[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]



 
                THE FINANCIAL COLLAPSE OF ENRON--Part 3
=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION
                               __________

                           FEBRUARY 14, 2002
                               __________

                           Serial No. 107-89
                               __________

       Printed for the use of the Committee on Energy and Commerce







 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma              BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa                    ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia             BART STUPAK, Michigan
BARBARA CUBIN, Wyoming               ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois               TOM SAWYER, Ohio
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING,          KAREN McCARTHY, Missouri
Mississippi                          TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
ROY BLUNT, Missouri                  THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia                  BILL LUTHER, Minnesota
ED BRYANT, Tennessee                 LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland     MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana                 CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California        JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska

                  David V. Marventano, Staff Director
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
                                 ______

              Subcommittee on Oversight and Investigations

               JAMES C. GREENWOOD, Pennsylvania, Chairman

MICHAEL BILIRAKIS, Florida           PETER DEUTSCH, Florida
CLIFF STEARNS, Florida               BART STUPAK, Michigan
PAUL E. GILLMOR, Ohio                TED STRICKLAND, Ohio
STEVE LARGENT, Oklahoma              DIANA DeGETTE, Colorado
RICHARD BURR, North Carolina         CHRISTOPHER JOHN, Louisiana
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
  Vice Chairman                      JOHN D. DINGELL, Michigan,
CHARLES F. BASS, New Hampshire         (Ex Officio)
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)











                            C O N T E N T S

                               __________
                                                                   Page

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

                                 (iii)

  







                THE FINANCIAL COLLAPSE OF ENRON--Part 3

                              ----------                              


                      THURSDAY, FEBRUARY 14, 2002

                  House of Representatives,
                  Committee on Energy and Commerce,
              Subcommittee on Oversight and Investigations,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 11 a.m., in 
room 2322, Rayburn House Office Building, Hon. James C. 
Greenwood (chairman) presiding.
    Members present: Representatives Greenwood, Bilirakis, 
Stearns, Largent, Burr, Tauzin (ex officio), Deutsch, Stupak, 
Strickland, DeGette, John, Rush, and Dingell (ex officio).
    Also present: Representatives Ganske, Markey, Green, and 
Jackson-Lee.
    Staff present: Tom DiLenge, majority counsel; Mark 
Paoletta, majority counsel; Michael Geffroy, majority counsel; 
Peter Kielty, legislative clerk; Will Carty, legislative clerk; 
Brendan Williams, legislative clerk; Edith Holleman, minority 
counsel; Consuela Washington, minority counsel; Jonathan 
Cordone, minority counsel; and Chris Knauer, minority 
investigator.
    Mr. Greenwood. Good morning. This hearing of the Oversight 
and Investigations Subcommittee of the Energy and Commerce 
Committee will come to order.
    The Chair recognizes himself for an opening statement.
    ``I wish we could get caught. We're such a crooked 
company.'' Of all of the words in the now famous memo our 
witness sent to Kenneth Lay in August of last year, these might 
be the most chilling.
    According to this morning's witness, the person who uttered 
those words was a management level employee of Enron, a team 
player, a person who probably stood to lose a great deal in any 
financial collapse at Enron. What is the truth behind Enron's 
precipitous collapse?
    This morning we have before us, as our sole witness, Ms. 
Sherron Watkins, Enron's Vice President of Corporate 
Development. Ms. Watkins has become known as the lone voice who 
sought to warn Enron Chairman and CEO Ken Lay that Enron was in 
danger of imploding ``in a wave of accounting scandals.'' 
Subsequent events have proved the truth of that unvarnished 
assessment.
    But we now understand from evidence this committee has 
gathered in its investigation, from the materials contained in 
the Powers Report, and from testimony of senior Enron officials 
at last week's hearing, that these so-called aggressive 
accounting practices were used to hide an even larger business 
failure.
    Last week we took testimony from two senior Enron 
officials, Jordan Mintz and then treasurer, now Enron President 
and Chief Operating Officer, Jeffrey McMahon. They, too, 
anguished that something was terribly wrong at Enron, but were 
unable to determine the full extent of the problems or the 
dangers ahead.
    Unlike them, our witness this morning was privy to 
substantially more evidence of the accounting practices used to 
hide various related party transactions between Enron and what 
are known as the Raptor entities--special purpose entities 
owned by LJM2, the limited partnership set up and run by Enron 
and its former Chief Financial Officer, Andrew Fastow. She will 
testify today that, in her opinion, these transactions were 
outright manipulations of Enron's income statements, booking 
fictitious income, and hiding actual losses.
    Ms. Watkins took her concerns right to the top. She wrote a 
memo to Mr. Lay on August 15 that set forth in stark terms the 
seriousness of Enron's situation and the dire consequences that 
would inevitably result if corrective action were not taken, 
and soon.
    We now know that Ms. Watkins also met with Mr. Lay not just 
once, as has been previously disclosed, but on two additional 
times in late October of last year, to further share her 
concerns and to urge that Enron restate its income statements 
for the past 2 years due to the deceptive transactions with the 
Raptors special purpose entities. Yet, until the Powers Report 
came out 2 weeks ago affirming her analysis of the Raptors, no 
one at Enron, or Andersen ever sought to address these 
concerns.
    Indeed, the actions taken by Enron in October and November 
of last year to revise its earnings and shareholder equity 
numbers still fail to address many of the concerns raised by 
Ms. Watkins and confirmed by the Powers Report.
    Ms. Watkins also will describe today her meetings and 
conversations with others throughout Enron's corporate 
hierarchy, as well as with outside advisors. This included Mr. 
McMahon, Associate General Counsel, Rex Rogers, Vice President 
for Human Resources Cindy Olson, James Hecker, an Andersen 
audit partner, and Vinson & Elkins managing partner Joe Dilg.
    Her initial meeting with Mr. Lay in August prompted an 
investigation by Vinson & Elkins, assisted by Andersen, the 
very two parties Ms. Watkins urged Mr. Lay and others not to 
include in the review because of clear conflicts of interest. 
Not surprisingly, the report that Vinson & Elkins issued on 
October 15 was so flawed that Ms. Watkins seriously considered 
leaving the company.
    Instead, she persisted in her attempts to convince Mr. Lay 
of the enormity of the challenge facing Enron and the failure 
of outside experts to clearly state the facts. It wasn't until 
October 31 that Ms. Watkins learned that a Special Committee of 
the Board of Directors would examine Enron's questionable 
business practices. This investigation has since become known 
as the Powers Inquiry.
    Ms. Watkins' appearance and testimony before us today will 
be the first time anyone has had the opportunity to question 
her publicly about her own actions and how individuals at the 
highest level in the company responded to her warnings.
    Let me point out that Ms. Watkins is not a whistleblower in 
the conventional sense. She was, and is, a loyal company 
employee, who sought valiantly, and sadly in vain, to get the 
people in charge to face the facts and make the hard choices 
needed to save the company. Ms. Watkins is still an Enron 
employee, and because of this fact has requested a subpoena 
compelling her testimony today.
    I want to point out, however, that she has been responsive 
to and very cooperative with our investigators. And I look 
forward to her sharing with the subcommittee and the American 
public, in her own words, how it came to be that, at the end, a 
once faithful employee concluded that her company was cooking 
the books.
    Ms. Watkins, thank you for your help. We welcome your 
testimony.
    [The prepared statement of Hon. James C. Greenwood 
follows:]
 Prepared Statement of Hon. James C. Greenwood, Chairman, Subcommittee 
                    on Oversight and Investigations
    ``. . . I wish we would get caught. We're such a crooked company.''
    Of all the words in the now famous memo our witness sent to Kenneth 
Lay in August of last year, these might be the most chilling.
    According to this morning's witness, the person who uttered those 
words was a management level employee of Enron, a team player . . . a 
person who probably stood to lose a great deal in any financial 
collapse of Enron.
    What is the truth behind Enron's precipitous collapse?
    This morning we have before us, as our sole witness, Ms. Sherron 
Watkins, Enron's Vice President of Corporate Development. Ms. Watkins 
has become known as THE LONE voice who sought to warn Enron Chairman 
and CEO Ken Lay that Enron was in danger of imploding ``. . . in a wave 
of accounting scandals.''
    Subsequent events have proved the truth of that unvarnished 
assessment.
    But we now understand, from evidence this Committee has gathered in 
its investigation, from the materials contained in the Powers' Report, 
and from testimony of senior Enron officials at last week's hearing, 
that these so-called ``aggressive'' accounting practices were used to 
hide an even larger business failure.
    Last week, we took testimony from two senior Enron officials, 
Jordan Mintz and then treasurer, now Enron President and Chief 
Operating Officer Jeffrey McMahon.
    They too anguished that something was terribly wrong at Enron, but 
were unable to determine the full extent of the problems or the dangers 
ahead.
    Unlike them, our witness this morning was privy to substantially 
more evidence of the accounting practices used to hide various related-
party transactions between Enron and what are known as the Raptor 
entities--special purpose entities owned by LJM2, the limited 
partnership set up and run by Enron and its former Chief Financial 
Officer Andrew Fastow. She will testify today that, in her opinion, 
these transactions were outright manipulations of Enron's income 
statements, booking fictitious income and hiding actual losses.
    Ms. Watkins took her concerns right to the top. She wrote a memo to 
Mr. Lay, on August 15th that SET FORTH IN STARK TERMS the seriousness 
of Enron's situation and the dire consequences that would inevitably 
result if corrective action were not taken . . . and soon.
    We now know that Ms. Watkins also met with Mr. Lay, not just once--
as has been previously disclosed--but two additional times in late 
October of last year, to further share her concerns and to urge that 
Enron restate its income statements for the past two years due to the 
deceptive transactions with the Raptors special purpose entities. Yet, 
until the Powers Report came out two weeks ago, affirming her analysis 
of the Raptors, no one at Enron or Andersen ever sought to address 
these concerns.
    Indeed, the actions taken by Enron in October and November of last 
year to revise its earnings and shareholder equity numbers still fail 
to address many of the concerns raised by Ms. Watkins and confirmed by 
the Powers Report.
    Ms. Watkins also will describe today her meetings and conversations 
with others throughout Enron's corporate hierarchy as well as with 
outside advisors.
    This included Mr. McMahon, Associate General Counsel Rex Rogers, 
Vice President for Human Resources Cindy Olson, James Hecker (an 
Andersen audit partner) and Vinson & Elkins managing partner Joe Dilg.
    Her initial meeting with Mr. Lay in August prompted an 
investigation by Vinson & Elkins, assisted by Andersen--the very two 
parties Ms. Watkins urged Mr. Lay and others NOT to include in the 
review, because of clear conflicts of interest.
    Not surprisingly, the report that Vinson & Elkins' issued on 
October 15th was so flawed that Ms. Watkins seriously considered 
leaving the company. Instead, she persisted in her attempts to convince 
Mr. Lay of the enormity of the challenge facing Enron and THE failure 
of outside experts to clearly state the facts. It wasn't until October 
31 that Ms. Watkins learned that a special committee of the Board of 
Directors would examine Enron's questionable business practices. This 
investigation has since become known as the Powers Inquiry.
    Ms. Watkins appearance and testimony before us today will be the 
first time anyone has had the opportunity to question her publicly 
about her own actions and how individuals at the highest level in the 
company responded to her warnings.
    Let me point out that Ms. Watkins is not a ``whistleblower'' in the 
conventional sense. She was--and is--a loyal company employee, who 
sought valiantly and sadly, in vain, to get the people in charge to 
face the facts and make the hard choices needed to save the company. 
Ms. Watkins, indeed, is still an Enron employee, and because of this 
fact, has requested a subpoena compelling her testimony today.
    I want to point out, however, that she has been responsive to and 
very cooperative with our investigators.
    And I look forward to her sharing with the Subcommittee and the 
American public, in her own words, how it came to be that, at the end, 
a once faithful employee concluded that HER COMPANY WAS COOKING THE 
BOOKS.
    Ms. Watkins, thank you for your help and we welcome your testimony 
today.

    Mr. Greenwood. The Chair recognizes the gentleman from 
Florida, Mr. Deutsch, for his opening statement.
    Mr. Deutsch. Thank you, Mr. Chairman.
    And thank you, Ms. Watkins, for being here. You know, this 
is obviously our continuation of trying to understand what 
happened at Enron and really looking at it and looking at the 
future.
    And I really want to take a couple of seconds just thanking 
the chairmen of the subcommittee and the full committee, but 
also the staff. I think our staff has really done an incredible 
job over the last about 8 weeks or so. This subcommittee has a 
long history in the Congress of looking at issues of really 
cases of failures, of corruption.
    And Chairman Dingell, who led this subcommittee for so many 
years, created almost a historic reputation for this 
subcommittee. And I believe that this hearing and this process 
that we are doing is part of that.
    You know, I've tried to put in perspective what we're doing 
and where we hope to lead. And it's not just an investigation 
for an investigation's sake. But I think all of us at this 
point, we know a lot more than we knew a week ago, a lot more 
than 2 weeks ago. The issues I think are much broader than just 
Enron. The issues really are our capital systems and the 
transparency in the accounting system.
    And I think what we all understand is that our economy, 
which is the strongest economy in the history of the world, one 
of the reasons that we have that economy is transparency in the 
capital markets and the public accounting system. And I don't 
think there's a question that that totally abysmally failed in 
the case of Enron. I mean, I think it's factually accurate that 
it failed. That trying to understand Enron from its public 
documents I think was close to impossible. That those documents 
did not fairly represent the actual state of the company.
    And the Secretary of the Treasury, when Enron initially 
filed for bankruptcy, said that, ``Well, this is not a big 
deal. Companies go bankrupt. They don't go bankrupt. They're 
successful.'' I take great exception to that. There have been 
several major companies in America that have gone bankrupt 
since Enron. Kmart has gone bankrupt, Global Crossing has gone 
bankrupt. But there is a fundamental difference.
    Public markets knew what was going on in those companies. 
It was transparent. It was reflected in equity value. People 
could understand what was going on. In the case of Enron, that 
was not the case. The seventh largest company in America 
vaporized in literally a matter of weeks, and the house of 
cards fell.
    And as we're looking at transaction after transaction after 
transaction--and, again, the number at this point--our 
understanding is there were 4,000 of these partnerships, and 
the Raptors were probably the largest, but just several--that 
the methods seemed to be continuously used again and again.
    I guess the concern we have, and I have--but I think all of 
my colleagues share--is, No. 1, you know, how do we protect our 
capital markets from, No. 1, this never happening again? 
Because I think that is clearly our goal. That when people try 
to understand public companies they can understand. That is the 
whole point. But, No. 2, who else is doing this?
    And, obviously, I don't think you are going to be able to 
tell us that today. But I think that is clearly, you know, a 
critical component that you, as someone who was watching what 
was going on, understood what was going on, and if there are 
other companies out there that are out there doing this, 
obviously people in those companies know it as well.
    And I guess one of the things that hopefully will happen is 
that it will immediately be reflected in statements in their 
filings to the SEC.
    Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the Chairman of the full committee, the gentleman 
from Louisiana, Mr. Tauzin, for an opening statement.
    Chairman Tauzin. Thank you, Mr. Chairman. Let me first 
thank you, Mr. Chairman, and the incredible work of the 
Democratic and Republican joint investigatory staff. You have 
done, I think, our country a great service, and you continue to 
do so with these hearings. And I deeply appreciate--I know I 
speak for all of the members--your personal commitment to this 
task.
    Let me first observe that as a result of these hearings and 
the incredible new information that our witness will provide us 
with today, I think America is learning what went wrong at 
Enron. More importantly, corporate executives across America 
are reassessing corporate management, and board members across 
America are beginning to ask hard questions and to become 
significantly more involved and concerned in the operations of 
their companies.
    The SEC has announced planned reforms. FASB has announced 
planned reforms. This subcommittee and the committee that we 
have assigned the job of jurisdiction over FASB and the 
accounting standards in America, shared by Cliff Stearns of 
Florida, is beginning the process of recommending legislation 
to our full committee.
    Yesterday, the Subcommittee on Energy and Air Quality of 
our committee examined the aspects of the Enron collapse on the 
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 
is a doctrine that says that even if you are totally in the 
right on the highway, if you had the last clear chance to avoid 
the accident, you can still be responsible for what happened.
    Our witness today will talk about how she attempted to give 
the leadership at Enron a last clear chance, not just to do 
what was right in correcting its filings with the American 
public and the investors in this company, but to do what was 
right in getting rid of culprits, in assigning responsibility, 
in accepting responsibility, and in correcting the problems, in 
the hope that there was still a chance to save the corporation 
from the bankruptcy that it now faces.
    We will learn whether the company took that last clear 
chance. I don't think there's anything more prophetic in the 
document we have now received from our witness describing her 
evaluation of the culprits, of what had happened, who was 
responsible for it, and what had to be done if the company was 
going to have a chance to be saved.
    In the last paragraphs of that memo which our witness 
handed Mr. Ken Lay on October 30, I quote, ``My conclusions if 
Ken Lay takes these steps. The bad news, this is horrific. 
Plaintiff attorneys will be celebrating. The trouble facing the 
company will be obvious to all. The good news, the wild 
speculations will slow down, if not cease. Nobody wants Ken 
Lay's head. He is very well respected in business and the 
community.''
    And then she identifies the culprits. ``The culprits are 
Skilling, Fastow, Glisan, Causey, as well as Arthur Andersen, 
and V&E.''
    In the final paragraph, we find, ``My conclusions if we 
don't come clean and restate. All these bad things will happen 
to us anyway. It is just that Ken Lay will be more implicated 
in this than is deserved, and he won't get the chance''--I 
might add, the last clear chance--``to restore the company to 
its former stature.''
    What we are learning and what will be confirmed today, I 
believe, by this witness is that we have witnessed an 
incredible--an incredible collection of not only miscreants and 
potential criminal behavior, but a series of abuses, of 
accounting standards and practices, a series of abuses of the 
American public investing--the investing public in its 
confidence in this company, in its knowledge about its income 
and its debt, abuse that led to a horrible loss to its 
employees, not only their jobs but of their pensions, and 
abuses that have rocked Wall Street and the investment 
communities and the corporate boards of America.
    If there is any good news in all of this, it is that we are 
finding out what went wrong. We are really getting to the 
bottom of it, and we are learning how we might turn the corner 
and begin to make improvements in our laws and our rules to 
help make sure that no other company ever experiences this 
again.
    If there is other good news--and I say this with deep 
appreciation, Ms. Watkins--it is the knowledge that there are 
people like you in this world who are willing to try to make it 
right, who understand their fiduciary responsibility to their 
company, and are willing to go out on a limb, as you did, to 
make sure that people who could make a difference, who could 
change things, who could make it right, and who could save that 
company, did have at least a last clear chance to do it.
    And there is one other good news. I have a perspective that 
I think more and more members are beginning at least to share. 
There may be other problems in other companies in America. This 
is incredibly an aberration. I have never, in all of our years 
of watching companies succeed and fail and bankruptcies--and 
there have been some mighty big bankruptcies in this country--
seen anything like this.
    When we are through examining it and responding to it, I 
think the American public will be well served by the process of 
learning from this experience and the changes we're going to 
make. And the witness who comes before us will deserve, again, 
the appreciation of the American public for doing what she did 
and for standing out the way she has.
    And I deeply appreciate your being here, Ms. Watkins.
    Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman and, before 
recognizing the ranking member of the full committee, would 
announce that we have apparently two votes before us now. So 
after Mr. Dingell's opening remarks, we will recess and make 
these two votes and come back.
    Mr. Dingell. I am willing to do it whichever way you like, 
Mr. Chairman--go now or go later.
    Mr. Greenwood. Well, I would welcome the gentleman's 
opening statement right now, and the other members----
    Mr. Dingell. Very well.
    Mr. Greenwood. [continuing] are free to go.
    Mr. Dingell. Mr. Chairman, thank you for holding this 
hearing, and I commend you and the committee for continuing the 
investigation into the actions that caused Enron, once the 
seventh largest company in the country, to become the largest 
bankruptcy in the history of the country.
    Each hearing that we have held, and I expect we will be 
holding more, reveals more of the internal corruption that 
destroyed Enron. This corruption swept in Enron's top 
management as well as its in-house and outside accountants and 
lawyers, all of whom reviewed and approved the transactions we 
discuss today. All of them apparently knew that Enron was 
pledging its stock to guarantee its own hedges with an alleged 
outside party.
    This is clearly a violation of all accounting procedures 
and principles, and apparently one that the Houston office of 
Arthur Andersen approved over the opposition of its Chicago 
office. It led directly to a $1.1 billion reduction in Enron's 
equity and a $700 million reduction in earnings. These same 
people knew that a partnership run by Enron's chief financial 
officer was benefiting greatly from these transactions. All of 
them, and an unquestioning Board of Directors, did nothing.
    I want to thank Ms. Watkins for the heroic efforts she made 
to help Enron avoid this, in her own words, ``implosion in a 
wave of accounting scandals.'' Ms. Watkins took the actions 
that should have been taken months before by many others, both 
inside and outside Enron, with fiduciary duties to the company 
and to its shareholders. I applaud her. It is never easy to be 
a whistleblower, particularly in a company where the mentality 
did not encourage negative news and negative views. Bearers of 
bad news are often punished.
    Today, we are going to concentrate on the Raptor 
transactions, which have been described in the Report of the 
Special Committee as ``extremely complex Raptor structured 
finance vehicles'' designed to allow Enron to ``avoid 
reflecting losses in the value of some merchant investments in 
its income statement.'' We cannot fully understand the 
structure of these vehicles, but we know they are breathtaking 
in scope and breathtaking in audacity and in their impact.
    These four vehicles resulted in a write-down of equity, the 
restatement of earnings, and the credit rating reduction that 
sank Enron. Although the Raptors were supposed to take the risk 
of losses in merchant investments, they actually guaranteed by 
Enron's stock and used the appreciation in Enron's stock value 
to increase earnings. This is a violation of all basic 
accounting principles.
    The accounting shenanigans that permitted such returns were 
instigated and/or approved by Andrew Fastow, Enron's Chief 
Financial Officer; Richard Causey, Enron's Chief Accounting 
Officer; Rick Buy, Enron's Chief Risk Management Officer; 
Arthur Andersen; and by Vinson & Elkins, Enron's outside 
counsel.
    The Raptors also benefited greatly LJM2, a special purpose 
entity run by Mr. Fastow. Although they were supposed to hedge 
potential losses in some of Enron's merchant investments, they 
actually repaid LJM2's total investment plus some very generous 
returns with Enron taking the total risk. As described in an 
LJM2 presentation to its partners in October of 2000, Raptor 
III, for example, paid out $41 million on a $30 million 
investment in just 8 days. This is an amazing 2,503 percent 
annual return for those investors.
    I think it is important to note for the record, Mr. 
Chairman, that Mr. Fastow, Mr. Causey, Mr. Buy, and Arthur 
Andersen have all been removed from their positions, perhaps 
too late, but gone anyway.
    But Enron has supported Vinson & Elkins, which approved 
every single one of these deals for Enron, and then papered 
over Ms. Watkins' allegations in a report finding not a single 
transaction with LJM was ``contrary to Enron's best 
interests,'' to this day. The law firm's written report was 
issued just 1 day before Enron announced its equity write-down 
and earnings reductions based on the very Raptor transactions 
that Ms. Watkins brought to Kenneth Lay's attention.
    I think it would be quite appropriate to devote a hearing 
to the role Enron's legal counsel played in this fiasco that 
took $70 billion from the pockets of unsuspecting shareholders 
and employees. And I note that their role in this does no 
credit to the profession of which I take pride in being a part.
    But today I look forward to hearing from an extraordinarily 
courageous woman who has been a bright spot in an otherwise 
sorry and outrageous saga. Ms. Watkins, we thank you.
    Mr. Chairman, I thank you.
    [The prepared statement of Hon. John D. Dingell follows:]
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Mr. Chairman, thank you for holding this hearing as the Committee 
continues its investigation into the actions that caused Enron, once 
the seventh largest company in the country, to become the largest 
bankruptcy in history. Each hearing that we have held--and I expect 
that we will hold several more--reveals more of the internal corruption 
that destroyed Enron. This corruption swept in Enron's top management, 
as well as its in-house and outside accountants and lawyers, all of 
whom reviewed and approved the transactions that we are discussing 
today. All of them apparently knew that Enron was pledging its stock to 
guarantee its own hedges with an alleged outside party.
    This was a violation of all accounting procedures and apparently 
one that the Houston office of Arthur Andersen approved over the 
opposition of its Chicago office. It led directly to both a $1.1 
billion reduction in Enron's equity and a $700 million reduction in 
earnings. These same people knew that a partnership run by Enron's 
chief financial officer was benefitting greatly from these 
transactions. All of them, and a unquestioning board of directors, did 
nothing.
    I want to thank Ms. Watkins for the heroic efforts she made to help 
Enron avoid this--in her own words--``implosion in a wave of accounting 
scandals.'' Ms. Watkins took the actions that should have been taken 
months before by others both inside and outside Enron, with fiduciary 
duties to the company and its shareholders. I applaud her. It is never 
easy to be a whistleblower, particularly in a company where the 
mentality did not encourage negative news. Bearers of bad news are 
often punished.
    Today we are going to concentrate on the Raptor transactions, which 
are described on the report of the special committee as ``extremely 
complex Raptor structured finance vehicles'' designed to allow Enron to 
``avoid reflecting losses in the value of some merchant investments in 
its income statement.'' We cannot today fully understand the structure 
of these vehicles, but we know that they are breathtaking in their 
scope and audacity--and in their impact. These four vehicles resulted 
in the write-down of equity, the restatement of earnings, and the 
credit rating reduction that sank Enron. Although the Raptors were 
supposed to take on the risk of losses in merchant investments, they 
were actually guaranteed by Enron stock and used the appreciation in 
Enron stock's value to increase earnings.
    This is a violation of basic accounting principles. The accounting 
shenanigans that permitted such returns were instigated or approved by 
Andrew Fastow, Enron's chief financial officer; Richard Causey, Enron's 
chief accounting officer; Rick Buy, Enron's chief risk management 
officer; Arthur Andersen; and Vinson & Elkins, Enron's outside counsel.
    The Raptors also benefited greatly LJM2, a special purpose entity 
run by Mr. Fastow. Although they were supposed to hedge potential 
losses in some of Enron's merchant investments--they actually repaid 
LJM2's total investment plus some very generous returns with Enron 
taking the total risk. As described in an LJM2 presentation to its 
partners in October 2000, Raptor III, for example, paid out $41 million 
for a $30 million investment in just eight days. This was an amazing 
2,503 percent annual return for the investors.
    I think it is important to note for the record, Mr. Chairman, that 
Mr. Fastow, Mr. Causey, Mr. Buy, and Arthur Andersen have all been 
removed from their positions. Perhaps too late but gone anyway. But 
Enron has supported Vinson & Elkins, which approved every single one of 
these deals for Enron and then papered over Ms. Watkins' allegations in 
a report finding that not a single transaction with LJM ``was contrary 
to Enron's best interests,'' to this day. The law firm's written report 
was issued just one day before Enron announced its equity write-down 
and earnings reductions based on the very Raptor transactions that Ms. 
Watkins brought to 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.
    But today, I look forward to hearing from an extraordinarily 
courageous woman who has been a bright spot in an otherwise sorry and 
outrageous saga.

