Text of Sherron Watkins' Testimony at House Hearing on Enron

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American Hero Sherron Watkins

February 14, 2002

Text of Watkins' Testimony at House Hearing on Enron

The following is the text of a hearing of the Oversight and Investigations Subcommittee of the House Energy and Commerce Committee on the financial collapse of the Enron Corporation, as recorded by the Federal News Service.

Witness: * Sherron S. Watkins, Vice President of Enron

The Committee is chaired by Rep. James Greenwood of Pennsylvania.

REP. GREENWOOD: (Sounds gavel.) Good morning. This hearing of the Oversight and Investigations Subcommittee of the Energy and Commerce Committee will come to order. And the chair recognizes himself for an opening statement.

"I wish we could get caught. We are 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' witness, the person who uttered those words was a management level 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, quote, "in a wave of accounting scandals."

Subsequent events have proved the truth of that unvarnished assessment. What we now understand from evidence this committee has gathered in its investigation, and 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 had 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 two years, due to the deceptive transactions with the Raptor's 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 (ph) -- an Enron audit partner -- and Vinson and Elkins managing partner Joe Dilg.

Her initial meeting with Mr. Lay in August prompted an investigation by Vinson and 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 interests. Not surprisingly, the report that Vinson and 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 31st 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 whistle-blower 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. We welcome your testimony.

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

REP. PETER DEUTSCH (D-FL): 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 second 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 eight weeks or so. And 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.

I have tried to put in perspective what we are 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 two weeks ago, that 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 totally abysmally failed in the case of Enron. I mean, I think it's factually accurate that it filed; that trying to understand Enron from its public documents I think was close to impossible. Those documents did not fairly represent the actual state of the company.

And, you know, the secretary of the Treasury when Enron initially filed for bankruptcy said that, Well, this is not a big deal -- companies go bankrupt, they don't go bankrupt -- they're successful, they're not. 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 I mean there is a fundamental difference. The 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 are 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 a several -- that the method seemed to be continuously used again and again.

I guess the concern we have -- and I have -- but I think all my colleagues share is, number one: You know, How do we protect our capital markets from, number one, this never happening again, because I think that's clearly our goal, that when people try to understand public companies they can understand -- that's the whole point. But, number two, who else is doing this? And obviously I don't think you're going to be able to tell us that today. But I think that is clearly 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 and their filings to the SEC. Thank you, Mr. Chairman.

REP. GREENWOOD: The chair thanks the gentleman and recognizes the chairman of the full committee, the gentleman from Louisiana, Mr. Tauzin, for an opening statement.

REP. BILLY TAUZIN (R-LA): 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 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 execs 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 its planned reforms. FASB has announced planned reforms. This committee and the committee that we assigned the job of jurisdiction over FASB and the accounting standards in America, chaired by Cliff Stearns of Florida, is beginning the process of recommending legislation to our full committee. Yesterday the subcommittee on Energy of our committee examined the aspects of the Enron collapse on the energy 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's 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 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 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 30th, 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: while 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, Glisson, 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's 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 and its confidence in this company, and its knowledge about its income and it debt, abuse that led to a horrible loss to its employees, not only of their jobs but of their pensions, and abuses that have rocked Wall Street and the investment communities and the corporate boards of America.

If there is any good news in all this, it's that we're finding out what went wrong. We're really getting to the bottom of it, and we're 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 experiences this again. But there is other good news, and I say this with deep appreciation, Ms. Watkins, it's 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 the 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 great chance to do it.

And there's one other good news. And 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 the years of watching companies succeed and fail and bankruptcies -- and there have been some might 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 are 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.

I deeply appreciate you being here, Ms. Watkins. Thank you, Mr. Chairman.

REP. 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.

REP. JOHN DINGELL (D-MI): I'm willing to do it whichever way you like, Mr. Chairman -- go no, or go later.

REP. GREENWOOD: Well, I would welcome the gentleman's opening statement now -- REP. DINGELL: Very well.

REP. GREENWOOD: -- and the other members are free to go.

REP. 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, as 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 discussed 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 to a $1.1 billion reduction in Enron's equity, and a $700,000 reduction in earnings. These same people knew that a partnership run by Enron's chief financial officer, who was benefiting greatly from these transaction. 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 and a wave of accounting scandals." Ms. Watkins took the actions that should have been taken months before by many others both inside and outside of Enron with fiduciary duties to the company and to its shareholders. I think we should 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 by 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 on its income statement. We cannot fully understand the structure of the vehicles, but we know they are breathtaking in scope, and breathtaking -- (inaudible) -- and in the impact they had. These four vehicles resulted in a write-down of equity, the restatement of earnings, and a credit reduction that sank Enron. Although the Raptors were supposed to take the risk of losses in merchant investments, they actually were guaranteed by Enron stock and used the appreciation in Enron 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 LJM-II, 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 LJM-II's owner investment some generous returns with Enron taking the total risk. As described in an LJM-II presentation to its partners in October of 2000, Raptor-3, for example, paid out $41 million on a $30 million investment in just eight days. This is an amazing 2,503 percent annual return for those investors.

I think it's 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 they have anyway. But Enron has supported Vinson & Elkins, which approved every single one of these deals for Enron, and then -- (inaudible) -- 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 one day before Enron announced its equity write-down and earnings and reductions based on the very Raptor transactions that Mr. Watkins brought to Kenneth 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. And I note that their role in this does not credit to the profession of which I take pride in being a part.

But today I look forward to hearing from an extraordinary, 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.

REP. GREENWOOD: The chair thanks the gentlemen, and the committee will recess for approximately 20 minutes.

(Recess.) REP. GREENWOOD: The committee will come to order. And the chair recognizes the gentleman from Florida, Mr. Stearns, for an opening statement.

REP. CLIFF STEARNS (R-FL): Thank you, Mr. Chairman. And Ms. Watkins, obviously, like other members, I'd like to take the opportunity to welcome you to our committee and pleased that you're willing to testify. Your status is perhaps not, as the press might outline, that you're a whistleblower. You're not the traditional whistleblower in the sense that you're 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 sort of a semantic way, you're not a whistleblower in the traditional sense. I'm not sure if we have a word, which describes when you complain and you stay within the company and work as you did, but it, I think, 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.

Secondly, I want to explore a number of substantive issues, which you raise in your August 15th, 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 & 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 believe 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 recognized 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.

I believe this is what you alluded to in your memo when you wrote, and I'm quoting, quote, "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 the value in the entities come from underlying values of the derivative." Unfortunately, in this case, there was a big loss in Enron stock (and NP?). So during the question-and-answer period, I hope we can further explore that. Again, thank you very much for testifying.

REP. GREENWOOD: The chair thanks the gentleman and would urge each of the members, if they could, to keep their opening remarks to as brief as possible so 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.

REP. BART STUPAK (D-MI): 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's 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's a denial and a lack of acceptability of responsibility by Enron officials in all the hearings we've had thus far to date.

It's 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," end of quote. 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. (Inaudible) -- the emperor's new clothes.

And while you're to be commended for coming forward in August of 2001, there was another emperor, Jeffrey Skilling, who was running Enron prior to your August 15th letter. And I have a feeling he knew he had no clothes, and that is why or that is what prompted his resignation.

I'd 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's any relation to Arthur Andersen. (Laughter.) 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 dignified. 'I must continue to end the procession,' he thought, so the empire" -- the emperor, excuse me -- "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 and his own parade and his servants, Mr. Winokur and Jaedicke, following behind him, carrying his non-existent robe. I know we're anxious to hear Ms. Watkins' testimony, so I'm going to take your advice and look forward to answering the questions that will be put to you today. So, Mr. Chairman, with that, I'll yield back my time.

REP. GREENWOOD: The chair thanks the gentleman and thanks him for not showing the picture of the unclothed emperor. (Laughter.) The chair recognizes the gentleman from North Carolina, Mr. Burr, for an opening statement.

REP. RICHARD BURR (R-NC): I thank the chairman. Mr. Chairman, we have before us today a witness who 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'd add one more uniqueness about Ms. Watkins that was lacking in all the other individuals who have chosen to come before this committee to stop the bleeding at Enron -- a 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 noticeably 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 could detail what others have done. 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 Livin' Long Like This." "Wanted: The Outlaws." "Mama, Don't Let Your Babies Grow Up To Be Cowboys," or just "Some Good Old 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 better describe the witness we have before us today.

In all seriousness, thank you, Sherron, for appearing before us. You're 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.

REP. GREENWOOD: The chair thanks the gentleman and recognizes himself for 10 minutes for questions.

Ms. Watkins, when you and I -- oh, I'm sorry. I'm sorry. It's a good thing we have staff here. Ms. Watkins, you're 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.

REP. GREENWOOD: Okay. Do you -- the chair 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.

REP. GREENWOOD: And would you identify your counsel for me?

MS. WATKINS: Mr. Philip Hilder.

REP. GREENWOOD: Okay. Sir, would you spell your last name?

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

REP. GREENWOOD: Thank you. In that case, if you would please rise and raise your right hand, I'll give you the oath. Do you swear that the testimony you are about to give is the truth, the whole truth and nothing but the truth?


REP. GREENWOOD: Okay. Be seated. You are under oath, and you are recognized for your opening remarks. You'll probably want to pull that microphone over to you, and it's fairly directional.

MS. WATKINS: Okay. Good morning, Mr. Chairman, members of the subcommittee. I'm Sherron Watkins. And thank you for the opportunity to address the subcommittee this morning.

REP. GREENWOOD: Pull it up a little closer and speak right into it. There you go.

MS. WATKINS: I'm 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.

I began my career in 1982 at Arthur Andersen as an auditor. I spent eight 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 of 1993.

In October of 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 & Acquisitions Group, which is also known as the Corporate Development Group. In early 2000, I transferred to Enron Broad-Band Services. I worked there until June of 2000 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 into 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 of the Raptor.

