Enron Whistleblower Sherron Watkins — Transcript

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1. 0:00so we came into work they're handing out
2. 0:03bags of lay's potato chips
3. 0:05and the nutritional facts were something
4. 0:07like
5. 0:08complete and honest feedback totally
6. 0:10anonymous and confidential we want to
7. 0:13know what you're feeling what you're
8. 0:14thinking
9. 0:19corporate fraud works best in the
10. 0:20shadows
11. 0:22behind corporate walls
12. 0:25how does the government bring these
13. 0:27wrongdoers to justice
14. 0:32whistleblowers
15. 0:34these are the stories of those who risk
16. 0:36their careers to shine a light on
17. 0:38allegations of fraud
18. 0:41today on fraud in america
19. 0:47well welcome to today's episode of fraud
20. 0:50in america i can tell you and i i told
21. 0:53our guest today before we got started
22. 0:55this is one that i've been looking
23. 0:56forward to
24. 0:57for many many reasons i went to law
25. 0:59school
26. 1:00my first day was september 10 2001.
27. 1:05unbeknownst to me of course down in
28. 1:06houston there was a an accounting
29. 1:09scandal brewing about this time
30. 1:12so as i was going through law school
31. 1:14this story broke
32. 1:15and it drastically changed some of my
33. 1:18long-term career goals and i ultimately
34. 1:20became a whistleblower attorney in large
35. 1:22part because of what happened uh at
36. 1:25enron so today
37. 1:27i'm very very honored to talk to our
38. 1:29guests
39. 1:30sharon watkins she's the former vp of
40. 1:32corporate development at enron
41. 1:34corporation um it will talk about today
42. 1:38it really was the jumping off point to
43. 1:40so many wonderful things that happened
44. 1:42in our world
45. 1:43to protect and encourage other
46. 1:44whistleblowers to step forward to
47. 1:47uncover fraud before it metastasized
48. 1:49into something quite big so
49. 1:51because of her courage she was
50. 1:54recognized by time magazine as one of
51. 1:57the time magazines people of the year
52. 1:59along with cynthia cooper who was
53. 2:01represented by a law firm that i
54. 2:02actually worked at
55. 2:04many many years ago
56. 2:05she was the worldcom whistleblower and
57. 2:08also colleen raleigh who was an fbi
58. 2:10whistleblower who stepped forward all of
59. 2:12that happened
60. 2:14exactly 20 years ago this month so this
61. 2:17is really a full circle moment for me
62. 2:20sharon welcome to the show well thank
63. 2:22you so much for having me i'm looking
64. 2:24forward to our discussions
65. 2:26yeah this should be this should be
66. 2:27really uh great but you know i got to
67. 2:30take you back to a town uh called
68. 2:32tomball texas population 6 000. can you
69. 2:37talk to me about you know what it was
70. 2:38like growing up there uh why that led to
71. 2:41who you are today
72. 2:43well um i'm glad you mentioned that you
73. 2:45know the time magazine cover with the
74. 2:47three of us
75. 2:48cynthia colleen myself you know
76. 2:51obviously we're all women i mean they
77. 2:53called it the year of the whistleblower
78. 2:54we've got a lot of things in common we
79. 2:56were the primary breadwinners for our
80. 2:58family
81. 2:59um we're people of faith
82. 3:01um but also we all grew up the three of
83. 3:04us grew up um in towns smaller than ten
84. 3:07thousand and i think what that does
85. 3:10is you do grow up
86. 3:12around neighbors relatives your parents
87. 3:16listening to them just casually
88. 3:18take responsibility for the village you
89. 3:21know just you know hey
90. 3:23call the mayor did you see somebody
91. 3:24dumped all that trash in the vacant lot
92. 3:26off of main street you know that that
93. 3:29there's this sense that your actions
94. 3:30matter we're all in this together
95. 3:33and i think that infused in us
96. 3:36an optimistic viewpoint that basically
97. 3:39we could speak up we could put things in
98. 3:41writing we could address
99. 3:43those in power because
100. 3:45we optimistically thought
101. 3:47you know that our actions would result
102. 3:49in riding the ship
103. 3:52now i say you know optimistic but also i
104. 3:54should say we were naive because i
105. 3:56really failed to grasp that
106. 3:59when
107. 4:00it's almost like you're calling the
108. 4:01mayor to let him know that he dumped
109. 4:04trash in the bank
110. 4:05right right you know failed to realize
111. 4:08where you might not want to hear that
112. 4:09news
113. 4:11yeah i think you're i think you're right
114. 4:13sharon as i look back over the last 20
115. 4:15years the whistleblowers that i've
116. 4:16interacted with many many of them come
117. 4:18from small towns people of faith who uh
118. 4:21view that if they face if they see
119. 4:23something should say something and if
120. 4:25that doesn't work you'd do something
121. 4:27that's simply uh is the right thing to
122. 4:30do for a lot of people i think