    Mr. Greenwood. The Chair thanks the gentleman, and the 
committee will recess for approximately 20 minutes.
    [Brief recess.]
    Mr. Greenwood. The committee will come to order. The Chair 
recognizes the gentleman from Florida, Mr. Stearns, for an 
opening statement.
    Mr. Stearns. Thank you, Mr. Chairman.
    And, Ms. Watkins, obviously, like other members, we would 
like to take the opportunity to welcome you to our committee, 
and we are pleased that you are willing to testify.
    Your status is perhaps not, as the press might outline, 
that you are a whistleblower. You are not the traditional 
whistleblower in the sense that you are still working for the 
company. And the way you did it was commendable, in the sense 
that you went to different people and talked to them, and you 
asked for a transfer to another part of the company. But in a 
sort of semantic way, you are not a whistleblower in the 
traditional sense, and I am not sure if we have a word for--
which describes when you stay within the company and work as 
you did, but it is--I think it was very effective and helpful 
for us.
    I believe that employees such as yourself in no small 
measure contribute to the integrity of our commercial system by 
insisting that all participants play by the rules. And I think 
all Americans thank you for what you did.
    Second, I want to explore a number of substantive issues 
which you raise in your August 15, 2001, memo to Mr. Lay that 
touched upon the efficacy of our financial accounting 
standards. As part of the full committee's Enron investigation, 
Chairman Tauzin has asked my subcommittee, which is Commerce, 
Trade, and Consumer Protection, to examine our accounting 
standards in light of the Enron collapse.
    As a matter of fact, my subcommittee just concluded a 
hearing which examined the adequacy and responsiveness of 
existing accounting standards. I believe, as it seems you may 
have believed also when you wrote the memo to Mr. Lay, that 
there is ample evidence that Enron, at a minimum, confused, 
obfuscated its true financial health from the investing public 
by using or possibly misusing financial accounting standards.
    I now think there is enough evidence to suggest that Enron 
did not use special purpose entities such as Raptor as 
Generally Accepted Accounting Principles would authorize it, 
but they used it to hide poor performing merchant investments, 
so that Enron would not have to show the declining values that 
existed on their income statement.
    Moreover, it appears that Enron reported the transfer of 
assets to SPEs as a sale and recognize them as such in its 
income statement, while it held the third party investors in 
the SPE harmless against the risk associated with those assets 
by pledging its stock as collateral.
    I believe this is what you alluded to in your memo when you 
wrote, and I am quoting, ``If adequately explained, the 
investor would know that the entities described in our related 
party footnote''--and I assume you meant footnote number 16 of 
Enron's 2000 annual report--``are thinly capitalized, the 
equity holders have no skin in the game, and all of the value 
in the entities come from underlying values of the derivatives. 
Unfortunately, in this case, there is a big loss in Enron stock 
and NP.''
    So during the question and answer period, I hope we can 
further explore that. I, again, thank you very much for 
testifying.
    Mr. Greenwood. The Chair thanks the gentleman, and would 
urge each of the members, if they could, to keep their opening 
remarks as brief as possible, so that we can move forward with 
the witness in view of the fact that we have votes and members 
will be leaving.
    The Chair recognizes the gentleman, Mr. Stupak, for an 
opening statement.
    Mr. Stupak. Thank you, Mr. Chairman.
    I want to thank you, Ms. Watkins, for coming here today. 
Many of my colleagues and I truly appreciate your brave actions 
in informing Mr. Lay about the shady accounting that was going 
on in Enron. It is a shame that he and others on the Board, and 
in leadership positions at Enron, did not see these problems 
much earlier. Even now, there is a denial and a lack of 
acceptability of responsibility by Enron officials in all of 
the hearings we have had thus far to date.
    It is also a shame that even after you provided Mr. Lay 
with a road map of what was going on in Enron, as the Powers 
Report put it, they decided to hire inside counsel to do the 
investigation into the allegations. That counsel, Vinson & 
Elkins, was the very law firm that was responsible for 
providing advice on many of the questionable transactions.
    It was no surprise that Vinson & Elkins, in summarizing 
their findings, stated that Ms. Watkins' concerns were 
thoroughly investigated but, quoting now, ``found not to raise 
new or undisclosed information.''
    Mr. Chairman, we know that once a truly independent firm, 
one from outside the Enron family, was allowed to review the 
transactions, they came to a very different conclusion.
    Ms. Watkins, you mentioned in your interview with committee 
staff that when you met with Mr. Lay to discuss your memo you 
felt like the child who tells the emperor that he has no 
clothes. So I went out and got the book ``The Emperor's New 
Clothes.'' And while you are to be commended for coming forward 
in August of 2001, there was another emperor then, Jeffrey 
Skilling, who was running Enron prior to your August 15 letter. 
And I have a feeling he knew he had no clothes, and that is 
why--or that is what prompted his resignation.
    I would like to take just a moment to read you, if I may, 
the final page of Hans Christian Andersen's story. I don't 
believe he is any relation to Arthur Andersen.
    But the last page of the story goes like this. It says, 
``The emperor shivered for it seemed they were right. But what 
could he do? After all, he was the emperor, and people expected 
him to be dignified. I must continue to end the procession, he 
thought. So the emperor stood up just as tall, and his servants 
went on carrying the train that wasn't there.''
    Mr. Chairman, reading this, I can't help but think of our 
last hearing last week with Mr. Skilling in his own parade, and 
his servants, Mr. Winokur and Mr. Jaedicke, following behind 
him carrying his non-existent robe.
    I know we are all anxious to hear Ms. Watkins' testimony. 
So I am going to take your advice. I look forward to your 
answering the questions we will put to you today.
    So, Mr. Chairman, with that, I will yield back my time.
    Mr. Greenwood. The Chair thanks the gentleman, and thanks 
him for not showing the picture of the unclothed emperor.
    The Chair recognizes the gentleman from North Carolina, Mr. 
Burr, for an opening statement.
    Mr. Burr. I thank the Chairman.
    Mr. Chairman, we have before us today a witness who I can--
I believe can provide the most insight and helpful testimony we 
have yet to hear in piecing together this affair. With her 
background as a CPA and a former employee of Andersen, many 
have described Sherron Watkins as being unique in her ability 
to bring light on this charade.
    I would add one more uniqueness about Ms. Watkins that was 
lacking in all of the other individuals who have chosen to come 
before this committee--to stop the bleeding at Enron, to moral 
compass. In her now famous August memo, she brought to light 
what she saw as accounting improprieties, most noticeably in 
the Raptor transactions.
    Today she will share with us her observations and concerns 
that she raised with Enron executives, most notably Ken Lay, 
concerns that fell on deaf ears at the top of the company, 
while simultaneously this one-time Giant fell to its knees.
    Mr. Chairman, I can detail, but others have done that. I 
think what best details the situation at Enron were the list of 
songs by the Texas native who just passed away, Waylon 
Jennings. One song might be ``I Ain't Living Long Like This,'' 
``Wanted: The Outlaws,'' ``Momma Don't Let Your Babies Grow Up 
to be Cowboys,'' or just ``Some Good Ole Boys.''
    And Andersen could best be described as ``Are You Sure Hank 
Done it That Way?''
    However, Waylon's ballad ``A Good-Hearted Woman'' could not 
better describe the witness we have before us today. In all 
seriousness, thank you, Sherron, for appearing before us. You 
are doing this committee and your fellow Enron employees a 
great service.
    In the New Testament, when Peter stepped out of the boat 
and walked on water, the miracle wasn't the fact that he walked 
on water. No, the miracle was that he chose to put his faith in 
God and step out of the boat, a boat which was his protection 
but was bound to sink in troubled water.
    Thank you for choosing to step out of the boat today.
    I yield back.
    [Additional statements submitted for the record follow:]
Prepared Statement of Hon. Steve Largent, a Representative in Congress 
                       from the State of Oklahoma
    Thank you Chairman Greenwood. As many of you know, this is my last 
day in Congress and I want to again, very briefly, thank the Chairman 
and the other members of the committee for their hard work and 
friendship over the years. Serving with you has been a high honor and 
privilege.
    When I ran for Congress in 1994 I believed, and still believe, that 
oversight was one of the most important functions of Congress. Much of 
the business of making sure our government is responsive and efficient 
happens in this committee. Over the years, this committee has dealt 
with many serious issues, but few have been more distressing, 
unexpected--and even shocking--than the scandal surrounding the 
collapse of Enron, the seventh largest corporation in the United 
States.
    This committee has a duty to displaced Enron workers, and to the 
American people, to connect as many dots as possible so we can 
determine what happened in this collapse and take whatever steps are 
necessary to ensure that something like this does not happen again. In 
the course of these hearings, as we try to untangle what appears to be 
a web of deceit, we may determine that this drama is nothing more than 
a story of simple robbery. It does appear, at this point, that Enron's 
collapse was not brought about by anything other than those in the 
company who carefully constructed their own house of cards. Yet, I have 
full confidence that this committee will, in a careful and measured 
way, scour the laws that may have been circumvented or disobeyed and 
tighten them so this type of fiasco can be avoided in the future.
    Again, I thank the Chairman and the other members for their 
friendship and dedication to serving the public on this committee. I 
look forward to hearing today's testimony and, in particular, I want to 
commend Mr. Sherron Watkins for her courage in coming forward with her 
statement.
                                 ______
                                 
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Chairman Greenwood, your and the staff's diligence in conducting 
these hearings must be commended. Although we have much more hard work 
ahead of us, there should be no question that this Subcommittee's 
investigation into Enron's financial collapse has begun to reveal what 
happened here and is serving a great public service.
    Let me also note that the Committee continues to move on other 
fronts to examine whether legislative remedies are in order.
    Earlier this morning we began our Commerce, Trade, and Consumer 
Protection Subcommittee hearing, which is examining whether current 
financial accounting standards sufficiently protect investors. 
Yesterday, we held an Energy and Air Quality Subcommittee hearing that 
examined the impact of Enron's collapse on energy markets.
    Yesterday's energy hearing revealed a fact that underscores a point 
I want to make about today's hearing. In the energy hearing, we learned 
that, for all its size and market power, Enron ultimately had little 
effect on energy markets when it dramatically failed; the marketplace 
quickly adjusted, supplies were not significantly disrupted, neither 
were energy prices. This was some good news amidst all the sad news.
    Our O&I hearing, which today marks its third day of testimony 
focused on Enron, has revealed a deceptively simple lesson: that self-
interested individuals--working in an ill-managed environment--were 
able to construct self-enriching schemes that effectively destroyed a 
company. This, in many respects, was an aberration, certainly not 
representative of how most companies and corporations operate in 
America, and certainly not representative of everybody who works in 
such companies.
    This morning, we have before us Sherron Watkins, one of several 
senior Enron employees we have come across in our investigation who 
attempted to call attention to these questionable partnerships and sham 
dealings. This, too, is a good news story, because it shows that, even 
among the culture of greed and corruption that appears to have 
permeated so many within Enron's management, there were loyal, honest 
employees who attempted to stand up and put matters right. It seems, in 
the case of Enron, that there were not enough of these people in 
positions of influence. Clearly those at the top, or in senior 
management, did not stand up.
    But I believe we should acknowledge that some senior employees did 
not try to hide matters; they did not shirk their duty to the company; 
they did not work to deceive the investing public. To the contrary, 
they stood up for their company, their fellow employees, and the 
investing public, at great personal risk. They did the right thing, 
when it would have been so easy to close their eyes to it all.
    Ms. Watkins, as Chairman Greenwood pointed out, was so concerned 
about what she saw in Enron's dealings with these related partnerships 
that she went to the person in charge of it all, Chairman and CEO Ken 
Lay, believing that would save the company.
    Her communication did set off action and inquiry within the 
company, but these were not enough to correct matters--indeed some 
action aimed to hide matters further from public view. This morning I 
look forward to learning more about the people involved in these 
decisions. These are people who, we now understand, did not believe Ms. 
Watkins, or who minimized her complaints. I look forward to discussing 
some of this with her this morning.
    In an interview with Committee investigators, Ms. Watkins has 
indicated that there are more widespread financial shenanigans that 
have yet to be reported. Also, it turns out she was more active in 
communicating concerns to the top than had previously been realized. I 
look forward to learning more about her late October conversations with 
Mr. Lay and other individuals--conversations on the eve of Enron's 
collapse.
    Ms. Watkins, welcome. I appreciate your cooperation with this 
Committee and hope your testimony will help us get even closer to the 
truth.

    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes himself for 10 minutes for questions.
    Ms. Watkins, when you and I--oh, I am sorry. I am sorry. It 
is a good thing we have staff here. Ms. Watkins, you are aware 
that this committee is holding an investigative hearing, and 
when holding an investigative hearing it is our practice to 
take testimony under oath. Do you have any objections to taking 
your testimony under--giving your testimony under oath today?
    Ms. Watkins. No, I don't.
    Mr. Greenwood. Okay. The Chair then advises you that under 
the rules of this committee, and the rules of the House, you 
are entitled to be advised by counsel. Do you choose to be 
advised by counsel today?
    Ms. Watkins. Yes, I do.
    Mr. Greenwood. And would you identify your counsel for me?
    Ms. Watkins. Mr. Philip Hilder.
    Mr. Greenwood. Okay. Sir, would you spell your last name, 
please?
    Mr. Hilder. Hilder, sir. H-I-L-D-E-R.
    Mr. Greenwood. Thank you.
    In that case, if you would please rise and raise your right 
hand, I will give you the oath.
    [Witness sworn.]
    Mr. Greenwood. You may be seated. You are under oath, and 
you are recognized for your opening remarks. You probably want 
to pull that microphone over to you, and it is fairly 
directional.