It was my understanding that the Raptor special-purpose entities were owned by LJM, a 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 -- (inaudible) -- 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 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 believe, would have been a job- terminating move.

On August 14th, 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 14th, 2001, in response to a request for questions for an upcoming all-employee meeting to be held August 16th, 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 troubled by anything at Enron, please bring those concerns to him or any number of the top management, including Cindy Olson, Steve Kane and others.

On August 16th 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 20th. 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 17th, 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 June 2002 -- I mean, January 2002. On Monday, August 20th, 2001, Mr. Lay's assistant scheduled a meeting for me to meet with Mr. Lay that following Wednesday, August 22nd, 2001. I subsequently held discussions with a former mentor at Andersen, James Hecker (sp), and a long-time friend and co-worker, Jeffrey McMahon, to vet my concerns before my meeting with Mr. Lay.

I met with Mr. Lay on the afternoon of Wednesday, August 22nd, 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 14th, 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 affect 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.

REP. GREENWOOD: Thank you very much for your testimony, Ms. Watkins. And we all thank you again for being here. 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 do legitimate -- serve legitimate financial purposes, with which you had no qualms. And as you described -- and I think 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 and the pot on the stove: that gradually, largely directed by Mr. Fastow, I understand, the rules of the game began to change, and the legitimacy of these entities and partnerships began to be stretched, till finally we end up with something like the Raptors, which seem to serve no legitimate -- and perhaps not even a legal -- purpose. And 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 then 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 shareholders by an issuance of stock in the future.

REP. GREENWOOD: Explain how that affected the income statements.

MS. WATKINS: Well, the -- Raptor was hedging with -- REP. GREENWOOD: Again, if you would pull the microphone a little closer -- the silver one is the one that actually broadcasts into the room here.

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 a tech investment in Avichi (ph) and the new power company, a start-up 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 a corresponding write-down 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.

REP. GREENWOOD: As you came to understand this, prior to your meeting, 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 Raptor -- 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.

REP. GREENWOOD: And did it seem to be -- did you get the impression, or was it said to you 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.

REP. GREENWOOD: Did you watch Mr. Skilling's testimony before this subcommittee last week?

MS. WATKINS: Yes, I did.

REP. 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's the best advice you ever received?” And his reply was, "If it doesn't make any sense, don't believe it." (Laughter.)' REP. GREENWOOD: Did you confront Mr. Skilling himself with this concern?

MS. WATKINS: No, sir, I did not.

REP. GREENWOOD: 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.

REP. GREENWOOD: And what led you to -- did you have other experiences or were there experiences of others that led you to believe that that might be -- that 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.

REP. GREENWOOD: Do you think it's possible that Mr. Skilling was unaware of the natures of these transactions?

MS. WATKINS: No, I do not.

REP. GREENWOOD: Could you tell us why that's not possible? He seemed to have forgotten about them.

MS. WATKINS: He is a very much 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.

REP. 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 that I was the writer of the anonymous letter, and that I had also met with Mr. Lay. I found that out August 30th, 2001.

REP. GREENWOOD: And how did he respond? Did he name you employee of the month? (Laughter.) 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.

REP. GREENWOOD: Wanted to have you fire? He told people he wanted to have you fired?

MS. WATKINS: That's what Ms. Olson told me.

REP. GREENWOOD: Okay. And he wanted your computer?


REP. GREENWOOD: And did he obtain your computer?

MS. WATKINS: Ms. -- he did, but Ms. Olson basically said, Let me send you to your office with an IT person -- here's a new laptop -- transfer whatever files you want to on the new one -- delete whatever ones you want to on the old one -- we'll just hand him the hardware. She said, “You don't mind doing that, do you?” And I said, “No, I don't.” (Laughter.)

REP. GREENWOOD: So you pulled a fast one on Andy. Let's get to your face-to-face meeting with Mr. Lay. Could you describe 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 or given you some comfort that he was in fact going to deal with this?

MS. WATKINS: Well, he -- 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 employees saying, "We're 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 -- I said my understanding of the way these things are generally presented -- it's 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 he certainly said he would look into it and order an investigation, and ask me what would -- what could he do for me, which was when I requested the transfer out of Mr. Fastow's group.

REP. GREENWOOD: Okay, my time has expired. The chair thanks the recognizes for gentleman Mr. Dingell for 10 minutes for purposes of inquiry.

REP. DINGELL: Mr. Chairman, I thank you. Again, I commend you. Ms. Watkins, I want to commend you also. I hope you'll 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 and Elkins not do this investigation. That was because they had approved many of the LJM deals, as attorney for Enron, is that correct?

MS. WATKINS: Yes sir, it is.

REP. 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.

REP. DINGELL: Ms. Watkins -- and in this document it says that Jim Derrick decided not to engage and independent accountant, as you had recommended. Is that correct?


REP. 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 discovery-style 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 10th for roughly three hours and had no indication that it was a limited investigation. I only discovered that it was limited when I -- when I read their October 15th response, which was not provided to me -- read it off of this committee's web page.

REP. DINGELL: It is fair to say that this then was not much of an investigation, was it?

MS. WATKINS: I don't think so.

REP. DINGELL: Vinson & Elkins said that with all these caveats, there was no problem except a cosmetic one, is that correct?

MS. WATKINS: That is what they concluded.

REP. DINGELL: And on page seven, Vinson & Elkins tells Ken Lay that Enron's stock is being used to support transactions with Condor and Raptor. Enron was getting earnings through derivative transactions with Raptor when it could be argued that there was no third party involved, and because of the falling value of both Enron's 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.

REP. DINGELL: Now, then Vinson & Elkins says at page eight of the document, notwithstanding these bad cosmetics, Enron representatives uniformly stated that Condor Raptor vehicles were -- (inaudible) -- useful vehicles that benefited Enron. What this says to me is that everyone -- Vinson & Elkins, Ken Lay, Jim Derrick, and all 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.

REP. DINGELL: And they knew that they were in bad financial shape, did they not?


REP. DINGELL: And they had approved them, had they not?


REP. DINGELL: So, when high-level officials say they didn't know about those vehicles, can that be true?

MS. WATKINS: No. They knew about they vehicles.

REP. DINGELL: No, what do you think all these people expected to happen at this point in September 2001?

MS. WATKINS: I think what's -- what's 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, that -- you know, when I met with Rex Rogers on August 17th, he said, "Sherron, how could you possibly be right? I mean, Andersen and Vinson & Elkins would not risk their firms giving us wrong advice. They've blessed these structures." And so I -- I think that certain people at Enron thought that these were complex but clever and that they were legitimate.

REP. DINGELL: So, 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.

REP. DINGELL: The accountant was in a similar position, both as accountant and as consultant, is that not so?

MS. WATKINS: Yes, that's right.

REP. 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.

REP. DINGELL: So, they were -- they were essentially represented as being of benefit in the meeting of targets, which could not be met?

MS. WATKINS: Yes sir.

REP. DINGELL: Mr. Chairman, in the interests of time, I would like to just ask unanimous consent to introduce the document to which I have referred. And again, Ms. Watkins, you are a women of extraordinary courage. We thank you for your assistance.

REP. 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.

REP. TAUZIN: Thank you, Mr. Chairman. First, Ms. Watkins, I apologize that we scheduled this hearing on Valentine's Day. I want to wish you Happy Valentine's.

MS. WATKINS: Thanks.

REP. TAUZIN: I want to refer specifically to the document, which you handed Ken Lay on October the 30th. 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 are, to your best knowledge and belief, 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 in it was something I felt should be -- should be said.

REP. TAUZIN: So that 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.

REP. TAUZIN: Most specifically you say that. 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?


REP. TAUZIN: Is that accurate? Did Mr. -- 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.

REP. TAUZIN: Now, did you his -- did you see Mr. Skilling's testimony last week before this committee?

MS. WATKINS: Yes sir, I did.

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

MS. WATKINS: Yes, I did.

REP. TAUZIN: Now, he basically testified that he never saw these sheets and he was not required to sign them, that's why he didn't sign them. Is it your testimony that he in fact knew about these sheets?

MS. WATKINS: Well, all I can say is -- all I can speak to is that it was Enron's very strict policy, when completing transactions and deals, to have deal sheets, 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.

REP. 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's correct.

REP. TAUZIN: Is that correct?

MS. WATKINS: That's -- that would be my understanding of our very strict procedures, yes.

REP. TAUZIN: Were those procedures that Mr. Skilling would have understood?


REP. TAUZIN: You say that, 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 mis-served Mr. Lay, the board, Enron and its shareholders.

REP. TAUZIN: In fact, you go on to say that Ken Lay 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.

REP. TAUZIN: You say further on, "the culprits are Skilling, Fastow, Glisson, Causey, as well as Arthur Andersen and Vinson & Elkins." Do you believe that statement to be true?

MS. WATKINS: Yes sir, I do.

REP. 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.

REP. 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 transaction at those prices for volatile stocks was that Mr. Fastow could not lose money and he was backstopped by Enron stock.

REP. TAUZIN: Ms. Watkins, you made it as clear as I've ever seen anybody make it. You basically outlined for Mr. Lay what would happen if he did the right thing -- 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 save his company; and that if he didn't take that advice, you told him, the worst is going to happen, it's 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.

REP. 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 23rd all-employee meeting to discuss the (write-downs?) 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 1980s problem, when the Peruvian government nationalized an oil company Enron had, to the (J-Block?) problem Enron had in 1997. And I don't think an accounting manipulation problem is in any way related to a -- REP. TAUZIN: You're saying he didn't get it.


REP. TAUZIN: He didn't get it. Now, as I understand your memo to him, you're basically telling him that these officials of his corporation were engaging in these essentially improper activities, were doing it in a way that he and his board were being duped, kept in the dark.

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 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.

