HOUSTON -- Former Enron Corp. executive Sherron Watkins based some of her allegations about problems with the company's accounting practices on gossip and rumors, a lawyer who investigated Watkins' claims testified yesterday.
Max Hendrick III, a lawyer at Vinson & Elkins LLP, said he started a monthlong investigation of Watkins' claims in August 2001, after she brought them to ex-Chairman Kenneth L. Lay. Watkins was named one of Time magazine's People of the Year in 2002 for raising red flags about accounting practices that helped lead to the energy trader's collapse.
"Some of her information came from office gossip," Hendrick told jurors during the 10th week of the federal fraud and conspiracy trial of Lay and Enron's former Chief Executive Officer Jeffrey K. Skilling.
Defense lawyers presented Hendrick to cast doubt on Watkins' testimony that Lay was skeptical about her accounting warnings and he hired Vinson & Elkins to do a "bogus" investigation instead of a comprehensive probe.
Lay, 63, and Skilling, 52, face at least 25 years in prison each if convicted on charges that they conspired to defraud investors by manipulating the company's earnings while selling their own Enron shares at inflated prices.
The government alleges the executives hid billions in debts and losses in off-the-books partnerships created by former Chief Accounting Officer Andrew S. Fastow to do Enron-related deals. Fastow has pleaded guilty to fraud in connection with some of those deals and faces 10 years in prison.
The Lay and Skilling defense teams contend that the defendants were deceived by unscrupulous subordinates such as Fastow and prosecutors are seeking to criminalize normal business practices.
Fastow's partnerships, along with investment hedges they helped create, were partly to blame for the ruin of what was once the U.S.' seventh-largest corporation, legal experts have said.
Watkins, an Enron vice president and former Arthur Andersen LLP accountant, testified last week that she approached Lay in the late summer of 2001 with questions about the accounting used in connection with the company's Raptor hedges. The vehicles were used to insure against losses on the company's investments.
Watkins testified that she warned Lay that she believed millions in losses had been improperly hidden in the Raptor hedges. She also told Lay she was "incredibly nervous" that Enron would "implode in a wave of accounting scandals."
She asked Lay to hire independent lawyers and accountants to review the hedges' structures. Watkins said she questioned whether Andersen and Vinson & Elkins could conduct the review since they had signed off on the Raptors at their inception. Andersen served as Enron's regular outside auditor at the time.
Instead, Enron's in-house lawyers hired Hendrick to do a "preliminary investigation" of Watkins's allegations, Hendrick testified yesterday. Enron was the Houston law firm's largest client at the time.
Hendrick said Vinson & Elkins' relationship with Enron would have disqualified it from doing a full "independent investigation" of wrongdoing at the company. Enron paid the law firm as much as $120 million in fees between 1999 and 2001.
He noted that Enron's in-house lawyers only asked him to do a preliminary probe of Watkins' allegations to determine if a comprehensive investigation was warranted.