   TESTIMONY OF SHERRON WATKINS, VICE PRESIDENT OF CORPORATE 
                 DEVELOPMENT, ENRON CORPORATION

    Ms. Watkins. Okay. Good morning, Mr. Chairman, members of 
the subcommittee. I am Sherron Watkins. And thank you for the 
opportunity to address the subcommittee this morning.
    Mr. Greenwood. Pull it up a little closer and speak right 
into it. There you go.
    Ms. Watkins. I am currently employed at Enron Corporation 
as a Vice President. By way of background, I hold a master's 
degree in professional accounting from the University of Texas 
at Austin, and I have been a certified public accountant since 
1983.
    I began my career in 1982 at Arthur Andersen as an auditor. 
I spent 8 years at Andersen in both the Houston and New York 
offices. I joined New York-based MG Trade Finance in 1990 to 
manage their portfolio of commodity-backed finance assets. I 
held that position until October 1993.
    In October 1993, I was hired by Mr. Andrew Fastow and moved 
back to Houston to manage Enron's newly formed partnership with 
CalPERS, the California Public Employee Retirement System. The 
partnership was the Joint Energy Development Investments 
Limited Partnership, or JEDI. I held the JEDI management 
portfolio position until the end of 1996.
    From 1997 until early 2000, I worked for Enron 
International, primarily in the mergers and acquisitions group, 
which is also known as the corporate development group. In 
early 2000, I transferred to Enron Broadband Services. I worked 
there until June of 2001 in a variety of roles.
    In mid to late June of 2001, I went to work directly for 
Mr. Fastow, assisting in the corporate development work that 
had been put under his supervision after Cliff Baxter resigned 
in May of 2001. I worked for Mr. Fastow in this new role until 
late August 2001. I have since been reassigned into the human 
resources group with a variety of assignments.
    While working for Mr. Fastow in 2001, I was charged with 
reviewing all assets that Enron considered for sale and 
determining the likely economic impact of sale. As part of the 
sale analysis, I reviewed the estimated book values and market 
values of each asset.
    A number of assets were hedged with an entity called 
Raptor. Any asset that was hedged should, for the most part, 
have a locked-in sales value for Enron, meaning that despite 
current market prices Enron should realize the hedged price 
with Raptor. It was my understanding that the Raptor special 
purpose entities were owned by LJM, the partnership run by Mr. 
Fastow.
    In completing my work, certain Enron business units 
provided me with analyses that showed certain of the hedged 
losses that had been incurred by Raptor were actually coming 
back to Enron. The general explanation was that the Enron stock 
backstopping the Raptor hedge had declined in value such that 
Raptor would have a shortfall and would be unable to fully 
cover the hedge price that it owed to Enron.
    I was highly alarmed by the information I was receiving. My 
understanding as an accountant is that a company could never 
use its own stock to generate a gain or avoid a loss on its 
income statement. I continued to ask questions and seek 
answers, primarily from former co-workers in the global finance 
group, or in the business units that had hedged assets with 
Raptor. I never heard reassuring explanations.
    I was not comfortable confronting either Mr. Skilling or 
Mr. Fastow with my concerns. To do so I believed would have 
been a job terminating move.
    On August 14, 2001, I was informed of Mr. Skilling's sudden 
resignation and felt compelled to inform Mr. Lay of the 
accounting problems that faced Enron. I sent Mr. Lay an 
anonymous letter on August 14, 2001, in response to a request 
for questions for an upcoming all-employee meeting to be held 
August 16 to address Mr. Skilling's departure.
    At the all-employee meeting, Mr. Lay commented that our 
visions and values had slipped, and that if any employee was 
truly troubled by anything at Enron, please bring those 
concerns to him or any number of the top management, including 
Cindy Olson, Steve Kean, and others.
    On August 16, I met with Ms. Olson to show her a copy of 
the letter and discuss it with her. She encouraged me to meet 
with Mr. Lay personally. Since Mr. Lay was traveling through 
the rest of the week, she said the meeting would probably take 
place the week of August 20.
    I was concerned that Mr. Lay was planning to fill the 
Office of the Chair over the weekend and that he might choose 
Mr. Fastow or Rick Causey, the Chief Accounting Officer. To 
voice my concerns, I met with Rex Rogers, Enron's Associate 
General Counsel, on Friday, August 17, 2001. I provided Mr. 
Rogers with a version of the anonymous letter as well as two 
additional memos, all of which are part of the seven pages that 
this committee discovered in mid January 2002.
    On Monday, August 20, 2001, Mr. Lay's assistant scheduled a 
meeting for me to meet with Mr. Lay that following Wednesday, 
August 22, 2001. I subsequently held discussions with a former 
mentor at Andersen, James Hecker, and a long time friend and 
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 
22, 2001. The meeting lasted just over one half hour. I 
provided him with five memos I had drafted to help explain the 
problems facing the company. These five memos constitute the 
seven pages this committee discovered and subsequently 
disclosed on January 14, 2002. Additionally, I provided Mr. Lay 
an analysis of the Raptor entity economics and a presentation 
prepared by Enron's risk assessment and control group.
    I primarily used the memo titled ``Summary of Raptor 
Oddities'' as talking points with Mr. Lay. My main point to Mr. 
Lay was that by this time Raptor owed Enron in excess of $700 
million under certain hedging agreements. My understanding was 
that the Raptor entities basically had no other business aside 
from these hedges. Therefore, they had collectively lost over 
$700 million.
    I urged Mr. Lay to find out who lost that money. If he 
discovered that this loss would be borne by Enron shareholders 
via an issuance of stock in the future, then I thought we had a 
very large problem on our hands. I gave Mr. Lay my opinion that 
it is never appropriate for a company to use its stock to 
effect its income statement.
    At the conclusion of the meeting, Mr. Lay assured me that 
he would look into my concerns. I also requested a transfer as 
I was uncomfortable remaining as a direct report to Mr. Fastow.
    I intend to fully cooperate with the subcommittee, and I 
now welcome the opportunity to answer any questions the members 
may have at this time.
    Mr. Greenwood. Thank you very much for your testimony, Ms. 
Watkins. We all thank you again for being here.
    The Chair recognizes himself for 10 minutes for inquiry.
    Ms. Watkins, when we spoke yesterday you described that in 
your earlier days working for Mr. Fastow, the special purpose 
entities were basically legitimate. They seemed to be garden 
variety, securitized entities that were designed to serve 
legitimate financial purposes with which you had no qualms. And 
as you explained, Condor was one of those early SPEs that fit 
that category.
    As you described your time with the company, it seemed to 
me that it was like the story of the frog in the pot on the 
stove. That gradually, largely directed by Mr. Fastow, the 
rules of the game began to change, and the legitimacy of these 
entities and partnerships began to be stretched until finally 
we end up with something like the Raptors, which seem to serve 
no legitimate, and perhaps not even a legal, purpose. It seemed 
to me that the difficulty was that the corporate culture was 
slowly acclimated to this transition from what was quite 
legitimate, to what was clearly not legitimate.
    Let me ask you this specific question. Is it your opinion 
that the Raptor transactions were nothing more than sheer 
income statement manipulation? And if you do think that, why do 
you say so?
    Ms. Watkins. That is my opinion, and it is my opinion 
because true economic risk was not passed to a third party. 
Raptor owed Enron in excess of $700 million, and there was not 
an outside third party that bore that loss. It was going to be 
borne by Enron's shareholders by an issuance of stock in the 
future.
    Mr. Greenwood. Explain how that affected the income 
statements.
    Ms. Watkins. The Raptor hedges were locking in, supposedly, 
sales value that Enron had on equity investments that it had 
made. The investments that were probably the more volatile was 
the tech investment in Avici and the New Power Company, a 
startup that Enron had done.
    Those investments were hedged with Raptor. They had dropped 
significantly in value, and in the related party footnote in 
2000 it mentions that Enron had recognized $500 million of 
revenue from the special entities' offsetting of corresponding 
writedown in the equity investment portfolio of Enron.
    I think that tended to make readers think that it was a 
$500 million gain offset by a $500 million loss. Therefore, 
zero impact on the income statement. However, without the 
Raptor transactions, Enron would have had a $500 million loss 
not covered by any gains running through the 2000 income 
statement.
    Mr. Greenwood. As you came to understand this, prior to 
your first meeting with Mr. Lay, did you discuss these concerns 
with other employees at Enron?
    Ms. Watkins. As I was doing my work and looking at these 
assets hedged by Raptor, my concern was that it seemed to be 
just common knowledge that the Raptor losses were backstopped 
by Enron stock. And an analysis was always looked at, what's 
the value of Enron stock compared to the money Raptor owes us? 
And I was shocked that people could explain this to me with no 
concern in their voice, like there was some magic structure 
that Enron and Andersen had come up with to make this work.
    Mr. Greenwood. Did you get the impression, or was it said 
to you by others that they thought that this was perfectly 
legitimate, or that it was shaky, but everyone is going along 
with the deal?
    Ms. Watkins. There were people like Mr. McMahon and others 
that had expressed concerns about LJM and the transactions 
Enron was doing with LJM. But for the most part, people seemed 
to think there was some accounting rule that was allowing this 
to be acceptable. It was very common knowledge. It wasn't 
hidden.
    Mr. Greenwood. Did you watch Mr. Skilling's testimony 
before this subcommittee last week?
    Ms. Watkins. Yes, I did.
    Mr. Greenwood. Would you care to comment on how you reacted 
as you heard Mr. Skilling describe his awareness or lack of 
awareness or understanding of these transactions?
    Ms. Watkins. Well, I would like to use Mr. Skilling's own 
words to describe what I thought about his testimony. He was 
interviewed by Enron's in-house newsletter in 2001. In the 
interview, Mr. Skilling was asked, ``What is the best advice 
you ever received?'' And his reply was, ``If it doesn't make 
any sense, don't believe it.''
    Mr. Greenwood. Did you confront Mr. Skilling himself with 
this concern?
    Ms. Watkins. No, sir, I did not.
    Mr. Greenwood. And why did you not?
    Ms. Watkins. I did not want to do that without the safety 
net of a job in hand. I felt like it would be an immediate job 
terminating move. Frankly, I thought it would be fruitless, 
that nothing would happen.
    Mr. Greenwood. Did you have other experiences, or the 
experiences of others that led you to believe you might be 
putting your job on the line if you were to confront Mr. 
Skilling, or Mr. Fastow for that matter, with these concerns?
    Ms. Watkins. Basically, it appeared that the Raptor 
transactions had been going on for a number of years. My 
understanding was that Mr. Skilling was fully aware of them. He 
is a very hands-on manager. I had also heard rumors that people 
as close to him as Mr. Baxter had complained to him, and he had 
done nothing. So I really felt it was fruitless to go to Mr. 
Skilling.
    Mr. Greenwood. Do you think it is possible that Mr. 
Skilling was unaware of the nature of these transactions?
    Ms. Watkins. No, I do not.
    Mr. Greenwood. Could you tell us why you think that is not 
possible? He seemed to have forgotten about them.
    Ms. Watkins. He is a very intense, hands-on manager. He was 
very involved in Mr. Fastow's endeavors, and I find it very 
hard to believe that he was not fully aware of transactions 
with Mr. Fastow's partnerships.
    Mr. Greenwood. Now, did Mr. Fastow learn that you had 
communicated your concerns to Mr. Lay?
    Ms. Watkins. I did find out that he found out I was the 
writer of the anonymous letters, and that I had also met with 
Mr. Lay. I found that out August 30, 2001.
    Mr. Greenwood. And how did he respond? Did he name you 
Employee of the Month?
    Ms. Watkins. Well, Ms. Olson told me that she and Ken Lay 
were both highly alarmed by Mr. Fastow's reaction. He wanted to 
have me fired. He wanted to seize my computer.
    Mr. Greenwood. He wanted to have you fired? He told people 
he wanted to have you fired?
    Ms. Watkins. That is what Ms. Olson told me.
    Mr. Greenwood. Okay. And he wanted your computer?
    Ms. Watkins. Yes.
    Mr. Greenwood. And did he obtain your computer?
    Ms. Watkins. He did, but Ms. Olson basically said, ``Let me 
send you to your office with an IT person. Here is a new 
laptop. Transfer whatever files you want on to the new one. 
Delete whatever ones you want to on the old one. We will just 
hand him the hardware.'' She said, ``You don't mind doing that, 
do you?'' And I said, ``No, I don't.''
    Mr. Greenwood. So you pulled a fast one on Andy. Let us get 
to your face-to-face meeting with Mr. Lay. Could you describe 
for the committee how he reacted and what your impression of 
his reaction is, and particularly with regard to what extent it 
seemed to you, based on his comments, his reactions, that the 
news that you were bringing to him was surprising or not 
surprising, was alarming or not alarming, and to what extent it 
seemed to you that he had an appropriate response that would 
have convinced you, given you some comfort that he was, in 
fact, going to deal with this.
    Ms. Watkins. Well, he tried to put me at ease. He knew this 
was probably difficult for me to do, and he recognized that. I 
handed him my set of documents and directed him to the Summary 
of Raptor Oddities document as a talking point. He seemed to 
take it very seriously. In fact, when he read the quote that I 
put in that memo about the manager level employee saying we are 
such a crooked company, he winced. You know, that seemed a 
painful comment to him.
    He was aware that these Raptor transactions had been 
presented to the Board, but I said my understanding of the way 
these things are generally presented, it is high level 
summaries, and I am not so certain that the true nature was 
fully disclosed. And he contended that I might be right, and by 
the end of the discussion, you know, he certainly said he would 
look into it and order an investigation, and asked me, you 
know, what could he do for me, which is when I requested the 
transfer out of Mr. Fastow's group.
    Mr. Greenwood. Okay. My time has expired.
    The Chair recognizes the gentleman, Mr. Dingell, for 10 
minutes for purposes of inquiry.
    Mr. Dingell. Mr. Chairman, I thank you. Again, I commend 
you.
    Ms. Watkins, I want to commend you also. I hope you 
understand these questions are friendly, but our time is 
limited, so I, therefore, have to ask them in a way that gives 
you an opportunity to answer, where possible, yes or no.
    I will be working from a document which is entitled 
``Outlines of Points to Discuss with Ken Lay and Jim Derrick.''
    Ms. Watkins, you specifically asked that Vinson & Elkins 
not do this investigation. That was because they had approved 
many of the LJM deals as attorney for Enron, is that correct?
    Ms. Watkins. Yes, sir, it is.
    Mr. Dingell. Now, I want to refer you to the document that 
I have just mentioned. This is a document which was prepared by 
Vinson & Elkins on the result of their investigation, and Jim 
Derrick is Enron's General Counsel, is he not?
    Ms. Watkins. Yes, he is.
    Mr. Dingell. Ms. Watkins, and in this document it says that 
Jim Derrick decided not to engage an independent accountant as 
you had recommended. Is that correct?
    Ms. Watkins. Yes.
    Mr. Dingell. The caveat on the investigation was that they 
should not second-guess the accounting treatment. They would 
not do a detailed transaction analysis, and there would be no 
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 10 for 
roughly 3 hours and had no indication that it was a limited 
investigation. I only discovered that it was limited when I 
read their October 15 response, which was not provided to me. I 
read it off of this committee's web page.
    Mr. Dingell. It is fair to say that this, then, was not 
much of an investigation, was it?
    Ms. Watkins. I don't think so.
    Mr. Dingell. Vinson & Elkins said that with all of these 
caveats there is no problem, except a cosmetic one, is that 
correct?
    Ms. Watkins. That is what they concluded.
    Mr. Dingell. And on page 7, Vinson & Elkins tells Ken Lay 
that Enron stock is being used to support transactions with 
Condor and Raptor. Enron was getting earnings through 
transactions with Raptor when it could be argued that there was 
no third party involved. And because of the falling value of 
both Enron stock and asset value, the question was raised as to 
who bears the loss.
    These are exactly the same questions you had asked earlier. 
Isn't that so?
    Ms. Watkins. Yes, sir.
    Mr. Dingell. Now, then, Vinson & Elkins says at page 8 of 
the document, ``Notwithstanding these bad cosmetics, Enron 
representatives uniformly stated that Condor and Raptor 
vehicles were clever, useful vehicles that benefited Enron.'' 
What this says to me, that everyone--Vinson & Elkins, Ken Lay, 
Jim Derrick, and all of the people they interviewed--knew that 
these were not special purpose vehicles that bore risk. Is that 
correct?
    Ms. Watkins. It would appear to be so, yes.
    Mr. Dingell. And they knew that they were in bad financial 
shape, did they not?
    Ms. Watkins. Yes.
    Mr. Dingell. And they had approved them, had they not?
    Ms. Watkins. Yes.
    Mr. Dingell. So when high level officials say they didn't 
know about these vehicles, can that be true?
    Ms. Watkins. No, they knew about the vehicles.
    Mr. Dingell. Now, what do you think all of these people 
expected to happen at this point in September 2001?
    Ms. Watkins. I think what is interesting to note is that it 
says here, ``The Raptor vehicles were clever, useful vehicles 
that benefited Enron.'' I think that there was an understanding 
that Andersen and Vinson & Elkins had blessed these things. 
When I met with Rex Rogers on August 17, he said, ``Sherron, 
how could you possibly be right? Andersen and Vinson & Elkins 
would not risk their firms giving us wrong advice. They have 
blessed these structures.'' And so I think that certain people 
at Enron thought that these were complex but clever, and that 
they were legitimate.
    Mr. Dingell. Now, so here we have a situation where Vinson 
& Elkins does--I think they had to--some kind of due diligence, 
or gave legal advice to Enron on these matters. Is that not so?
    Ms. Watkins. Yes, sir.
    Mr. Dingell. The accountant was in the similar position, 
both as accountant and as consultant, is that not so?
    Ms. Watkins. Yes, that is right.
    Mr. Dingell. So am I fair in inferring from this that their 
statements about the character of these devices as being of 
benefit to Enron was in error?
    Ms. Watkins. Well, a benefit to Enron, if you consider that 
we were meeting financial statement targets that we had told 
investor analysts, but you can't meet those targets falsely.
    Mr. Dingell. So they were essentially representing them as 
being a benefit in the meeting of targets which could not be 
met.
    Ms. Watkins. Yes, sir.
    Mr. Dingell. Mr. Chairman, in the interest of time, I would 
like to just ask unanimous consent to introduce the document to 
which I have referred.
    Again, Ms. Watkins, you are a woman of extraordinary 
courage. We thank you for your assistance.
    Mr. Greenwood. Without objection, the document to which the 
gentleman from Michigan refers, and all of the other documents 
in the binder, will be made a part of the record.
    The Chair recognizes the gentleman, Mr. Tauzin, for 10 
minutes.
    Chairman Tauzin. Thank you, Mr. Chairman.
    First, Ms. Watkins, I apologize that we scheduled this 
hearing on Valentine's Day. We want to wish you Happy 
Valentine's Day.
    Ms. Watkins. Thank you.
    Chairman Tauzin. I want to refer to the document which you 
handed Ken Lay on October 30. That document has been widely 
publicized in the last several days. Some have characterized it 
as an attempt to describe a public relations effort to help the 
company through this problem.
    I want you to tell me whether the facts outlined in that 
document, to your best knowledge and belief, are true.
    Ms. Watkins. Yes, sir. I was providing this to Mr. Lay as a 
concept on public relations. However, I felt it was a truthful 
public relations strategy, and it was something I felt should 
be said.
    Chairman Tauzin. The things you recommended that Mr. Lay 
say and do are based upon facts in this document that you 
believe to be true.
    Ms. Watkins. Yes, I do believe that Mr. Skilling and Mr. 
Fastow, along with two very well respected firms, did dupe Ken 
Lay and the Board.
    Chairman Tauzin. You say that, ``As CEO, Mr. Lay relied 
upon his COO, Mr. Skilling, as well as CFO Fastow and CAO 
Causey, to manage the details.'' Is that correct?
    Ms. Watkins. Yes.
    Chairman Tauzin. Is that accurate? Was Mr. Skilling 
expected to manage the details of these transactions?
    Ms. Watkins. From all the records and the presentations 
that I have reviewed, Mr. Skilling was supposed to be an 
integral part of the controls and the review process with the 
LJM transactions.
    Chairman Tauzin. Did you see Mr. Skilling's testimony last 
week before this committee?
    Ms. Watkins. Yes, sir, I did.
    Chairman Tauzin. Did you specifically hear his testimony 
regarding the LJM approval sheets?
    Ms. Watkins. Yes, I did.
    Chairman Tauzin. Now, he testified that he never saw these 
sheets and he was not required to sign them. That is why he 
didn't sign them. Is it your testimony that he, in fact, knew 
about these sheets?
    Ms. Watkins. Well, all I can speak to is that it was 
Enron's very strict policy, when completing transactions and 
deals, to have deal approval sheets, and there was never a name 
put on the approval block that was not required. And I don't 
ever remember an instance where signatures were not obtained 
for every person listed.
    Chairman Tauzin. So that if Mr. Skilling's name 
consistently appears on the sheets, but it remains unsigned, it 
was not because he was not obligated to sign it. It was because 
he just didn't sign it.
    Ms. Watkins. That is correct.
    Chairman Tauzin. Is that correct?
    Ms. Watkins. That would be my understanding of our very 
strict procedures, yes.
    Chairman Tauzin. Were those procedures that Mr. Skilling 
would have understood?
    Ms. Watkins. Yes.
    Chairman Tauzin. You say also in the memo that Mr. Lay 
should admit that he trusted the wrong people. Are you saying 
that Mr. Lay was wrong to trust Mr. Skilling and Mr. Fastow and 
Mr. Causey with these details?
    Ms. Watkins. Yes, sir. I do believe they misserved Mr. Lay, 
the Board, Enron, and its shareholders.
    Chairman Tauzin. In fact, you go on to say that Ken Lay and 
his Board were duped by a COO who wanted the targets met no 
matter what the consequences, a CFO motivated by personal 
greed, and two of the most respected firms--Arthur Andersen and 
Company and Vinson & Elkins--who had both grown too wealthy off 
Enron's yearly business and no longer performed their roles as 
Ken Lay, the Board, and just about everybody on the street 
would expect as a minimum standard for CPAs and attorneys. Do 
you believe that statement to be true?
    Ms. Watkins. Yes, sir, I do.
    Chairman Tauzin. You say further on the culprits are 
Skilling, Fastow, Glisan, Causey, as well as Arthur Andersen 
and Vinson & Elkins. Do you believe that statement to be true?
    Ms. Watkins. Yes, sir, I do.
    Chairman Tauzin. Now, in Mr. Skilling's testimony, he very 
specifically denied any knowledge that in these transactions 
Enron Corporation had not properly transferred the risk to 
cover the losses. Do you believe that statement to be true?
    Ms. Watkins. No, I do not. Mr. Skilling was a great 
proponent of looking to the markets to make sense of a 
transaction. And I doubt we could have hedged these volatile 
stocks with any true unrelated third party at the prices that 
we were actually able to obtain from Raptor.
    Chairman Tauzin. Is it your testimony, then, that Mr. 
Skilling must have known about the details of the Raptor 
transaction to know that risk had not transferred?
    Ms. Watkins. It is my opinion that he was probably aware 
that we could not have transacted at those prices with an 
unrelated third party, and the only reason Mr. Fastow was 
transacting with Enron through the Raptor transactions at those 
prices for volatile stocks was that Mr. Fastow could not lose 
money and he was backstopped by Enron stock.
    Chairman Tauzin. Now, Ms. Watkins, you made it as clear as 
I have ever seen anybody make it. You basically outlined for 
Mr. Lay what would happen if he did the right thing--he cleaned 
up this mess, reported correctly to his stockholders and 
investors, if he got rid of the culprits, and if he made these 
public statements on behalf of the corporation that he, in 
fact, was going to do everything to say his company.
    And that if he didn't take that advice, you told him, ``The 
worst is going to happen. It is going to happen anyhow. And Mr. 
Lay will be more implicated in this than is deserved.'' What 
did you mean by that?
