on and who was not. I want to focus on the gentleman 

who held the position of Executive Vice President and Chief Risk 

Officer. 

Now, would you describe for us the function of the Chief Risk Officer in the corporation? 

Ms. WATKINS. Mr. Buy supervised our credit department. 

Chairman TAUZIN. And his name is Rick Buy, right? 

59

Ms. WATKINS. Rick Buy, yes. He supervised our credit department, our risk assessment and control group, and he was in charge 

of our risk management policy that was presented to the Board 

each year. 

Chairman TAUZIN. So he was—according to our documents—responsible for identifying, quantifying, controlling risk in both 

Enron’s trading activities and their investment opportunities, 

right? 

Ms. WATKINS. Yes. 

Chairman TAUZIN. This would include all of these special entities 

and partnerships that Enron was engaging in, right? 

Ms. WATKINS. Yes, that is correct. 

Chairman TAUZIN. Now, did you ever have a conversation with 

him about the precarious financial condition of Enron and its reliance upon these questionable deals to continue to meet the earnings projections? 

Ms. WATKINS. I had worked with Mr. Buy during the time period 

where I was managing the JEDI portfolio. I have also had discussions with him. He was a former co-worker and friend. The week 

leading up to my meeting with Mr. Lay, Mr. Buy was on vacation, 

and I actually phoned him. I was trying to use him as a sounding 

board as well. 

I told him a bit about my concerns and that I had a meeting 

scheduled with Mr. Lay. I asked him if I could fax him my materials to get his opinion about—— Chairman TAUZIN. But did you tell him that, in fact, some of the 

materials had come from his own shop? 

Ms. WATKINS. No. But I just told him I had some memos that 

I wanted to fax him and have him look at. 

Chairman TAUZIN. Did you identify those memos, or explain to 

him what they might say or—— Ms. WATKINS. I told him I was very concerned about the Raptor 

transactions, that we had very large accounting issues, and that it 

was not appropriate to be backstopping these Raptor losses with 

Enron stock. 

Chairman TAUZIN. So you offered to send him all of this. What 

was his response? 

Ms. WATKINS. He said he would rather not see it. 

Chairman TAUZIN. Now, he would rather not see it? And his job 

was the risk officer for the corporation? 

Ms. WATKINS. Yes, sir. 

Chairman TAUZIN. And so I suppose you didn’t send it to him, 

then? 

Ms. WATKINS. No, I did not. 

Chairman TAUZIN. So the Chief Risk Officer of the corporation 

was in a see no evil, hear no evil, speak no evil position? 

Ms. WATKINS. It was——

Chairman TAUZIN. He didn’t want to see the documents? 

Ms. WATKINS. It would appear that would be the case. 

Chairman TAUZIN. Now, did he tell you anything about the precarious financial condition of Enron and its reliance upon these 

deals? 

Ms. WATKINS. Mr. Buy expressed the opinion to me, as early as 

maybe even 1997/1998, that he felt like Enron was one or two 

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quarters away from disaster. Now, he had different reasons for 

that, but that was because we were a trading company. Trading 

companies usually it is hard to predict earnings. You have to depend upon volatility in the marketplace. 

And we were so dead set on predicting our earnings, and the 

street had become accustomed to us predicting our earnings. So he 

just felt like if we ever missed our earnings targets people, i.e. the 

analysts and the investing community, would look at us under a 

microscope and that he was concerned that would put us in in a 

disastrous position. 

Chairman TAUZIN. So here is the Chief Risk Officer who has expressed to you concerns that you may be a quarter away from disaster because of Enron’s reliance upon these transactions, who says 

to you, ‘‘Don’t send me the documents illustrating your concerns 

that there are serious problems with these transactions.’’ How did 

you react to that? 

Ms. WATKINS. I was disappointed because I felt like he was in 

a position to help us disclose these things with Mr. Lay. 

Chairman TAUZIN. And you weren’t going to get any help at all 

from him. 

Ms. WATKINS. Right. 

