From 17 Corporate Crime Reporter 14, April 7, 2003

INTERVIEW WITH SHERRON WATKINS, FORMER ENRON VICE PRESIDENT, HOUSTON, TEXAS

Last year, Time Magazine named Coleen Rowley (The FBI), Sherron Watkins (Enron) and Cynthia Cooper (WorldCom), as Persons of the Year.

"In a year that saw our trust in American institutions tested so severely, what better way to capture that news than to profile three ordinary people who in extraordinary ways tried to restore confidence in business and government?" said Time managing editor Jim Kelly.

It was Watkins, the former Enron executive, who in August 2001 wrote a now famous memo to Enron CEO Ken Lay asking: "Has Enron become a risky place to work? For those of us who didn't get rich of the last few years, can we afford to stay?"

"Enron has been very aggressive in its accounting -- most notably the Raptor transactions and the Condor vehicle," Watkins wrote to Lay. "It sure looks to the layman on the street that we are hiding losses in a related company and will compensate that company with Enron stock in the future. I am incredibly nervous that we will implode in a wave of accounting scandals. . ."

Which two months later, Enron did.

Watkins has just come out with a book, co-authored with Mimi Schwartz, on her Enron experience. (Power Failure: The Inside Story of the Collapse of Enron (Doubleday, 2003)).

We interviewed Watkins on March 31, 2003.

CCR: What is your current work?
WATKINS: I'm on the lecture circuit on a full time basis. And I'm also looking to start a corporate governance consulting group that advises board members.

CCR: What school did you graduate from and what have you been doing since?
WATKINS: I graduated from the University of Texas at Austin in 1981 with a BA and in 1982 with a MA in accounting. I joined the Houston office of Arthur Andersen, where I worked until 1987. I then moved to New York City and worked for Arthur Andersen there in litigation services. I left Arthur Andersen in 1990 and went work for Metallgesellschaft. I worked with MG Trade Finance Corporation, which was a boutique commodity-based lending outfit.

I was in charge of managing their portfolio of assets, which were primarily oil and gas loans, as well as refinery loans.

In late 1993, I left MG, moved back to Houston, and went to work for Enron.

Actually, Andrew Fastow hired me to run the portfolio that had just started with Calpers. They had just started a joint venture with Enron called JEDI -- joint energy development investments. It was a limited partnership.

That was a partnership put together in order to invest in energy related companies, that would also do more trading business with Enron.

CCR: Give us a short history of Enron.
WATKINS: The company started in 1985 as a merger of two large pipeline companies.

Internorth, was based in Omaha, Nebraska and had a large pipeline system. Houston Natural Gas was based in Houston and had a gas pipeline system. It was a merger that made Enron one of the largest regulated gas pipeline companies in the United States. It had pipelines that went from the Gulf Coast up to Canada, down to Florida, and over to California.

The only area that the company didn't service was up to the northeast.

CCR: Who were the clients?
WATKINS: In a regulated gas pipeline system, you are buying gas from producers, and then the customers are large gas distribution companies or power plants. The company that you might buy gas from would be a customer of Enron's.

In 1990, Enron hired Jeff Skilling. The gas market was deregulating. Gas commodity trading was on the blackboard. Enron hired Jeff Skilling to transform the company into a gas trading company.

In 1993, when I arrived, 70 percent of the company's earnings still came from regulated gas pipeline revenues and an upstream oil and gas company called Enron Oil and Gas. Probably just about 20 or 25 percent came from gas trading and the rest were small amounts from liquid pipeline operations, some from international.

In 1997, revenues were still about 65 percent, or 60 percent regulated pipelines and Enron Oil and Gas.

By 1999, it was 90 percent trading and ten percent pipeline business. That shows you how much the trading business had grown. We hadn't sold off the pipeline business. It was the same amount of income.

CCR: Why did you leave New York to join Enron?
WATKINS: I'm from Houston and wanted to get back to Texas. But certainly, Enron was the best thing since sliced bread in the energy field.

I was working in New York for MG Trade Finance, and we were offering finance to the oil and gas sector. And the main competitor we had was Enron Finance.

CCR: When you joined Enron in 1993, what was your work?
WATKINS: The banks had abandoned the oil and gas sector. Enron was offering some lending products to upstream oil and gas companies. We were also looking at some oilfield service.

But the JEDI portfolio had gotten started in the summer of 1993. In about two to three years, we invested almost $1 billion worth of assets.

I was managing that portfolio of assets for the JEDI partnership. Enron was always looking to reinvent itself. It was a fun place to work. It was innovative. Pushing the edge of the envelope. It had a performance review system that worked effectively in the earlier years.

It prevented deadwood people from hanging around just because they were the favorite of some boss. You really had to contribute. And that is a morale booster.

You can be at some companies, and you know certain people are not carrying their weight. That's always frustrating. That never happened at Enron.