REP. TAUZIN: And finally, Ms. Watkins, I refer you to the document entitled "Lessons Learned," tab eight. In that document, there are three points: Recognizing, in effect, the accounting hedge versus an economic hedge; the operation 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.

REP. TAUZIN: Now, it changes handwriting. Whose handwriting is that?

MS. WATKINS: That's my handwriting.

REP. 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. And 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 invest the income statement.

REP. TAUZIN: You just can't do that legitimately, legally.

MS. WATKINS: That's correct.

REP. TAUZIN: Where'd you get this document?

MS. WATKINS: From the risk assessment and control group, run by Mr. Richard Buy.

REP. 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.

REP. TAUZIN: There's another note you wrote on the second point. "The corporation isn't Raptor. How could corporation consider anything at Raptor?" What'd you mean by that?

MS. WATKINS: Well, the bullet point just -- this is "Corp should consider hedging assets in Raptor to minimize problems." And if Raptor is supposed to be Mr. Fastow's company, then it's Mr. Fastow's problem. Why should Enron Corporation -- REP. TAUZIN: It's not the corporation.

MS. WATKINS: -- consider anything (there?)? Exactly.

REP. TAUZIN: Even with this, you still say he didn't get it.

MS. WATKINS: I don't think so.

REP. TAUZIN: Thank you, ma'am.

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

REP. DEUTSCH: Thank you, Ms. Watkins. Someone reading through Enron's (statement?), would they have a perspective that those statements fairly represent the status of the company prior to the -- (inaudible)? MS. WATKINS: I don't think so. I think that related-party footnote is wholly inadequate in describing the transactions with Mr. Fastow's partnership.

REP. 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's going on in the company, and you and me and, I think, anyone who's looked at this could come to the same conclusion that they do not? How did that happen?

MS. WATKINS: It's inconceivable, and I don't understand how it happened.

REP. DEUTSCH: And 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.

REP. DEUTSCH: This is somewhat of a sidelight, 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, 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'm trying to get a copy at this point, but it's 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 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 statement?

MS. WATKINS: It's hard for me to say about executives who sold stock, because so many of them thought that somehow or other this was legitimate. I'm -- REP. 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 actually understood the partnership, 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 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. But there was a feeling -- I mean, Enron is a very arrogant place with a feeling of invincibility. And I'm 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.

REP. DEUTSCH: Was there any thought at all -- because, again, I guess what I'm hearing you say and what I've looked at this point is that anyone -- and I don't think you have to be a Harvard MBA at this point or an Arthur Andersen partner to understand that there were liabilities were not requested 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 of 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 who had 100 percent of their life savings in 401(k)s, 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 of what this would mean to actual shareholders?

MS. WATKINS: I never heard any discussion.

REP. 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.

REP. DEUTSCH: You have testified -- and, you know, you have used the word, I guess, "improper." I feel comfortable using the word "illegal," because, 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 just to have it on the record in this sense.

The hedging, okay, of (Vichy?), all right, that would have been a normal business decision. What was the original investment of the (Vichy?)? Do you know the details?

MS. WATKINS: I don't have exactly what was -- REP. DEUTSCH: Do you have a ballpark number?

MS. WATKINS: I really don't. I think it was under $10 million.

REP. DEUTSCH: Okay, and what was the price when the hedge was put into effect, the value?

MS. WATKINS: I believe around $166 or $170 a share.

REP. 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.

REP. DEUTSCH: Okay. So the idea was to hedge that increase. And what you have said and what you've 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 the strike price? Was that available?

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.

REP. DEUTSCH: Okay. And, again, just to kind of walk through the 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.


MS. WATKINS: There would have been a significant haircut to that price.

REP. DEUTSCH: Right. Can you use real numbers?

MS. WATKINS: As much as -- REP. DEUTSCH: I'm sorry. What?

MS. WATKINS: As much as -- as much as, I would say, 30 or 40 percent.

REP. DEUTSCH: Okay. And that strike price would be what number?

MS. WATKINS: Probably more like $120 or $110; maybe even lower. I'm –

REP. 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 the (Vichy?) is selling for –

REP. DEUTSCH: No, no, the put.

MS. WATKINS: I think $170 a share.

REP. DEUTSCH: No, no, but what was the -- what did it cost Enron to buy it from this partnership?

MS. WATKINS: I'm not familiar exactly with those details.

REP. DEUTSCH: A 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 –

REP. DEUTSCH: Right, and I guess -- this is where, you know, I think we have crossed the line of a legal activity. Because what I hear you saying is that that transaction which you have 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 and 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 head of the general partnership as the general partner, basically selling it to yourself, and it's at a different price than a third-party price. By definition, you know, it's not an arm's length transaction. I mean, by definition, if the price is so significantly different. That's number one. And, number two, what is absolutely clear -- and I think 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, the general partnership -- no one in this transaction ever -- I mean, ever contemplated that the general partnership could ever guarantee the gain. I mean, they 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.

REP. DEUTSCH: And that obviously is not a transaction?


REP. DEUTSCH: That's not a business transaction. I mean, that's 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 -- other than making sure those losses were not borne by Enron's financial statements, which is not economic.

REP. GREENWOOD: The time of the gentleman has expired.

REP. DEUTSCH: Thank you.

REP. GREENWOOD: 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 United States House of Representatives. He has long been a valued, respected, and I would say admired, member of this committee. We value his contribution. I understand that the gentleman does not have time to inquire -- or he does?

REP. STEVE LARGENT (R-OK): Mr. Chairman, all I wanted to do was ask unanimous consent to submit my opening statement for the record.

REP. 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.

REP. 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 mean, I did know from the footnote that Enron had recognized $500 million of revenue in 2000 from the Raptor hedging transaction. Five hundred 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's the way the structure worked, I knew we had a very large problem.

REP. 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 allowed to go on for so long.

REP. 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.

REP. BURR: Let me go to the Vinson and 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 graph with Mr. 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.

MS. WATKINS: That they did not want Vinson and Elkins to make any or give any opinions regarding whether the accounting treatment was proper -- just assume that it was.

REP. BURR: Let me move to your meeting with Mr. Lay I think on August 22nd. You said you spent almost an hour. He seemed surprised by a lot of the things. But he made some commitments to you he'd look into it, didn't he?

MS. WATKINS: Yes, he did., REP. 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.

REP. 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.

REP. 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 and 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 and Elkins to conduct the investigation.

REP. 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.

REP. BURR: I think that this discussion outlined for the meeting really lays out that no second guessing 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.

REP. BURR: Sherron, prior to the release of V&E's final report, they briefed your orally, I think on 10/16. Is that correct?

MS. WATKINS: They -- 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.

REP. BURR: And was that the first time that you knew that Vinson and 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?

MS. WATKINS: Yes. That was -- it was roughly a two-hour meeting where Joe Dilg and Max Hendrick (ph) 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 10th, when we had initially met for three hours at the beginning of the investigation.

REP. 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 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 a billion two in shareholder equity that very morning. We happened to close that day at $33 a share, the same -- about the same price we had opened with that morning. But my concern was that that wasn't going to stick, that 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.

REP. 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's correct. I did not feel that.

REP. 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 17th, he did say, Well, 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.

REP. 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?

REP. BURR: About that current earnings release -- what they said on 10/16. Did they address the earnings release?

MS. WATKINS: Well -- REP. BURR: I think it was a press statement that went out -- I think that was the announcement of the $577 million -- MS. WATKINS: It was -- we had a press release that we had unwound some of the LJM transactions, and taken these write-offs and reductions of shareholder equity in the third quarter. It was my opinion we should restate. And Mr. Dilg responded, “Do you really think Mr. Lay should ignore the advice of his counsel in this matter?”

REP. BURR: Given that you are going through a release from Enron for the $577 million adjustment, and a write-down of $1.2 billion in shareholder equity, how is that consistent with the report that V&E is briefing you on that there's no problem s?

MS. WATKINS: Well, it was -- 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 a billion two write-down to equity if these deals were okay?” And they said -- 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.”

REP. BURR: Sherron, thank you very much. I yield back.

REP. GREENWOOD: The chair thanks the gentleman and recognizes the gentleman from Michigan, Mr. Stupak, for 10 minutes.

REP. 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 this financial statement, there was pressure there to approve these special SPEs and these transactions, and you said a question about Enron putting pressure -- they said, Well, I am sure there's 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's not going in the financial statement, before it's put out to the public?

MS. WATKINS: Well, my understanding as a former accountant is that, you know, it's an odd situation. The accounting industry is paid by public -- by companies requesting their services. But your -- an accounting firm is supposed to keep their eye on who is relying on their opinions. Outside investors are relying on their opinions. That's 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.

REP. STUPAK: If these transactions are questionable, that may not fairly accurately represent the financial position of a company, and they really have the ultimate responsibility before it's released to the public to say yes or no to putting these out. Is that a fair statement?

MS. WATKINS: Yes, that's correct.

REP. STUPAK: How about Vinson and Elkins -- would they have the same kind of responsibility on the financial statements?

MS. WATKINS: I don't -- I don't think law firms necessarily have the same responsibility.

REP. STUPAK: Let me take you back a few years. Eight years ago -- you said for eight years you worked for Arthur Andersen.


REP. STUPAK: While you're at Arthur Andersen did you have any document retention policy back then?

MS. WATKINS: I am sure we did.

REP. STUPAK: Okay. Then let me ask the question this way: While at Arthur Andersen, how often did you see a memo or correspondence 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, and I am sure the policies have changed.

REP. STUPAK: But during your eight 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 any specific memo on that.

REP. STUPAK: Okay. In your eight years at Arthur Andersen, for a 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.

REP. 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 with -- helping him in that corporate development area.

REP. STUPAK: Did you work under Mr. Baxter before then?

MS. WATKINS: Indirectly, yes, I did.

REP. STUPAK: Do you have any reason, or do you know why he retired?