Chairman TAUZIN. Now, you were part of an investor conference 

call on October 23. Now, to put it in perspective, this is about the 

time that you are discussing with Mr. Lay your concerns and bringing them to him attention? 

Ms. WATKINS. Well, it was after the earnings release, which talked about the $1.2 billion shareholder reduction. 

Chairman TAUZIN. October 16, right? 

Ms. WATKINS. October 16. We had an October 23 investor call 

that was open to the public, and I just listened in. 

Chairman TAUZIN. Right. Now, I understand that Mr. Causey 

and Mr. Lay were members of that conference call. 

Ms. WATKINS. Yes, that is right. 

Chairman TAUZIN. And you had a chance to listen in to the conversations. Were the Raptors discussed in that conference call? 

Ms. WATKINS. Yes. An analyst asked the question, ‘‘Okay. Enron 

has unwound these Raptor transactions. You have written off the 

transactions in the third quarter of 2001. If they had never existed 

at all, what would have been the income statement impact for the 

year 2000?’’ And Mr. Causey responded that there would have been 

little or no impact, because we could have done these transactions 

elsewhere. 

Chairman TAUZIN. Was that a true statement? 

Ms. WATKINS. I don’t think so, and the Powers Report doesn’t 

think so either. 

Chairman TAUZIN. Did Mr. Lay have any comments on that 

point? 

Ms. WATKINS. Well, Mr. Lay parroted Mr. Causey word for word. 

And I felt like that was a statement he didn’t necessarily know, 

and it was unwise to parrot the Chief Accounting Officer on that 

statement. 

Chairman TAUZIN. Now, here Mr. Causey and Mr. Lay are on a 

conference call with investors telling them that if the Raptors had 

not been a part of Enron there would have been no impact on the 

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income statement. You believe that to be false. Did you express 

your concerns about these statements following that conversation? 

Ms. WATKINS. Well, I did go into Ms. Olson’s office, and I said, ‘‘You need to warn Mr. Lay that he should not make comments like 

that unless he knows it to be a fact.’’ Mr. TAUZIN. Did you make notes of those conversations? 

Ms. WATKINS. Yes, I did. 

Chairman TAUZIN. Have you supplied those notes to the committee? 

Ms. WATKINS. I have them. I believe my attorney was going to 

supply them later. 

Chairman TAUZIN. I would appreciate it if you would supply 

those notes that we might have them as part of the record. Without 

objection, that will be so ordered One final thing I want to get on 

the record, Ms. Watkins, that I think is awfully important, too. 

Once you were identified as the author of the anonymous letter you 

first sent, did any of the executive offices of Enron, of the 50th floor 

up, ever contact you to discuss with you what you had written? Did 

anybody praise you for coming forward from the 50th floor? Was 

there a difference between the reaction of Enron employees below 

the 50th floor, as opposed to those in charge on the 50th floor and 

above? 

Ms. WATKINS. Well, the reaction from the employees that have 

been laid off has been just fantastic. They are very supportive. And 

then, I would say from 90 percent of the employees that are still 

there the reaction is also very positive. From the 50th floor, I have 

only had one person give me an ‘‘atta girl’’ so to speak, and that 

was Mr. Ray Bowen. 

Chairman TAUZIN. One final thing. This is very important, obviously, for you and for us. Will you agree to inform us immediately 

if, as a result of your coming forward to testify before this committee, and your willingness to come forward to Mr. Lay with your 

concerns as you have, if any retaliatory action is threatened or proposed or suggested in terms of your employment and your position 

with Enron? 

Ms. WATKINS. Yes, sir. 

Chairman TAUZIN. All right. We thank you for that, and we assure you we will be watching that extraordinarily carefully. 

Are there any requests for additional questions? 

Mr. DEUTSCH. Thank you, Mr. Chairman. 

Chairman TAUZIN. The gentleman from Florida. 

Mr. DEUTSCH. Just a couple of very specific followups. In your 

discussion with staff yesterday, you stated that you believed that 

Enron should have taken additional writeoffs beyond those in the 

November 8 restatement. Could you explain that? 

