Outside law firm probed complaints
HOUSTON (AP) – Enron Corp.’s outside law firm conducted a monthlong investigation of complaints raised by former Vice President Sherron Watkins and determined many of her concerns were fueled by office gossip and financial report footnotes, a lawyer in the investigation testified Wednesday. Max Hendrick, a partner with Houston law firm Vinson & Elkins LLP, also said in the criminal fraud and conspiracy trial of former Enron Chief Executive Jeffrey Skilling and founder Kenneth Lay that the September 2001 investigation turned up no evidence the energy trading company sought retaliation against Watkins.
Watkins, who warned higher-ups the company was a financial house of cards, testified last month that she discussed her concerns with Lay only to learn months later that her job was threatened for doing so. She also said she believed an independent legal and accounting investigation should have been conducted of the concerns and accused Vinson & Elkins of lying when it determined accounting by outside firm Arthur Andersen was appropriate. “What we did, we carried out and took our job seriously,” Hendrick said. “We carried out our investigation in a professional way. I approached it just as I would an engagement for anyone else.”
Asked by Lay attorney Bruce Collins if he was “prepared to throw away 30 years of professional integrity to conduct a whitewash,” Hendrick replied: “I certainly was not.”
Watkins wanted independent legal and accounting firms to investigate her complaints because Vinson & Elkins and Arthur Andersen had approved off-the-books deals she cited in them.
Hendrick, however, said when he discussed the investigation with Enron legal counsel James Derrick, he was told that the company wanted a quick investigation and believed introduction of others not familiar with Enron would slow the process.
Derrick was to testify after Hendrick, to be followed by Skilling, although the lawyers expected the long-anticipated appearance of the former chief executive would not be until Thursday.
“I think, as best I recall, Mr. Derrick indicated he would like the company to move quickly and maintain the investigation on a confidential basis,” Hendrick said. But he said the impression he received was the “overriding notion of doing the right thing in response to Ms. Watkins,” Hendrick said.
“We understood some of her information came from office gossip,” Hendrick said after talking with her. He also said after conversations with her and after reviewing other materials, “It became clear she was relying on footnotes to financial statements to come up with numbers.”
Hendrick said he and a partner met with Watkins in mid-October as Enron was announcing massive third-quarter 2001 losses related to the unwinding of partnerships led by Chief Financial Officer Andrew Fastow that Andersen had deemed appropriate.
“I think her concern was even if the accounting was appropriate, it looks bad,” Hendrick said of Watkins’ sentiments. “She did express on at least one or a couple of occasions Enron was a risky place to work and she needed to escalate her job search.”
On Tuesday, jurors were told of the company’s prolonged but unsuccessful efforts to unload troubled assets.
Prosecutors have said that Skilling gave the go-ahead for partnerships run by Fastow to buy poorly performing assets and investments to warehouse them and help Enron boost earnings.
But Mark Metts, a former top mergers and acquisitions executive at Enron, testified Tuesday that when he suggested Fastow was getting preferential treatment in a deal to buy a wind power project, Skilling responded he wanted Fastow to “play by the same rules” when bidding against potential buyers.
Metts said his suggestion involving the “Project Wind” deal earned him a tongue-lashing from Fastow in a 10-minute phone call where Fastow did most of the talking, screaming at him that “I was out of my mind that he was being treated special.”
“He was very hostile in a very “You’re in trouble’ sort of tone,”‘ Metts said.
Fastow also sent an e-mail to Skilling, questioning in April 2001 whether his LJM partnership was being put at a disadvantage at the expense of what was best for Enron, according to evidence.
Within weeks, Metts was demoted and put under the supervision of Fastow, who testified last month that the second of his partnerships, LJM2, was created to deposit poor Enron assets and investments so the company could hide debt.
“I wasn’t there for long anyway, so it didn’t matter,” said Metts, now a partner at a Houston law firm and specializing in mergers and acquisitions.
“Project Wind” ultimately was sold, but not until after Enron in December 2001 had filed for bankruptcy protection. By then, Skilling had resigned and Fastow had been fired.
Skilling faces 28 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces six counts of fraud and conspiracy.
In other testimony Tuesday, lawyers picked away at parts of the government’s allegations, disputing earlier testimony that layoffs were disguised as reassigned jobs. Other testimony focused on a troubled power project in India where Enron spent more than $1 billion and eventually settled for $20 million.
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AP Business Writer Kristen Hays contributed to this story.
AP-ES-04-05-06 1308EDT