Employee wrote CEO to warn of Enron's risk, investigators say


WASHINGTON - An Enron Corp. employee explicitly warned the company's chairman in August that several years of improper accounting practices threatened to bring down the company, congressional investigators said yesterday.

"I am incredibly nervous that we will implode in a wave of accounting scandals," the employee wrote in an unsigned seven-page letter to Kenneth L. Lay, Enron's chairman and chief executive. Excerpts of the letter were released yesterday by the House Energy and Commerce Committee, one of five congressional committees investigating Enron's collapse.

The firm, which once had a market value of $70 billion, filed for Chapter 11 bankruptcy protection Dec. 2 after acknowledging that it had overstated its profits by nearly $600 million.

The seven-page letter suggests that Lay knew about the company's accounting problems at a time when he was assuring employees and the investment community that Enron's stock would rebound. It could also trigger significant new problems for Enron, its accounting firm, Arthur Andersen LLP, and Vinson & Elkins, the company's law firm, at a time when the Justice Department has dispatched dozens of prosecutors and federal investigators to Houston, where a federal task force's wide-ranging criminal inquiry will be based.

The anonymous warning letter to Lay was written by Sherron S. Watkins, a vice president of corporate development, according to several people who knew of the letter. Her letter was sent to Lay sometime between Aug. 14, when the company's chief executive officer, Jeffrey Skilling, unexpectedly resigned, and Aug. 31. In a letter dated Aug. 21, Lay sought to reassure Enron employees that the company was on solid footing, writing that "one of my highest priorities is to restore investor confidence in Enron. This should result in a significantly higher stock price." At the time, Enron shares were trading for about $36.88. By late November, it was trading as low as 30 cents a share.

After receiving the letter, Lay asked Enron's Houston law firm, Vinson & Elkins, to investigate the issues raised in it. But the company insisted that the law firm limit its investigation to a review of whether the letter contained new factual information and not conduct a wider inquiry into whether Enron was properly accounting for its profits and losses. On Oct. 15, Vinson & Elkins found that Enron had committed no wrongdoing, according to lawyers involved in the matter.

The law firm also identified Watkins as the author of the letter, and Lay later met with her.

Watkins could not be reached for comment yesterday. Her husband, Richard Watkins, referred phone calls to a lawyer.

In the letter, Watkins raised concerns about Enron's accounting practices and whether company partnerships were being used to hide losses and inflate Enron's stock price. These are among the issues being investigated by the Justice Department, the Securities and Exchange Commission, the Department of Labor and members of Congress.

According to people who have reviewed the full text of Watkins' letter, she wrote Lay: "I have heard one manager-level from the Principal Investments Group say, 'I know it would be devastating to all of us, but I wish we would get caught. We're such a crooked company.'"

Robert Bennett, Enron's Washington-based lawyer, protested the committee's release of excerpts of the letter. "I think it's very unfair for committees of Congress who profess to be conducting fair and objective investigations to be selectively releasing documents with their spokespeople putting spins on them," he said.

He said Lay acted "very, very responsibly" and was concerned about the issues raised by Watkins and referred them to Enron's outside law firm to be investigated.

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