Ms. WATKINS. Well, the Raptor vehicles that I wrote about, that 

were all associated with LJM2, they were unwound and written off 

in the third quarter of 2001. And they have yet to be restated. 

Those should be unwound as if they never existed, and they should 

restate 2000 results in the first quarter of 2001. 

Mr. DEUTSCH. What is the significance of taking additional writeoffs, especially since Enron is now in bankruptcy proceedings? 

Ms. WATKINS. It is the appropriate thing to do for a public company. We are still publicly traded and under SEC rules. 

62

Mr. DEUTSCH. And just a couple very quick followup questions. 

Is your sense that there was complicity with the auditors, Arthur 

Andersen, and, in a sense, with Vinson & Elkins as well, or was 

there basically fraud to both your accountants and your attorneys? 

In other words, was this a cooperative effort with Enron management to basically come up with these ideas? Or was the representation to the accountants and the attorneys misinformation? 

Ms. WATKINS. It is my opinion that Enron transaction accountants, most notably Ben Glisan, helped come up with the structure 

and come up with the support for the structure, and then convinced 

Andersen that it worked. 

Mr. DEUTSCH. So they knew—what you are really saying is, in 

your opinion, they knew—it was not that Enron was holding back 

what the actual structure of the transaction was. 

Ms. WATKINS. Oh, I think they understood the structure, yes. 

Mr. DEUTSCH. And the issues in terms of Enron being the guarantor and all of those issues? 

Ms. WATKINS. Yes. 

Mr. DEUTSCH. You mentioned something, obviously, very disturbing. That you, in fact, felt fear of your personal safety. Did you 

do anything to follow up based on that fear? 

Ms. WATKINS. I did actually talk with some Enron security personnel. I was a little bit concerned that I had—in effect, Mr. 

Fastow potentially lost his job because, you know, I brought up 

these concerns. And I actually talked to Enron security personnel 

about whether I should do anything different, more concern that 

Mr. Fastow might be vindictive. 

Mr. DEUTSCH. Did they give you any advice to take specific action? 

Ms. WATKINS. Just general security advice on——

Mr. DEUTSCH. Did Mr. Fastow exhibit any, you know, violent behavior——

Ms. WATKINS. No. 

Mr. DEUTSCH. [continuing] erratic behavior that would lead——

Ms. WATKINS. No. It is just I did not feel very much support. I 

did feel like I was a little bit of a lone fish swimming upstream, 

and so it starts to wear on you that it is you against them. And 

I was a little bit concerned. 

Mr. DEUTSCH. Are you convinced that Mr. Baxter’s death is a 

suicide, or is it possible that there was another, you know, more 

nefarious activity? 

Ms. WATKINS. I am sure the authorities have reported that correctly. 

Mr. DEUTSCH. Is there any doubt in your mind? 

Ms. WATKINS. Probably not. 

Mr. DEUTSCH. Doubt in your mind about that it was a suicide? 

Ms. WATKINS. Yes. I believe it probably was. 

Mr. DEUTSCH. If you say ‘‘probably,’’ there is doubt. 

Ms. WATKINS. It is just a sensitive topic that I would rather not 

comment on. 

Mr. DEUTSCH. Okay. Let me—the last thing, is submit for the 

record a list of transactions of Enron management. This is something we talked about previously. It is actually a list of transVerDate May 23 2002 11:43 Jul 02, 2002 Jkt 010199 PO 00026 Frm 00066 Fmt 6633 Sfmt 6602 W:\DISC\77991 pfrm17 PsN: 77991
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actions of sales of Enron stock through the end of last year, totaling $1.1 billion. 

Chairman TAUZIN. Without objection, the document will be part 

of the record. 

Mr. DEUTSCH. Total of 17 million shares. You know, obviously, none of these shares were sold at zero, at a dollar, at $5, at $10. 

And I guess, you know, these people were wise enough or lucky 

enough to sell stocks before the facts that you have described and 

that we have uncovered became public. 

And it is either they were all very lucky or, in fact, they were 

trading on inside information, as it appears from the outside looking in. 

Thank you, Mr. Chairman. 