CCR: Who was in charge when you first got there?
WATKINS: The company was divided into four main areas: the regulated pipeline group, Enron Oil and Gas, Enron International, and the trading outfit. Jeff Skilling ran the trading outfit.

Enron Corp., which sat on top of those four units, was run by Ken Lay, who was the CEO, and Rich Kinder, who was the COO.

CCR: You were happy with Enron?
WATKINS: Certainly.

CCR: When did you start to notice something going wrong?
WATKINS: The company was always trying to meet 15 percent earnings growth figures every year. As trading became a bigger piece of the bottom line, that became harder to do. Trading is somewhat volatile, and you really can't predict when you are going to have a banner year, and when you are going to have a so-so year.

I saw some aggressive accounting in 1996 that I wasn't happy with. It was called fair-value accounting. We took the assets in this JEDI portfolio that I was managing. The accountants determined that we were holding these assets for sale. We didn't intend to have the assets forever. And so we could mark them up and down according to their fair market value.

In a normal hard assets scenario, the hard assets are on the books for their historical costs. You don't get to write them up, unless you sell them for a gain. And you do have to write them down if they drop in value below your cost.

In this instance, we are writing them up, based on our own estimates of what the market value is. You can see where that is ripe for problems.

It started in the latter part of 1996. I was not for the accounting method at all. I thought it was somewhat crazy. JEDI bought a public company and took it private in September 1996.

CCR: What company was that?
WATKINS: It was called Clinton Gas Systems. It was an Appalachian based driller. Enron changed the name to C-Gas. We paid $30 million. In less than a month, they wrote it up by an additional $15 million. They said the company was worth $45 million. The reason they gave was -- they had drilled eight wells, and seven had been successful.

I tried to call BS to that. It was an in-fill drilling operation, and you are supposed to drill about eight to a dozen in a month and have about a 90 percent success ratio.

That's what that is all about. It doesn't make the company worth 50 percent more in value. So, I thought we were abusing this new accounting that had been developed.

I made a few protests, and it didn't go anywhere. I didn't want to be associated with it. That's when I switched jobs and moved to Enron International. That was in January 1997.

CCR: Who was heading Enron International?
WATKINS: Rebecca Mark.

CCR: What's your take on Mark?
WATKINS: She has gotten a lot of bad press because of two major flameouts -- India and the water business. But she did scores of other projects that returned a handsome profit to Enron, that did just fine.

And my take on her is that she was an excellent project manager, but probably got stretched a little bit too thin when she started to run a whole global outfit.

CCR: What was your work at Enron International?
WATKINS: We were looking at the metals and minings industry. That sector is very energy intensive. So we were looking at supplying gas or electricity and financial products, to that sector. I did that for about a year. Then for two years I traded plain vanilla energy deals. We looked at a gas pipeline in western Africa, a gas distribution system in Egypt.

You go to a lot of countries and kick the tires and look around at projects. Sometimes they don't make economic sense.

In South Korea, Enron put up $250 million in a joint venture. And SK Corp., one of the top five chaebols, contributed six gas companies, that were worth $250 million.

We did a 50/50 joint venture. The purpose of the cash was to buy up more gas distribution companies. I believe that the joint venture has at least 15 gas distribution companies now. It is still doing well, but it is tough to sell, because North Korea is one of these axis of evil places.

CCR: Did you see any trouble at Enron International?
WATKINS: I tell people that my three years at Enron International were wonderful because I was blissfully unaware of any accounting gimmicks.

Certainly, I didn't look at the financial statements. I just knew that the stock price of Enron was doing okay. Jeff Skilling took over as Enron COO in 1997.

The CEO, Ken Lay, was supposed to retire to be chairman of the board. Rich Kinder, the COO, was supposed to become the CEO.

There are various rumors as to what happened. But Ken Lay decided to stay on for five more years. Rich Kinder basically said -- I'm tired of doing all the heavy lifting, I'm out of here.

When you think about it, there must be something unspoken about his departure. Most executives would wait five years to be the CEO of a major company.

But he said -- no, I'm leaving. He is now the CEO of a smaller company that is doing very well. That is when Ken Lay tapped Jeff Skilling to be CEO.

This was probably Ken Lay's biggest mistake. Ken Lay was never focused on running the company. He was always interested more in politics, getting a baseball stadium for Houston. Rich Kinder was the man running the show. He was very involved in all of the details.

CCR: Had Kinder stayed, could he have saved Enron?
WATKINS: Yes. I've seen him in action. And he knew about the fair value accounting in 1996. But he always said things like -- we should not smoke our own dope or drink our own whiskey.

I liken fair value accounting to someone experimenting with crack cocaine on the weekend.

When Rich Kinder left, the company became a huge abuser of fair value accounting. Had he stayed in 1997, he would have put the company in rehab and said -- we have to stop this.