MS. WATKINS: It was to spend more time with his family.

REP. STUPAK: Wasn't forced out of the company or anything like that?


REP. 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 easy to discover. The facts weren't really hidden.

REP. 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 should be doing transactions with the CFO's partnership.

REP. STUPAK: And the CFO at this time was Mr. Fastow?

MS. WATKINS: Mr. Fastow.

REP. STUPAK: In your opinion, why did Mr. Skilling then leave Enron on August 14th, 2001?

MS. WATKINS: It's my opinion that he could foresee these problems and he wanted to get away as far away from it as possible.

REP. STUPAK: Again some questions from Mr. Dingell -- he 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 their assets weren't there. Common knowledge by who?

MS. WATKINS: The different business units that were hedging their assets with Raptor, as well as the global finance staff under Mr. Fastow.

REP. STUPAK: Mr. Dingell actually read a little bit from this one document which he placed on the record -- I believe it's 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're 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 other shareholders of Enron, did they?

MS. WATKINS: No, they did not.

REP. STUPAK: I mean, clever, but not legal and not benefiting Enron?

MS. WATKINS: Yes, that's correct.

REP. STUPAK: Who did they benefit?

MS. WATKINS: They -- you could possibly say that they benefited Enron, because it allowed Enron to meet projected financial targets, which kept Enron's stock price inflated.

REP. 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: Well, it's -- 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.

REP. STUPAK: Okay. Let me ask you this question then. 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.

REP. STUPAK: So it's fair to say then you didn't invest in any of these SPEs, like some did, that put $5,800 in and they end up coming back with a million within two months or three months?

MS. WATKINS: No, I did not.

REP. STUPAK: Okay. You indicated -- let me to go this question. In number 8 here, it was in our book here, number 8 -- was the Raptor h edging 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 the form of stock dilution. And in your handwriting, there it is, that's the smoking gun -- "You cannot do this" -- and that's your handwriting?

MS. WATKINS: Yes, it is.

REP. STUPAK: Who produced this document?

MS. WATKINS: Mr. Rick Buy's risk assessment and control group.

REP. STUPAK: Do you know when he would have produced it?

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.

REP. STUPAK: So risk assessment under Mr. Buy produced this in the first quarter of 2001. Who was this 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 have appeared to have seen this analysis.

REP. STUPAK: So, okay -- and this was an internal document?

MS. WATKINS: It probably went certainly to Mr. Fastow -- and I would imagine that it also went to Mr. Skilling.

REP. STUPAK: How about Vinson and Elkins? Would they probably receive this?

MS. WATKINS: Probably not.

REP. STUPAK: Arthur Andersen?

MS. WATKINS: Probably not.

REP. 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.

REP. 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 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 problem. And any accountant worth their weight in salt would certainly pick this up, would they not?

MS. WATKINS: Well, I mean, 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.

REP. GREENWOOD: The time of the gentleman has expired. The chair thanks the gentleman. The chair recognizes the gentleman from Florida, Mr. Stearns, for 10 minutes to inquire.

REP. STEARNS: Thank you, Mr. Chairman. And, Sherron, let me thank you and also the staff for the prodigious amount of work they have 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 a failure of the generally accepted accounting principles -- in other words, failure of the GAAP itself, or a failure to implement these principles?

MS. WATKINS: I think Enron had a failure to implement them correctly.

REP. STEARNS: So you don't think there's anything generally wrong with the 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. And, you know, in the tax accounting, if you follow the codes, whatever result you get, you are justified in using that treatment. In financial accounting, a number of my accounting friends have said if you follow the rules, even if you get squirrelly results, you know, 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.

REP. 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 it's collapse -- is that what you're 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. The –

REP. STEARNS: 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.

REP. 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 LJM 1 or 2, or anything -- you'd say that's not the problem?

MS. WATKINS: Well, I don't think Enron reported the accounting -- the accounting of these transactions I think was inappropriate. We should not have been able to –

REP. STEARNS: But that was because of the people. That was Mr. Fastow and his people.


REP. STEARNS: But it wasn't Arthur Andersen?

MS. WATKINS: Well, Andersen also signed off on the way we were implementing these accounting -- REP. 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: I think so, because they are charged with auditing the results, and a sensitive related-party transaction should get a lot of scrutiny.

REP. STEARNS: So, Arthur Andersen, in your opinion, signed off on something they shouldn't have.


REP. STEARNS: Do you think they knew what they were signing off on?

MS. WATKINS: They sure should have known what they were signing off on.

REP. STEARNS: Okay. Okay. So, you know, you've been an accountant, it said -- you told me in your opening statement, for 19 years, and yet you're the only one here out of this huge organization we have here. And, you know, we have talked to Jeffrey McMahon -- 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're 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 31st -- did he say anything to you about maybe firing Vinson & Elkins?

MS. WATKINS: I met with Mr. Lay on October 30th and the 31st, and, you know, I was concerned that we -- we needed to restate, come clean, and –

REP. STEARNS: Because this is a key point -- you were -- the report came back and everybody was ready to act on it, and we'll clean house and get this thing straightened out, right? 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 this special committee and hired a new law firm and a new accounting firm to look into my concerns."

REP. STEARNS: What was the new law firm named that he said he was going to hire after he replaced Vinson & Elkins?

MS. WATKINS: He -- he first said it was Milner (sp) and something, which sort of surprised me because when the announcement came out, it Wilmer, Cutler, and that's an easy name to remember. And I - it gave me the impression that Mr. Lay was not making these decisions, that someone else was, and they were just informing him of the decisions.

REP. 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 -- (inaudible) –

REP. STEARNS: And who was telling him that, do you think?

MS. WATKINS: I don't know. I'm not privy to the inner-workings.

REP. STEARNS: I talked to Mr. Skilling, and I talked to him briefly about Cliff Baxter, and I just wanted 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: I -- actually, the last time I spoke with Mr. Baxter was January 15th 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 told Mr. Baxter that I had mentioned him specifically and I read to him over the phone exactly what I had written about it. And he said, "Sherron, you're right. You know, I was very concerned about these transaction." He said, "But I'll tell you what, if I had known there was anything illegal about it, I would have pushed it further."

REP. 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, three times, one time"?

MS. WATKINS: When he -- he told me he spoke to him quite often about the inappropriateness of a company of our stature –

REP. STEARNS: Okay. 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.

REP. STEARNS: Okay. Okay. What about Jeff McMahon. What -- did you actually ever talk to him about any of these problems?

MS. WATKINS: I did meet with –

REP. STEARNS: Were you aware of -- that Mr. McMahon, he was -- he met with Skilling. He obviously -- he was the president and chief operating officer, a 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 21st, I met with Mr. McMahon for roughly an hour-and-a-half. I mean, that is when he told me that he found the conflicts to be -- to be something that -- you know, too great for Enron.

REP. 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 -- you know, make these changes or I can't stay as treasurer. And I -- and as I recall the -- 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.

REP. STEARNS: I asked Mr. Skilling about Mr. McMahon and this conversation. He said, "We talked nothing about what you mentioned, Congressman. All we talked about was compensation." I don't know if you heard Mr. Skilling say that.

MS. WATKINS: It sounds like that's –

REP. STEARNS: So, Mr. McMahon –

MS. WATKINS: -- the truth, but not the whole truth.

REP. STEARNS: Right. So, Mr. Skilling is trying to convince me they're talking about the bonus for Mr. McMahon, and that's all they talked about, yet it was clear to me and all the information we had, that Mr. McMahon was telling him about the stuff that you just know about. And that's -- and that's what you're saying, that when you talked to Mr. McMahon, that he told you the same thing, that he talked to him all about these partnerships.

MS. WATKINS: He -- the Raptor transactions had not been done, I don't think, or -- I'm not completely aware. Mr. McMahon told me he did not talk about accounting issues as much as they were -- these deals were likely not benefiting Enron shareholders; they were likely benefiting Mr. Fastow and not Enron shareholders.

REP. STEARNS: Okay. So that is directly opposite to what Mr. Skilling told us. And you're telling us that Mr. McMahon told you that, and Mr. McMahon has also told us that's what he told him. So, I think it's clear at this point that there are 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 -- REP. GREENWOOD: Did you want -- did Ms. Watkins, did you want to clarify anything?

MS. WATKINS: Well, I just wanted to add that I had 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."

REP. STEARNS: Thank you, Mr. Chairman.

REP. GREENWOOD: The chair recognizes the gentle lady from Colorado, Ms. DeGette, for 10 minutes. And we would note that at the end of her questioning, we will recess for approximately 20 minutes for the vote.

REP. DIANA DEGETTE (D-CO): 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. And first I thought, well, maybe it was because we were both women of about the same age working the male-dominated field. I thought, no, it's not that. Then I said maybe it's because we're both moms, because moms tend to get -- you know, you can figure out if someone's telling the truth. But then I realized no, it's 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. (Laughter.) 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.

REP. DEGETTE: So, if someone said that you ghost -- that someone else, like Mr. McMahon, ghost-wrote these memos, that would not be true?

MS. WATKINS: That is not true.

REP. DEGETTE: And you wrote these because you were concerned about the future of the company and the future for the shareholders didn't you?


REP. DEGETTE: Did you -- 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's ludicrous.

REP. DEGETTE: It's not true, is it.


REP. DEGETTE: Are you surprised Mr. Fastow might think that?

MS. WATKINS: I'm not surprised he would think that.

REP. DEGETTE: Why not?

MS. WATKINS: I understand that he and Mr. McMahon had a rather contentious relationship.

REP. DEGETTE: And so you think he was referring to Mr. McMahon?


REP. DEGETTE: Now, you worked for Arthur Andersen for eight years, but it was a long time ago, right?


REP. DEGETTE: And, you're a CPA, right?

MS. WATKINS: Yes, I am.

REP. 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'd say about three or four weeks.

