A Texas law firm, asked by Enron Corp. to examine accusations by a company vice president that the firm was about to “implode” from improper accounting, told Enron last year that the claims did not warrant “a further widespread investigation.”
The vice president, identified yesterday as Sherron Watkins, who oversaw the company’s global financing, told Enron Chairman Kenneth L. Lay in August that one senior company manager had said of the firm’s accounting practices, “I know it would be devastating to all of us, but I wish we would get caught.”
“I realize that we have had a lot of smart people looking at this and a lot of accountants including AA&Co. [Arthur Andersen & Co.] have blessed the accounting treatment. None of that will protect Enron if these transactions are ever disclosed in the bright light of day,” Mrs. Watkins wrote.
On Dec. 2, the Houston-based company filed for Chapter 11 protection in New York, the largest corporate bankruptcy in U.S. history.
The law firm, Vinson & Elkins, said in an Oct. 15 letter to James V. Derrick Jr., Enron’s executive vice president and general counsel, that based on the “findings and conclusions” of its inquiry into the accusations, “the facts disclosed through our preliminary investigation do not in our judgment warrant a further widespread investigation by independent counsel and auditors.”
The firm said “some response should be made” to Mrs. Watkins to assure her that “her concerns were thoroughly reviewed, analyzed and although found not to raise new or undisclosed information, were given serious consideration.”
It said, however, the preliminary probe had left its lawyers “with concerns” over the “bad cosmetics involved” in two energy partnerships formed by Enron executives in what congressional investigators have said were attempts to conceal mounting losses.
“Coupled with the poor performance of the merchant investment assets places in those [partnerships] and the decline in the value of Enron stock, there is a serious risk of adverse publicity and litigation,” the firm said.
The House Energy and Commerce Committee distributed copies of the Watkins letter at a press briefing a day after congressional investigators probing Enron’s collapse released partial excerpts from the letter.
Spokesman Ken Johnson said Mrs. Watkins has agreed to an interview by the panel, calling her letter “the first real smoking gun that showed company officials had some knowledge, or at least were warned of, a potential problem in advance.”