He could sniff out any kind of fluff. He would have kept a nice watchful eye over Jeff Skilling. And the company wouldn't have wasted so much money in retail electricity, and broadband. And certainly, he never would have approved the stuff that happened with Andy Fastow.

Jeff Skilling always considered Rebecca Mark his chief rival at Enron International. And he just never liked her business model. He doesn't like hard assets. He thinks they have too low a return. But she was still close to Ken Lay. At the end of the day, Mark's assets gave Ken Lay the global ambassador position that he loved.

He got to go to the big January conference in Davos, Switzerland. It would be -- "there's Bill Gates, there's Andy Grove, and there's Ken Lay from Enron".

Ken Lay would prefer to talk about bringing clean gas fired energy to the third world than talk about energy trading back home in the United States.

In 1999, Rebecca stepped outside of Enron and began running Azurix, a water company that Enron bought. That company went public in the summer of 1999. One week after it went public, Skilling disbanded Enron International. He broke everything up into regions. The regions reported to him.

He didn't just let people go and sell assets. But he gave them earnings targets and cash flow targets that just meant that you were going to have to just start selling assets and laying off people to meet those targets.

At any rate, I joined the Caribbean region in all this reorganization in late 1999. That's when I started to again see some questionable bookeeping once again.

The project name was Condor. But it was an outside partnership called Whitewing. Investors had poured in about $1 billion. Whitewing was buying assets from Enron. But it was really mostly on paper.

And if these assets were considered merchant assets, Enron was able to book cash flow from operations. Normally, if you sell assets, that's just cash flow from investing and divesting activities. It is not reported as part of cash flow from operations, which is a key indicator of the corporation's financial health.

We had this classification of merchant assets. If those were assets held for resale that we had fair valued, that was considered part of your operating revenues.

I had worked on the sale of Promigas, a Columbian gas pipeline company to Whitewing. I thought it was fairly bogus. It was in my opinion a manipulation of cash flow from operations.

The fair value accounting that started in 1996 was very aggressive. Did it violate any rules? Probably not. It was just aggressive.

CCR: You didn't report that in 1996?
WATKINS: Well, I talked to some Andersen people. They just kind of shut you down. Andersen was at the time Enron's auditor.

CCR: When you say they shut you down, you mean?
WATKINS: I was walking down the hall, and Tom Bauer and Carl Bass, two Andersen partners were coming toward me. I knew them both from my Andersen days. I was just teasing them and I said -- when are you guys going to grow some balls? You are not going to let us do this fair value stuff. And they laughed. Tom said -- I don't think you can be talking about my balls in the office.That kind of stuff.

They went and said something to Rick Causey, the chief accountant. The next day, I was hauled into Andy Fastow's office and told -- you have made a big mistake, don't tease about this stuff. We need to present a united front.

Those guys knew me.They had worked with me. Why didn't they just say -- let's go to lunch and talk about it? Why do you think it is not a good idea?

Instead, they go and tell on me to Rick Causey -- hey, you have some people in your shop who don't agree with this.

CCR: Did you go elsewhere -- to the audit committee?
WATKINS: Not on that. Rich Kinder even signed off on this. I believe he would have stopped its use in 1997 had he stuck around. It is the kind of thing that makes you feel uncomfortable.

CCR: But not something you are willing to blow the whistle on right there?
WATKINS: Well, it was not illegal. It was aggressive accounting. But a lot of companies use aggressive accounting.

CCR: But the problems you observed at Whitewing were more of a red flag?
WATKINS: Yes.To me it didn't appear to be a real sale. Certainly, the Colombians didn't know we had sold Promigas. The same Caribbean business unit people kept running the asset. I guess Whitewing technically today owns those assets. But the Enron examiner that the bankruptcy judge has put in place is trying to nullify the whole transaction and say it was a sham so that the assets come back Enron to be distributed to all of the creditors.

CCR: When you realized that this was going on, what did you do about it?
WATKINS: I was uncomfortable with it. But I lived with it. And it wasn't just Promigas. Enron had me look at selling three or four other Caribbean assets to Whitewing. But luckily none of the others fit the criteria. In hindsight, I should have left the company. And many of my friends there say that they were uncomfortable with most of the aggressive accounting.

But it felt foolish to leave. At that time, if you started interviewing and telling other Houston companies that you wanted to leave Enron, they would assume that you are being pushed out.

The stock was doing great. Sometimes you start to feel like -- well, maybe this is one little element and the other sales are legitimate. You ask yourself -- how much of this is pervasive?

Employees now are going to be much more leery of accounting shenanigans. But when you are seeing it up close, especially with Andersen blessing it -- it is easy to say -- I'm not comfortable with this, but everyone else seems to be.

It was part of the reason why I moved on to broadband.

CCR: When did you move to broadband?
WATKINS: February 2000.