REP. 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 three or four weeks, right?

MS. WATKINS: Well, I had the advantage of hindsight, when 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 $700,000 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 that wasn't kosher.

REP. DEGETTE: Even -- even Congress people like us can figure that out. So, now, you said that information -- in your testimony, you said the information gathered from coworkers helped you come to the conclusion that the Raptor SPEs were financially untenable. It was pretty common knowledge and discussion among the coworkers about these entities, correct?

MS. WATKINS: Yes, it was.

REP. 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.

REP. DEGETTE: Well, 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. I mean, one of the things I asked Vinson & Elkins to do was to look at -- 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.

REP. DEGETTE: You knew a dozen people who had typed in concerns?


REP. DEGETTE: Ms. Watkins, would you be willing to share those names with this committee?

MS. WATKINS: I can -- I can share certainly at least two because they are in the documents that you are releasing today.

REP. DEGETTE: Would you be willing to, in our -- as part of our investigation, to share the rest of them?

MS. WATKINS: Well, I can share Jeff Donahue, who was managing director in charge of corporate development.


MS. WATKINS: Kim Detling (sp), a managing director in corporate development. Michelle Nezzy (sp) Marvin one of the business unit people who hedged assets with Raptor.

REP. DEGETTE: Jeff McMahon.

MS. WATKINS: I don't know whether he typed in comments or not.

REP. DEGETTE: Oh, he didn't type -- but he was concerned, right?


REP. DEGETTE: Cliff Baxter was concerned.


REP. 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'm 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 Bowman had -- 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.

REP. DEGETTE: So, it wasn't that everybody certainly at your level, knew but didn't care; it's that they were afraid to come forward. Would that be a fair characterization?


REP. DEGETTE: Now, why is it that you think Mr. Skilling knew about these issues?

MS. WATKINS: Because he was an intense, hands-on manager.

REP. DEGETTE: What does 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 a comparable analysis in the marketplace. Mr. Skilling was very concerned that if the multiples, that might have been as high as seven or eight, cyclically moved down to, say, three or four, then our own models would force us to take a write-down. And he sat in on a number of meetings where I was present where we were trying to devise a real hedging strategy to avoid facing those losses on the income statement.

REP. DEGETTE: So he was involved hands-on –


REP. DEGETTE: -- personally in accounting meetings, talking about accounting treatments of transactions. You saw the transaction sheets that the chairman showed you, the four that had the 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.

REP. 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.

REP. 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 those approvals. And quite often it was a verbal approval over the phone, and then it was always followed up by a signature.

REP. DEGETTE: Thank you very much. Thank you for coming today. I really appreciate it.

REP. GREENWOOD: With 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, you know, "One of the following two signatures are required." If the name was listed in the signature block, it was required.

REP. 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.

REP. GREENWOOD: Do you know anything about Jordan Mintz's efforts to get him to sign that sheet?

MS. WATKINS: I did not know of those until I heard his testimony here last week.

REP. GREENWOOD: Okay. The chair thanks the gentlelady. The committee will recess for approximately 15 minutes.

(Recess.) REP. GREENWOOD: The committee will come to order. The chair recognizes Mr. Strickland for ten minutes for purposes of inquiry.

REP. STRICKLAND: Thank you, Mr. Chairman.

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, to a special purpose entity known as White Wing. Is that correct?

MS. WATKINS: Yes, it's also known by its project name, which is Condor.

REP. STRICKLAND: Ok. Enron's Caribbean region decided to sell Promigas to Whitewing because Enron's risk and finance departments had put out the word that all division should sell merchant assets to White Wing by the end of the 3rd and 4th quarters of '99. Besides that mandate, was there any other reason for Enron to sell Promigas to Whitewing at that time?

MS. WATKINS: No, there was not.

REP. 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 onto 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.

REP. STRICKLAND: Okay. Now, Enron decided to sell its merchant assets to Whitewing in order to increase its cash flow. Was there any other reason for this decision?

MS. WATKINS: I believe that the assets sold to Condor Whitewing, 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 Whitewing.

REP. STRICKLAND: Okay. In fact, cash flow had become a big concern for Enron -- had it not?

MS. WATKINS: Yes, that's correct.

REP. STRICKLAND: Now, Wall Street analysts began to distrust Enron's increasingly complex earnings statements, so they started examining the company's cash flow. After all, cash is cash. However, since Enron had been manipulating its earnings, its cash flow 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 cash flow of, say, one tenth of that profit in that year. That is probably not a unheard-of phenomenon 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.

I might want to correct a statement that Mr. Congressman Greenwood made earlier. I do think that the Cactus vehicles, the contract assets securitization vehicles that we did in the early '90s and '95, '96, 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 Whitewing was to generate funds flow from operations for Enron.

REP. STRICKLAND: So -- and correct me if I say something that you think is factually inaccurate, but it seems that Enron planned to increase its cash flow by selling these merchant assets to Whitewing during the third and fourth quarters of 1999?

MS. WATKINS: That's correct, yes.

REP. STRICKLAND: Did Enron provide any guarantees to Whitewing for these transactions that you know of?

MS. WATKINS: The Whitewing structure was set up such that if the assets that were sold to Whitewing were not liquidated and were not sufficient to repay the investors in Whitewing, then that structure was backstopped by Enron's stock.

REP. 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 are -- 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.

REP. STRICKLAND: And I am impressed with your background check 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 getting funds flow from operations, a 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 Whitewing. It was almost like something that was on paper, not real, because the business unit continued to manage the asset, the counter party 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.

REP. STRICKLAND: Now, after Enron sold Promigas to Whitewing, who managed and operated that company?

MS. WATKINS: The Caribbean business unit. It stayed with the Caribbean business unit.

REP. STRICKLAND: And that was Enron?

MS. WATKINS: Yes, that's Enron. But it was not Whitewing personnel that managed it; it was Enron personnel who managed it.

REP. STRICKLAND: In fact, the people involved in the day-to- day functioning of Promigas didn't even know that they had been -- that it had been sold -- is that correct?

MS. WATKINS: That's correct.

REP. STRICKLAND: Ms. Watkins, who was the general partner of Whitewing? In other words, who ran Whitewing?

MS. WATKINS: I believe it was something called an Osprey or something, but it was an Enron entity that was the general partner of Whitewing.

REP. 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 Whitewing was under Mr. Andrew Fastow, and I believe he had Cheryl Lipshoots (ph) running the Condor Whitewing structure.

REP. STRICKLAND: Okay. Now, Enron sold these assets to Whitewing at book value?


REP. 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 Whitewing 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.

REP. DEGETTE: Would the gentleman yield for one second?

REP. STRICKLAND: I would yield.

REP. DEGETTE: Cheryl Lipshoots (ph) was the secretary to the board of directors of Enron at that time, right?


REP. DEGETTE: No? Was she employed by Enron?

MS. WATKINS: She was employed by Enron under Mr. Fastow –

REP. DEGETTE: Okay, I just wanted to clear that up, that Mr. Fastow was in charge, and Cheryl Lipshoots (ph) was running it, and they were both working for Enron.


REP. DEGETTE: Thank you. Thank you.

REP. STRICKLAND: Thank you. I have just a couple more questions, Ms. Watkins.

REP. GREENWOOD: You have just a couple of more seconds.

REP. 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 cash flow as a more reliable indicator of the condition of the corporation. To make sure its cash flow appeared proportional to its earnings, Enron decided to increase its cash flow. Is that correct?


REP. GREENWOOD: The time of the gentleman has expired.

REP. STRICKLAND: Thank you, Mr. Chairman.

REP. GREENWOOD: Ms. Watkins, when you were involved in this transaction to sell assets to Condor, was there a discussion or agreement about whether or not those assets could be sold back and whether there were documents that would reflect that?

MS. WATKINS: There were -- as I recall, there were extensive conversations, because Promigas was an important asset for the region. We did not -- we were legally selling it to this Whitewing 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.

REP. GREENWOOD: And that was the purpose of that –


REP. GREENWOOD: -- because you would -- if the charade was evident, you wouldn't be able to get a tax treatment?

The chair recognizes the gentleman from Illinois, Mr. Rush, for 10 minutes.

REP. RUSH: I want to thank you, Mr. Chairman, and Ms. Watkins. It's very pleasing that you are here. Your testimony has been forthright and I would say without any kind of a value in term's of Ms. Temple's testimony, it's diametrically opposed to the kind of testimony that Ms. Temple presented to this committee, and it is certainly appreciated by the committee -- at least one member of the committee, and I believe that it is appreciated -- your testimony 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 financial condition of Enron?

MS. WATKINS: On the afternoon of August 16th, following the all- employee meeting that had been held that day.

REP. 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.

REP. RUSH: So did you read your various -- 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.

REP. RUSH: And what was her response when you showed her the anonymous letter?

MS. WATKINS: She could -- she was -- clearly understood that this was a serious problem, and she said it would be best if I explained it personally to Mr. Lay.

REP. RUSH: Okay, at one 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 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 30th, 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.

REP. RUSH: Okay. Did she in any way indicate to you how the attitude displayed by Mr. Fastow -- I mean, was he -- did she -- 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 could?

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.

REP. RUSH: And what is Ms. Olson's relationship with the Enron Corporation?

MS. WATKINS: I believe she's a senior vice president, or an executive vice president.

REP. 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 401(k) plan.

REP. 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, concerning your claims?

MS. WATKINS: I think she probably understood that they were being investigated and by a professional law firm. And I am sure she was waiting to see the results of that investigation.

REP. RUSH: And can you be more specific about your concern -- what you said to her about your concerns about Enron's financing? I mean, what was her responses 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.

REP. RUSH: My time is running down, but I 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 know that there was -- the parking lot attendant -- knew that there was something going on there. I mean, what -- 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 -- I mean, Enron was voted most innovative. It was voted one of the best places to work. I mean, it was the job to have in Houston. The atmosphere was electric. It was fun. You were surrounded by bright people, energized - change the world. It was -- 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.