123. 4:32but that doesn't always work out i guess
124. 4:34so you grew up uh in this small town um
125. 4:38your mom if i get this right your mom
126. 4:40had a business degree
127. 4:42and she encouraged you to go into the
128. 4:44world of business is that right
129. 4:47well she did she um graduated from ut's
130. 4:50business school
131. 4:52back in the 50s you know she really
132. 4:54wasn't welcome into business so she
133. 4:56became a business teacher at
134. 4:59a local high school
135. 5:00but when i had to check a major when i
136. 5:02was heading to
137. 5:04ut
138. 5:05accounting was near the top of the list
139. 5:07and i would say i just had better things
140. 5:09to do and just checked it
141. 5:11it was
142. 5:12um she did encourage me like the bit
143. 5:14that the business school would be
144. 5:16you know a great place to park myself
145. 5:19um the interesting thing now is it is
146. 5:21very difficult to get into ut's business
147. 5:24school yeah you can't just sort of check
148. 5:26the major and say yeah this is what i
149. 5:27want to do
150. 5:30so off you went to the university of uh
151. 5:32texas and while you were there did you
152. 5:34find a love for accounting and business
153. 5:36how'd that all roll out
154. 5:38um i would actually say it was just um
155. 5:40it came easy to me
156. 5:42yeah i could you know take an accounting
157. 5:45test and just get one thing wrong you
158. 5:47know i'd make a 98 a 96 it was kind of
159. 5:50easy
160. 5:51and because i did have a high gpa i was
161. 5:53hired by arthur anderson in the houston
162. 5:56office and they were the place to work
163. 5:58in the 80s wow so this is uh let's see i
164. 6:02remember
165. 6:03correctly so this is 1981 is that right
166. 6:05you joined arthur anderson yeah and
167. 6:08eventually became an auditor but then
168. 6:10you decided at some point to head north
169. 6:12of the mason-dixon line
170. 6:14and join a firm in new york city is that
171. 6:17right well when i
172. 6:19in the 80s if you remember oil prices
173. 6:22dropped to under 10 a barrel
174. 6:25and the whole sector just had this
175. 6:27massive collapse so it was kind of not
176. 6:29fun auditing these
177. 6:31um oil and gas companies in houston
178. 6:33texas but i tell you what jeb sometimes
179. 6:36i think i'm a little bit of a jinx
180. 6:38so
181. 6:39um in 87 new york city was booming and i
182. 6:43was a manager at arthur anderson and i
183. 6:46heard the grapevine that if you just
184. 6:47raise your hand and say you wanted to
185. 6:49move to new york anderson would transfer
186. 6:51you there that they needed more you know
187. 6:53more auditors in new york
188. 6:55so i decided to do that and i moved
189. 6:58october 1st 1987
190. 7:00and like 16 or 17 laters days later it
191. 7:04was black monday right yeah where the
192. 7:06stock market collapsed the financial
193. 7:08sector had a lot of layoffs you know so
194. 7:12i ended up moving into litigation
195. 7:14support at arthur anderson
196. 7:16and that was interesting because it did
197. 7:18give me some insights
198. 7:20you know into
199. 7:22problem accounting firms that we helped
200. 7:24defend you know in other situations as
201. 7:26well
202. 7:27but after six years in manhattan i was
203. 7:29like oh i'm
204. 7:30i used to love the city but now it's
205. 7:32wearing on me time to get back to my
206. 7:34texas roots
207. 7:35and i thought hey when when you look
208. 7:37around enron was the only you know place
209. 7:40to work in houston it was the best paid
210. 7:42the best most exciting
211. 7:44you know if you could get a job at enron
212. 7:46that would be amazing during this time
213. 7:48enron was already the behemoth in
214. 7:50houston they had already taken off when
215. 7:52i actually first started there in 93
216. 7:54enron's mission statement was still
217. 7:56natural gas pipeline related
218. 7:59but this was 93 and jeff skilling had
219. 8:02been hired away from mckenzie in 1990
220. 8:05and he had started the gas bank and was
221. 8:08really helping open open up
222. 8:10the gas commodity trading business
223. 8:12which you know enron really was
224. 8:15you know a big part of why that that
225. 8:17market developed
226. 8:18and so we were already
227. 8:20being discussed you know in harvard
228. 8:23business case studies you know fortune
229. 8:25forbes were already looking at this gas
230. 8:28bank idea and what enron was doing so we
231. 8:31were kind of getting that most
232. 8:33innovative company recognition at that
233. 8:36point
234. 8:37so we at some point i guess your path
235. 8:40crossed with andy fastow can you talk
236. 8:42about uh your initial interaction with
237. 8:44andy did he hire you is that is that yes
238. 8:47andy was the one that hired me so um in
239. 8:501993 the summer of 93
240. 8:52enron had partnered with calpers the
241. 8:55california public employee retirement
242. 8:57system you know that's a multi-billion