CCR: Why did you move to broadband?
WATKINS: They had what they called a quick hire process. After the performance reviews in 1999, all of the people ranked in the first two categories were invited to come to a job fair. Jeff Skilling got up and said -- broadband is the wave of the future. We are going to be trading broadband. The future of Enron is broadband.You have an opportunity to transfer out -- because you have been ranked either a one or a two. We have built a great luxury liner ship.

I had a friend who was a director living in Panama. We had a power plant in Panama. She was trying to expand our energy business in Panama. She said -- you listen to the COO of the company, and he said he hates international assets, and the future of the company is broadband -- it makes no sense for me to stay in Panama when he wants to sell off all of our assets.

About 600 people moved into broadband in one month.

CCR: How long did you work there?
WATKINS: There was no organization in broadband at all. It was headed by Ken Rice and Kevin Hannon.

The original broadband group started when Enron bought Portland General, an electricity utility in 1996. With that came a small fiber optic company. They formed a separate little subsidiary in Enron called Enron Communications. It was later changed to Enron Broadband. They were constructing a fiber optic route that went from Seattle to Portland to San Francisco, Salt Lake City, Las Vegas and over to Los Angeles. That proved to be a valuable route.

Enron was able to swap space off of that for a nationwide network. At that point, it was a plain vanilla broadband company -- fiber optics in the ground. But Enron had grander schemes. Part of the company was chasing a streaming video operation, WWF, wrestling matches, major league baseball. There was broadband trading. And some of that made a lot of sense.

If you are a company that has locations all over the world, and you are networked up, you have to buy fiberoptic services based on your peak usage. It's usually a ten-year contract.

The users had to buy way more capacity than they really needed, and for a longer period of time that they really needed. And they couldn't assign the extra capacity to anyone else.

Enron was looking at a pay-as-you-go dial-up capacity when you need product. They were trying to make a more efficient broadband market. But the broadband trading got ahead of itself, because the technology doesn't really allow you to dial up additional capacity like that.

Enron broadband had no supervision. There was one associate who went flying off to Memphis and agreed to do a weekend streaming video for Black Entertainment Television's Live Gospel Weekend. He never got a contract.

We didn't have the capacity to do that. The techies, who loved to figure these things out, hooked up a streaming video over a satellite, and we streamed that. It cost us a lot of money but we never were paid for that because we didn't have a contract.

How a 20-year old associate can go and do that is beyond me. It was violating every kind of control that Enron ever had in place.

CCR: There was chaos, but there was also criminality, if you believe the Justice Department.
WATKINS: Well, that came on the financing of the Blockbuster deal. We were teaming up with Blockbuster to stream movies into homes via the internet. There were problems at the outset from our end and from their end.

On our end, we were trying to develop the technology to even allow that to happen at a reasonable cost. But on their end, Blockbuster didn't have the digital rights. So, they came to the table without full disclosure.

They might have said we don't have digital rights, but they certainly indicated they could get them. But they couldn't. So there were problems from their side and from our side. That deal had so many people on it.

I left broadband in the summer of 2001.

CCR: Did you observe any accounting problems at broadband?
WATKINS: No. There were staff meetings. And Blockbuster was talked about. And we know that the Blockbuster deal had been monetized, which means that Enron sold future cash flow streams to someone, and they recognized revenue.

None of us knew that it was fraudulent until you read the stuff the Department of Justice came up with. We were told we sold future cash flow streams on the Blockbuster contract.

And we said to ourselves -- wow, what fool bought that? It was like future profits that are not assured at all. But we didn't know that there were all of those promises, that Enron was going to buy those back, that there wasn't real money at risk.

CCR: Why did you leave broadband?
WATKINS: It was horribly chaotic. I went to work for the wrong guy initially. Then the COO asked me to do one job. And then a few months later another job. And you scratch your head and say -- this is not working.

At about the same time, there was a guy named Jim Fallon. He realized this was a big waste of money. He went to talk to Jeff Skilling and said -- you better give me the reins, because Ken Rice and Kevin Hannon don't know what they are doing.

In the spring 2001, Skilling gave him the reins. And Fallon said -- we have to cut, cut, cut. This market isn't going to come around for eight years or so. We have to keep our toes in the water, but we have to fold it back into wholesale.

So, my job was eliminated in June 2001.

That's when I went back to work for Andy Fastow.

CCR: Did you want to work for Fastow?
WATKINS: At this point I was starting to get disheartened about Enron and started interviewing outside of the company. The way things work is -- you need to find a job quickly. You can't be without a position. I had an offer from investor relations. And I had an offer from Andy Fastow, the CFO.

Andy now all of a sudden had mergers and acquisitions as part of his responsibilities. He is a little bit insecure. And I had worked with him for three years. He wanted someone he knew as part of the M& A activity. It wasn't a vice president level job.

The investor relations job had really long hours four times a year with earnings releases. So, during those four times a year, you have to come in at 7 a.m. and don't leave until 10 p.m. My nanny takes night classes.