REP. RUSH: And the -- 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? And -- is that –

MS. WATKINS: Everyone was very conscious of what they were contributing in the last six months. The performance ranking system judged you on what you contributed to the company in the last six months -- no old tapes. And so -- and in that sense it was very competitive.

REP. RUSH: And Mr. Fastow and Mr. Skilling and others could very easily manipulate that type of concern to help people to overlook some of the transgressions 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.

REP. RUSH: Do you have any relationship, either a 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 mean, I know several people who have been let go.

REP. RUSH: And do you -- there's an issue regarding your severance pay. Are you familiar with –

MS. WATKINS: Or lack thereof?

REP. RUSH: 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'd never imagined that they would have to live because of the fact that they don't have the severance pay. Can you -- do you see a problem there, and what's the nature of the problem, and how would you recommend that we go about resolving that issue here?

MS. WATKINS: Well, recently it was disclosed -- maybe at salon.com -- but the retention bonuses that were paid the week before the bankruptcy. And the amounts I find -- some of the amounts I find shocking for 90 days retention. And I do not believe that it was in the best interests of creditors to -- yes, we should retain certain people, but I don't think they needed to be paid three and four times their base salary to stay for 90 days. And 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, a million five, two million -- $450,000 -- I mean, gargantuan sums of money to agree to stay at Enron for 90 days. I am appalled by that list.

REP. RUSH: Thank you. I yield back, Mr. Chairman.

REP. GREENWOOD: The chair thanks the gentleman, and recognizes the gentleman from Iowa, Mr. Ganske, for 10 minutes.

REP. 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 -- employees, pensioners, investors -- they have seen their nest eggs disappear, and they speak about unbearable grief. In Iowa we had -- I've spoken to a lot of former employees of the natural gas company that was based in Omaha, merged with the Houston Natural Gas Company, and 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 -- the problems we are seeing with Enron are just an issue of corporate greed in one company. I think that we are seeing problems with companies like Global Crossing, Elan (ph) -- 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 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.

REP. 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've got a locked-in sales value. And so some of these assets, most notably Avici and New Power, had -- the market values were significant 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 edged with Raptor. And the business units that were helping me pull together this information kept showing me losses that should have been Raptor's that were coming back to Enron.

REP. 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 –

REP. GANSKE: Did you ever hear, you know, at the water cooler about somebody who made an investment of $10,000, $15,000, and got millions?

MS. WATKINS: No, I did not.

REP. GANSKE: Okay. So you're gathering all 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.

REP. GANSKE: So then you write a 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's a bit like robbing the bank in one year and trying to pay it back two 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 (redeployed?) 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.

REP. GANSKE: But this is bad news, okay, and you're writing this -- you originally wrote this anonymously.


REP. 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'm still at Enron. And I felt like I could bring the concerns to him.

REP. GANSKE: Did you put a personal copy of this somewhere outside of the company? Did you keep a copy of this memo somewhere else?

MS. WATKINS: I did. On 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.

REP. GANSKE: Did you keep a copy for your own personal files?

MS. WATKINS: Yes, I did. Yes, I did.

REP. GANSKE: And where did you keep those files? At home?


REP. GANSKE: At work?

MS. WATKINS: No, in a lock box.

REP. 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.


REP. GANSKE: Were you worried about your own personal safety?

MS. WATKINS: at times, I mean, 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.

REP. GANSKE: Why would you be worried about your personal safety?

MS. WATKINS: Because it was the seventh-largest company in America.

REP. GANSKE: And you were dealing with a really powerful problem –


REP. 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 401(k) plan and I have stock options.

REP. GANSKE: Did you sell any of that stock?

MS. WATKINS: Yes, I did.

REP. GANSKE: When did you sell it?

MS. WATKINS: I sold -- well, 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 -- (met?) to myself around $17,000 of stock options in early October.

REP. GANSKE: And you sent these memos to Mr. Lay when?

MS. WATKINS: August 15th.

REP. 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: Well, I mean, I could have sold in July at $45. I actually sold in October more out of a knee-jerk reaction to September 11th. When the markets reopened after the terrorist attacks, most stocks did decline. Enron declined into the low 20s. I had virtually no stock options that were in the money in the low 20s.

In early October we moved into the mid-30s and even high 30s, 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?

REP. GANSKE: So you sold $31,000 at one time and $17,000 at another time?


REP. 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've heard from testimony today, you know, you were concerned that, you know, 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've outlined potentially criminal behavior.

MS. WATKINS: A co-worker of mine asked whether or not -- she knew I had done this, and she asked whether or not I'd consider going to the SEC on this. And I said, you know, "I don't want to hasten our demise. There are 20,000 employees here whose livelihood is at risk. And 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." You know, I did not want to hasten the demise.

REP. 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 he said, "Can you please give us time to investigate?" And I said, "Oh, most definitely."

REP. 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.

REP. GANSKE: Well, we all know -- and you, as an accountant, could see the problems coming. I mean, you wrote about an impending implosion. This must have weighed quite heavily on your mind in terms of thinking about, well, what happened both to your fellow employees, as they were locked in, and investors around the country. Tell me what you were feeling about that time –


REP. GANSKE: -- specifically on whether you had an ethical obligation to let this be known.

MS. WATKINS: I don't -- 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. I mean, 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 just to go to the press or to go to the SEC would have not 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're in right now.

REP. GREENWOOD: The time of the gentleman has expired.

REP. GANSKE: Thank you, Mr. Chairman.

REP. GREENWOOD: Before I go to the next -- before I recognize Mr. Markey for questions, I just want 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 13th and wanted to interview me the following week. I was actually a little surprised that it took them so long to –

REP. GREENWOOD: It took two months; is that right?

MS. WATKINS: -- call me. Yes.

REP. GREENWOOD: Any indication why it took them two months, since you were so central?

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.

REP. GREENWOOD: The chair recognizes the gentleman from Massachusetts, Mr. Markey, for 10 minutes.

REP. ED MARKEY (D-MA): Thank you, Mr. Chairman. Thank you, Ms. Watkins. Pinocchio had a conscience called Jiminy Cricket. Every time Pinocchio ignored Jiminy Cricket, his 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, the more jeopardy that investors and employees of Enron were placed in.

Now, what you have done is really very courageous. You're 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're 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're doing here, that you should let us know. They did the same thing to the Morton Thiacol whistleblowers that spoke of the O-ring. 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 15th and August 22nd letters to Mr. Lay, you warn that, quote, "We do not have valuation issues" -- I'm sorry -- "We do have valuation issues with our international assets, and possibly some of our Enron energy services 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. I mean, 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 structured so if we did want to sell an international power plant, we had a number of subsidiaries that might appeal to a European buyer, an Asian buyer. Some of them were very legitimate just to allow us all the options that we might want to pursue sometime in the future.

REP. 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.

REP. MARKEY: 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've got the valuation problems.

REP. MARKEY: So, in other words, if they mark to the model and it turns out the model's not working -- MS. WATKINS: That's on our fair-value assets.


MS. WATKINS: Most of the international assets were not necessarily fair-value assets. Those tended to be the domestic ones. So we do have some domestic assets that are fair value that are marked to a model that is somewhat subjective.

REP. 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.

REP. MARKEY: You do not. Now, on 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 seven of the presentation documentation for this meeting, Mr. Fastow says that the reason Enron needs private equity is because, quote, "Energy and communications assets typically do not generate earnings or cash flow within the first one to three years, and investments dilute Enron's current earnings per share and its credit rating ratios." Do you agree with that?

MS. WATKINS: I mean, not all energy and communication assets don't generate cash flow, but I guess he means Enron's energy and communication assets were not generating cash flow.

REP. MARKEY: Yes. Then you agree with that.


REP. MARKEY: Now, the proposed solution in that document was, quote, "to deconsolidate assets" and, quote, "create structures which accelerate projected earnings and cash flows." Now, you had run the JEDI partnership and had sold the Colombian asset to White Wing to increase cash flow. 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'm mainly familiar just with Raptor and the Raptor special-purpose entities, and it does appear that those were created solely to ensure that certain losses that should flow through our income statement were masked.

REP. MARKEY: All right, if you could turn to page nine, where it states that private equity can also be used for, quote, "earnings generation." You found that to be true on the Raptors' SPEs, didn't you?


REP. MARKEY: You did. Now, Mr. Skilling told us under oath that while he was at Enron, he was not aware of, quote -- this is what he told the committee -- "any financing arrangements designed to conceal liabilities or inflate profitability" and that, again quote, "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 opinion, was Raptor IV, quote, "a financing arrangement designed to conceal liabilities or inflate profitability"?

MS. WATKINS: I would focus in on his comment that we did these deals to shift risk and return to an entity that wanted to bear that differing risk and return. So the risk-and-return scenario that Enron didn't want to bear transferred to a special-purpose entity. But we know from the Powers report that there was no real economic risk transferred to Raptor.

REP. MARKEY: Do you believe that he knew the actual financial condition of the company? Mr. Skilling, that is.

MS. WATKINS: Yes, I do.

REP. MARKEY: You do. Here on the LJM2 approval sheet, we have Skilling signing off at tab two. 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 mean, I'm looking at one that says, "Jeff Skilling/Joe Sutton" with no signature, but maybe it was -- oh. I don't know who that is (to find it?). I mean, if there was a signature block on these sheets, it had to be filled.

REP. MARKEY: So that would be back on first, second -- page three -- fourth page. It says, "LJM Approval Page 3," and the bottom is executive Jeff Skilling, with his signature next to it, March 12th, 2001. Can you see that?

MS. WATKINS: March 12th, 2001. That's under tab 2?

REP. MARKEY: Yes, it's under tab 2, page 3.