    Ms. Watkins. Mr. Lay was back at the helm as CEO, and it is 
my humble opinion that he did not understand the gravity of the 
situation the company was in.
    Chairman Tauzin. Now, you explained to him, as the Chairman 
has outlined, in rather detailed form, what you thought was 
wrong with Raptors, what you thought was wrong with these 
transactions. Did he understand the gravity, the implications, 
of what you were telling him, in your opinion?
    Ms. Watkins. In my opinion, I don't think he did. And I 
have that opinion because at an October 23 all-employee meeting 
to discuss the writedowns that had occurred in the third 
quarter there were several questions about Raptor and about the 
LJM transactions.
    And Mr. Lay likened the problem the company was now facing 
to a 1980's problem when the Peruvian government nationalized 
an oil company Enron had to a J-block problem Enron had in 
1997. And I don't think an accounting manipulation problem is 
in any way related to a----
    Chairman Tauzin. You are saying he didn't get it.
    Ms. Watkins. No, I don't----
    Chairman Tauzin. He didn't get it. Now, as I understand 
your memo to him, you are basically telling him that these 
officials of his corporation were engaging in improper 
activities, were doing it in a way that he and his Board were 
being duped, kept in the dark. Who had the power to protect 
those people from discovery from Mr. Lay and his Board? Who had 
the power to allow these activities to go forward, by all of 
these employees, including investing themselves in some of 
these outside partnerships and entities at great profit? Who 
had the power to let all of that happen and keep that 
information from the Board and Mr. Lay all that while?
    Ms. Watkins. My opinion would be that would be Mr. 
Skilling.
    Chairman Tauzin. And, finally, Ms. Watkins, I refer you to 
the document entitled ``Lessons Learned,'' Tab 8. In that 
document there are three points--recognize the accounting hedge 
versus an economic hedge, corporation should consider hedging 
assets in Raptor to minimize credit capability/volatility, the 
new Raptor structure transferred risk in the form of stock 
dilution. Did you show this document to Mr. Lay?
    Ms. Watkins. Yes, I did.
    Chairman Tauzin. Now, it contains some handwriting. Whose 
handwriting is that?
    Ms. Watkins. That is my handwriting.
    Chairman Tauzin. The handwriting basically says to the 
final point, there it is. That is the smoking gun. You cannot 
do this. What did this mean?
    Ms. Watkins. Well, my concern was that this was a document 
Enron had produced. It was well known. What that bullet point 
is trying to say in plain English is that the new Raptor 
structure transferred income statement equity investment risk 
in the form of stock dilution. And you can never use your stock 
to affect the income statement.
    Chairman Tauzin. You just----
    Ms. Watkins. You can't do that.
    Chairman Tauzin. [continuing] can't do that legitimately, 
legally.
    Ms. Watkins. That is correct.
    Chairman Tauzin. Where did you get this document?
    Ms. Watkins. From the risk assessment and control group run 
by Mr. Richard Buy.
    Chairman Tauzin. And if I may, what was Mr. Lay's reaction 
to this document when you showed it to him?
    Ms. Watkins. He was concerned. He was concerned with 
everything I was telling him.
    Chairman Tauzin. There is another note you wrote on the 
second point. ``The corporation isn't Raptor. How could 
corporation consider anything at Raptor?'' What did you mean by 
that?
    Ms. Watkins. Well, the bullet point just says the 
corporation should consider hedging assets in Raptor to 
minimize, you know, some problems. And if Raptor is supposed to 
be Mr. Fastow's company, then it is Mr. Fastow's problem. Why 
should Enron Corporation----
    Chairman Tauzin. Not the corporation.
    Ms. Watkins. [continuing] consider anything there? Exactly.
    Chairman Tauzin. Even with this, you still say he didn't 
get it?
    Ms. Watkins. I don't think so.
    Chairman Tauzin. Thank you, ma'am.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman from Florida, Mr. Deutsch, for 10 
minutes.
    Mr. Deutsch. Thank you, Ms. Watkins. Someone reading 
through Enron's statements, would they have a perspective that 
those statements fairly represent the status of the company 
prior to the bankruptcy?
    Ms. Watkins. I don't think so. I think that related party 
footnote is wholly inadequate in describing the transactions 
with Mr. Fastow's partnerships.
    Mr. Deutsch. Okay. So I think all of us would probably 
agree with what you just said. How was that able to happen? How 
were we able to get to the seventh largest company in America 
under what we consider general accounting principles that those 
statements are supposed to fairly represent what is going on in 
the company? And you and me and I think anyone who has looked 
at this would come to the same conclusion that they do not. How 
did that happen?
    Ms. Watkins. It is inconceivable, and I don't understand 
how it happened.
    Mr. Deutsch. I mean, obviously, it happened. I mean, at 
some point in time someone had to have had discussions between 
people at Enron and their accountants, Arthur Andersen, and 
their attorneys, Vinson & Elkins. I mean, are you aware of 
discussions that would have allowed it to happen?
    Ms. Watkins. I can really just point to what Mr. Stupak 
said in the emperor's new clothes. There were swindlers in the 
emperor's new clothes discussing the fine material that they 
were weaving. And I think Mr. Skilling and Mr. Fastow are 
highly intimidating, very smart individuals, and I think they 
intimidated a number of people into accepting some structures 
that were not truly acceptable.
    Mr. Deutsch. This is somewhat of a side light, but I think 
something significant. At the time that you were obviously 
aware of what was going on, I mean, that the statements of the 
company did not reflect, in fact, huge losses in the billions 
of dollars, so what the value of Enron was was--as reflected in 
its stock price was not its true value. And there were people, 
obviously, in Enron that knew about this.
    And, apparently, what we know--and I am trying to get a 
copy at this point, but it is a public domain at this point--
that effectively dozens of management people were selling 
hundreds of millions of dollars worth of stock at this period 
of time.
    So, obviously, people knew what was going on, because my 
recollection is that there was only one actual purchase with, 
you know, dozens of sales. Was that the sort of culture of what 
was going on in terms of the inside management at this point in 
time? Understanding, in fact, what you uncovered and what we 
know now, that the value was not--that the liability of these 
Raptors was not reflected in the statements.
    Ms. Watkins. It is hard for me to say about executives who 
sold stock, because so many of them thought that somehow or 
other this was legitimate. I am----
    Mr. Deutsch. Legitimate, but they also knew that there was 
an actual loss out there, and legitimate also that it seems as 
if everyone understood that the partnership could never make 
good on that loss. So there was--so people who actually 
understood the partnerships understood that eventually that 
loss was going to come back to Enron.
    I mean, it might have been legal, but as a practical 
matter, in terms of the value of the company, I can't imagine 
how they wouldn't know that that--there was going to be a day 
of reckoning at some point in time.
    Ms. Watkins. You could be right. I can't really speculate. 
Enron is a very arrogant place, with a feeling of 
invincibility. And I am not certain people felt like it was 
that imminent. They just felt like Mr. Fastow, along with the 
accountants, would come up with some magic in the future.
    Mr. Deutsch. Was there any thought at all--I mean, because, 
again, I guess what I am hearing you say and when I look at it 
at this point, is that anyone--and I don't think you had to be 
a Harvard MBA at this point or an Arthur Andersen partner to 
understand that there were liabilities that were not reflected 
in the balance sheet of the company, huge liabilities, in the 
billions of dollars.
    And if you knew that and the market and the transparency in 
the public markets, you knew the stock was going to go down at 
some point. Was there any concern at all for shareholders for 
employees that 100 percent of their life savings in 401Ks to 
retired people throughout the country who had investments in 
Enron stock who really have been devastated by this collapse of 
Enron? And was there any thought, any discussion, what this 
would mean to actual shareholders?
    Ms. Watkins. I never heard any discussions.
    Mr. Deutsch. Did you have any sense at all that there was 
any concern for shareholders at all?
    Ms. Watkins. I don't recall any discussions of concerns 
like that.
    Mr. Deutsch. You have testified, and, you know, you have 
used the word I guess ``improper.'' I feel comfortable using 
the word ``illegal,'' because--and, you know, I guess sometimes 
I debate whether to go into, you know, what level of detail in 
terms of these transactions. But I think we have to go into 
some detail really to understand them and also for--just to 
have it on the record in this sense.
    The hedging, okay, Avici--all right. That would have been a 
normal business decision. What was the original investment of 
Avici? Do you know the detail?
    Ms. Watkins. I don't have exactly what was originally----
    Mr. Deutsch. Do you have a ballpark number?
    Ms. Watkins. I really don't. I think it was under $10 
million.
    Mr. Deutsch. Okay. And what was it--what was the price when 
the hedge was put into effect, the value, the----
    Ms. Watkins. I believe around $166 or $170 a share.
    Mr. Deutsch. So the value was $166 million at that point? 
Or more?
    Ms. Watkins. Enron's value was probably in excess of $150 
million by then.
    Mr. Deutsch. Okay. So the idea was to hedge that increase. 
And what you have said and what you have testified to is, first 
of all, could they have gone to a legitimate third party, an 
investment bank, to buy--a derivative to buy a put for that--
for the strike price? I mean, was that available?
    Ms. Watkins. I believe we had some hold restrictions on the 
stock, but probably there were some transactions, derivative 
transactions, that were available to us from unrelated parties.
    Mr. Deutsch. Okay. And, again, just to kind of walk through 
this specific transaction, so in a ballpark number, what would 
an unrelated third party ask for to sell that type of put to 
lock in that gain? Just a ballpark number.
    Ms. Watkins. Well, I don't think you could have locked it 
in at that $170 price.
    Mr. Deutsch. Right.
    Ms. Watkins. There would have been a significant haircut to 
that price.
    Mr. Deutsch. Right. Can you use real numbers?
    Ms. Watkins. As much as, I would say, 30 or 40 percent.
    Mr. Deutsch. Okay. And that strike price would be at what 
number?
    Ms. Watkins. Probably more like $120 or $110, maybe even 
lower. I am----
    Mr. Deutsch. Okay. And then, what was the price that was 
sold by the partnership, by the Raptor?
    Ms. Watkins. I don't believe that we have sold it. I 
believe Avici is selling for somewhere----
    Mr. Deutsch. No, no. The put. The----
    Ms. Watkins. Oh, I think $170 a share.
    Mr. Deutsch. No, no. But what was the--what did it cost 
Enron to buy it from this partnership?
    Ms. Watkins. I am not familiar exactly what those details.
    Mr. Deutsch. Ballpark about?
    Ms. Watkins. Well, I don't know exactly how the Raptor puts 
or fees were paid. I do know that approximately $35 million 
went to Mr. Fastow or went to LJM out of the Raptors, and that 
that was supposedly representing fees. But that was for all of 
the hedges.
    Mr. Deutsch. Right. And I guess this is where, you know, I 
think that, you know, we have crossed the line of illegal 
activity, because what I hear you saying is that that 
transaction that you just described, which was one of many 
transactions, and basically there was this sort of cookie 
cutter of locking this in, and what appears to have happened is 
Arthur Andersen and Vinson & Elkins basically gave approval for 
this cookie cutter in terms of basically locking in value. You 
lock in the gain on the balance sheet as a gain. Then you 
basically have this sham transaction, and that's the whole 
point.
    What you seem to be absolutely, I think, convinced of, and 
what I am as well, is that if a third party would have sold it 
at a market price, and this sort of partnership which was 
headed by the CFO of the company, Mr. Fastow, as, you know, 
head of the general partnership, as the general partner, 
basically selling it to yourself. And it is at a different 
price than a third party price.
    By definition, you know, it is not an arms length 
transaction. I mean, by definition. If the price is so 
significantly different, that is No. 1. And, No. 2, what is 
absolutely clear--and I think, you know, just trying to 
elaborate on this a little bit, getting into some of the 
details--that there really--the transaction never really 
existed, because as opposed to guaranteeing the gain this 
general partnership--no one in this transaction ever--I mean, 
ever contemplated that the general partnership could ever 
guarantee the gain.
    I mean, it could only guarantee the gain if the stock went 
up and Enron's stock went up. Is that accurate?
    Ms. Watkins. Yes, it is. The saying around Enron was that 
heads Mr. Fastow wins, tails Enron loses.
    Mr. Deutsch. And that obviously is not a transaction.
    Ms. Watkins. No.
    Mr. Deutsch. That is not a business transaction. I mean, 
that is not a transaction that--I mean, could you contemplate 
in any shape, manner, or form that there was a business 
purpose?
    Ms. Watkins. No. Other than making sure those losses were 
not borne by Enron's financial statements, which is not 
economic.
    Mr. Greenwood. The time of the gentleman has expired.
    The Chair would note the presence of the gentleman from 
Oklahoma, Mr. Largent, and would also note that this is his 
last day as a member of the U.S. House of Representatives. He 
has long been a valued, respected, and I would say admired 
member of this committee. We have valued his contribution. I 
understand that the gentleman does not have time to inquire, or 
he does?
    Mr. Largent. Mr. Chairman, all I wanted to do is ask 
unanimous consent to submit my opening statement for the 
record.
    Mr. Greenwood. Without objection, the gentleman's opening 
statement will be part of the record, and the Chair and the 
committee wishes him well in his future endeavors and 
recognizes the gentleman from North Carolina, Mr. Burr, for 10 
minutes to inquire.
    Mr. Burr. I thank the Chair. We will miss Steve Largent.
    Sherron, once you started to look for the problems, how 
long did it take you to identify the degree of problems that 
existed in some of these transactions?
    Ms. Watkins. Actually, not very long. I did know from the 
footnote that Enron had recognized $500 million of revenue in 
2000 from the Raptor hedging transactions. $500 million is a 
significant number when you look at our net income for 2000. As 
soon as I discovered that the losses at Raptor were backstopped 
by Enron, and that is the way the structure worked, I knew we 
had a very large problem.
    Mr. Burr. Could anybody charged with a review of what took 
place in these partnerships have missed it?
    Ms. Watkins. I don't think so, and I was highly alarmed 
that this had occurred and been allowed to go on for so long.
    Mr. Burr. Did you feel like the letter that you had sent to 
Mr. Lay really did lay out a blueprint of what people should 
look at if they were outside concerns looking in at these 
transactions?
    Ms. Watkins. Yes, I did.
    Mr. Burr. Let me go to the Vinson & Elkins--I think this 
was a preliminary outline that they used that Mr. Dingell just 
put in the record. It was used to discuss--to be a discussion 
draft with Mr. Lay and Mr. Derrick. And, specifically, I want 
to go to item D, caveats, first one. And in that it says, ``No 
second-guessing of accounting treatment by AA.'' Interpret that 
for me if you will.
    Ms. Watkins. That they did not want Vinson & Elkins to make 
any--or give any opinions regarding whether the accounting 
treatment was proper, just assume that it was.
    Mr. Burr. Let me move to your meeting with Mr. Lay I think 
on August 22. You said you spent almost an hour. He seemed 
surprised by a lot of the things. But he made some commitments 
to you to look into it, didn't he?
    Ms. Watkins. Yes, he did.
    Mr. Burr. Having left that meeting, was there ever an 
exception that Mr. Lay made relative to these accounting 
discrepancies that you raised, that he wasn't going to look at 
those but he might look at something else?
    Ms. Watkins. No. I understood that he was going to try to 
get to the bottom of my concerns.
    Mr. Burr. Is there any way that what you shared with him 
could have been heard in a way that you could do an independent 
review of these transactions, leaving out second-guessing 
accounting treatment and believe that you could fully 
understand what you had raised with him?
    Ms. Watkins. No. The point is the accounting treatment. The 
point is the accounting disclosures in the footnotes to the 
financial statements.
    Mr. Burr. When you left that meeting with Ken Lay, did it 
ever cross your mind that they would turn to somebody who 
already had a relationship with Enron, be it Vinson & Elkins or 
Andersen, to actually do the review of their own work?
    Ms. Watkins. I didn't think they would choose V&E. I was 
slightly--well, more than slightly disappointed to find out 
that they subsequently did choose Vinson & Elkins to conduct 
the investigation.
    Mr. Burr. Did Mr. Lay stress with you that he would have a 
review done that was independent or that was thorough?
    Ms. Watkins. He stressed that he would get to the bottom of 
it. He would look into my concerns. He didn't really go into 
detail as to what he was going to do to do that.
    Mr. Burr. Well, I think that this discussion outline for 
the meeting really lays out the no second-guessing of 
accounting treatment by Arthur Andersen, no detailed 
transaction analysis. And it seems that V&E was given very 
specific instructions, ``We need you to produce a report. We 
need you to stamp it okay. But don't raise any questions about 
any of these things that have been brought to our attention.'' 
Is that pretty much what he did?
    Ms. Watkins. Well, it appears from this V&E document that 
they had a very limited scope.
    Mr. Burr. Sherron, prior to the release of V&E's final 
report, they briefed you orally, I think on 10/16. Is that 
correct?
    Ms. Watkins. I think they had issued their report. I had 
not seen it. I didn't see it until this year. They briefed me 
after the earnings release that morning.
    Mr. Burr. And was that the first time that you knew that 
Vinson & Elkins had turned to Arthur Andersen to play a part in 
their review of the accounting discrepancies that you had 
raised that they had already signed off on?
    Ms. Watkins. Yes, that is--it was roughly a 2-hour meeting 
where Joe Dilg and Max Hendrick went through how they had 
conducted their investigation. The reason they said that they 
chose to have Arthur Andersen relook at their own work was in 
the interest of time, that the company wanted a speedy 
response, and no other accounting firm could get up to speed on 
these transactions very quickly.
    But they also told me other things that--where they had 
limited their investigation despite suggestions that I had 
given them on September 10 when we had initially met for 3 
hours at the beginning of the investigation.
    Mr. Burr. What was your reaction to that?
    Ms. Watkins. I was highly alarmed. I did not think it was 
good advice for Mr. Lay. They told me that, you know, the 
conclusion was the accounting was appropriate when done. The 
cosmetics were bad, but it was appropriate. And I felt like 
that was--especially since I knew that we had unwound these 
transactions and written off $1.2 billion in shareholder equity 
that very morning, we happened to close that day at $33 a 
share, about the same price we had opened with that morning. 
But my concern was that wasn't going to stick.
    I gave it less than a 5-percent probability that this was 
going to go quietly, and I was highly concerned that not only 
had the Titanic hit the iceberg, but we were already tilting.
    Mr. Burr. Is it safe to say you didn't feel like the 
commitment that Mr. Lay had made to you to get to the bottom of 
it had successfully been accomplished?
    Ms. Watkins. Yes, that is correct. I did not feel that.
    Mr. Burr. Sherron, one last question if I can, and it 
really deals with Enron management and their interaction 
between themselves and their audit firm. Are you aware at any 
point in that relationship, as these partnerships were created 
or as they fell, where Enron management in any way, shape, or 
form used anything persuasive to encourage Andersen to turn 
their head or shut their eyes at the structure or the outcome 
of these partnerships?
    Ms. Watkins. I don't think it was a turn the head kind of 
deal. Mr. Rogers, when I met with him August 17, he did say, 
``Well, you know, we push our internal accountants quite 
hard.'' He mentioned we probably push our outside auditors 
pretty hard. So he seemed to indicate that there was probably a 
lot of pressure that Enron put on Andersen to accept the 
structures that Enron was developing around the Raptor 
vehicles.
    Mr. Burr. And given the timing of the V&E briefing with 
you, which was 10/16, which was close to that financial 
reporting period, can you share with me what V&E said about the 
10/16 earnings release?
    Ms. Watkins. About the earnings release itself?
    Mr. Burr. About that current earnings release, what they 
said on 10/16. Did they address the earnings release?
    Ms. Watkins. Well----
    Mr. Burr. I think it was a press statement that went out, 
and I think there was the announcement of the $577 million----
    Ms. Watkins. We had a press release that we had unwound 
some of the LJM transactions and taken these writeoffs and 
reductions of shareholders equity in the third quarter. It was 
my opinion that we should restate, and Mr. Dilg responded, ``Do 
you really think Mr. Lay should ignore the advice of his 
counsel in this matter?''
    Mr. Burr. Given that you are going through a release from 
Enron with a $577 million adjustment, and a writedown of $1.2 
billion in shareholder equity, how is that consistent with the 
report that V&E's briefing you on that there is no problems?
    Ms. Watkins. Well, it was very surprising to me. I said, 
``Well, if you told Mr. Lay that the accounting was 
appropriate, why did we unwind these deals? Why take $1.2 
billion writedown to equity if these deals are okay?'' And 
their reply to me was that, ``Well, that was a business 
decision. I believe Mr. Lay felt like that these transactions 
were a distraction from core business, and he just decided to 
unwind them.''
    Mr. Burr. Sherron, thank you very much. I yield back.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman from Michigan, Mr. Stupak, for 10 
minutes.
    Mr. Stupak. Thank you, Mr. Chairman.
    Ms. Watkins, thanks again for coming. Let me pick up a 
little bit where Mr. Burr just left off. In the financial 
statement, there was pressure there to approve these special 
SPEs and these transactions. And you said--the question about 
Enron putting pressure and you said, ``Well, I am sure there is 
pressure on the internal auditors and external auditors.''
    But before a financial statement goes public, doesn't 
Arthur Andersen have at least a fiduciary responsibility to 
say, ``This ain't right. It is not going in a financial 
statement before it is put out to the public?''
    Ms. Watkins. My understanding as a former accountant is 
that it is an odd situation. The accounting industry is paid by 
companies requesting their services, but an accounting firm is 
supposed to keep their eye on who is relying on their opinions. 
Outside investors are relying on their opinions. That is who 
they are there to protect, and they make an opinion that these 
financial statements, including the footnotes, fairly represent 
the financial condition of the company.
    Mr. Stupak. And if these transactions are questionable, 
that may not fairly accurately represent the financial 
condition of the company. And they really have the ultimate 
responsibility before it is released to the public to say yes 
or no to putting this in. Is that a fair statement?
    Ms. Watkins. Yes, that is correct.
    Mr. Stupak. How about Vinson & Elkins, would they have the 
same kind of responsibility on the financial statements?
    Ms. Watkins. I don't think law firms necessarily have the 
same responsibility.
    Mr. Stupak. Okay. Let me take you back a few years. Eight 
years ago--you said for 8 years you worked with Arthur 
Andersen. While there are Arthur Andersen, did you have any 
document retention policy back then?
    Ms. Watkins. I am sure we did.
    Mr. Stupak. Okay. Then let me ask the question this way. 
While at Arthur Andersen, how often did you see a memo or 
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.
    Mr. Stupak. Sure.
    Ms. Watkins. And I am sure the policies have changed.
    Mr. Stupak. Well, during your 8 years, did you ever 
remember receiving or seeing one of these memos saying, ``Just 
want to remind you of our retention policy''?
    Ms. Watkins. I don't recall necessarily----
    Mr. Stupak. Okay.
    Ms. Watkins. [continuing] any specific memo on that.
    Mr. Stupak. In your 8 years at Arthur Andersen, or while 
you were based in Houston, did you work on the Enron account 
then?
    Ms. Watkins. No, I did not work on the Enron account.
    Mr. Stupak. Okay. You took Cliff Baxter's position as Vice 
President under Mr. Fastow, correct?
    Ms. Watkins. Well, no. When Mr. Baxter resigned, the whole 