So, there was no way I could do it.

CCR: Were things rocky from the beginning with Fastow?
WATKINS: No. He had me looking at all of the assets we had for sale and prioritizing them. So, I'm looking at book values, estimated market values. We had a Brazilian asset that we paid $1.3 billion for. It was throwing off 90 million dollars of income, but that was a minuscule rate of return. And we couldn't sell it for what we paid for it. But you could sell it for maybe $900 million to a billion.

So, yes, you would have a loss on the sale, but if you use that cash to pay off debt and lower interest costs, you actually help the bottom line out more than hanging on to the asset.

So, you are looking at a spreadsheet with columns -- assets, book value, estimated market value, on balance sheet, off balance sheet, hedged. The spreadsheet had been started by the accounting department. I'm looking at these things that said "hedge - Raptor." In the loss columns, the accountants were logging hundreds of millions of dollars in losses still coming back to be borne by Enron.

I thought -- that doesn't make sense. I knew that the raptors were subsidiaries of LJM. LJM was Andy's outside investment partnership that he had started in 2000. He had raised about $600 million from outside investors to buy Enron assets as well as other energy company assets.

The raptors were subsidiaries of LJM.

When I was at broadband, broadband made an equity investment in a router company called Avici. It went public and our little $10 million was worth $300 million. It shot through the roof. I heard that we had hedged Avici with LJM. We had locked in our value with LJM.

I remember thinking to myself when I was with broadband -- wow, Andy really raised some high risk money. I couldn't believe his partners were willing to take on that much risk.

When I'm looking at this spread sheet, Avici was one of the assets that had $100 million in losses. Avici had gone public, shot to $170 a share and had dropped to the two digits.

I'd meet with business unit people to see why there were these big losses. And they drew all of these boxes on a white board, trying to explain the structure to me. But that's when they told me that the raptors were backstopped with nothing but the promise of Enron shares in the future.

And Enron shares had gone down. In all of these deals, the asset shoots up in value, Enron rides it up in value, then hedges it with Raptor. Unfortunately, the assets drops significantly, and Raptor owed Enron $500 million for FY 2000. That had grown to $750 million by the first quarter of 2001. The numbers for third quarter of 2001 were looking like $1 billion.

These raptor entities had suffered significant losses on these hedges and owed Enron a lot of money. Enron had booked those as revenues and a receivable from raptor.

The business unit people were telling me that the raptors were nothing but a shell company that had a promise of Enron shares in the future.

And that's what raptors were going to use to pay Enron back. The problem is that Enron shares had dropped so much that there wasn't enough value in the raptors to pay Enron back the $1 billion it owed.

These people are explaining this to me. And I'm thinking -- I can't believe that we have devised something that people think is okay when it just can't be. There was no third party money anywhere. It was Enron stock and Enron assets.

To me, that was not just aggressive accounting. That was bogus accounting. Even with Whitewing, you had a third party that had given Enron $1 billion for this vehicle to buy Enron assets. There was a third party at risk. And they are still holding the bag today.

But in this situation, there was only Enron. Andy had spawned these things. In each one of these structures, he put in $30 million in equity, but took out $40 million in a put fee. So on a cash on cash basis, he had gotten his money out, plus a nice return and was out of there.

CCR: What did you say to him when you learned of this?
WATKINS: I didn't say a word. This was one of these things when you look at it and you say -- this was the worst accounting fraud that I have ever seen. These guys have to know it. They did this and they must know it was wrong.

CCR: What did you do?
WATKINS: I started interviewing even harder to get a job outside of the company. And my intention was to get up the courage on my last day to go to Jeff Skilling and say -- you have accounting fraud here, the structures are fraudulent.

That was my intention. I thought if I went before I found another job, they would likely fire me. On August 14, 2001, Skilling just shockingly resigned.

Skilling was a smart man. His departure told me that he knew what I knew.

Telecom was fading. Enron Energy Services was not turning out to be the cash cow he thought. California had been a cash cow for Enron. But by then, the crisis had gotten so bad that the FERC instituted price cap on all of the western states. The crisis abated in May 2001. But that ended the cash cow for Enron.

Telecom was cratering. Retail wasn't doing well. Jeff Skilling looked down the road and said -- I don't have anything coming down the pike that is going to be a big earnings generator where I could clean up this stuff.

Skilling leaves as CEO. Ken Lay says he will come back as CEO. I just thought Ken Lay has no idea what had happened to his company. I could envision a scenario where Andy Fastow and Rick Causey keep pumping up these structures.

I found out that the structures were horribly under water in the first quarter of 2001. Imagine this scenario: you set up a fraudulent structure to begin with. You promised Enron stock to a paper company.

You had that paper company do transactions with you.

This is why people said -- heads Andy Fastow wins, tails Enron loses. If the underlying assets had continued to rise in the market, then Andy's hedge would have provided a gain to him. But if they lose, then Andy doesn't have to come out of pocket -- he's got a pile of Enron stock that will pay Enron back.