243. 8:58dollar pension fund in california
244. 9:01and they're primarily in the stock
245. 9:02market but they had a small slice of
246. 9:05their portfolio that they reserved for
247. 9:07alternative investments things that
248. 9:08might bring a higher return
249. 9:10and they had started a
250. 9:1350 50 partnership with enron they put in
251. 9:16250 million dollars in cash
252. 9:18enron put in 250 million dollars enron
253. 9:21stock
254. 9:22and they form this
255. 9:24this investment partnership to do equity
256. 9:27investing
257. 9:28where you're lending
258. 9:30money to or equity investing in an oil
259. 9:33and gas company and part of that
260. 9:34requirement that capital funding you're
261. 9:37asking for the commodity back you know
262. 9:39you're wanting the oil volumes you're
263. 9:40winning the gas volumes so this was also
264. 9:43another way to jumpstart the trading
265. 9:45when you have some physical supply it
266. 9:47opens up some opportunities for you and
267. 9:50so that was the impetus for white fit
268. 9:52with enron and the trading operation
269. 9:55so andy's the one that hired me because
270. 9:57my experience with the commodity finance
271. 9:59shop in new york fit perfectly with what
272. 10:02he needed for someone to manage this
273. 10:04jedi portfolio oh jedi it was joint
274. 10:07energy
275. 10:08development investment partnership
276. 10:11so that's where some of the star wars
277. 10:12stuff started
278. 10:14you were perfectly placed given your
279. 10:16experience at all these different stops
280. 10:18along the way to recognize what was
281. 10:20actually happening here
282. 10:22only because of all these other
283. 10:23experiences where you're able to
284. 10:24ultimately connect the dots
285. 10:26that's exactly right jim that is so true
286. 10:28so
287. 10:29in 1996
288. 10:32and i want to slow down at this point
289. 10:33because this is an important point of
290. 10:35your story i think
291. 10:36um you talk about that you saw the seeds
292. 10:39of fraud around this time can you talk
293. 10:41about what what those were and why this
294. 10:44is so important to your story
295. 10:46well i appreciate you mentioning that
296. 10:48jeff because i think it is an important
297. 10:50part to the story it was
298. 10:52the third quarter
299. 10:54of 1996 and it had been a really
300. 10:58low volatile summer the trading shop had
301. 11:00not made much money they need volatility
302. 11:02to to make money
303. 11:04and it looked like enron's wholesale
304. 11:06operations was going to miss their
305. 11:08earnings target
306. 11:09and you know even as
307. 11:12under rich kinder you know
308. 11:14enron you just couldn't miss your
309. 11:16earnings targets
310. 11:17um so there was this whole all hands on
311. 11:20deck meeting
312. 11:21and there was a discussion
313. 11:23that okay we mark to market our gas
314. 11:26commodity positions and our oil
315. 11:28commodity positions you know that are
316. 11:30liquid marking to market requires a
317. 11:32liquid market and a readily determined
318. 11:35price
319. 11:36and the idea is that if you wanted to
320. 11:37sell this position tomorrow you could
321. 11:40you know that's what liquid means well
322. 11:42they decided that some of these equity
323. 11:44investments that were held within the
324. 11:46jedi portfolio that those were actually
325. 11:49held for sale they weren't strategic
326. 11:52assets
327. 11:53and we should be able to mark those
328. 11:55things to
329. 11:56market which really was marking it to a
330. 11:59model right
331. 12:01and they
332. 12:02termed it fair value accounting what is
333. 12:04the fair market value of these
334. 12:06investments
335. 12:08and i had a very big problem with it
336. 12:09because
337. 12:11it's not a liquid market it would take
338. 12:13months to sell these kind of equity
339. 12:15investments you know this is you know
340. 12:18when when a company has to sell a
341. 12:19corporation or an equity investment in a
342. 12:21hurry it's called a fire sale for a
343. 12:23reason you know you're not going to get
344. 12:25the true value of the company
345. 12:28and in september of 1996 enron took two
346. 12:33investments that it had within jedi and
347. 12:36wrote them up significantly one was
348. 12:38written up by 50 you know just
349. 12:40absolutely you know not correct and even
350. 12:43if you were trying to argue fair market
351. 12:46value
352. 12:47one of the investments had been
353. 12:49purchased out of the publicly traded
354. 12:51market
355. 12:52on early september
356. 12:54and then in one month they're writing it
357. 12:56up by 50
358. 12:58you know it just didn't hold water any
359. 12:59way you looked at it so i complained and
360. 13:02i even complained to some anderson
361. 13:04partners that were in the enron office
362. 13:06one day
363. 13:07and
364. 13:08i really got posed for it