corporate development function was assigned and put under Mr. 
Fastow. So I went to work directly for Mr. Fastow helping him 
in that corporate development area.
    Mr. Stupak. Did you work under Mr. Baxter before then?
    Ms. Watkins. Indirectly, yes, I did.
    Mr. Stupak. Do you know why he retired?
    Ms. Watkins. It was to spend more time with his family.
    Mr. Stupak. Okay. He wasn't forced out of the company or 
anything like that?
    Ms. Watkins. Oh, no. No.
    Mr. Stupak. Okay. Is it fair to say that these questionable 
transactions, the LJM and Raptor, would they possibly be 
discovered by the next Vice President who went in there?
    Ms. Watkins. I think they were very easy to discover.
    Mr. Stupak. Okay.
    Ms. Watkins. The facts weren't really hidden.
    Mr. Stupak. Okay. In response to a question from Mr. 
Dingell, if I heard you correctly, you said Cliff Baxter 
complained to Mr. Skilling. What did he complain to Mr. 
Skilling about?
    Ms. Watkins. My understanding is that Mr. Baxter complained 
that it was inappropriate for a company of our size, of our 
stature, to do transactions with the CFO's partnership. It was 
inappropriate. It didn't look good. We shouldn't be doing 
transactions with the CFO's partnership.
    Mr. Stupak. And the CFO at this time was Mr. Fastow.
    Ms. Watkins. Mr. Fastow.
    Mr. Stupak. Okay. In your opinion, why did Mr. Skilling 
then leave Enron on August 14, 2001?
    Ms. Watkins. It is my opinion that he could foresee these 
problems, and he wanted to get as far away from it as possible.
    Mr. Stupak. Okay. Again, some questions from Mr. Dingell. 
You indicated when asked about Raptor and LJM, the hedging, it 
was common knowledge how they were doing this. And that it 
really wouldn't stand up, because they weren't--their assets 
weren't there. Common knowledge by whom?
    Ms. Watkins. The different business units that were hedging 
their assets with Raptor, as well as the global finance staff 
under Mr. Fastow.
    Mr. Stupak. Okay. Mr. Dingell actually read a little bit 
from this one document which he placed in the record. I believe 
it is on page 8. And it said, ``Notwithstanding these bad 
cosmetics, Enron representatives uniformly stated that the 
Condor and Raptor vehicles were clever, useful vehicles that 
benefited Enron.'' So my question--if they are pledged 100 
percent with Enron stock, and then they couldn't meet the 
hedges as the stock started to fall, therefore, they didn't 
benefit Enron, the employees, or the shareholders of Enron, did 
they?
    Ms. Watkins. No, they did not.
    Mr. Stupak. I mean, clever but not legal and not benefiting 
Enron.
    Ms. Watkins. Yes, that is correct.
    Mr. Stupak. Who did they benefit?
    Ms. Watkins. You could possibly say that they benefited 
Enron, because it allowed Enron to meet projected financial 
targets, which kept Enron's stock price inflated.
    Mr. Stupak. Okay. So, then, that benefit then would go to 
Enron, but that benefit was then taken out of Enron, was it 
not?
    Ms. Watkins. The problem I have with it is it keeps the 
stock price inflated. And you had Mr. Skilling saying our stock 
price was going to go to $120 per share. So you have people 
buying that inflated stock price, thinking the stock price is 
going to go higher. Those are now new shareholders of Enron 
that certainly are not benefited by these transactions.
    Mr. Stupak. Okay. Let me ask you this question, and by no 
means do I mean anything negative by it. But we have had 
testimony throughout about how certain employees benefited 
handsomely financially from some of these transactions and 
being part of these SPEs. Were you ever offered an opportunity 
to join in one of these, or to be part of one?
    Ms. Watkins. No, I was not.
    Mr. Stupak. So it is fair to say, then, you didn't invest 
in any of these SPEs like some did, like what, put $5,800 in 
and they end up coming back with a million within 2 months or 3 
months?
    Ms. Watkins. No, I did not.
    Mr. Stupak. Okay. You indicated--well, let me go to this 
question. In number 8 here, it was in our book here, number 8, 
was the Raptor hedging strategy analysis risk and assessment 
control? And the Chairman asked you some questions about it. In 
fact, on one page, lessons learned, the new Raptor structure 
transferred risk in one--in the form of stock dilution. It is 
in your handwriting. There it is. That is the smoking gun. You 
cannot do this. And that is your handwriting.
    Ms. Watkins. Yes, it is.
    Mr. Stupak. Okay. Who produced this document?
    Ms. Watkins. Mr. Rick Buy's risk assessment and control 
group.
    Mr. Stupak. Okay. Do you know when he would have produced 
it?
    Ms. Watkins. I believe that this was produced during the 
first quarter of 2001 to address the fact that the Raptor 
structures were under water.
    Mr. Stupak. Okay. So risk assessment or Mr. Buy produced 
this in the first quarter of 2001. Who would this be 
distributed to?
    Ms. Watkins. I am not completely certain of that. I believe 
it might have gone as high as the Finance Committee of the 
Board, but from reading the Powers Report, they do not appear 
to have seen this analysis.
    Mr. Stupak. Okay. This was an internal document.
    Ms. Watkins. It certainly went to Mr. Fastow, and I would 
imagine that it also went to Mr. Skilling.
    Mr. Stupak. How about Vinson & Elkins? Would they probably 
receive this?
    Ms. Watkins. Probably not.
    Mr. Stupak. Arthur Andersen?
    Ms. Watkins. Probably not.
    Mr. Stupak. Okay. But you thought probably the Board of 
Directors may have received this?
    Ms. Watkins. I thought so at the time when I was meeting 
with Mr. Lay. But from reading the Powers Report, it appears 
that they did not see this.
    Mr. Stupak. So when you put in here your comments, or even 
the new Raptor structure transferred risk in the form of stock 
dilution, not knowing anything about this, before I get--before 
all of this whole Enron thing, even I can pick it up now. 
Anyone who received this in the company should have realized 
there were serious, serious problems, and any accountant worth 
their weight in salt would certainly pick this up. Would they 
not?
    Ms. Watkins. It would certainly seem so. But it was so well 
understood and so prevalent. That is why I called Mr. Hecker at 
Andersen. I was about to meet with Mr. Lay, and I thought--
well, I called him--but since I had not been in accounting for 
over 10 years--to say, you know, could this ever be okay? And 
he said it didn't sound right, and his words to me were, 
``Sherron, any accounting treatment must be clearly defensible 
if fully exposed. So if this is not clearly defensible when 
fully exposed, you are probably correct and you should go see 
Mr. Lay.''
    Mr. Greenwood. The time of the gentleman has expired. The 
Chair thanks the gentleman.
    The Chair recognize the gentleman from Florida, Mr. 
Stearns, for 10 minutes for inquiry.
    Mr. Stearns. Thank you, Mr. Chairman. And, again, let me 
commend you and also the staff for the prodigious amount of 
work they have done here.
    Just to get on the record that--it is more applicable to 
the committee that I chair dealing with FASB--I just wanted to 
ask you some questions. There is ample evidence, as I noted, 
that Enron at a minimum used/abused financial accounting 
standards to confuse its true financial condition. In your 
view, is Enron indicative of a failure to implement GAAP, 
Generally Accepted Accounting Principles? Or failure of the 
Generally Accepted Accounting Principles--in other words, 
failure of the GAAP itself or the failure to implement these 
principles?
    Ms. Watkins. I think Enron had a failure to implement them, 
correct.
    Mr. Stearns. So you don't think there is anything generally 
wrong with GAAP itself? Do you think GAAP works?
    Ms. Watkins. It should work. In my opinion, I think somehow 
in this country our financial accounting system has morphed 
into the Tax Code. In tax accounting if you follow the codes, 
whatever result you get, you are justified in using that 
treatment.
    And financial accounting--a number of my accounting friends 
have said, ``If you follow the rules, even if you get 
squirrelly results, you have a leg to stand on.'' And I am 
surprised that the financial accounting system has morphed into 
that, because you should still fairly represent your financial 
condition.
    Mr. Stearns. This is, to me, a very important point. You 
know, what you are saying is that Enron's problem was a flawed 
corporate strategy and simple old-fashioned bad assets, and 
that the accounting problems did not precipitate its collapse. 
Is that what you are saying?
    Ms. Watkins. No, I do think the accounting problems 
precipitated the collapse, because when the investing community 
was uncertain about our numbers, when they were driving the 
stock price down, almost everyone was aware that if the stock 
price dropped too low, if our investment grade rating fell 
away, there would be additional debt coming due. And we did 
have an old-fashioned run on the bank.
    Mr. Stearns. Okay. So, but you are saying that the GAAP 
worked, and it was--GAAP was not the problem. The accountants--
it was more the business strategy and how they used the 
accounting principles, how they implemented it.
    Ms. Watkins. They did not implement them correctly.
    Mr. Stearns. Okay. So if you went to the American Institute 
of Accountants and talked to them, you wouldn't recommend that 
they change anything with Raptor partnerships or LJM1 or 2 or 
anything? You would say that is not the problem.
    Ms. Watkins. The accounting of these transactions I think 
was inappropriate. We should not have been able to----
    Mr. Stearns. But that was because of the people--that was 
Fastow and his people.
    Ms. Watkins. Yes.
    Mr. Stearns. But it wasn't Arthur Andersen.
    Ms. Watkins. Well, Andersen also signed off on the way we 
were implementing these accounting----
    Mr. Stearns. But if Arthur Andersen was told something, and 
it was not the truth, they might accept it. Is it possible that 
Arthur Andersen has some culpability here because they signed 
off on it?
    Ms. Watkins. Well, I think so, because they are charged 
with auditing the results. And a sensitive related party 
transaction should get a lot of scrutiny and----
    Mr. Stearns. So Arthur Andersen, in your opinion, signed 
off on something they shouldn't have.
    Ms. Watkins. Yes.
    Mr. Stearns. Do you think they knew what they were signing 
off on?
    Ms. Watkins. They sure should have known what they were 
signing off on.
    Mr. Stearns. Okay. Okay. So, you know, you have been an 
accountant, you told me in your opening statement, for 19 
years. And yet you are the only one here out of this huge 
organization we have here. And, you know, we have talked to 
Jeffrey McMahon, who is President and Chief Operating Officer. 
He said he went to Skilling. We talked to Jordan Mintz, who is 
Vice President and General Counsel of Corporate Development. He 
tried to get Skilling to sign documents.
    Both Richard Buy, the Chief Risk Officer, and Richard 
Causey, the Chief Accounting Officer, all somehow were aware of 
this, and yet you are the only one standing here. And so when 
you went to Mr. Lay, and he came back and said he was going 
to--V&E was going to do an analysis, I think it was on October 
31. Did he say anything to you about maybe firing Vinson & 
Elkins?
    Ms. Watkins. Well, I met with Mr. Lay on October 30 and 31, 
and I was concerned that we needed to restate, come clean, 
and----
    Mr. Stearns. Because this is a key point. The report came 
back and everybody is ready to act on it and clean house and 
get this thing straightened out, right?
    Ms. Watkins. Yes.
    Mr. Stearns. Isn't that your impression?
    Ms. Watkins. Well, he had said at the time, ``Well, we have 
fired Vinson & Elkins and Arthur,'' which I was a little bit 
surprised. When I met with him the following day, he corrected 
that and said, no, that we had formed the Special Committee and 
hired a new law firm and a new accounting firm to look into my 
concerns.
    Mr. Stearns. What was the new law firm's name that he said 
he was going to hire after he replaced Vinson & Elkins?
    Ms. Watkins. He first said it was Milner and something, 
which sort of surprised me because when the announcement came 
out it was Wilmer, Cutler. And that is an easy name to 
remember, and it gave me the impression that Mr. Lay was not 
making these decisions, someone else was. And they were just 
informing him of the decisions.
    Mr. Stearns. So he told you earlier, though, that he was 
going to fire Arthur Andersen and V&E, right?
    Ms. Watkins. Yes. And I think he misunderstood, though, 
the----
    Mr. Stearns. And who was telling him that, do you think?
    Ms. Watkins. I don't know. I am not privy to the inner 
workings.
    Mr. Stearns. I talked to Mr. Skilling, and I talked to him 
briefly about Cliff Baxter. And I just want to ask you a 
question on this. In your memo, you said, ``He complained 
mightily to Mr. Skilling, and all who would listen, about the 
inappropriateness of the transaction with LJM.'' Did Mr. Baxter 
discuss his concerns about these transactions with you?
    Ms. Watkins. Actually, the last time I spoke with Mr. 
Baxter was January 15 of this year. I phoned him to give him 
the heads up that my memo had been discovered and was in the 
press, and that it mentioned that executives had warned Mr. 
Skilling. So I told Mr. Baxter that I had mentioned him 
specifically, and I read to him over the phone exactly what I 
had written about him.
    And he said, ``Well, Sherron, you are right. You know, I 
was very concerned about these transactions.'' He said, ``But I 
tell you what. If I had known there was anything illegal about 
it, I would have pushed it further.''
    Mr. Stearns. Did Mr. Baxter tell you that he talked to 
Skilling frequently about this? I mean, you say mightily. Did 
he actually say, ``I talked to him 10 times, 3 times, 1 time?''
    Ms. Watkins. I mean, he told me he spoke to him quite often 
about the inappropriateness of a company----
    Mr. Stearns. Okay.
    Ms. Watkins. [continuing] of our stature----
    Mr. Stearns. Did Mr. Baxter ever tell Ken Lay--did Baxter 
ever say to you, ``I also mentioned it to Kenneth Lay, because 
I was frustrated with Mr. Skilling?''
    Ms. Watkins. No. The way the culture worked, I don't think 
anyone would have gone around Mr. Skilling to talk to Mr. Lay.
    Mr. Stearns. Okay. What about Jeff McMahon? Did you 
actually ever talk to him about any of these problems?
    Ms. Watkins. I did meet with Mr.----
    Mr. Stearns. Were you aware that Mr. McMahon--he was--he 
met with Skilling. He was the President and Chief Operating 
Officer, former Treasurer of the company. He recently became 
President. He said he told Mr. Skilling of his concern over the 
company's many complex partnerships. Did you ever talk to him?
    Ms. Watkins. On August 21, I met with Mr. McMahon for 
roughly 1\1/2\ hours, and that is when he told me that he found 
the conflicts to be something that--you know, too great for 
Enron.
    Mr. Stearns. Too great for Enron?
    Ms. Watkins. Mr. McMahon did not characterize it as a bonus 
discussion with me. He characterized it as more of an ultimatum 
that he was giving Mr. Skilling; ``Make these changes or I 
can't stay as Treasurer.'' And as I recall Mr. McMahon telling 
me, he felt like that was a strong statement to Mr. Skilling. 
And, you know, a few days or weeks later he gets a call 
saying--from Mr. Skilling that Mr. Skilling wanted him to go 
join a new venture, Enron Networks. And Mr. McMahon told me 
that he felt like Mr. Skilling was setting him up for a fall.
    Mr. Stearns. I asked Mr. Skilling about Mr. McMahon and 
this conversation. He said, ``We talked nothing about what you 
mention, Congressman. All we talked about was compensation.'' I 
don't know if you heard Mr. Skilling say that.
    Ms. Watkins. Well, it sounds like that is the truth but not 
the whole truth.
    Mr. Stearns. Right. So Mr. Skilling is trying to convince 
me they are talking about the bonus for Mr. McMahon, and that 
is all they talked about. Yet it was clear to me, in all of the 
information we had, that Mr. McMahon was telling him all about 
the stuff that you just know about. And that is what you are 
saying. When you talked to Mr. McMahon, he told you the same 
thing, that he talked to him all about these partnerships.
    Ms. Watkins. The Raptor transactions had not been done, I 
don't think, or I am not completely aware. Mr. McMahon told me 
he did not talk about accounting issues as much as there were--
these deals were likely not benefiting Enron shareholders. They 
were likely benefiting Mr. Fastow and not Enron shareholders.
    Mr. Stearns. Okay. So that is directly opposite to what Mr. 
Skilling to us. And you are telling us that Mr. McMahon told 
you that, and Mr. McMahon has also told us that is what he told 
him. So I think it is clear at this point that there is two 
witnesses here that do not agree with what Mr. Skilling has 
said.
    I think my time is up, Mr. Chairman. Unless Ms. Watkins 
would like to clarify.
    Mr. Greenwood. The time of the gentleman----
    Mr. Stearns. Did you want--Ms. Watkins, did you want to 
clarify anything?
    Ms. Watkins. Well, I just wanted to add that I also heard 
from one of Mr. Baxter's close friends that he had a 
conversation with Mr. Skilling in March of 2001. Mr. Baxter's 
recollection of the meeting was that he told Mr. Skilling, ``We 
are headed for a train wreck, and it is your job to get out in 
front of the train and try to stop it.''
    Mr. Stearns. Thank you, Mr. Chairman.
    Mr. Greenwood. The Chair recognizes the gentlelady from 
Colorado, Ms. DeGette, for 10 minutes, and would note that at 
the end of her questioning we will recess for approximately 20 
minutes for the vote.
    Ms. DeGette. Thank you, Mr. Chairman.
    Ms. Watkins, before I ask my questions, I just want to 
welcome you and let you know how impressed I was by your memos 
and by your testimony. And when I was reading this, I felt sort 
of a bond with you. First, I thought, well, maybe it was 
because we were both women of about the same age working in the 
male-dominated fields. I thought, no, it is not that.
    Then I said maybe it is because we are both moms, because 
moms tend to get--you know, you can figure out if someone is 
telling the truth. But then I realized, no, it is not that. 
What it is is both of our mothers were teachers, as I 
understand. Your mother taught accounting. My mother taught 
kindergarten. And then I realized that both perfectly prepared 
us for the careers we were going to embark on.
    And I really want to thank you for coming.
    I want to ask you, did you write these memos, Ms. Watkins, 
all by yourself?
    Ms. Watkins. Yes, I did.
    Ms. DeGette. So if someone said that you ghost--that 
someone else, like Mr. McMahon, ghostwrote these memos, that 
would not be true?
    Ms. Watkins. That is not true.
    Ms. DeGette. And you wrote these because you were concerned 
about the future of the company and the future for the 
shareholders, didn't you?
    Ms. Watkins. Yes.
    Ms. DeGette. Were you aware that Mr. Fastow told the Vinson 
& Elkins investigators that it was his belief that you were 
acting in conjunction with a person who wanted Mr. Fastow's 
job?
    Ms. Watkins. I think that is ludicrous.
    Ms. DeGette. Do you think--it is not true, is it? Are you 
surprised Mr. Fastow might think that?
    Ms. Watkins. I am not surprised he would think that.
    Ms. DeGette. Why not?
    Ms. Watkins. I understand that he and Mr. McMahon had a 
rather contentious relationship.
    Ms. DeGette. And so you think he was referring to Mr. 
McMahon.
    Ms. Watkins. Yes.
    Ms. DeGette. Okay. Now, you worked for Arthur Andersen for 
8 years, but it was a long time ago, right?
    Ms. Watkins. Yes.
    Ms. DeGette. And you are a CPA, right?
    Ms. Watkins. Yes, I am.
    Ms. DeGette. Now, let me ask you this. How long had you 
been working for Mr. Fastow before you figured out that there 
were problems with the Raptor SPEs?
    Ms. Watkins. I would say about 3 or 4 weeks.
    Ms. DeGette. So all these people who said these were very 
complex transactions, and there wasn't much transparency, it 
didn't take an accounting genius, although I am sure you are 
one, but, I mean, you figured it out in 3 or 4 weeks, right?
    Ms. Watkins. Well, I had the advantage of hindsight where 
these structures were clearly under water, and also I was never 
shown the complex transactions. I just knew what the facts 
were. Raptor owed us $700 million. No one had lost that money. 
Enron shareholders were going to pay for it in the future. So I 
didn't need to see the structure. I knew that----
    Ms. DeGette. Right.
    Ms. Watkins. [continuing] that wasn't kosher.
    Ms. DeGette. Even Congresspeople like us can figure that 
out. So, now, you said that information--in your testimony you 
said the information gathered from co-workers helped you come 
to the conclusion that the Raptor SPEs were finally untenable. 
It was pretty common knowledge in discussion among the co-
workers about these entities, correct?
    Ms. Watkins. Yes, it was.
    Ms. DeGette. Can you tell me how widespread the concern 
was?
    Ms. Watkins. The Enron global finance staff knew about it, 
and various business units that had sold assets to Raptor knew 
about it. There were whole sections of Enron, the pipeline 
group, the trading group, that had no idea about it. But in a 
handful of groups it was widespread knowledge.
    Ms. DeGette. But what about your group? I mean, did people 
talk about this commonly? How many people are we talking about?
    Ms. Watkins. I think a fair number. One of the things I 
asked Vinson & Elkins to do was to look at a--a survey had been 
conducted by Mr. Lay over the Labor Day weekend. And I knew of 
at least a dozen people who had typed in serious concerns about 
our accounting.
    Ms. DeGette. You knew a dozen people who had typed in 
concerns.
    Ms. Watkins. Yes.
    Ms. DeGette. Ms. Watkins, would you be willing to share 
those names with this committee?
    Ms. Watkins. I can share certainly at least two, because 
they are in the documents that you are releasing today.
    Ms. DeGette. Would you be willing to, as part of our 
investigation, to share the rest of them?
    Ms. Watkins. Well, I can share Jeff Donahue, who was the 
Managing Director in Charge of Corporate Development.
    Ms. DeGette. Okay.
    Ms. Watkins. Tim Detmering, a Managing Director in 
Corporate Development; Michelle Nezi Marvin, one of the 
business unit people who had hedged assets with Raptor.
    Ms. DeGette. Jeff McMahon.
    Ms. Watkins. I don't know whether he typed in comments.
    Ms. DeGette. Oh, he didn't type--but he was concerned, 
right?
    Ms. Watkins. Yes.
    Ms. DeGette. Cliff Baxter was concerned.
    Ms. Watkins. Yes.
    Ms. DeGette. If you have other names, perhaps you could 
work with your counsel and with our staff, because that would 
help us in our investigation.
    I am wondering if you can try to characterize the 
atmosphere in the global finance group and maybe elsewhere in 
Enron. Did everybody know what was going on, but everybody was 
too afraid to do anything about it?
    Ms. Watkins. It was rather widespread knowledge that Mr. 
Ray Bowen was complaining about the Raptor structures and LJM. 
And Mr. Fastow called him in and gave him, as Mr. McMahon puts 
it, a high decibel grilling. And so that I think made others--
it was like an off limits subject. You just didn't even want to 
discuss it around the water cooler.
    Ms. DeGette. So it wasn't that everybody certainly at your 
level knew but didn't care. It is that they were afraid to come 
forward. Would that be a fair characterization?
    Ms. Watkins. Yes.
    Ms. DeGette. Now, why is it that you think Mr. Skilling 
knew about these issues?
    Ms. Watkins. Because he was an intense, hands-on manager.
    Ms. DeGette. What is that? Can you give us a couple of 
examples of financial transactions you saw Mr. Skilling get 
involved in hands-on?
    Ms. Watkins. Well, for instance, in 1996 when I was still 
managing the JEDI partnership, we had equity investments in 
various--primarily oil and gas-related companies. That was the 
year we adopted fair value accounting, which meant that, as an 
example, if we paid $100 million for an investment, an oil and 
gas company, and they drilled a dozen wells that were all 
successful, if our models showed us that we now thought that 
company was worth $150 million, we would write that company up 
by $50 million and recognize $50 million in the income 
statement.
    Well, a lot of the models were based off the multiples at 
which E&P companies trade. They were based off comparable 
analysis in the public marketplace. Mr. Skilling was very 
concerned that if the multiples that might have been at a high 
of seven or eight cyclically moved down to, say, three or four, 
then our own models would force us to take a writedown. He sat 
in on a number of meetings where I was present, where we were 
trying to devise a real hedging strategy to avoid placing those 
losses on the income statement.
    Ms. DeGette. So he was involved hands-on----
    Ms. Watkins. Yes.
    Ms. DeGette. [continuing] personally in----
    Ms. Watkins. Yes.
    Ms. DeGette. [continuing] accounting meetings talking about 
accounting treatments of transactions. Now, you saw the 
transaction sheets that the Chairman showed you before that had 
the signature sheet, signature line for his approval. Would it, 
in your experience, be like Mr. Skilling to not sign those?
    Ms. Watkins. No. The procedures around our approval sheets 
were cast in stone.
    Ms. DeGette. And were they used in many transactions?
    Ms. Watkins. Yes. Any capital expended at Enron above a 
certain amount had a deal approval sheet, and the procedures 
were very well identified, and I never recall an instance where 
the approvals indicated via the approval signature block were 
not obtained. And no approvals----
    Ms. DeGette. So if someone sent those to Mr. Skilling, and 