But imagine setting up this fraudulent structure. Then in 2001, this fraudulent structure isn't working. It's under water. And so you redo it. And Andersen let them get away with this -- over the protests of one of the partners, Carl Bass.

CCR: What did you do to protest?
WATKINS: My worry was that another restructuring was underway for the third quarter of 2001 and that Fastow and Causey would just keep restructuring these things until they just blew up sometime in 2003 or 2004.

I thought Jeff Skilling was trying to get the hell out of dodge And he would say -- I haven't been at the company since 2001. And all of this would happen without Ken Lay really understanding his own company.

Ken Lay had called for an all employee meeting. And there was a drop box for questions. I wrote a one page letter outlining my concerns. Lay must have mentioned a dozen times -- our vision and values have slipped and we are going to get that back. We've probably gotten a little too aggressive with some of our financings. We've got to get back to plain vanilla business. Plain vanilla is fine. We just don't need to get so complicated that people don't understand our business.

Sort of this whole new cleaner, fresher, brighter Enron. He said -- if any employee is truly troubled by anything, please come and talk with us. And he named some of the warm and fuzzy upper management types.

So, I decided I would at least go and talk with Cindy Olson, who was the head of human resources. I had known her from an earlier position when we worked together. I met with her on Thursday August 16. I showed her the one page letter. She said -- would you consider meeting with Ken Lay in person.

She said -- I know Ken, he gravitates toward good news, he takes people at face value. He probably showed your letter around to Causey and Fastow and others, and they probably said -- no, this person is not right, Andersen signed off on this stuff, it's all been blessed and it is okay. He does better meeting people face to face. You can explain it to him in person.

I said I would meet with him. She said it wouldn't be until next week, because Lay had flown up to New York to meet with the analysts, who were all in an uproar over Skilling resigning.

Lay was going to expand the office of the chair. My concern was that he was going to put Fastow there or Rick Causey there. She said he might do that. That put me in another panic.

On Friday, I met with Rex Rogers, the number two guy on the legal side. He was number two to Jim Derrick, who was the general counsel. I met with Rex with a couple of more memos.

I wanted them to counsel Ken Lay to be cautious about who he put in the office of the chair. I couldn't call Ken Lay over the weekend, but these guys could.

I met with Rex for a couple of hours on Friday. On Monday, I got to the office.

Cindy Olson has called Ken Lay to set up the meeting. Ken has called his staff to research what Causey or Fastow said about my letter.

Causey sent Ken Lay an e-mail explaining why my concerns were not valid.

The e-mail was bizarre. It said something like: regarding the concerns about the raptor transactions. I wouldn't answer this at the all employee meeting, but if someone does ask a question about our structured finance deals, you just need to answer -- Enron continues to use contingent Enron stock in its structured finance deals, and where the economics of the transaction would indicate that the stock might be issued in the future, then we include those shares in our fully diluted EPS calculations looking forward.

I'm accusing the company of robbing the bank and the bank robber is saying -- well, I didn't exceed the speed limit laws when I drove to the bank to rob it. It completely ignored my criticism.

I had a voice mail from Cindy Olson saying -- look at this e-mail from Causey, and if it doesn't answer your concern, then Ken Lay still wants to meet with you.

I ended up meeting Ken Lay that Wednesday, August 22 for about 30 minutes. Mainly, I'm trying to get him to do what they eventually did -- when it was too late -- with the Powers Committee. Hire an outside lawyer, hire an outside accounting firm to look into these things.

I thought Andersen and Vinson & Elkins had lost their objectivity.

Len Lay listened attentively. But he was saying -- could Arthur Andersen really be wrong, could all of these people have signed off on something that was fraudulent? And I was trying to convince him that -- yes, the answer is probably yes.

Andersen was getting $1 million a week. Enron was their largest client.

For Vinson & Elkins, Enron was eight percent of their annual revenue. And for a law firm, that's big.

Obviously, everything went completely opposite to what I thought was going to happen.

I didn't know this then, but I found out in February 2002, when I testified in front of a House committee -- that two days before I met with Ken Lay, Enron had a memo from Vinson & Elkins about the pluses and minuses of firing me.

So, his first action was not to investigate my concerns but to consider firing me.

The memo said it might be more trouble than it is worth.

All of the stereotypes about whistleblowers are true. I was kind of stuck in a shabby little office down on the 16th floor. I was moved out of my 49th floor executive office. No real work was given to me. I was treated like a pariah.

People would return my voice mails and e-mails, but they would still keep me at bay. They didn't want me to be so alarmed that I was completely shut out. And then they were lying to me.

The fact that they hired Vinson & Elkins to look into my concerns was extremely disappointing to me. But I still met with them, September 10, the day before 911.

