Correction to This Article
The July 31 article in "The Fall of Enron" series reported that former in-house Enron attorney Kristina Mordaunt invested $5,800 in a partnership called Southampton Place that bought an interest in Andrew S. Fastow's first LJM partnership, and that she earned $1 million on her investment. Mordaunt says she performed legal work for Enron on the first LJM deal, but did not participate in the negotiations between Enron and LJM. She also says she was not involved with LJM transactions at the time she invested in Southampton and was not aware of what LJM was doing then. Enron terminated Mordaunt when it learned of her investment in Southampton.

Losses, Conflicts Threaten Survival

By April Witt and Peter Behr
Washington Post Staff Writers
Wednesday, July 31, 2002

Fourth of five articles

On Oct. 4, 2001, Kenneth L. Lay was on stage, one of the nation's most admired business executives presiding over an Enron Corp. energy summit at the Ritz-Carlton at Pentagon City. Appearing completely at ease, Lay told the assembled Washington policymakers that with more energy deregulation Enron and the nation would continue to flourish.

But Lay's Enron had only 59 days to live.

Back in Houston, Lay's treasurer, Ben F. Glisan, and another executive worked the phones, quietly breaking bad news to analysts for the nation's Big Three corporate credit-rating agencies: Enron was about to report significant losses for the third quarter. Its very survival depended on the rating agencies' pronouncements about its financial health.

But the Enron executives' efforts to explain the losses, more than half of which involved a secret series of financial deals code-named the Raptors, surprised and troubled the influential analysts.

"We were questioning and scratching our heads about the type of accounting they were using," John C. Diaz of Moody's Investors Service would later recall.

On Oct. 8, the company's outside board of directors -- friends and admirers of Lay -- gathered in Houston. Typically, board meetings were congenial celebrations of Enron tales of success. Directors accepted executives' confident assurances and a clublike atmosphere prevailed.

This time, company executives informed the board about the Raptors' losses, describing them as a one-time setback that didn't cast doubt on Enron's future. Board members also heard sketchy details about an anonymous employee who had raised questions about Enron's accounting. But Enron executives didn't identify the employee as Sherron Watkins, a company vice president, or disclose that her warnings were specifically about the Raptor transactions.

The directors later said they left the meeting thinking Enron was doing fine.

'Cease and Desist'

Elsewhere in the universe of people who lived and profited in Enron's orbit, fear was a contagion.

On Oct. 9, Nancy Temple, a 38-year-old lawyer in Arthur Andersen LLP's Chicago headquarters joined a conference call on Enron with two of the accounting firm's top lawyers. She jotted alarming news on her notepad: "Highly probable some SEC investigation."

Enron's third-quarter Raptor losses were not what most troubled Temple.

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