he didn't sign them, in your opinion that would be 
intentionally?
    Ms. Watkins. No deal could be done without all of those 
approvals. And quite often it was a verbal approval over the 
phone, and then it was always followed up by a signature.
    Ms. DeGette. Great. Thank you very much. Thank you for 
coming today. I really appreciate it.
    Mr. Greenwood. In the gentlelady's remaining time, Mr. 
Skilling's testimony here last week was that while there was a 
line provided--his term was there was a line provided for his 
signature, the form provided for his signature, that he was 
advised that his signature was not required. Are you aware of 
any such distinction with regard to those deal sheets?
    Ms. Watkins. No. Those deal sheets were cast in stone. If 
it was an either/or, it would say one of the following two 
signatures are required. If the name was listed in the 
signature block, it was required.
    Mr. Greenwood. It was required. And there was never any 
provided for, as if he could sign it if he felt like it?
    Ms. Watkins. No, it was a requirement.
    Mr. Greenwood. Do you know anything about Jordan Mintz's 
efforts to get him to sign the sheet?
    Ms. Watkins. I did not know of those until I heard his 
testimony here last week.
    Mr. Greenwood. Okay. The Chair thanks the gentlelady.
    The committee will recess for approximately 15 minutes.
    [Brief recess.]
    Mr. Greenwood. The committee will come to order.
    The Chair recognizes Mr. Strickland for 10 minutes for 
purposes of inquiry.
    Mr. Strickland. Thank you, Mr. Chairman.
    Ms. Watkins, toward the end of 1999, while you were working 
for Enron International representing the Caribbean region, you 
negotiated the sale of Promigas, an Enron asset, to a special 
purpose entity known as White Wing. Is that correct?
    Ms. Watkins. Yes. It is also known by its project name, 
which is Condor.
    Mr. Strickland. Okay. Enron's Caribbean region decided to 
sell Promigas to White Wing because Enron's risk and finance 
departments had put out the word that all divisions should sell 
merchant assets to White Wing by the end of the third and 
fourth quarters of 1999. Besides that mandate, was there any 
other reason for Enron to sell Promigas to White Wing at that 
time?
    Ms. Watkins. No, there was not.
    Mr. Strickland. Ms. Watkins, would you please briefly 
explain what a merchant asset is for the benefit of this 
committee?
    Ms. Watkins. Enron has both merchant assets and strategic 
assets. Merchant assets are assets considered held for sale, 
that we have bought for investment purposes and that we 
generally do not intend to hold on to for any length of time. 
Merchant assets could be fair valued, meaning they could be 
written up to estimated market value, while strategic assets, 
if they were worth more than Enron had paid for them, those 
gains could not be recognized until we sold or disposed of the 
asset.
    Mr. Strickland. Okay. Now, Enron decided to sell its 
merchant assets to White Wing in order to increase its 
cashflow. Was there any other reason for this decision?
    Ms. Watkins. I believe that the assets sold to Condor White 
Wing, the merchant assets, generated--I know they generated 
funds flow from operations for Enron, and I believe that to be 
one of the sole purposes for selling assets into Condor White 
Wing.
    Mr. Strickland. Okay. In fact, cashflow had become a big 
concern for Enron, had it not?
    Ms. Watkins. Yes, that is correct.
    Mr. Strickland. Now, Wall Street analysts began to distrust 
Enron's increasingly complex earnings statements, so they 
started examining the company's cashflow. After all, cash is 
cash. However, since Enron had been manipulating its earnings, 
its cashflow would appear inadequate compared to its inflated 
earnings statements. This was a problem for Enron, was it not?
    Ms. Watkins. Well, I am not certain that Enron was 
manipulating its earnings at that point in time. But for a 
commodity trader where you would routinely mark-to-market 
positions, you can have earnings that represent the discounted 
fair value of 10 years worth of profits. You recognize that in 
the first year, but you would only have cashflow of, say, one-
tenth of that profit in that year.
    That is probably not an unheard of phenomena with trading 
companies, but trading companies have PE multiples in the 12 to 
14 range. Enron enjoyed a much larger price to earnings 
multiple and did not want to be characterized as a normal 
trading company.
    The analysts were concerned that our funds flow from 
operations was significantly lower than our earnings. It was a 
financial performance statistic that they were concerned about, 
and Enron attempted to fix that first, fairly legitimately, by 
securitizing contracts and selling them out to outside third 
parties.
    I might want to correct a statement that Congressman 
Greenwood made earlier. I do think that the Cactus vehicles, 
the contract to asset securitization vehicles that we did in 
the early 1990's and 1995/1996 were legitimate, were legitimate 
securitizations.
    Condor, however, I think was one of the first special 
purpose vehicles that was backstopped by Enron stock that was 
kept off balance sheet, and I think one of the main purposes of 
Condor White Wing was to generate funds flow from operations 
for Enron.
    Mr. Strickland. So, and correct me if I say something that 
you think is factually inaccurate, but it seems that Enron 
planned to increase its cashflow by selling these merchant 
assets to White Wing during the third and fourth quarters of 
1999.
    Ms. Watkins. That is correct, yes.
    Mr. Strickland. Did Enron provide any guarantees to White 
Wing for these transactions that you know of?
    Ms. Watkins. The White Wing structure was set up such that 
if the assets that were sold to White Wing were not liquidated 
and were not sufficient to repay the investors in White Wing, 
then that structure was backstopped by Enron stock.
    Mr. Strickland. So this was a transaction where Enron 
guaranteed an investment with its own stock? Is that a 
factually correct statement?
    Ms. Watkins. These vehicles have been schematically 
depicted in The Wall Street Journal and in the Houston 
Chronicle and a number of press. It supposedly is legitimate. I 
don't quite understand how these things can be off balance 
sheet when you have a claw back to the company and to the 
company's own stock, but somehow or other they appear to be 
available for use.
    Mr. Strickland. And I am impressed with your background and 
your training, and I sit here and I hear you say that. And I am 
wondering at what point is there some authority that has the 
ability to explain why something that appears to be 
illegitimate may be legitimate. Is that a puzzle to you as a 
professional CPA and a person who is deeply knowledgeable about 
financial transactions?
    Ms. Watkins. Well, the Condor structure troubled me. The 
fact that it was off balance sheet troubled me. The fact that 
we were, you know, getting funds flow from operations, the 
financial performance statistic from this structure troubled 
me. And while I was working in the Caribbean business unit, we 
were instructed that we now had new targets. They were funds 
flow targets, and we needed to find a way of selling our 
merchant assets into Condor White Wing.
    It was almost like something that was on paper, not real, 
because the business unit continued to manage the asset. The 
counterparty never understood that we had supposedly sold it. 
And there was an unspoken understanding that we could buy it 
back at some point in the future.
    Mr. Strickland. Now, after Enron sold Promigas to White 
Wing, who managed and operated that company?
    Ms. Watkins. The Caribbean business unit. It stayed with 
the Caribbean business unit.
    Mr. Strickland. And that was Enron?
    Ms. Watkins. Yes, that is Enron. But it was not White Wing 
personnel that managed it. It was Enron personnel who managed 
it.
    Mr. Strickland. In fact, the people involved in the day-to-
day functioning of Promigas didn't even know they had been--
that it had been sold, is that----
    Ms. Watkins. That is correct.
    Mr. Strickland. Is that correct?
    Ms. Watkins. That is correct.
    Mr. Strickland. Ms. Watkins, who was the general partner of 
White Wing? In other words, who ran White Wing?
    Ms. Watkins. I believe it was something called an Osprey, 
or something, but it was an Enron entity that was the general 
partner of White Wing.
    Mr. Strickland. Would it be possible for you to identify 
for the committee the individuals who were involved in running 
this?
    Ms. Watkins. The administrative running of White Wing was 
under Mr. Andrew Fastow, and I believe he had Cheryl Lipschutz 
running the Condor White Wing structure.
    Mr. Strickland. Okay. Enron sold these assets to White Wing 
at book value.
    Ms. Watkins. Yes.
    Mr. Strickland. Compared to market value, is book value a 
reliable indicator of an asset's true worth?
    Ms. Watkins. The transactions were supposed to be sold into 
White Wing at market value. I believe they were all transacted 
at book value, and we documented the fact that book values were 
close approximations of market values at that time.
    Ms. DeGette. Will the gentleman yield for 1 second?
    Mr. Strickland. I would yield.
    Ms. DeGette. Cheryl Lipschutz was the secretary to the 
Board of Directors of Enron at that time, right?
    Ms. Watkins. No.
    Ms. DeGette. Was she employed by Enron?
    Ms. Watkins. She was employed by Enron under Mr. Andy 
Fastow.
    Ms. DeGette. Okay. I just wanted to clear that up, that Mr. 
Fastow was in charge and Cheryl Lipschutz was running it, and 
they were both working for Enron.
    Ms. Watkins. Yes.
    Ms. DeGette. Thank you.
    Thank you.
    Mr. Strickland. Thank you. I have just a couple more 
questions, Ms. Watkins.
    Mr. Greenwood. You have just a couple more seconds.
    Mr. Strickland. One more question, Mr. Chairman.
    Wall Street analysts were beginning to doubt Enron's 
deceptively complex earnings statements, so they began to look 
at Enron's cashflow as a more reliable indicator of the 
condition of the corporation. To make sure its cashflow 
appeared proportional to its earnings, Enron decided to 
increase its cashflow. Is that correct?
    Ms. Watkins. Yes.
    Mr. Greenwood. The time of the gentleman has expired.
    Mr. Strickland. Thank you, Mr. Chairman.
    Mr. Greenwood. Ms. Watkins, when you were involved in this 
transaction to sell assets to Condor, was there discussion or 
agreement about whether or not those assets could be sold back, 
and whether there were documents that would reflect that?
    Ms. Watkins. As I recall, there were extensive 
conversations because Promigas was an important asset for the 
region. We were legally selling it to this White Wing 
structure. Legally, we were losing control of the asset, and 
there was a lot of discussion that we wanted it back, we 
drafted some documents that would be trigger points where the 
business unit could buy it back.
    My understanding was that Mr. Causey instructed our 
business unit that there could be nothing in writing that the 
business unit could buy it back, or Andersen would not let us 
have the sale treatment that we were getting in the funds flow 
statement.
    Mr. Greenwood. And that was the purpose of that, because 
you would----
    Ms. Watkins. Yes.
    Mr. Greenwood. If the charade was evident, you wouldn't be 
able to get a tax trade.
    Ms. Watkins. Yes.
    Mr. Greenwood. The Chair recognizes the gentleman from 
Illinois, Mr. Rush, for 10 minutes.
    Mr. Rush. I want to thank you, Mr. Chairman, and Ms. 
Watkins. This is certainly very pleasing that you are here. 
Your testimony has been forthright, and I would say without any 
kind of value in terms of Ms. Temple's testimony. I am 
diametrically opposed to the kind of testimony that Ms. Temple 
presented to this committee, and it is certainly appreciative 
by the committee, at least one member of the committee, and I 
believe that it is appreciative--your testimony is 
appreciative--is appreciated by the American public.
    On what date did you first speak with Cindy Olson or 
communicate with her in any way about your concerns about the 
natural condition of Enron?
    Ms. Watkins. On the afternoon of August 16, following the 
all-employee meeting that had been held that day.
    Mr. Rush. And how many times did you speak with her about 
your concerns, and approximately during what time period?
    Ms. Watkins. She encouraged me to meet with Mr. Lay, which 
I did do. I then subsequently transferred into Ms. Olson's 
group. I did not have lengthy conversations with her after that 
about my concerns. I had expressed them to Mr. Lay, and I 
thought that was the best place to discuss them.
    Mr. Rush. So did you read your various letters--or did Ms. 
Olson, rather, read your--the various letters that you sent to 
Mr. Lay and the attachments?
    Ms. Watkins. I only showed her the anonymous letter, the 
one page. I did not provide her with copies of the other memos. 
If she obtained them elsewhere, I don't know.
    Mr. Rush. And what was her response when you showed her the 
anonymous letter?
    Ms. Watkins. She clearly understood that this was a serious 
problem, and she said that it would be best if I explained it 
personally to Mr. Lay.
    Mr. Rush. Okay. At what time did you--in your earlier 
testimony, you indicated that you had a discussion with Ms. 
Olson about Mr. Fastow's desire to have you terminated. At what 
point in the aforementioned series of discussions did you have 
that--express that concern to Ms. Olson?
    Ms. Watkins. When I met with Mr. Lay on the 22nd, I was 
leaving for a small vacation that Friday, coming back the 
following Thursday. When I came into the office August 30, I 
had messages to immediately go see Ms. Olson, and that is when 
she told me that Mr. Fastow had wanted to have me fired, and 
wanted to seize my computer.
    Mr. Rush. Okay. Did she in any way indicate to you the 
attitude displayed by Mr. Fastow? I mean, was he--his demeanor, 
or how did she exactly--how did she relate to you what he had 
said? What was his frame of mind? If you can----
    Ms. Watkins. She didn't give me a lot of details. She just 
said that he was behaving in a way that was somewhat shocking 
to her as well as Mr. Lay.
    Mr. Rush. And what is Ms. Olson's relationship with the 
Enron Corporation?
    Ms. Watkins. I believe she is a Senior Vice President or an 
Executive Vice President.
    Mr. Rush. Is she associated at all with the stock fund at 
Enron?
    Ms. Watkins. I was not aware of it. I have since seen, in 
some testimony, that she is a trustee. But I was not aware of 
her position with regards to the 401K plan.
    Mr. Rush. And if she was a trustee at the time when this 
all was occurring, do you think that she had any fiduciary 
obligation to at the very least make an investigation into your 
claims, pursuing your claims?
    Ms. Watkins. I think she probably understood that they were 
being investigated and by a professional law firm. I am sure 
she was waiting to see the results of that investigation.
    Mr. Rush. And can you be more specific about your concern--
about what you said to her about your concerns about Enron's 
financing? I mean, what was her response to you? Did you--how 
did she respond? And did she indicate in any way that she had 
heard these same kind of concerns from other Enron employees?
    Ms. Watkins. Well, after Enron declared bankruptcy, or even 
as we were heading up to it, she seemed to indicate that no one 
could have seen this coming. She said, in fact, that I was the 
only one that had any kind of inkling that we were in the bad 
condition that we were in. So I don't think she had evidence 
from anyone else, or opinions from anyone else, about our 
condition.
    Mr. Rush. Yes. My time is running down, but I am really--I 
want to--if you could just explain to the committee about the 
culture there at Enron. It seems to me that everybody from the 
President to the parking lot knew that there was--parking lot 
attendant knew that there was something going on there. I mean, 
explain to us about the culture that was prevalent there in the 
company.
    Ms. Watkins. Well, I certainly think it was fairly well 
known about the Raptor transactions within the global finance 
unit and within the business units that hedged with Raptor. I 
don't think it was well known throughout the company.
    And the culture in Enron was voted most innovative. It was 
voted one of the best places to work. It was the job to have in 
Houston. The atmosphere was electric. It was fun. You were 
surrounded by bright people, energized to change the world. You 
felt somewhat invincible. And, yes, people were arrogant, and 
it was--did have a trader kind of mentality that was sometimes 
tough to live with. But it was always a fun place to work.
    Mr. Rush. And most people were conscious about their upward 
mobility in the company, and they thought that the company 
would be a place to move up fairly quickly, is that----
    Ms. Watkins. Everyone was very conscious of what they were 
contributing in the last 6 months. The performance ranking 
system judged you on what you contributed to the company in the 
last 6 months. No old tapes. In that sense, it was very 
competitive.
    Mr. Rush. And Mr. Fastow and Mr. Skilling and others could 
very easily manipulate that type of concern to have people to 
overlook some of the transgressions that they--that we are 
looking into right now? Is that your opinion?
    Ms. Watkins. Enron paid its people very well. The stock had 
been performing very well. I think there was a concern by most 
people that you didn't want to rock the boat.
    Mr. Rush. Do you have any relationship, any subsequent 
relationship to the bankruptcy, to some of the Enron employees 
who had been fired from Enron, some of the lower level 
employees?
    Ms. Watkins. I know several people who have been let go.
    Mr. Rush. And do you--there is the issue regarding their 
severance pay. Are you familiar with those----
    Ms. Watkins. Or lack thereof.
    Mr. Rush. Or lack thereof, right. Can you expound on what 
you think is the problem with their severance pay, and what is 
the--why is it at this point in time there are some former 
Enron employees who have made tremendous amounts of money, and 
who have very generous severance pay, and then there are others 
who have been forced to live in ways that they never imagined 
that they would have to live because of the fact that they 
don't have the severance pay? Do you see a problem there? And 
what is the nature of the problem? And how would you recommend 
that we go about resolving the issue?
    Ms. Watkins. Well, recently it was disclosed, maybe at 
Salon.com, the retention bonuses that were paid the week before 
the bankruptcy. Some of the amounts I find shocking for 90 
days' retention, and I do not believe that it was in the best 
interest of creditors to--yes, we should retain certain people, 
but I don't think they needed to be paid, 3 and 4 times their 
base salary to stay for 90 days.
    I think it is an insult to the 4,000 people that were let 
go with $4,000 checks that there are a handful of people, more 
than a handful, that were paid $600,000, $1.5 million, $2 
million, $450,000. I mean, gargantuan sums of money to agree to 
stay at Enron for 90 days. I am appalled by that list.
    Mr. Rush. Thank you.
    I yield back, Mr. Chairman.
    Mr. Greenwood. The Chair thanks the gentleman and 
recognizes the gentleman from Iowa, Mr. Ganske, for 10 minutes.
    Mr. Ganske. Thank you, Mr. Chairman.
    And thank you, Ms. Watkins, for coming to the committee. 
You know, I am outraged at what has happened with Enron. 
Employees, pensioners, investors, they have seen their nest 
eggs disappear, and they speak about unbearable grief. In Iowa, 
we had--I have spoken to a lot of former employees of the 
natural gas company that was based in Omaha, merged with the 
Houston Natural Gas Company, became Enron, and they have lost 
everything.
    I mean, there was even a suicide when a former executive 
who left the company with millions couldn't deal with the 
collapse of the company. So this is really serious. I do not 
think this is--that the problems we are seeing with Enron are 
just an issue of corporate greed in one company. I think that, 
you know, we are seeing problems with companies like Global 
Crossing, Elon. They took--you know, gave the money to someone 
else, took some of it back, counted the income as revenue 
without counting the outgo as expense.
    Amazon has resorted to pro forma accounting. Shares in Tyco 
dropped 50 percent on questions of its accounting. So this is a 
big, big deal, the biggest bankruptcy in our Nation's history.
    I applaud the full chairman--the chairman of the full 
committee and the chairman of this investigative committee on 
doing this.
    Now, Ms. Watkins, just briefly, in a minute, tell me, what 
was your job around the time that you went to Ken Lay? What 
were you supposed to be doing for the company?
    Ms. Watkins. I was gathering a list of all assets that we 
might consider for sale and looking at the economic impact of 
sale. So I was looking at the book value, the market value, 
what kind of gain or loss we might get if we were able to sell 
that asset for its market value.
    Mr. Ganske. So you started--with that information, you 
started to piece together this whole scenario. Is that what 
happened?
    Ms. Watkins. Well, yes, because a number of assets were 
hedged with Raptor. And my understanding of a hedge is that 
means you have got a locked in sales value. And so some of 
these assets, most notably Avici and New Power, the market 
values were significantly below our book value. But since we 
had the assets hedged, that should have been really no concern 
of Enron's. It should have been hedged with Raptor.
    And the business units that were helping me pull together 
this information kept showing me losses, that should have been 
Raptor's, coming back to Enron.
    Mr. Ganske. Okay. Were you also hearing, you know, 
scuttlebutt around the company about some of these things that 
you were seeing?
    Ms. Watkins. Not accounting impropriety scuttlebutt, just 
pretty----
    Mr. Ganske. Did you ever hear, you know, at the water 
cooler about somebody who made an investment of $10,000, 
$15,000----
    Ms. Watkins. No.
    Mr. Ganske. [continuing] and got millions?
    Ms. Watkins. No, I did not.
    Mr. Ganske. Okay. So you are gathering all of this 
information together. Did you ever have any trouble getting the 
information?
    Ms. Watkins. On the structures and the way they actually 
worked, no, I did not. It was readily apparent people had 
various analyses and presentations that they provided me.
    Mr. Ganske. So then you write this letter to Ken Lay and 
you say, ``I am incredibly nervous that we will implode in a 
wave of impending scandals.'' I want to read this full 
paragraph. ``Is there a way our accounting gurus can unwind 
these deals now? I have thought and thought about how to do 
this, but I keep bumping into one big problem. We booked the 
Condor and Raptor deals in 1999 and 2000. We enjoyed a 
wonderfully high stock price while many executives sold stock.
    ``We then try and reverse and fix the deals in 2001, and it 
is a bit like robbing the bank in 1 year and trying to pay it 
back 2 years later. Nice try, but investors were hurt. They 
bought at $70 to $80 a share looking for $120, and now they're 
at $38 or worse. We are under too much scrutiny, and there are 
probably one or two disgruntled pre-deployed employees who know 
enough about the funny accounting to get us into trouble.''
    When you wrote this letter to Mr. Lay, what was going 
through your mind? Were you afraid?
    Ms. Watkins. Well, I wanted to impress upon him that this 
was something that was likely to happen. We were downsizing. We 
had at this point maybe let go at least 400 or 500 people and--
--
    Mr. Ganske. But this is bad news. Okay? And you are writing 
this--you know, you originally wrote this anonymously.
    Ms. Watkins. Yes.
    Mr. Ganske. Okay. This is really bad stuff. I mean, were 
you worried that if you go to the President with this type of 
stuff that this could affect you personally?
    Ms. Watkins. I certainly was not going to go to Mr. 
Skilling. I believed, and I still believe, that Mr. Lay is a 
man of integrity. He didn't shoot the messenger. I am still at 
Enron. And I felt like I could bring the concerns to him.
    Mr. Ganske. Did you put a personal copy of this somewhere 
outside of the company? Did you keep this--a copy of this memo 
somewhere else?
    Ms. Watkins. I did. And the day I sent it to Mr. Lay 
anonymously I also sent it in an envelope to Mr. McMahon with 
my name on it. And I talked to him about it that day.
    Mr. Ganske. Did you keep a copy for your own personal 
files?
    Ms. Watkins. Yes, I did.
    Mr. Ganske. And where did you keep those files? At home?
    Ms. Watkins. No.
    Mr. Ganske. At work?
    Ms. Watkins. No. In a lock box.
    Mr. Ganske. In a lock box. So you were enough concerned 
about this that you wanted to put this somewhere where it 
couldn't be destroyed.
    Ms. Watkins. Yes.
    Mr. Ganske. Were you worried about your own personal 
safety?
    Ms. Watkins. At times. Just because the company was a 
little bit radio silent back to me, so I didn't know how they 
were taking my memos, or the investigation.
    Mr. Ganske. Why would you be worried about your personal 
safety?
    Ms. Watkins. Because it was the seventh largest company in 
America.
    Mr. Ganske. And you were dealing with really--a really 
powerful problem.
    Ms. Watkins. Yes.
    Mr. Ganske. And a really powerful company. I just have to 
ask you this. When you first learned about this problem at 
Enron, did you own stock?
    Ms. Watkins. I have stock in the 401K plan, and I have 
stock options.
    Mr. Ganske. Did you sell any of that stock?
    Ms. Watkins. Yes, I did.
    Mr. Ganske. When did you sell it?
    Ms. Watkins. I routinely diversified and did not hold that 