I met with them for three hours. I told them who they should talk with, what they should look at. All throughout September, I'm calling Rex Rogers saying -- can I help, is there anything I can look into?

And he is saying -- wait until Vinson & Elkins finishes their report.

They are doing a thorough study. They will be through at some point. And they will meet with you.

They met with me on October 16, the day Enron unwound these transactions.Vinson & Elkins has the gall to tell me that a thorough investigation of my concerns was done.

Arthur Andersen relooked at it and said the accounting was appropriate when done -- but that these things were just a distraction to core business, and a decision was made to unwind them.

And I ask myself -- "why do you do an unwind if it is all appropriate and you are unwinding this transaction, and you're hitting your income statement with about $700 million and your shareholder's equity for $1.2 billion?" You don't do that just because it is a distraction.

Within six weeks, Enron was declaring bankruptcy, partly because investors couldn't get a straight answer.

CCR: Were your fired?
WATKINS: No. The memo from Vinson & Elkins says that in Texas, there is no private whistleblower protection. There is some Texas case law that Ms. Watkins might use to bring a wrongful termination lawsuit, but we think that in court she will not prevail.

There is case law about when a company asks the individual to do something illegal, and you refuse and you are fired. There is case law that protects the individual in that case. But if you are an employee that just witnesses something that you think is illegal, there is no protection.

CCR: Did you quit?
WATKINS: I left in November 2002. But I had been turning in just time worked, which was diminishing over time.

Vinson & Elkins decided that I might have a leg to stand on to bring a lawsuit, but the discovery process would probably make these raptor structures more public than the company wanted, so they decided not to fire me.

Vinson & Elkins lied to me. When I finally got a look at their report, it was very limited in scope, it was not thorough, they did not look at the accounting and get a second opinion on the accounting, even from Andersen.

They say that I was not bringing up anything that they didn't already know. Well that's like saying -- she's accusing us of robbing the bank.

We already knew this.

In the last paragraph or two, the memo says something like -- "someone needs to get back to Ms. Watkins and let her know that a thorough investigation of her concerns was made and nothing was found to be amiss".

CCR: Andy Fastow was indicted October 2002. Michael Kopper pled guilty in August 2002. Others have pled guilty, others have been indicted. What's your take on the criminal prosecution?
WATKINS: There are three fronts that the Enron task force is chasing.

One is the California market manipulation. In that case, two traders have pled guilty. I feel certain that will go up pretty high. The two traders are cooperating.

They will probably get six to eight to ten felons, when that is said and done. That's the easier case, because much of it is laid out in the Fat Boy, Get Shorty, Richochet, Death Star memos.

They have admitted manipulating the market. That's criminal. And they are cooperating to get people higher up on the chain.

On the financial accounting side, there are two fronts. One is where Enron is the victim of Andy Fastow -- where Andy stole from the company. The other is where Enron is the villain, where the financial statement manipulations are violations of securities laws.

They have guilty pleas on the first front, from Kopper and Larry Lawyer. Obviously, they have indicted Andy Fastow. There will probably be six to eight felons from that set of cases.

Michael Kopper and Ben Glisan cooperated with the government right away. It was reported that Glisan tried to get immunity, but the government got Kopper instead.

But I'm sure they will be pursuing Ben. They have three NatWest bankers. And there will be four to five more.

Now, Enron as villain. They have Kevin Howard and Mike Krautz indicted.

They are trying to get higher ups.

CCR: What is the extent of your dealings with the Justice Department?
WATKINS: I've had some dealings with them. But in a court of law, some of what I know is hearsay and can't be used. I can testify against Ken Lay, Vinson & Elkins and others, but mainly in civil lawsuits -- what did the company know, when?

CCR: Will they get Skilling?
WATKINS: They are trying to get Skilling, but he kept his fingerprints off much of this. He's got plausible deniability. I understand they have a number of accountants who worked on those raptor structures.

Look at Worldcom. Simple. Five people in the CFO's office worked to shift expenses to the balance sheet. They did it without telling the board. Almost everything else is cut and dried.

Enron is complex. The Department of Justice has said -- Enron is like calculus, and everything else is like third grade math.

Even Healthsouth. Those accountants called themselves the family, met at night, and had two sets of books. It was cut and dried fraud.

Enron always had a fig leaf of propriety, where they would go to Andersen and get Andersen to approve these deals, or go to the lawyers.

So, one of your defenses is that you relied on the professional judgement of the lawyers and accountants.

So, the Department of Justice needs to have Andersen on their side to say -- they kept information from us, they crammed it down our throats at the last minute. Andersen has to turn on Enron so that the professional judgment excuse can't be plausible.

The Department has two Andersen witnesses already.

CCR: Is Fastow going to trial, or is he going to cut a deal?
WATKINS: Fastow, Skilling and the rest all have a lot of money.

And they all have young children. I think they would rather fight, and if they are convicted, appeal, in order to stay at home until their kids are in high school or college.