Chairman TAUZIN. Thank you very much. 

I would also ask that the record include the transcript of the conference call referred to in our recent questions as part of the 

record. Without objection, it is so ordered. 

The gentleman, Mr. Stupak, is recognized for questions. 

Mr. STUPAK. Thank you, Mr. Chairman. Just a few questions, if 

I may. 

But before I do that, I want to thank you, Mr. Chairman, Mr. 

Dingell, Mr. Deutsch, Mr. Greenwood. We have had about five or 

six hearings now. They have been good hearings. We have all been 

working together on this debacle, if you will, and things have gone 

quite well. And I would also like to mention our personal staffs, especially committee staff. They work long and hard to help get us 

prepared and work—— Chairman TAUZIN. Will the gentleman yield? 

Mr. STUPAK. Sure. 

Chairman TAUZIN. There is a personal interest story. I know he 

is going to get upset with me for saying it, but the gentleman who 

is in charge of our investigative staff, Mark Paoletta recently went 

through lung surgery, serious lung surgery, a surgery he was attempting to put off while this investigation was proceeding. And I 

had to threaten to fire him to make him—in fact, go to his father 

and threaten to fire him if he didn’t go to the hospital and take 

care of his lung surgery. He took care of it this weekend, and he 

is back to work already. 

The staff has done marvelous work, and Mr. Paoletta is particularly to be accorded our appreciation for his sacrifice of self to get 

this job done. And we thank you, Mark. 

I thank the gentleman. 

Mr. STUPAK. And we all appreciate Mark being back and helping 

throughout this whole ordeal that we have been going through. 

Ms. Watkins, something has been sort of bugging me, and I have 

asked this question before and never really got an answer. Maybe 

you can shed some light on it. In one of the transactions, Mr. Copper, in a very short period of time, made like about $2 million. And 

the records and everything we have seen says there is no reason 

why he should make $2 million in about 2 months, no indication 

of what was the consideration for the compensation. 

But yet he made that money, and I believe it was on the Southampton deal, and maybe it was on the unwinding of Chewco or 

something like that. Just how would someone get paid $2 million 

64

in this whole deal? I mean, how would you handle that on the 

books? 

Ms. WATKINS. All I know about those transactions were what I 

have read in the Powers Report. And I would probably agree with 

the Powers Report that it does raise questions when you can have 

such large returns in such a short period of time. 

Mr. STUPAK. What books handled that loss? The Enron books or 

Southampton? Would you know? 

Ms. WATKINS. Well, if Enron was purchasing an interest——

Mr. STUPAK. Right. 

Ms. WATKINS. [continuing] for instance, a Chewco interest or——

Mr. STUPAK. Which they are supposed to have been. 

Ms. WATKINS. If you are buying back an asset, that goes on your 

books at the price you paid. 

Mr. STUPAK. Paid. 

Ms. WATKINS. So it is not an income statement item. It is not 

necessarily a loss for Enron and a gain for Mr. Copper. It could be 

an asset purchase by Enron that provided a gain to Mr. Copper. 

Mr. STUPAK. Sounds like just the way to pass through some 

money real quickly, right? After you did your memo and Vinson & 

Elkins reviewed—did their investigation if you will, on or about October 15, they said that a broader investigation was not necessary 

and it was just bad cosmetics, and we can see our way through 

that. 

But then, the very next day, on October 16, is when Enron announced that, due to accounting errors and restructuring related to 

transactions involving LJM2, it was revising its shareholder equity 

numbers downward by $1.2 billion and posting a third quarter loss 

in excess of $500 million. And then, it went on, and you didn’t believe at that time, even despite the October 16 announcement, that 

the whole story had been told about the looming financial and accounting crisis involving all of these partnerships and these PSEs. 

And then, on November 8, Enron stated its intent to redo their 

financial statements for the past 4 years due to additional accounting problems, again, with the LJM and Chewco partnership. 

Now, despite all of these actions, October 15 and November 8, do 

you believe that we have learned all of the problems that are there, 

or are there still some things that you believe must be done to really come clean here with the American people and the stock and 

faith that people had in this company called Enron? 

