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Memo Warned of Enron's Setup Being Seen as 'Hoax'

Probe: Full text suggests that a senior executive was not telling Kenneth Lay anything new. She ridicules accounting procedures and forecasts the company's collapse.


HOUSTON — A detailed road map of Enron Corp.'s aggressive accounting maneuvers and an uncannily accurate prediction of the company's collapse were laid before Enron Chairman Kenneth L. Lay in August in a lengthy memo that became public Tuesday.

Excerpts of the memo had been released by congressional investigators Monday, but the full extent of the warnings became known only Tuesday with the release of the entire text.

The author of the memo, Sherron Watkins, 42, expressed concern that the company's vaunted business success would eventually become considered "nothing but an elaborate accounting hoax." Watkins, a vice president of corporate development at Enron, worked directly under the architect of Enron's complex and highly questionable financial dealings.

Watkins focused particularly on what were known as the "Raptor" transactions, in which Enron transferred several marginal investments to a putatively independent partnership. The partnership had gone virtually bankrupt by last summer, but Enron still was not disclosing the loss to shareholders, Watkins said.

The full text suggests that Watkins did not believe she was telling Lay much that he did not already know--and that many of the company's financial transactions were mere accounting shams.

She attempted to persuade Lay either to reverse the offending transactions promptly or to disclose them fully to shareholders and "develop damage containment plans." Lay did neither.

"Her motivation is not vindication or being proven right or bringing down the company," her husband, Richard, said Tuesday from the family home in Houston. "She's a team player."

Watkins went to work at Enron Tuesday morning as news of her memo was splashed across the front pages.

"It's a normal day," said her lawyer, Philip Hilder, although he acknowledged that "it's very difficult for anybody to go to work under these circumstances."

Watkins has suffered no retaliation from anyone at the company, the lawyer said, although a source close to her said Watkins has been made to feel "an outcast."

Sherron Watkins, the daughter of two secondary school educators, grew up in the distant Houston suburb of Tomball and graduated from the University of Texas.

Tuesday morning, television news trucks jammed the street in front of the Watkins home. Later that day, Richard Watkins praised his wife for doing "something quite courageous. She has the strength of her convictions. But she's very vulnerable."

A neighbor said the hint of moral indignation in Watkins' memo to Lay was genuine.

"Clearly she thought it was her moral and professional duty to do what she did," said Carrie Wood, who also was Watkins' sorority sister at UT. "Sherron was drawn to the dynamic intellectual challenge of being an Enron vice president. I don't think she was drawn to the materialistic greed that sprang out of it."

Word of Enron's accounting irregularities leaked out slowly during the fall, depressing the company's already-dropping stock price. Its businesses destroyed and its reputation in tatters, Enron finally filed for Chapter 11 bankruptcy protection Dec. 2.

Watkins wrote her memo on the heels of the surprise resignation Aug. 14 of Enron Chief Executive Jeffrey K. Skilling. The corporate announcement of Skilling's departure ascribed it to "personal reasons."

But to Watkins and others inside the company, the move hinted at his deep unease at the accounting irregularities and presaged a difficult period of public scrutiny.

"I think he . . . looked down the road and knew this stuff was unfixable, and would rather abandon ship now than resign in shame in 2 years," she wrote to Lay. Moreover, she warned, "the probability of discovery significantly increased with Skillings's shocking departure. Too many people are looking for a smoking gun."

Many of Enron's financial maneuvers would not bear that scrutiny, she said, even though they had been formally approved byEnron's outside auditor, Andersen, formerly known as Arthur Andersen.

'We're Such a Crooked Company'

This particularly applied to deals Enron had made with LJM, a partnership that had been set up to trade with Enron and was managed by Enron Chief Financial Officer Andrew S. Fastow. The goal was to move debt and other liabilities off Enron's books, where they would have a negative effect on the company's financial picture, and park them with a putatively independent company. As long as these liabilities remained secret, Enron's reputation, and its stock price, remained buoyant.

The LJM deals inspired deep unease within Enron, Watkins related, quoting one colleague remarking: "I know it would be devastating to all of us but I wish we would get caught. We're such a crooked company."

Lay responded to Watkins' letter by meeting with her personally and persuading the Enron board to commission an internal review by Vinson & Elkins, one of Enron's Houston law firms.

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