much Enron stock or stock options. I did sell $31,000 worth of 
stock in late August, and then I sold net to myself around 
$17,000 of stock options in early October.
    Mr. Ganske. And you sent this first--these memos to Mr. Lay 
when?
    Ms. Watkins. August 15.
    Mr. Ganske. So around the time that you sent these memos, 
after you had gathered this data and gotten to know the 
financial situation of the company, you sold some stock. Why 
did you sell it?
    Ms. Watkins. I could have sold in July at $45. I actually 
sold in October more out of a knee-jerk reaction to September 
11. When the markets reopened after the terrorist attacks, most 
stocks did decline. Enron declined into the low 20's. I had 
virtually no stock options that were in the money in the low 
20's.
    In early October, we moved into the mid 30's and even high 
30's, and I had two blocks of stock options that were then in 
the money. And I just, I think as many others, I felt some 
panic and need to get cash because you just felt like, you 
know, when was the next attack? What would that impact be on 
the stock market?
    Mr. Ganske. So you sold $30,000 at one time and $17,000 at 
another time?
    Ms. Watkins. Yes.
    Mr. Ganske. So $47,000. When you found out--when you gave 
the second memo and had the meetings with Mr. Lay, and then as 
we have heard from testimony today, you know, you were 
concerned that, you know, it was going back to the same law 
firm, kind of looked like it was a cover up, things weren't 
happening too much. Did you ever think about, you know, going 
to Treasury, Justice, the SEC, blowing the whistle on this? 
This is--you know, you have outlined potentially criminal 
behavior.
    Ms. Watkins. A co-worker of mine asked whether I had done 
this, and she asked whether or not I would consider going to 
the SEC on this. And I said I don't want to hasten our demise. 
There are 20,000 employees here whose livelihood is at risk. If 
it appears that I hastened the demise of the company, I might 
be targeted by them. They might confuse the problem as 
something I caused. I did not want to hasten the demise.
    Mr. Ganske. When you had your conversations with Mr. Lay, 
did he ask you not to share this information with anyone?
    Ms. Watkins. He did ask me had I taken it outside; had I 
taken it to the SEC or the press, and I said no, I had not done 
so. And he said, ``Can you please give us time to 
investigate?'' And I said, ``Oh, most definitely.''
    Mr. Ganske. Did he give you a timeline? Did you ask him for 
a timeline?
    Ms. Watkins. I did not ask him for a timeline. But he 
seemed to indicate that they would look into it rather quickly.
    Mr. Ganske. Well, we all know, and you as an accountant 
could see the problems coming. I mean, you wrote about it an 
impeding implosion. This must have weighed quite heavily on 
your mind in terms of thinking about what would happen both to 
your fellow employees as they were locked in, and investors 
around the country.
    Tell me what you were feeling about that time, specifically 
on whether you had an ethical obligation to let this be known.
    Ms. Watkins. I wasn't thinking legally. I really felt like 
I could not go outside of the company. Enron was full of bright 
people. There were maybe calm ways of addressing this. Having 
it hit the press in an inflammatory way would definitely hasten 
the demise.
    And I wanted to make sure that we had researched everything 
thoroughly, because what I wanted to do was restate, come 
clean, but with some contingency plans how to make sure our 
trade counter parties had confidence in our survival, maybe 
shore up some equity and finance deals, knowing that we were 
going to face hard times.
    But to go to the press, or to go to the SEC, would not have 
given Enron a chance to try to fix it calmly. And most 
definitely this news would have been inflammatory, and we would 
be in the same position we are in right now.
    Mr. Greenwood. The time of the gentleman has expired.
    Mr. Ganske. Thank you, Mr. Chairman.
    Mr. Greenwood. Before I recognize Mr. Markey for questions, 
I just wanted you to clarify something, Ms. Watkins. The Powers 
Report indicated that you had not cooperated, or had not 
participated in that investigation. Is that the case?
    Ms. Watkins. Well, not actually. They called me for the 
very first time December 13 and wanted to interview me the 
following week. I was actually a little surprised that it took 
them so long to----
    Mr. Greenwood. It took them 2 months. Is that right?
    Ms. Watkins. [continuing] to call me, yes.
    Mr. Greenwood. Any indication why it took them 2 months, 
since you were so essential?
    Ms. Watkins. I had just hired Mr. Hilder. Enron was 
offering an attorney to represent me that was also representing 
Mr. Causey and Mr. Buy. I was not comfortable using that 
attorney, so I had spoken with Mr. Hilder. He was not up to 
speed yet on the issues. So we did meet with the Special 
Committee the week before Christmas, but just to say that we 
needed to reschedule. They indicated that they were trying to 
look at evidence first before they conducted interviews.
    Mr. Greenwood. The Chair recognizes the gentleman from 
Massachusetts, Mr. Markey, for 10 minutes.
    Mr. Markey. Thank you, Mr. Chairman.
    Thank you, Ms. Watkins. Pinocchio had a conscience called 
Jiminy Cricket. Every time Pinocchio ignored Jiminy Cricket his 
nose grew longer and longer. You were the conscience of this 
corporation. You warned them. And when they ignored your 
advice, they had to tell more lies. And the longer they told 
those lies was the more jeopardy that investors and employees 
of Enron were placed in.
    Now, what you have done is really very courageous. You are 
a hero. But being a whistleblower is something that can test 
the strength of the strongest person. It can buckle their 
knees. And I have a feeling that this is just the beginning of 
a process for you in terms of the stress that you are going to 
be under.
    I just want you to know that for my part, and I think I 
speak for every member of this committee, that if actions that 
you feel are unwarranted are being taken against you because of 
what you are doing here that you should let us know. They did 
the same thing to the Morton Thiokol whistleblowers that spoke 
of the 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 15 and August 22 letters to Mr. 
Lay, you warned that, ``We do have valuation issues with our 
international assets and possibly some of our Enron Energy 
Services and mark-to-market positions.''
    Now, we know that Enron has created thousands of special 
purpose entities. Do you believe that there may be some mark-
to-market valuation problems involving transactions with any of 
these other special purpose entities that were constructed?
    Ms. Watkins. I don't believe so. A number of the special 
purpose entities that Enron has are somewhat routine. Enron did 
hire the best and the brightest, and a lot of them were 
structures so if we did want to sell an international 
powerplant, we had a number of subsidiaries that might appeal 
to a European buyer, an Asian buyer. Some of them were very 
legitimate, just to provide us all the options we might want to 
pursue some time in the future.
    Mr. Markey. How about Enron's international assets? Do you 
think there could be some mark-to-market valuation problems 
there?
    Ms. Watkins. Not so much mark-to-market, but in accounting 
if you have a long-term asset on your balance sheet that you 
feel is permanently impaired, you must write that down. And I 
believe there may be some problems with some of Enron's 
international assets.
    Mr. Markey. And how does that problem manifest itself?
    Ms. Watkins. If it appears that you will not achieve over 
time the value you have paid for a particular asset, you must 
write it down. So that would be an income statement impact when 
you realize you have got the valuation problem.
    Mr. Markey. So, in other words, if they mark to the model, 
and it turns out the model is not working----
    Ms. Watkins. That is on our fair value assets.
    Mr. Markey. Right.
    Ms. Watkins. Most of the international assets were not 
necessarily fair value assets. Those tended to be the domestic 
ones. We do have some domestic assets that are fair value that 
are marked to a model that is somewhat subjective.
    Mr. Markey. Okay. Now, Mr. Skilling has told us that he 
wasn't involved in the March 2001 Raptor transactions. The 
Powers Committee reports that others at Enron say he was. And 
Powers is critical of Mr. Skilling's failure to assure that the 
Raptor losses were properly accounted for in the first quarter 
of 2001. Do you have any knowledge of Mr. Skilling's 
involvement with or participation in the Raptor vehicles?
    Ms. Watkins. No, I do not.
    Mr. Markey. You do not. Now, in October of 2000, Mr. Fastow 
convened a meeting of the LJM partners to review their 
activities. Mr. Skilling is listed as a guest speaker. On page 
7 of the presentation document for this meeting, Mr. Fastow 
says that the reason Enron needs private equity is because 
``energy and communications assets typically do not generate 
earnings or cashflow within the first 1 to 3 years, and 
investments dilute Enron's current earnings per share and its 
credit rating ratios.'' Do you agree with that?
    Ms. Watkins. Some energy and communication assets generate 
cashflow. But I guess he means our--Enron's energy and 
communication assets----
    Mr. Markey. Yes.
    Ms. Watkins. [continuing] were not generating cashflow.
    Mr. Markey. And you agree with that.
    Ms. Watkins. Yes.
    Mr. Markey. Now, the proposed solution in that document was 
``to deconsolidate assets'' and ``create structures which 
accelerate projected earnings and cashflows.'' Now, you had run 
the JEDI partnership and had sold a Colombian asset to White 
Wing to increase cashflow. Would you agree that this was the 
purpose of Enron's SPE?
    Ms. Watkins. The purpose of the Condor SPE appeared, in my 
opinion, to be to generate funds flow. As far as LJM, I am 
mainly familiar just with Raptor and the Raptor special purpose 
entities. And it does appear that that--that those were created 
solely to ensure that certain losses that should flow through 
our income statement were masked.
    Mr. Markey. All right. If you could turn to page 9, where 
it says that private equity can also be used for ``earnings 
generation.'' You found that to be true on the Raptors SPEs, 
didn't you?
    Ms. Watkins. Yes.
    Mr. Markey. You did. Now, Mr. Skilling told us under oath 
that while he was at Enron he was not aware of--and this is 
what he told the committee--``any financing arrangements 
designed to conceal liabilities or inflate profitability,'' and 
that, again, ``the off balance sheet entities or SPEs that have 
gotten so much attention are commonplace in corporate America, 
and, if properly established, they can effectively shift risk 
from a company's shareholders to others who have a different 
risk-reward preference. As a result, the financial statements 
issued by Enron, as far as I know''--this is Mr. Skilling 
speaking--``accurately reflected the financial condition of the 
company.''
    So, in your option, was Raptor IV ``a financing arrangement 
designed to conceal liabilities or inflate profitability?''
    Ms. Watkins. Well, I would focus in on his comment that we 
did these deals to shift risk and return to an entity that 
wanted to bear that differing risk and return. The risk and 
return scenario that Enron didn't want to bear transferred to a 
special purpose entity. We know from the Powers Report that 
there was no real economic risk transferred to Raptor.
    Mr. Markey. Do you believe that he knew the actual 
financial condition of the company? Mr. Skilling, that is.
    Ms. Watkins. Yes, I do.
    Mr. Markey. You do. Here on the LJM2 approval sheet, we 
have Skilling signing off at Tab 2. Doesn't that mean to you 
that Mr. Skilling was involved in Raptor?
    Ms. Watkins. On these transactions where he is signing off, 
he should be. I am looking at one that says Jeff Skilling, Joe 
Sutton, with no signature. But maybe it was--oh, I don't know 
who that is that signed it. But if there was a signature block 
on these sheets it had to be filled.
    Mr. Markey. Okay. So, yes, that would be back on the first, 
second, page 3, fourth page. It says LJM approval sheet, page 
3. And the bottom is Executive Jeff Skilling, with his 
signature next to it, March 12, 2001. Can you see that?
    Ms. Watkins. March 12, 2001. That is under Tab 2?
    Mr. Markey. Yes. It is in Tab 2, page 3.
    Ms. Watkins. Yes.
    Mr. Markey. Now, what does that indicate inside the 
corporate structure, as you know it, when a signature like that 
is under----
    Ms. Watkins. Well, he is approving Raptor IV. And I am sure 
he was well versed with what this meant.
    Mr. Markey. Are you sure?
    Ms. Watkins. He typically was very well versed.
    Mr. Markey. So in your opinion, then, at the very top of 
the company these men were well briefed with regard to what was 
going on inside of these special purpose entities.
    Ms. Watkins. It would be my opinion that Mr. Skilling would 
be very well briefed about these transactions.
    Mr. Markey. Well, again, I thank you.
    And, Mr. Chairman, I thank you for your----
    Mr. Greenwood. The Chair thanks the gentleman.
    Mr. Markey. [continuing] the last couple of years, and I 
thank you for your courage.
    Mr. Greenwood. Before recognizing the gentleman from Texas, 
the Chair is going to exercise the prerogative because the 
Chair has to turn the gavel over to someone else.
    Ms. Watkins, in your interview with V&E, you discussed that 
Fastow was, in effect, blackmailing banks to become investors 
in LJM. What did you mean by that?
    Ms. Watkins. I had heard from friends that worked at Chase 
and Credit Suisse and Bank of America that Mr. Fastow was 
almost somewhat threatening, that if you didn't invest in LJM, 
Enron would not use you as a banker or an investment banker 
again. That he was threatening the institutions, that to get 
Enron business they should invest in LJM.
    Mr. Greenwood. Did that appear to be a successful strategy?
    Ms. Watkins. By the investors that are in LJM2, yes, it 
appeared to work.
    Mr. Greenwood. And how about Mr. McMahon. He told us about 
promises that were made to the banks. Did he participate in 
that?
    Ms. Watkins. Well, I just remember from his testimony last 
week that he was----
    Mr. Greenwood. Did he----
    Ms. Watkins. [continuing] he was asked about----
    Mr. Greenwood. Did you discuss this issue with McMahon?
    Ms. Watkins. He and I discussed that Mr. Fastow used 
strong-arm tactics occasionally.
    Mr. Greenwood. Okay. The Chair recognizes the gentleman 
from Texas, Mr. Green, for 10 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    And, Ms. Watkins, I have some questions. But, first, I had 
somebody from Houston send me an e-mail. Well, it actually came 
from another Member of Congress, and the young lady actually 
worked in Houston. And she said this, ``Capitalism is if you 
have two cows, and you sell one and buy a bull, and your herd 
multiplies, and the economy grows and you sell them to retire 
on the income.''
    And now you have Enron capitalism. You have two cows. You 
sell three of them to your publicly listed company using 
letters of credit opened by your brother-in-law at the bank, 
and then execute a debt equity swap from an associated general 
offer so that you get all four cows back with tax exemptions 
for five.
    The milk rights of the six cows are transferred via an 
intermediary to a Cayman Island company secretly owned by your 
CFO who sells the rights to all seven cows back to your listed 
company. And the annual report says the company owns eight cows 
with an option for six more.
    When I saw this late last night, of course, we ran until 3, 
and I thought after hearing all of the testimony that we have 
heard before today, that is about what it sounds like. And your 
testimony is very refreshing, in all honesty. And like a lot of 
members, I, you know, respect you and admire you for being 
willing to put your job on the line to go up to the CEO and 
say, you know, ``We have a problem.''
    And, you know, after reading Vinson & Elkins' response, 
they didn't respond like it should have been, and your 
testimony has already showed that.
    Let me turn, if you could, to Tab 2 in your book. And what 
it is it is your memo that you sent to Mr. Hecker, because at 
our first hearing we actually had Arthur Andersen here and 
talked about your memo. Were you surprised--I know as a former 
Arthur Andersen employee--how quickly Mr. Hecker communicated 
your concerns to Andersen's management?
    Ms. Watkins. Yes, I am looking at Tab 16, and it is a memo 
from Mr. James Hecker dated August 21. I phoned him as he----
    Mr. Green. Okay. Yes, it is Tab 2 on mine. It is Tab 16 on 
yours. Okay.
    Ms. Watkins. I phoned him, as it says, more like a sounding 
board to talk to him about my concerns before I met with Mr. 
Lay. I was thinking it was just something between us. In 
hindsight, I realized the severity of what I was concerned 
about was something that probably would induce him to do 
something about it. And I read this when this committee 
released this document a few weeks ago.
    Mr. Green. Okay. And when you spoke with him, you said--and 
you told me you thought it would be confidential, or just 
between you and him, or----
    Ms. Watkins. Well, I didn't say confidential necessarily, 
but I was just trying to run some things by him. I did not 
realize he had written a memo until this year.
    Mr. Green. I guess in most organizations, though, if 
somebody brings something to my attention that impacts my 
company, or partnership in this case, you know, I would expect 
him to be able to go to someone else and say, ``By the way, 
there is a problem that has been brought up, and it is my job 
to pass this on, so somebody in a decisionmaking capacity 
higher than mine can do it.''
    How long did you work with Arthur Andersen?
    Ms. Watkins. Eight years.
    Mr. Green. Oh. So it was a number of years. Was it your 
experience that the practice groups tended to be sensitive 
about internal allegations of accounting irregularities during 
your 8 years?
    Ms. Watkins. If I was still an auditor at Arthur Andersen, 
and I got a call like mine, I would be highly concerned with 
the conversation and the topics that I brought up with Mr. 
Hecker.
    Mr. Green. So it would circulate in the office and----
    Ms. Watkins. It doesn't surprise me that he, after reading 
this, talked to the people that he did, and that he did try to 
bring a lot of attention to my concerns.
    Mr. Green. Yes. And were you surprised that it actually 
made it all the way up to Chicago?
    Ms. Watkins. Not really. Mr. Hecker indicated to me during 
our call that he hoped I wasn't right, because he didn't think 
their firm could stand another scandal following Waste 
Management and Sunbeam.
    Mr. Green. Yes. And we have discussed that before at our 
hearings. I guess the Andersen folks who are here developed 
some type of ``I don't remember'' and ``I don't recall'' 
illnesses it seems like people get when they come into our 
committee room.
    When you worked at Arthur Andersen--and I appreciate your 
insights on what has happened--but it seems like they weren't 
as forthcoming as maybe they should have been, having been 
notified last August, and maybe even questions before your memo 
to Mr. Hecker.
    In most of your memos, you have almost always provided a 
list of additional people to speak with about collaborating 
your views. And you have been documenting, saying, ``This is 
just my opinion, but here is other folks that can 
collaborate.'' Are there people in the Enron food chain that--
who would be helpful to our subcommittee to talk to that maybe 
if we haven't had the opportunity--our investigators--is there 
anyone that you know of that you may not have shared with our 
committee staff?
    Ms. Watkins. I think I have mentioned most of the names to 
the staff--and also here today--that would be useful.
    Mr. Green. Okay. Let me--another question. If you will turn 
to page 37. Okay. I am sorry. If you will--I am sorry, Tab 26. 
The agenda for the LJM investments from October 26, 2000, 
annual partnership meeting.
    Ms. Watkins. Okay.
    Mr. Green. I know that you haven't seen this document 
before. But I think you can shed some light on this for us. 
Now, on page 37 of this report, sample investments, Raptor I, 
their first bullet points to--or reads in relevant part that 
Raptor is a structured finance vehicle, capitalized with Enron 
stock, derivative in LJM equity, that will enter into 
derivative transactions with Enron related to investments in 
Enron's merchant investment portfolio.
    How can an entity that is capitalized with Enron stock 
derivative legitimately enter into a derivative transaction 
with Enron? And how can Enron book that income from these 
transactions?
    Ms. Watkins. Well, the main issue, too, is that it was 
primarily capitalized with an Enron stock derivative. And the 
LJM equity had been completely offset by a cash fee paid to 
LJM. Under that structure I don't see how it could have been 
legitimate.
    Mr. Green. Okay. And, again, this is the annual partnership 
meeting of October of 2000. In your memo in August, and what we 
have seen from the Powers Report that there was even 
information in the spring of 2001--so, you know, it was before 
your memo--and now we have the original--the annual partnership 
meeting--and I have to admit, I was a business major. But I 
couldn't make heads or tails about how you could quantify this. 
I appreciate your answer.
    On page 38, sample investments, Osprey. The first bullet 
point reads to relevant part that Osprey is a partner in an 
investment vehicle that purchases merchant assets from Enron. 
It is capitalized with 50 million shares of Enron stock. If an 
entity were capitalized with Enron stock, and Enron stock sold 
assets--Enron sold assets to that entity, is Enron essentially 
selling assets to itself again?
    Ms. Watkins. Osprey and Condor and White Wing are all the 
same vehicle. And this is the Condor that I was referring to in 
my memos that I was uncomfortable with.
    Mr. Green. So the answer to the question is, if an entity 
were capitalized with Enron stock, and Enron sold assets to the 
entity, is Enron essentially selling assets to itself?
    Ms. Watkins. In this instance, there were significant 
outside investors.
    Mr. Green. Okay.
    Ms. Watkins. And they could fall back on the assets for 
repayment.
    Mr. Green. Okay.
    Ms. Watkins. But it was also structured that if the assets 
were not sufficient to repay the debt investors, they also had 
the stock. Supposedly, this is a legitimate accounting 
structure. I am not happy with it. I think if there is a claw 
back to the company, to its own stock, it should not be off 
balance sheet. And the debt that came into Condor or White Wing 
or Osprey was used to purchase assets, and Enron got funds flow 
from operations treatment from that.
    And I think if it had been a consolidated special purpose 
entity, it would have been funds flow from borrowings. And 
those are two very different funds flow items, in terms of how 
an analyst would evaluate the company.
    Mr. Green. Okay. The second bullet points out that this 
structure created a synthetic, multi-billion dollar balance 
sheet for Enron that deconsolidated assets to generate funds 
flow. If, in fact, these structures created synthetic balance 
sheets for Enron that indicated an increase in funds flow, 
would this be intentionally deceptive to investors, in your 
opinion?
    Ms. Watkins. Yes. In my opinion, it would.
    Mr. Green. Ms. Watkins, you said earlier that the push to 
sell assets and increase cashflow began in the third and fourth 
quarters of 1999?
    Ms. Watkins. Yes, sir.
    Mr. Green. So now 1\1/2\ years later, in its continued 
effort to artificially increase its cashflow, Enron is selling 
its assets at inflated prices to partnerships of which its 
senior executives are the general partners. These partnerships 
are either capitalized with or guaranteed by Enron stock, and 
this was done to improve the optics of Enron's balance sheet in 
order to deceive Wall Street analysts and investors.
    I know that is a long phrase. But do you think these--in 
your opinion, these partnerships were either capitalized or 
guaranteed this was done to improve the optics. And I love the 
terminology, ``the optics of Enron's balance sheets to deceive 
Wall Street analysts and investors.''
    Ms. Watkins. It appears that some of these vehicles were 
used for financial statement manipulation.
    Mr. Green. Thank you.
    Thank you, Mr. Chairman.
    Again, thank you for being here, and I have been proud to 
read the articles about a Texas lady who is willing to do that.
    Chairman Tauzin. I thank the gentleman.
    I think we have gone through the roster of members who are 
qualified to ask questions. I want to acknowledge for the 
record, however, the presence, once again, of Congresswoman 
Sheila Jackson-Lee, who is not a member of our committee, and, 
therefore, not entitled to participate with questions but who 
has been an extraordinary participant through all of these 
hearing processes on behalf of the citizens of her community 
who have been so devastated by this collapse.
    And again, Congresswoman Lee, we welcome you and thank you 
for your attendance and your participation, physically and I 
know emotionally, in these hearings. Thank you.
    Let me, before we wrap, put a few questions into the 
record, Ms. Watkins, that I think are important as well because 
the answers will tell us a little bit about who was taking 
responsibility for what was going on and who was not. I want to 
focus on the gentleman who held the position of Executive Vice 
President and Chief Risk Officer.
    Now, would you describe for us the function of the Chief 
Risk Officer in the corporation?
    Ms. Watkins. Mr. Buy supervised our credit department.