They are not going to plead guilty, go to jail, so that when they get out their kids are in college.

Michael Kopper has told friends that he expects to go to jail for eight years, and he's cooperating. So, I'm not sure the Justice Department is going to cut any immunity deals with the higher ups.

CCR: The buzz in Washington is that because of Lay's political connections to the White House, he'll get off.
WATKINS: Patently false. I've met these prosecutors. They are not political. They know their job. And they are after it. Certainly they want Skilling. And they want Lay.

It's almost the opposite. There was so much money given to the Republican Party by Ken Lay, that I think there is probably pressure from the White House to criminally indict Lay.

His contributions might have bought him a perp walk. There is extreme pressure to find a way to criminally indict him, even if he prevails in court in the long run.

CCR: Is there any thought of indicting the company?
WATKINS: That would be totally meaningless. It's in bankruptcy, it's in liquidating chapter 11. Enron will die with all of its liabilities.

I thought that there would eventually be 25 felons associated with Enron. But the press pool in Houston believes it's going to be 30.

The Enron task force is unprecedented. Leslie Caldwell and her team are just ruthless.

She is based in D.C. But they have a team here in Houston, because they believe they will be here for five or six years pursuing this.

I think they learned a lesson about going to trial on Andersen so quickly.

CCR: You are touring the country with this book. There are stories in the press that you dumped Enron stock knowing what you knew, that you should have gone public with your concerns earlier. What is the source of these stories?
WATKINS: It is not so much out to get me.

Bill Murphy from the Houston Chronicle just did a story on me. And he will probably tell you that the higher up executives at Enron who are not guilty admire me, because they knew how difficult it was to go to Lay.

Some people who are still out of a job, who have lost their retirement, probably have a valid gripe to say -- she didn't do me any favors. My whistleblowing activities failed.

The company did not do the right thing.

I have said this over and over again -- going outside of the company would have meant the demise of the company.

For a company to survive cooking the books, it has to come clean, and it has to restate financial statements and try and rectify the problem.

CCR: Why did you stay on with Enron?
WATKINS: I survived black Monday, December 3, 2001, only because they were having me meet with the lawyers -- law firms that were helping to defend Enron. I was told that -- I was gone, then, no you are here. One lawyer finally said -- "you have two more paychecks. We need you to meet in early January."

And in January 2002, one lawyer tells me -- "Sherron, I believe you're all wet. We've had one law firm here in town hire an accounting firm and they say it's okay". And I started to ask myself -- if there is big money, does all this become a giant coverup?

The thing that was such a relief to me was when the Powers Report came out February 1, 2002. They had used Wilmer, Cutler & Pickering and Deloitte Touche. They just condemned these transactions. They called it pure financial statement manipulation.

CCR: You are now giving speeches. To whom?
WATKINS: Small investors are still staying away from the market. Enron was just the start of all of these corporate scandals. Auditing is no longer trusted. Research analysts touted stocks that are now worthless. Investors are staying away.

There is extreme interest from business groups in hearing my personal story. Enron is the poster child for corporate abuse of power. We had research analysts touting us when they shouldn't have been.

We had big banks -- Citibank, Merrill Lynch, Chase -- almost aiding and abetting our financial statement manipulation schemes on some of this debt. We were lobbying Congress to shut down the SEC's efforts to clean up the accounting industry. We were big bullies.

CCR: You have a lecture agent?
WATKINS: Carol Bruckner at ICM in New York.

CCR: What is your fee?
WATKINS: $20,000 to $25,000 per speech. I'm giving two speeches a month.

CCR: You are setting up a consulting firm. What will that be about?
WATKINS: I'd like to have a one product shop using peers of boards -- retired CEOs, accounting partners, law partners -- to advise boards on corporate governance, compensation. Board members have a real hard time taking a hard stance because they are usually friends of the CEOs.

So, we are going to make sure that the corporations have their best practices on paper. But Enron looked great on paper too.

We will look at the softer issues and make sure that these board members have a sounding board. Some of the Enron board were raising concerns, but they weren't being listened to. It was too large of a board, for one thing.

CCR: A board member who wants to make sure that they are not riding an Enron, they would give you a call?
WATKINS: Yes. But it was like Enron took small steps in the wrong direction, and before you know it, they had crossed a line. And then management is trying to keep boards in the dark.

We will try and prevent companies from taking those small steps in the wrong direction in the first place. There are plenty of turnaround specialists that you call in when you suspect trouble.

I envision a relatively low cost maintenance deal just to make sure that if there is a step in the wrong direction, the company comes back to a center.

CCR: What's the name of your company?
WATKINS: That is the most difficult. We're trying not to hire a public relations firm to get name.

[Contact: Sherron Watkins, c/o Carol Bruckner, ICM, 40 West 57th Street, New York, New York 10019 Phone: (212) 556-5602. E-mail: [email protected]]