Ms. WATKINS. The only people at Enron saying there is a problem are the people hired from the Powers Report and myself. 

Mr. STUPAK. So despite all of the restatement of accounting and 

restatement of financial statements, again, the Powers Report and 

you, so——

Ms. WATKINS. Well, the Raptor transactions have not been restated yet. 

Mr. STUPAK. So what concerns would you still have, then, about 

the transparency or the accuracy of Enron’s financial statements 

besides the Raptor hasn’t been fully restated? 

Ms. WATKINS. Well, the Raptor transactions need to be fully restated and——

Mr. STUPAK. Anything else? 

65

Ms. WATKINS. Well, there was another memo written by an employee from Enron Energy Services. It was disclosed in the press. 

I think it outlined how Enron solved its EES mark-to-market valuation issues that I raised at the first part of my anonymous letter. 

And that needs to be looked at. That is segment reporting. I am 

sure they actually bore the loss in the wholesale group, but that 

segment reporting was important to Enron in 2001. 

Mr. STUPAK. Well, it seems like the October 16 reevaluation if 

you will was a result of your efforts, and it is our understanding 

between October 16 and November 8 you continued to push Ken 

Lay and others to do further restatements. So maybe after your 

testimony today we can expect some more restatements from Enron 

or some coming clean on Raptor or something like that. Hopefully, 

because we really want to get to the bottom of this. And what are 

all of the problems here? Let us get it on the table. They are in 

a bankruptcy situation, and we want to get this thing moved on. 

That brings me to my next question. In the minutes, and 

throughout some testimony and some of the flowcharts we have 

seen throughout here, there is mention of Enron Europe, the 

Southern Cone, which would be South America, Brazil, Australia, 

Japan. If we are seeing all of these problems here in this country 

related to Enron, do you know of any problems that others are seeing overseas? What has happened over there in Australia? 

In Brazil, they were particularly concerned about the devaluation 

of their currency there and how it would affect Enron. So the 

Enron collapse, how has it affected things overseas? If you know. 

Ms. WATKINS. I am not—I was in Enron International, but most 

of the international assets are hard assets. They are accrual-based 

assets. They are fairly traditional. In a country like Brazil that has 

devaluation concerns, it might mean that we don’t achieve the U.S. 

dollar cash price that we paid, but I don’t know of anything that 

would indicate any kind of financial statement manipulation related to those assets. 

Mr. STUPAK. I am looking at your memo. It is dated October 30, 

2001, 4:45. I am on the second page. It looks like it is Tab Number 

21. And I am looking on the bottom of page 2, it says, ‘‘Note.’’ Are 

you with me? 

Ms. WATKINS. Yes. 

Mr. STUPAK. Okay. It says, ‘‘Note: After restatement, the good 

news is that our core trading business is solid with strong numbers 

to report. The bad news, EBS was losing big money in 2000. The 

big losses then start until 2001, and EES did not start making a 

profit in 2000.’’ So how would—were the shareholders ever made 

aware of any of this? 

Ms. WATKINS. My concern when I was making this point was 

that Enron Broadband and Enron Energy Services were our growth 

vehicles. They were supposedly one of the reasons why we were enjoying a high PE multiple. And we did finally report to investors 

that EBS was losing money, large amounts of money in 2001. But 

the Raptor hedge on Avici made EBS look like it had only lost $50- 

or $60 million in 2000 when actually it was more like $250 million. 

And it was very important to Enron that we announce that 

Enron Energy Services was profitable in 2000. Without the New 

Power hedges, EES was not profitable in 2000. This would have 

66

significantly impacted our PE multiples and our stock price in the 

year 2000. 

Mr. STUPAK. So it is fair to say if—if you started losing money 

in 2000, it really wasn’t reported until 2001. So you probably had— you have at least 12 months. So, basically, the shareholders 

weren’t told the truth here what was going on with this situation. 

Is that a fair statement? 

Ms. WATKINS. That is a fair statement. 

Mr. STUPAK. Okay. With that, Mr. Chairman, I have nothing further. Thank you. 