    Chairman Tauzin. And his name is Rick Buy, right?
    Ms. Watkins. Rick Buy, yes. He supervised our credit 
department, our risk assessment and control group, and he was 
in charge of our risk management policy that was presented to 
the Board each year.
    Chairman Tauzin. So he was--according to our documents--
responsible for identifying, quantifying, controlling risk in 
both Enron's trading activities and their investment 
opportunities, right?
    Ms. Watkins. Yes.
    Chairman Tauzin. This would include all of these special 
entities and partnerships that Enron was engaging in, right?
    Ms. Watkins. Yes, that is correct.
    Chairman Tauzin. Now, did you ever have a conversation with 
him about the precarious financial condition of Enron and its 
reliance upon these questionable deals to continue to meet the 
earnings projections?
    Ms. Watkins. I had worked with Mr. Buy during the time 
period where I was managing the JEDI portfolio. I have also had 
discussions with him. He was a former co-worker and friend. The 
week leading up to my meeting with Mr. Lay, Mr. Buy was on 
vacation, and I actually phoned him. I was trying to use him as 
a sounding board as well.
    I told him a bit about my concerns and that I had a meeting 
scheduled with Mr. Lay. I asked him if I could fax him my 
materials to get his opinion about----
    Chairman Tauzin. But did you tell him that, in fact, some 
of the materials had come from his own shop?
    Ms. Watkins. No. But I just told him I had some memos that 
I wanted to fax him and have him look at.
    Chairman Tauzin. Did you identify those memos, or explain 
to him what they might say or----
    Ms. Watkins. I told him I was very concerned about the 
Raptor transactions, that we had very large accounting issues, 
and that it was not appropriate to be backstopping these Raptor 
losses with Enron stock.
    Chairman Tauzin. So you offered to send him all of this. 
What was his response?
    Ms. Watkins. He said he would rather not see it.
    Chairman Tauzin. Now, he would rather not see it? And his 
job was the risk officer for the corporation?
    Ms. Watkins. Yes, sir.
    Chairman Tauzin. And so I suppose you didn't send it to 
him, then?
    Ms. Watkins. No, I did not.
    Chairman Tauzin. So the Chief Risk Officer of the 
corporation was in a see no evil, hear no evil, speak no evil 
position?
    Ms. Watkins. It was----
    Chairman Tauzin. He didn't want to see the documents?
    Ms. Watkins. It would appear that would be the case.
    Chairman Tauzin. Now, did he tell you anything about the 
precarious financial condition of Enron and its reliance upon 
these deals?
    Ms. Watkins. Mr. Buy expressed the opinion to me, as early 
as maybe even 1997/1998, that he felt like Enron was one or two 
quarters away from disaster. Now, he had different reasons for 
that, but that was because we were a trading company. Trading 
companies usually it is hard to predict earnings. You have to 
depend upon volatility in the marketplace.
    And we were so dead set on predicting our earnings, and the 
street had become accustomed to us predicting our earnings. So 
he just felt like if we ever missed our earnings targets 
people, i.e. the analysts and the investing community, would 
look at us under a microscope and that he was concerned that 
would put us in in a disastrous position.
    Chairman Tauzin. So here is the Chief Risk Officer who has 
expressed to you concerns that you may be a quarter away from 
disaster because of Enron's reliance upon these transactions, 
who says to you, ``Don't send me the documents illustrating 
your concerns that there are serious problems with these 
transactions.'' How did you react to that?
    Ms. Watkins. I was disappointed because I felt like he was 
in a position to help us disclose these things with Mr. Lay.
    Chairman Tauzin. And you weren't going to get any help at 
all from him.
    Ms. Watkins. Right.
    Chairman Tauzin. Now, you were part of an investor 
conference call on October 23. Now, to put it in perspective, 
this is about the time that you are discussing with Mr. Lay 
your concerns and bringing them to him attention?
    Ms. Watkins. Well, it was after the earnings release, which 
talked about the $1.2 billion shareholder reduction.
    Chairman Tauzin. October 16, right?
    Ms. Watkins. October 16. We had an October 23 investor call 
that was open to the public, and I just listened in.
    Chairman Tauzin. Right. Now, I understand that Mr. Causey 
and Mr. Lay were members of that conference call.
    Ms. Watkins. Yes, that is right.
    Chairman Tauzin. And you had a chance to listen in to the 
conversations. Were the Raptors discussed in that conference 
call?
    Ms. Watkins. Yes. An analyst asked the question, ``Okay. 
Enron has unwound these Raptor transactions. You have written 
off the transactions in the third quarter of 2001. If they had 
never existed at all, what would have been the income statement 
impact for the year 2000?'' And Mr. Causey responded that there 
would have been little or no impact, because we could have done 
these transactions elsewhere.
    Chairman Tauzin. Was that a true statement?
    Ms. Watkins. I don't think so, and the Powers Report 
doesn't think so either.
    Chairman Tauzin. Did Mr. Lay have any comments on that 
point?
    Ms. Watkins. Well, Mr. Lay parroted Mr. Causey word for 
word. And I felt like that was a statement he didn't 
necessarily know, and it was unwise to parrot the Chief 
Accounting Officer on that statement.
    Chairman Tauzin. Now, here Mr. Causey and Mr. Lay are on a 
conference call with investors telling them that if the Raptors 
had not been a part of Enron there would have been no impact on 
the income statement. You believe that to be false. Did you 
express your concerns about these statements following that 
conversation?
    Ms. Watkins. Well, I did go into Ms. Olson's office, and I 
said, ``You need to warn Mr. Lay that he should not make 
comments like that unless he knows it to be a fact.''
    Mr. Tauzin. Did you make notes of those conversations?
    Ms. Watkins. Yes, I did.
    Chairman Tauzin. Have you supplied those notes to the 
committee?
    Ms. Watkins. I have them. I believe my attorney was going 
to supply them later.
    Chairman Tauzin. I would appreciate it if you would supply 
those notes that we might have them as part of the record. 
Without objection, that will be so ordered One final thing I 
want to get on the record, Ms. Watkins, that I think is awfully 
important, too. Once you were identified as the author of the 
anonymous letter you first sent, did any of the executive 
offices of Enron, of the 50th floor up, ever contact you to 
discuss with you what you had written? Did anybody praise you 
for coming forward from the 50th floor? Was there a difference 
between the reaction of Enron employees below the 50th floor, 
as opposed to those in charge on the 50th floor and above?
    Ms. Watkins. Well, the reaction from the employees that 
have been laid off has been just fantastic. They are very 
supportive. And then, I would say from 90 percent of the 
employees that are still there the reaction is also very 
positive. From the 50th floor, I have only had one person give 
me an ``atta girl'' so to speak, and that was Mr. Ray Bowen.
    Chairman Tauzin. One final thing. This is very important, 
obviously, for you and for us. Will you agree to inform us 
immediately if, as a result of your coming forward to testify 
before this committee, and your willingness to come forward to 
Mr. Lay with your concerns as you have, if any retaliatory 
action is threatened or proposed or suggested in terms of your 
employment and your position with Enron?
    Ms. Watkins. Yes, sir.
    Chairman Tauzin. All right. We thank you for that, and we 
assure you we will be watching that extraordinarily carefully.
    Are there any requests for additional questions?
    Mr. Deutsch. Thank you, Mr. Chairman.
    Chairman Tauzin. The gentleman from Florida.
    Mr. Deutsch. Just a couple of very specific followups. In 
your discussion with staff yesterday, you stated that you 
believed that Enron should have taken additional writeoffs 
beyond those in the November 8 restatement. Could you explain 
that?
    Ms. Watkins. Well, the Raptor vehicles that I wrote about, 
that were all associated with LJM2, they were unwound and 
written off in the third quarter of 2001. And they have yet to 
be restated. Those should be unwound as if they never existed, 
and they should restate 2000 results in the first quarter of 
2001.
    Mr. Deutsch. What is the significance of taking additional 
writeoffs, especially since Enron is now in bankruptcy 
proceedings?
    Ms. Watkins. It is the appropriate thing to do for a public 
company. We are still publicly traded and under SEC rules.
    Mr. Deutsch. And just a couple very quick followup 
questions. Is your sense that there was complicity with the 
auditors, Arthur Andersen, and, in a sense, with Vinson & 
Elkins as well, or was there basically fraud to both your 
accountants and your attorneys? In other words, was this a 
cooperative effort with Enron management to basically come up 
with these ideas? Or was the representation to the accountants 
and the attorneys misinformation?
    Ms. Watkins. It is my opinion that Enron transaction 
accountants, most notably Ben Glisan, helped come up with the 
structure and come up with the support for the structure, and 
then convinced Andersen that it worked.
    Mr. Deutsch. So they knew--what you are really saying is, 
in your opinion, they knew--it was not that Enron was holding 
back what the actual structure of the transaction was.
    Ms. Watkins. Oh, I think they understood the structure, 
yes.
    Mr. Deutsch. And the issues in terms of Enron being the 
guarantor and all of those issues?
    Ms. Watkins. Yes.
    Mr. Deutsch. You mentioned something, obviously, very 
disturbing. That you, in fact, felt fear of your personal 
safety. Did you do anything to follow up based on that fear?
    Ms. Watkins. I did actually talk with some Enron security 
personnel. I was a little bit concerned that I had--in effect, 
Mr. Fastow potentially lost his job because, you know, I 
brought up these concerns. And I actually talked to Enron 
security personnel about whether I should do anything 
different, more concern that Mr. Fastow might be vindictive.
    Mr. Deutsch. Did they give you any advice to take specific 
action?
    Ms. Watkins. Just general security advice on----
    Mr. Deutsch. Did Mr. Fastow exhibit any, you know, violent 
behavior----
    Ms. Watkins. No.
    Mr. Deutsch. [continuing] erratic behavior that would 
lead----
    Ms. Watkins. No. It is just I did not feel very much 
support. I did feel like I was a little bit of a lone fish 
swimming upstream, and so it starts to wear on you that it is 
you against them. And I was a little bit concerned.
    Mr. Deutsch. Are you convinced that Mr. Baxter's death is a 
suicide, or is it possible that there was another, you know, 
more nefarious activity?
    Ms. Watkins. I am sure the authorities have reported that 
correctly.
    Mr. Deutsch. Is there any doubt in your mind?
    Ms. Watkins. Probably not.
    Mr. Deutsch. Doubt in your mind about that it was a 
suicide?
    Ms. Watkins. Yes. I believe it probably was.
    Mr. Deutsch. If you say ``probably,'' there is doubt.
    Ms. Watkins. It is just a sensitive topic that I would 
rather not comment on.
    Mr. Deutsch. Okay. Let me--the last thing, is submit for 
the record a list of transactions of Enron management. This is 
something we talked about previously. It is actually a list of 
transactions of sales of Enron stock through the end of last 
year, totaling $1.1 billion.
    Chairman Tauzin. Without objection, the document will be 
part of the record.
    Mr. Deutsch. Total of 17 million shares. You know, 
obviously, none of these shares were sold at zero, at a dollar, 
at $5, at $10. And I guess, you know, these people were wise 
enough or lucky enough to sell stocks before the facts that you 
have described and that we have uncovered became public.
    And it is either they were all very lucky or, in fact, they 
were trading on inside information, as it appears from the 
outside looking in.
    Thank you, Mr. Chairman.
    Chairman Tauzin. Thank you very much.
    I would also ask that the record include the transcript of 
the conference call referred to in our recent questions as part 
of the record. Without objection, it is so ordered.
    The gentleman, Mr. Stupak, is recognized for questions.
    Mr. Stupak. Thank you, Mr. Chairman. Just a few questions, 
if I may.
    But before I do that, I want to thank you, Mr. Chairman, 
Mr. Dingell, Mr. Deutsch, Mr. Greenwood. We have had about five 
or six hearings now. They have been good hearings. We have all 
been working together on this debacle, if you will, and things 
have gone quite well. And I would also like to mention our 
personal staffs, especially committee staff. They work long and 
hard to help get us prepared and work----
    Chairman Tauzin. Will the gentleman yield?
    Mr. Stupak. Sure.
    Chairman Tauzin. There is a personal interest story. I know 
he is going to get upset with me for saying it, but the 
gentleman who is in charge of our investigative staff, Mark 
Paoletta recently went through lung surgery, serious lung 
surgery, a surgery he was attempting to put off while this 
investigation was proceeding. And I had to threaten to fire him 
to make him--in fact, go to his father and threaten to fire him 
if he didn't go to the hospital and take care of his lung 
surgery. He took care of it this weekend, and he is back to 
work already.
    The staff has done marvelous work, and Mr. Paoletta is 
particularly to be accorded our appreciation for his sacrifice 
of self to get this job done. And we thank you, Mark.
    I thank the gentleman.
    Mr. Stupak. And we all appreciate Mark being back and 
helping throughout this whole ordeal that we have been going 
through.
    Ms. Watkins, something has been sort of bugging me, and I 
have asked this question before and never really got an answer. 
Maybe you can shed some light on it. In one of the 
transactions, Mr. Copper, in a very short period of time, made 
like about $2 million. And the records and everything we have 
seen says there is no reason why he should make $2 million in 
about 2 months, no indication of what was the consideration for 
the compensation.
    But yet he made that money, and I believe it was on the 
Southampton deal, and maybe it was on the unwinding of Chewco 
or something like that. Just how would someone get paid $2 
million in this whole deal? I mean, how would you handle that 
on the books?
    Ms. Watkins. All I know about those transactions were what 
I have read in the Powers Report. And I would probably agree 
with the Powers Report that it does raise questions when you 
can have such large returns in such a short period of time.
    Mr. Stupak. What books handled that loss? The Enron books 
or Southampton? Would you know?
    Ms. Watkins. Well, if Enron was purchasing an interest----
    Mr. Stupak. Right.
    Ms. Watkins. [continuing] for instance, a Chewco interest 
or----
    Mr. Stupak. Which they are supposed to have been.
    Ms. Watkins. If you are buying back an asset, that goes on 
your books at the price you paid.
    Mr. Stupak. Paid.
    Ms. Watkins. So it is not an income statement item. It is 
not necessarily a loss for Enron and a gain for Mr. Copper. It 
could be an asset purchase by Enron that provided a gain to Mr. 
Copper.
    Mr. Stupak. Sounds like just the way to pass through some 
money real quickly, right? After you did your memo and Vinson & 
Elkins reviewed--did their investigation if you will, on or 
about October 15, they said that a broader investigation was 
not necessary and it was just bad cosmetics, and we can see our 
way through that.
    But then, the very next day, on October 16, is when Enron 
announced that, due to accounting errors and restructuring 
related to transactions involving LJM2, it was revising its 
shareholder equity numbers downward by $1.2 billion and posting 
a third quarter loss in excess of $500 million. And then, it 
went on, and you didn't believe at that time, even despite the 
October 16 announcement, that the whole story had been told 
about the looming financial and accounting crisis involving all 
of these partnerships and these PSEs.
    And then, on November 8, Enron stated its intent to redo 
their financial statements for the past 4 years due to 
additional accounting problems, again, with the LJM and Chewco 
partnership.
    Now, despite all of these actions, October 15 and November 
8, do you believe that we have learned all of the problems that 
are there, or are there still some things that you believe must 
be done to really come clean here with the American people and 
the stock and faith that people had in this company called 
Enron?
    Ms. Watkins. The only people at Enron saying there is a 
problem are the people hired from the Powers Report and myself.
    Mr. Stupak. So despite all of the restatement of accounting 
and restatement of financial statements, again, the Powers 
Report and you, so----
    Ms. Watkins. Well, the Raptor transactions have not been 
restated yet.
    Mr. Stupak. So what concerns would you still have, then, 
about the transparency or the accuracy of Enron's financial 
statements besides the Raptor hasn't been fully restated?
    Ms. Watkins. Well, the Raptor transactions need to be fully 
restated and----
    Mr. Stupak. Anything else?
    Ms. Watkins. Well, there was another memo written by an 
employee from Enron Energy Services. It was disclosed in the 
press. I think it outlined how Enron solved its EES mark-to-
market valuation issues that I raised at the first part of my 
anonymous letter. And that needs to be looked at. That is 
segment reporting. I am sure they actually bore the loss in the 
wholesale group, but that segment reporting was important to 
Enron in 2001.
    Mr. Stupak. Well, it seems like the October 16 reevaluation 
if you will was a result of your efforts, and it is our 
understanding between October 16 and November 8 you continued 
to push Ken Lay and others to do further restatements. So maybe 
after your testimony today we can expect some more restatements 
from Enron or some coming clean on Raptor or something like 
that. Hopefully, because we really want to get to the bottom of 
this. And what are all of the problems here? Let us get it on 
the table. They are in a bankruptcy situation, and we want to 
get this thing moved on.
    That brings me to my next question. In the minutes, and 
throughout some testimony and some of the flowcharts we have 
seen throughout here, there is mention of Enron Europe, the 
Southern Cone, which would be South America, Brazil, Australia, 
Japan. If we are seeing all of these problems here in this 
country related to Enron, do you know of any problems that 
others are seeing overseas? What has happened over there in 
Australia?
    In Brazil, they were particularly concerned about the 
devaluation of their currency there and how it would affect 
Enron. So the Enron collapse, how has it affected things 
overseas? If you know.
    Ms. Watkins. I am not--I was in Enron International, but 
most of the international assets are hard assets. They are 
accrual-based assets. They are fairly traditional. In a country 
like Brazil that has devaluation concerns, it might mean that 
we don't achieve the U.S. dollar cash price that we paid, but I 
don't know of anything that would indicate any kind of 
financial statement manipulation related to those assets.
    Mr. Stupak. I am looking at your memo. It is dated October 
30, 2001, 4:45. I am on the second page. It looks like it is 
Tab Number 21. And I am looking on the bottom of page 2, it 
says, ``Note.'' Are you with me?
    Ms. Watkins. Yes.
    Mr. Stupak. Okay. It says, ``Note: After restatement, the 
good news is that our core trading business is solid with 
strong numbers to report. The bad news, EBS was losing big 
money in 2000. The big losses then start until 2001, and EES 
did not start making a profit in 2000.'' So how would--were the 
shareholders ever made aware of any of this?
    Ms. Watkins. My concern when I was making this point was 
that Enron Broadband and Enron Energy Services were our growth 
vehicles. They were supposedly one of the reasons why we were 
enjoying a high PE multiple. And we did finally report to 
investors that EBS was losing money, large amounts of money in 
2001. But the Raptor hedge on Avici made EBS look like it had 
only lost $50- or $60 million in 2000 when actually it was more 
like $250 million.
    And it was very important to Enron that we announce that 
Enron Energy Services was profitable in 2000. Without the New 
Power hedges, EES was not profitable in 2000. This would have 
significantly impacted our PE multiples and our stock price in 
the year 2000.
    Mr. Stupak. So it is fair to say if--if you started losing 
money in 2000, it really wasn't reported until 2001. So you 
probably had--you have at least 12 months. So, basically, the 
shareholders weren't told the truth here what was going on with 
this situation. Is that a fair statement?
    Ms. Watkins. That is a fair statement.
    Mr. Stupak. Okay. With that, Mr. Chairman, I have nothing 
further. Thank you.
    And thank you again.
    Chairman Tauzin. I thank you very much, Mr. Stupak.
    As we conclude, I note, Ms. Watkins, that on that same memo 
you make the point that Lay should meet with top SEC officials, 
and that Key Lay and Enron needed to support one of the SEC's 
long-term objectives of requiring that the ``Big 5'' accounting 
firms rotate off their large clients on a regular basis as 
short as 3 years. Do you stand by that recommendation?
    Ms. Watkins. Yes, I do. As an investor in the U.S. stock 
market, I would feel a lot more comfortable knowing that public 
companies had to rotate their accounting firms every 3 years.
    Chairman Tauzin. It is a recommendation we receive from a 
number of sources as we go forward.
    Let me make several observations. First of all, that you 
sort of stumbled on the Raptors. You are not here saying that 
is all that may have been wrong. There may be other things in 
other transactions that are you not aware of that may need some 
inquiry. Is that correct?
    Ms. Watkins. Yes, sir.
    Chairman Tauzin. Second, that as I said at the beginning of 
this hearing, we are going to try to move as rapidly as we can 
from this inquiry into an actual examination of solutions. And 
the committees are beginning to do that. One of them met today; 
one of them met yesterday. And Mr. Greenwood and Mr. Stearns, 
in fact, have been asked by the committee to actually begin 
putting a set of recommendations together for the committee to 
look at.
    And your thoughts, as you have been asked before by some 
members, in regards to your observations and recommended 
changes we might make, are certainly welcome, and we would 
appreciate it.
    Ms. Watkins, your testimony stands for itself. It doesn't 
need a whole lot of elaboration or editorial comment. But I do 
want to make one. And that is that your testimony, your 
activities in regard to Enron, actually call all of us to 
examine the notion of corporate loyalty. There are some, I 
assume, who believe corporate loyalty is protecting the 
corporation against all harm, even when it is doing something 
wrong.
    You have demonstrated, for us, a different definition of 
corporate loyalty, a different definition of fiduciary 
responsibility to a corporation, that includes responsibility 
to its shareholders and investors. And I want to compliment you 
for that.
    There are mothers and fathers listening to these hearings, 
and who have heard your testimony, and now have an experience, 
I think, upon which to hopefully teach their sons and daughters 
who are going to work for American corporations about the 
notion of corporate loyalty that you bring to the table this 
morning, the notion that corporate loyalty means owning up to 
mistakes for the sake of the proper relationship with investors 
and consumers, and confronting them directly, and reporting 
them and dealing with them forthrightly.
    Would that the last clear chance you gave the leadership of 
Enron been accepted and taken, apparently that didn't happen, 
but you at least stood for that proposition. And, again, I 
commend you for that. I hope that sons and daughters of 
American citizens follow your example, frankly, and adopt your 
concept of corporate loyalty as a mantra.
    As I said, we are learning from these hearings. I think 
corporate America is learning from these hearings. And I truly 
believe, as Mr. Greenwood does, that when we complete them--and 
our work is not yet finished--but when we complete them we will 
together, Democrats and Republicans on this committee, be able 
to propose a set of reforms, together with the reforms that I 
know corporate America itself is talking about instituting, and 
agencies of our government are talking about instituting, that 
is going to build better, clearer, more responsible lines of 
communication and information and disclosure and investor 
confidence in this country.
    If that is a result of this mess, then perhaps our country 
will be much better for it in the end, and you will have 
contributed mightily to that process. For that, I thank you.
    And unless there is any other business to come before the 
committee, the Chair announces that the record will stay open 
for 30 days.
    Ms. Watkins, your testimony was under oath, of course. And 
if you and your attorney will carefully review it, if there are 
any additional comments or clarifications or additions you want 
to make to the record, the record is open for 30 days. We may 
have additional questions we would like to submit to you in 
writing to which you might respond.
    We will be in touch with you in that regard. Again, thank 
you for your extraordinary cooperation and for your 
contributions.
    The hearing stands adjourned.
    [Whereupon, at 4:06 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:] 
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