REP. 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 4. And I am sure he was well versed with what this meant.

REP. MARKEY: You're sure?

MS. WATKINS: He typically was very well versed.

REP. 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 these special purpose entities?

MS. WATKINS: It would be my opinion that Mr. Skilling would be very well briefed about these transactions.

REP. MARKEY: Well, again, I thank you. And, Mr. Chairman, I thank you for your courtesies in the last several years –

REP. GREENWOOD: I thank the gentleman –

REP. MARKEY: --and I thank you, Ms. Watkins, for your courage.

REP. GREENWOOD: Before recognizing the gentleman from Texas, the chair is going to exercise the prerogative -- the chair has to turn the gavel over to someone else.

But, 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 Andy was -- 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.

REP. GREENWOOD: Okay. Did t hat appear to be a successful strategy?

MS. WATKINS: By the investors that are in LJM2, yes, it appeared to work.

REP. GREENWOOD: How about Mr. McMahon? Was he -- he taught us about promises that were made to the banks. Was he -- did he participate in that ?

MS. WATKINS: Well, I just remember from his testimony that he was asked about –

REP. GREENWOOD: Did you discus this issue with McMahon?

MS. WATKINS: I -- he and I discussed that Mr. Fastow used strong-arm tactics occasionally.

REP. GREENWOOD: The chair recognizes the gentleman from Texas, Mr. Green, for 10 minutes.

REP. GREEN: Thank you, Mr. Chairman. And, Ms. Watkins, if you'll -- I'll 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 works in Houston. And she said this: Capitalism is if you have two cows and you sell one and you buy a bull and y our 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; then execute a dead equity swap from an associate general officer, so you get all four cows backs 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 three o'clock. And I thought, After hearing all the testimony that we've heard before today, that's about what it sounds like. And your testimony is very refreshing in all honesty. And, like a lot of members, I respect you and admire you to be willing to put your job on the line, to go up to the CEO and say, you know, We have a problem. And after reading Vinson and Elkins' response, they didn't respond like it should have been, and your testimony has already shown that.

Let me turn if you could to tab 2 in your book -- and what it is your memo that you sent to Mr. Hecker -- because our first hearing we actually had Arthur Andersen here and talked about your memo. Were you surprised? I know as a former Arthur Andersen how quickly Mr. Hecker communicated your concerns to Andersen's management?

MS. WATKINS: Yes, I think -- I'm looking at tab 16, and it's a memo from Mr. James Hecker, dated August 21st. I phoned him as he says –

REP. GREEN: Okay, yes, it's tab 2 on mine -- tab 16 on yours.

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 -- you know, I was thinking it was just something between us. In hindsight I realize the severity of what I was concerned about was something that probably would induce him to do something about it. And I read this when this committee released this document a few weeks ago.

REP. GREEN: And when you spoke with him and you told me you thought it would be confidential, or just between you and him?

MS. WATKINS: Well, I didn't say confidential necessarily -- but I was just trying to run some things by him. And it -- I did not realize he had written a memo until this year.

REP. 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'm -- I would expect him to be able to go to someone else and say, By the way, there's a problem that has been brought up, and it's my job to pass this on so somebody in a decision-making capacity higher than mine can do it.

How long did you work with Arthur Andersen?

MS. WATKINS: Eight years.

REP. GREEN: Oh, so it was a number of years. And was it your experience that the practice groups tended to be sensitive about internal allegations of accounting irregularities during your eight years?

MS. WATKINS: If I was still an auditor at Arthur Andersen and I got a call I guess like mine, I would be highly concerned with the conversation and the topics that I brought up with Mr. Hecker. So –

REP. GREEN: So, it would circulate in the office, and –

MS. WATKINS: I mean, it doesn't surprise me that he, that after reading this, he talked to the people that he did, and that he did try to bring a lot of attention to my concerns.

REP. GREEN: And did you -- were you surprised that it actually made it all the way up to Chicago?

MS. WATKINS: Not really. I mean, 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.

REP. GREEN: Yeah, and we discussed that before at our hearings. I guess the Andersen folks who were here developed some type of "I- don't-remember" and "I-don't-recall" illnesses that it seems like people get when they come into our committee room. And when you worked at Arthur Andersen -- you know, I appreciate your insights in that, because on what's happened -- but it seemed like they weren't as forthcoming as maybe they should have been, having been notified last August. And maybe even questioned before your memo to Mr. Hecker.

In most of your memos you almost always provided an additional list of people to speak with about collaborating your views. And you have been documenting, saying, “This is just my opinion, but here's 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 we haven't had the opportunity, or our investigators? Is there anyone that you know of that you may not have shared with our committee staff?

MS. WATKINS: I think I've mentioned most of the names to the staff, and also here today, that would be useful.

REP. GREEN: Okay. Let me -- another question, and if you'll turn to page 37. Okay, I'm sorry -- tab 26, the agenda for the LJM investments from October the 26th, 2000, annual partnership meeting.


REP. 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 1." Their first bullet points to, or reads in relevant part, that Raptor is structured, financed or capitalized with Enron stock derivative and 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 derivatives 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 was 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. So under that structure, I don't see how it could have been legitimate.

REP. 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, the relevant part, that Osprey is a partner and an investment vehicle that purchases merchant assets from Enron. It's capitalized with 50 million shares of Enron stock. If an entity were capitalized with Enron stock, and Enron sold assets to that entity, is Enron essentially selling assets to itself again?

MS. WATKINS: This -- Osprey and Condor and Whitewing are all the same vehicle, and this is the Condor that I was referring to in my memos that I was uncomfortable with.

REP. GREEN: So, to answer the question, if the 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 –


MS. WATKINS: -- and they could fall back on the assets for repayment. But it was also a structure 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'm not happy with it. I think if there is a clawback (ph) to the company to its own stock it should not be off-balance-sheet. And the debt that came into Condor, or Whitewing, 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 entities it would have been funds flow from borrowings. And those are two very different funds flow items in terms of how an analyst would evaluate the company.

REP. GREEN: The second bullet points out that this structure creates 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 indicate an increase in funds flow, would this be intentionally deceptive to investors in your opinion?

MS. WATKINS: Yes, in my opinion it would.

REP. GREEN: Ms. Watkins, you said earlier that the push to sell assets and increase cash flow began in the third and fourth quarters of 1999?

MS. WATKINS: Yes, sir.

REP. GREEN: So now a year and a half later in its continued effort to artificially increase its cash flow, 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 deceiving Wall Street analysts and investors? I know that's 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 the Enron balance sheets to deceive Wall Street analysts and investors?

MS. WATKINS: It appears that some of these vehicles were used for financial statement manipulation.

REP. GREEN: Okay. 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.

REP. TAUZIN: I thank the gentleman. I think we have gone through the roster of members 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 these hearing processes, on behalf of the citizens of her committee 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 as well. Thank you.

Let me before we wrap put a few questions into the record, Ms. Watkins, that I think are important as well because I think the answers will tell us a little bit about who was taking responsibility for what was going on and who was not. And I want to focus on the gentleman who held the position of executive vice president and chief risk officer. And would you describe for us the function of the chief risk officer in the corporation?

MS. WATKINS: Mr. Buy supervised our credit department.

REP. TAUZIN: And his name is Rick Buy, right?

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.

REP. TAUZIN: So he was, according to our documents, responsible for identifying, quantifying, controlling the risk in both Enron's trading activities and their investment opportunities, right?


REP. TAUZIN: This would include all these special entities and partnerships that Enron was engaged in, right?

MS. WATKINS: Yes, that's correct.

REP. 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 -- you know, 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 of my concerns.

REP. TAUZIN: Now, 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.

REP. TAUZIN: Which -- 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 have very large accounting issues, and that it was not appropriate to be backstopping these Raptor losses with Enron stock.

REP. TAUZIN: So you offered to send him all this. What was his response?

MS. WATKINS: He said he'd rather not see it.

REP. TAUZIN: Now, he would rather not see it? And his job was the risk officer for the corporation?

MS. WATKINS: Yes, sir.

REP. TAUZIN: And so I suppose you didn't send it to him them?

MS. WATKINS: No, I did not.

REP. TAUZIN: So the chief risk officer of the corporation was sort of in a see no evil, hear no evil, speak no evil position?

MS. WATKINS: It would appear so.

REP. TAUZIN: He didn't want to see the documents?

MS. WATKINS: It would appear that would be the case.

REP. TAUZIN: Now, did he tell you anything about -- at any time -- about the precarious financial condition of Enron, and its reliance upon these deals?

MS. WATKINS: Mr. Buy expressed the opinion to me, you know, as early as maybe even 1997-98, that he felt that Enron was one or two quarters away from disaster. Now, he had different reasons for that, but that was because we were a trading company. Trading companies usually -- it's 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 with a -- under a microscope, so to speak, and that he was concerned that that would put us in, as he put it, in a disastrous position.

REP. 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 your reliance, Enron's reliance upon these transactions, who says to you, Don't send to me the documents illustrating your concerns that there are serious problems with these transactions -- who did you react to that?

MS. WATKINS: I was disappointed, because I felt like he was in a position to, you know, help us disclose these things with Mr. Lay.

REP. TAUZIN: And you weren't getting any help at all from him?


REP. TAUZIN: Now, you were part of an investor conference call on October 23rd. Now, to put it in perspective, this is about the time that you were discussing with Mr. Lay your concerns and bringing them to his attention?

MS. WATKINS: Well, it was after the earnings release, which talked about the $1.2 billion shareholder reduction.

REP. TAUZIN: October 16th, right?

MS. WATKINS: October 16th. We had an October 23rd investor call that was open to the public, and I just listened in.

REP. TAUZIN: Right. And now I understand that Mr. Causey and Mr. Lay were members of that conference call.

MS. WATKINS: Yes, that's right.