And thank you again. 

Chairman TAUZIN. I thank you very much, Mr. Stupak. 

As we conclude, I note, Ms. Watkins, that on that same memo 

you make the point that Lay should meet with top SEC officials, 

and that Key Lay and Enron needed to support one of the SEC’s 

long-term objectives of requiring that the ‘‘Big 5’’ accounting firms 

rotate off their large clients on a regular basis as short as 3 years. 

Do you stand by that recommendation? 

Ms. WATKINS. Yes, I do. As an investor in the U.S. stock market, 

I would feel a lot more comfortable knowing that public companies 

had to rotate their accounting firms every 3 years. 

Chairman TAUZIN. It is a recommendation we receive from a 

number of sources as we go forward. 

Let me make several observations. First of all, that you sort of 

stumbled on the Raptors. You are not here saying that is all that 

may have been wrong. There may be other things in other transactions that are you not aware of that may need some inquiry. Is 

that correct? 

Ms. WATKINS. Yes, sir. 

Chairman TAUZIN. Second, that as I said at the beginning of this 

hearing, we are going to try to move as rapidly as we can from this 

inquiry into an actual examination of solutions. And the committees are beginning to do that. One of them met today; one of them 

met yesterday. And Mr. Greenwood and Mr. Stearns, in fact, have 

been asked by the committee to actually begin putting a set of recommendations together for the committee to look at. 

And your thoughts, as you have been asked before by some members, in regards to your observations and recommended changes we 

might make, are certainly welcome, and we would appreciate it. 

Ms. Watkins, your testimony stands for itself. It doesn’t need a 

whole lot of elaboration or editorial comment. But I do want to 

make one. And that is that your testimony, your activities in regard to Enron, actually call all of us to examine the notion of corporate loyalty. There are some, I assume, who believe corporate 

loyalty is protecting the corporation against all harm, even when 

it is doing something wrong. 

You have demonstrated, for us, a different definition of corporate 

loyalty, a different definition of fiduciary responsibility to a corporation, that includes responsibility to its shareholders and investors. And I want to compliment you for that. 

There are mothers and fathers listening to these hearings, and 

who have heard your testimony, and now have an experience, I 

think, upon which to hopefully teach their sons and daughters who 

are going to work for American corporations about the notion of 

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corporate loyalty that you bring to the table this morning, the notion that corporate loyalty means owning up to mistakes for the 

sake of the proper relationship with investors and consumers, and 

confronting them directly, and reporting them and dealing with 

them forthrightly. 

Would that the last clear chance you gave the leadership of 

Enron been accepted and taken, apparently that didn’t happen, but 

you at least stood for that proposition. And, again, I commend you 

for that. I hope that sons and daughters of American citizens follow 

your example, frankly, and adopt your concept of corporate loyalty 

as a mantra. 

As I said, we are learning from these hearings. I think corporate 

America is learning from these hearings. And I truly believe, as 

Mr. Greenwood does, that when we complete them—and our work 

is not yet finished—but when we complete them we will together, 

Democrats and Republicans on this committee, be able to propose 

a set of reforms, together with the reforms that I know corporate 

America itself is talking about instituting, and agencies of our government are talking about instituting, that is going to build better, 

clearer, more responsible lines of communication and information 

and disclosure and investor confidence in this country. 

If that is a result of this mess, then perhaps our country will be 

much better for it in the end, and you will have contributed mightily to that process. For that, I thank you. 

And unless there is any other business to come before the committee, the Chair announces that the record will stay open for 30 

days. 

Ms. Watkins, your testimony was under oath, of course. And if 

you and your attorney will carefully review it, if there are any additional comments or clarifications or additions you want to make 

to the record, the record is open for 30 days. We may have additional questions we would like to submit to you in writing to which 

you might respond. 

We will be in touch with you in that regard. Again, thank you 

for your extraordinary cooperation and for your contributions. 

The hearing stands adjourned. 

[Whereupon, at 4:06 p.m., the subcommittee was adjourned.] 

[Additional material submitted for the record follows:]

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