Whistle-Blower Shifts Focus of Enron Trial

Former Enron Corp. accountant Sherron Watkins, here with attorney Philip Hilder, testified Wednesday that she warned then-Chairman Kenneth L. Lay of the firm's fraudulent partnerships and had said the firm was "crooked." (By Carlos Javier Sanchez -- Bloomberg News)

HOUSTON, March 15 -- Former Enron Corp. accountant Sherron Watkins told jurors on Wednesday that she warned former chairman Kenneth L. Lay about "an elaborate accounting hoax" that could bring down the company but that Lay instead chose a path toward concealment and "disaster."

The mid-morning entrance of Watkins, who was named one of Time magazine's persons of the year in 2002 for her role as a corporate whistle-blower, turned heads at the defense table and in the crowded courtroom. Until now, most witnesses in the seven-week-old government case have concentrated on the actions of former chief executive Jeffrey K. Skilling. But her testimony marked a shift, as prosecutors focused increasingly this week on the actions of Lay in the company's final months.

Prosecutors contend that Lay misled investors and employees in a series of conference calls and meetings designed to paper over problems and maintain the stock price. Watkins's account came a day after a former Enron pipeline worker blamed Lay for steep losses in his retirement savings account and a former executive recounted how he confronted Lay during a meeting of top company officials.

Watkins met with Lay in August 2001, sounding alarms about partnerships that she said could lead the energy trader to "implode in a wave of accounting scandals." Lay listened and "winced" as he read a line in her memo that called Enron "crooked" and said it deserved to get caught. But, she testified, Lay ultimately disappointed her by presiding over a whitewashed internal investigation into "fraudulent" partnerships that put the company on a course for bankruptcy.

Lay and Skilling face multiple fraud charges that could put them in prison for the rest of their lives if convicted. The defendants could begin putting on evidence as early as the end of the month.

Defense lawyers for both men had unsuccessfully sought to limit Watkins's account to bar her from sharing opinions she had formed. U.S. District Judge Simeon T. Lake III rejected that bid, saying it would keep Watkins on the stand for only "about two minutes."

Watkins's direct questioning by prosecutors was peppered with numerous tag-team defense objections. Under prodding from Skilling attorney Ronald Woods, the judge three times instructed jurors that sometimes-inflammatory Watkins memos were admitted against Lay, but not Skilling, whose sudden resignation had triggered her warning memos to Lay.

That was an unusual turn in a case in which Skilling has been the primary government target.

On cross-examination from Lay lawyer Chip Lewis, Watkins responded with fiery, occasionally combative remarks. Lewis tried to show that Lay accommodated her concerns and that he relied on auditors and lawyers at Vinson & Elkins LLP, one of the most "preeminent legal institutions" in the country. "Not anymore," Watkins said, referring to the firm's reputation.

Lewis also stressed that Watkins sold about $47,000 worth of Enron stock during the same period as Lay. Watkins said her sales were "wrong" because she knew nonpublic information about Enron's problems.

Skilling lawyer Woods worked to paint Watkins as a malcontent speaking beyond her expertise and as a woman who has gotten rich by writing a book and charging as much as $30,000 per speech on Enron's failure.

The day before, Johnnie Nelson, the pipeline worker, told the eight-woman, four-man jury that he "lost everything" when the company filed for bankruptcy protection in December 2001. He said he had believed Lay when, acting as chief executive in October 2001, Lay told employees that the "underlying fundamentals of our business are very strong."