REP. TAUZIN: And you had a chance to listen in to the conversations. Was the Raptors discussed in that conference call?

MS. WATKINS: Yes. An analyst asked the question: Okay, Enron has unwound these Raptor transactions, you've 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 not impact, because we could have done these transactions elsewhere.

REP. TAUZIN: Was that a true statement?

MS. WATKINS: I don't think so, and the Powers Report doesn't think so either.

REP. 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.

REP. TAUZIN: Now, here Mr. Causey and Mr. Lay are in a conference call with investors, telling them that if the Raptors had not been a part of Enron, that there would have been no impact on the income statement. You believe that not to be true. 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.

REP. TAUZIN: Did you make notes of those conversations?

MS. WATKINS: Yes, I did.

REP. TAUZIN: Have you supplied those notes to the committee?

MS. WATKINS: I have them. I believe my attorney was going to supply them later.

REP. TAUZIN: I would appreciate it if you would supply those notes, that we might have them as part of the record. And, 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, the 50th floor up, ever contact you to discuss with you what you had written? Did anybody praise you for coming forward on 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: 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 Bowman.

REP. TAUZIN: Now -- and 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, posed or suggested in terms of your employment and your position with Enron?

MS. WATKINS: Yes, sir.

REP. 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?

REP. DEUTSCH: Thank you, Mr. Chairman.

REP. TAUZIN: The gentleman from Florida.

REP. DEUTSCH: Just a couple of very specific follow-ups. In your discussion with staff yesterday, you stated that you believe that Enron should be taking additional write-offs beyond those in the November 8th restatement. Could you explain that?

REP. TAUZIN: Well, the Raptor vehicles that I wrote about that were all associated with LJM 2 -- 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.

REP. DEUTSCH: What's the significance of taking additional write-offs, especially Enron is now in bankruptcy proceedings?

MS. WATKINS: It's the appropriate thing to do for a public company. We are still publicly traded and under SEC rules.

REP. DEUTSCH: And just a couple of very quick follow-up questions. Is it your sense that there was complicity with the auditors, Arthur Andersen, and in a sense with Vinson and 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 attorney’s misinformation?

MS. WATKINS: It is my opinion that Enron transaction accountants -- most notably Ben Glisson, helped to come up with the structure and come up with a support for the structure, and then convinced Andersen that it worked.

REP. DEUTSCH: So they knew -- what you are really saying is that 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.

REP. DEUTSCH: And the issues in terms of Enron being the guarantor and all those issues?

MS. WATKINS: Yes, yes.

REP. DEUTSCH: You mentioned something obviously very disturbing, that you in fact felt for 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 concerned that Mr. Fastow might be vindictive.

REP. DEUTSCH: Did they give you any advice to take specific action?

MS. WATKINS: Just general security advice on -- REP. DEUTSCH: Did Mr. Fastow exhibit any violent behavior or -- MS. WATKINS: No -- REP. DEUTSCH: -- erratic behavior that would -- MS. WATKINS: No, it's 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's you against them, and I was a little bit concerned.

REP. DEUTSCH: Are you convinced that Mr. Baxter's death is a suicide, or was it possible that there was another more nefarious activity?

MS. WATKINS: I'm sure the authorities will have reported that correctly.

REP. DEUTSCH: Is there any doubt in your mind?

MS. WATKINS: Probably not.

REP. DEUTSCH: Got in your mind about that it was a suicide?

MS. WATKINS: Yes, I believe it probably was.

REP. DEUTSCH: So if you say probably, there's doubt?

MS. WATKINS: It's just a sensitive topic that I'd rather not comment on.

REP. DEUTSCH: Let me, for the last thing; submit for the record a list of transactions of Enron management. This is something we talked about previously. It's actually a list of transactions of sales of Enron stock through the end of last year, totally $1.1 billion -- REP. TAUZIN: Without objection, that will be part of the record.

REP. DEUTSCH: -- a 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 these people were wise enough or lucky enough to sell stocks before the facts that you've described and that we've uncovered became public. And it's 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.

REP. 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, and without objection, it is so ordered.

The gentleman Mr. Stupak is recognized for questions.

REP. STUPAK: Thank you, Mr. Chairman. And 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've 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, but especially committee staff -- they've worked long and hard to help get us prepared and worked -- I know I appreciate it, and everybody -- REP. TAUZIN: If the gentleman would yield -- REP. STUPAK: Sure I would.

REP. TAUZIN: There's a personal interest story -- I know he's going to get upset with me for telling it, but the gentleman who is in charge of our investigative staff, Mark Paoletta (ph) here, just 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 follow-up, 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 you can see he's back to work already. The staff has done marvelous work, and Mr. Paoletta (ph) particularly accorded our appreciation for his sacrifice of self to get this job done, and we thank you, Mark. I thank the gentleman.

REP. 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've asked this question before, and never really got an answer -- maybe you can shed some light on it. In one of the transactions, Mr. Kopper in a very short period of time, made about $2 million, and the records and everything we have seen said there's no reason why he should make $2 million in about two 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 the unwinding of Chewco or something like that. Any -- just how would someone get paid $2 million in this whole deal? I mean, how would you handle that on the books?

MS. WATKINS: Well, all I know about those transactions were what I've 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.

REP. STUPAK: Who -- what books handled that loss? The Enron books or Southampton? Would you know?

MS. WATKINS: Well, if Enron was purchasing an interest, you know for instance a Chewco interest or whatever, if you are buying back an asset, that goes on your books at the price you paid. So it's not an income statement item. It's not necessarily a loss for Enron and a gain for Mr. Kopper. It could be an asset purchase by Enron that provided a gain to Mr. Kopper.

REP. STUPAK: It sounds like just a way to pass through some money really quickly, right? In -- after you did your memo, and Vinson & Elkins reviewed -- did their investigation, if you will, on or about October 15th, 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 16th, is when Enron announced that due to account errors and restructuring related to transactions involving LJM-II, it was revising the 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 in spite of the October 16th announcement, that the whole story had been told about the looming financial and accounting crisis involving all these partnerships and these PSEs (sic). And then on November 8th, Enron stated its intent to redo their financial statements for the past four years due to additional accounting problems, again with the LJM and Chewco partnership.

Now, despite all these actions, October 15th and October 8th (sic), do you believe that we've learned all the problems that are there, or is 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: Well, I mean, the only people at Enron that are saying we have a problem is the people hired from the Powers report and myself.

REP. STUPAK: So, despite all these restatement of accounting and restatement of financial statements, again, the Powers Report and you –

MS. WATKINS: Well, the Raptor transactions have not been restated yet.

REP. STUPAK: So, what concerns would you still have then about the transparency or the accuracy of Enron's financial statements, beside the Raptor hasn't been fully restated?

MS. WATKINS: Well, the Raptor transactions need to be fully restated, and –

REP. STUPAK: Anything else?

MS. WATKINS: Well, if the -- 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's segment reporting. I'm sure they actually bore the loss in the wholesale group, but that segment reporting was important to Enron in 2001.

REP. STUPAK: Well, it seems like the October 16th revaluation, if you will, was a result of your efforts. And it's our understanding between October 16th and November 8th there, 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 the problems here? Let's get it on the table. They're in the bankruptcy situation and we want to get this thing moved on.

It brings me to my next question. In the minutes, and throughout some testimony and some of the flow charts we've seen throughout here, there's mention of Enron Europe, the Southern Cone, which would be South America, Brazil, Australia, Japan. If we're seeing all these problems here in this country related to Enron, do you know of any problems that others are seeing overseas? What's 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'm not -- I was in Enron international, but most of the international assets are hard assets. They're accrual-based assets. They're fairly tradition. 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.

REP. STUPAK: In -- I'm looking at your memo. It's dated October 30th, 2001, 4:45. I'm on the second page. It looks like it's tab number 21. And I'm looking on the bottom of page two. It says "Note." Are you with me?


REP. 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 didn't start until 2001 and EES did not start making a profit in 2000. So how would -- was 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 investor that EBS was losing money, large amounts of money in 2001. But, the Raptor hedge on Evichi (sp) 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 significantly impacted our PE (multiple ?) and our stock price in the year 2000.

REP. STUPAK: So, it's fair to say, if you started losing money in 2000 and it really wasn't reported until 2001, so you probably have -- you have at least 12 months, so basically the shareholders weren't told the truth here of what was going on with this situation. Is that are fair statement?

MS. WATKINS: That's a fair statement.

REP. STUPAK: Okay. With that, Mr. Chairman, I have nothing further. Thank you. And thank you again.

REP. 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 Ken Lay and Enron needed to support one of the SEC's long-term objectives requiring that the big five accounting firms rotate off their large clients on a regular basis as short as three years. Do you stand by that recommendation?

MS. WATKINS: Yes, I do. I mean, as an investor in the U.S. stock market, I would feel a lot more comfortable knowing the public companies had to rotate their accounting firms every three years.

REP. TAUZIN: It's a recommendation we received from a number of sources as we go forward.

Let me make several observations -- first of all, that you sort of stumbled onto Raptors. You're not here saying that's all that may have been wrong. There may be other things in other transactions that you are not aware of that may need some inquiry, is that correct?

MS. WATKINS: Yes sir.

REP. TAUZIN: Secondly, that, as I said at the beginning of this hearing, we're 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, and 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 by me or editorial comment, but I do want to make one. And that is that your testimony, your activities in regard to Enron actually call upon, I think, all of us to examine the notion of corporate loyalty. There is some, I assume who believe corporate loyalty is protecting the corporation against all harm, even when it's doing something wrong. You 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 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 to 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 this hearing. 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 that 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's 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, and if there are any additional comments or clarifications or additions you want to make for the record, the record is open for 30 days. We may have additional questions we'd like to submit to you in writing to which you might respond, we'll be in touch with you in that regard. Again, thank you for your extraordinary cooperation and for your contributions.

The hearing stands adjourned.




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