365. 13:11and it really really bothered me and i
366. 13:13remember talking to
367. 13:15the head of risk management at the time
368. 13:17i said look i'm not in the accounting
369. 13:18department i'm not booking these entries
370. 13:21but my name is on the jedi portfolio i'm
371. 13:24the head you know i'm the person
372. 13:25managing this portfolio so this hap this
373. 13:28is happening on the assets i manage and
374. 13:31i just don't want my name associated
375. 13:33with it and so i looked to see about
376. 13:35transferring and by the end of that year
377. 13:37i had transferred with a group
378. 13:39that moved from wholesale to enron
379. 13:42international so i got myself away
380. 13:44from that activity
381. 13:46um
382. 13:47but
383. 13:48the reason i mentioned that those
384. 13:50transactions is
385. 13:52they really were the seeds
386. 13:54of enron's ultimate fraud
387. 13:57and in some cases those equity
388. 13:59investments went public
389. 14:01you know and we had some tech
390. 14:02investments they went high when the tech
391. 14:05boom was happening and they fell down to
392. 14:07the floor when the tech bust happened
393. 14:09and enron never wanted to write things
394. 14:11down
395. 14:12and the raptor fraud that i found in
396. 14:152001
397. 14:17what was a false
398. 14:18hedging strategy around those equity
399. 14:21investments that had been written up so
400. 14:23to avoid write-offs they did this
401. 14:25fraudulent structure
402. 14:26so
403. 14:27you know the the interesting thing or
404. 14:29connecting the dots of the big fraud
405. 14:32with the tiny fraud
406. 14:34and that's
407. 14:36you know i can trace the the seeds of
408. 14:38enron's big fraud back to september of
409. 14:401996.
410. 14:43this is such a uh
411. 14:45an interesting story i think maybe for
412. 14:46some of our listeners you know
413. 14:48we know without a doubt since we started
414. 14:50this show that there's people that
415. 14:52listen to this show on a regular basis
416. 14:54who are working for companies right now
417. 14:57and they're being asked to look the
418. 14:58other way right they're seeing some of
419. 14:59these seeds of fraud and sometimes they
420. 15:02find themselves justifying or um
421. 15:04explaining away you know it's not that
422. 15:06big of a deal the dollar amounts you
423. 15:08know it's not that much money um the
424. 15:10risk of the company and the stockholders
425. 15:12isn't that big
426. 15:14um so i think this story is really
427. 15:16important sharon this idea that seeds of
428. 15:18fraud can grow into becoming massive
429. 15:20forest of fraud that can bring down a
430. 15:22company so i really appreciate you
431. 15:23sharing that well jeb you make a great
432. 15:25point for anyone listening that is
433. 15:27looking at something small
434. 15:29i am so pleased with the bounty
435. 15:32provisions of dodd-frank
436. 15:35that give
437. 15:36whistleblowers within a public company
438. 15:38if they give tips referrals complaints
439. 15:40to the sec
440. 15:42and the sec investigates and finds the
441. 15:44company
442. 15:4510 to 30 percent of those fines go to
443. 15:46the whistleblower first off that's
444. 15:48attracted legal talent to the support of
445. 15:50the whistleblower you can find legal
446. 15:53support you can remain anonymous
447. 15:55but secondly
448. 15:57it gives an opportunity another tool
449. 16:00a check and a balance against abuses of
450. 16:03power within a corporation you know if
451. 16:05dodd-frank had been in existence in the
452. 16:0790s i would have contacted an attorney
453. 16:09reported this fair value accounting
454. 16:12the sec would have come in
455. 16:14slapped in on the wrist and said there's
456. 16:16no way this meets any kind of generally
457. 16:18accepted accounting principles this
458. 16:19doesn't work
459. 16:20they would have caused them to restate
460. 16:22their quarterly financial statements
461. 16:24find them and enron would have been
462. 16:26scared straight and this is the most
463. 16:28important point i think
464. 16:29we should actually be very grateful when
465. 16:31you see a small thing within a public
466. 16:33corporation i have an analogy i
467. 16:35sometimes like to use the word on the
468. 16:37street is that serial killers start with
469. 16:39the neighborhood cats before they move
470. 16:41on to human beings
471. 16:43so really you're
472. 16:44the sec is catching somebody when
473. 16:46they're killing the neighborhood cats
474. 16:48but you know that's going to grow into
475. 16:51worse killings you know so it's we
476. 16:53should be grateful when the small things
477. 16:56are are stopped and someone bothered by
478. 16:58it out there listening
479. 17:00get a hold of a whistleblower attorney
480. 17:02check it out see what can be done thank
481. 17:04you sharon uh so at taxpayers against
482. 17:07fraud we of course have 500 member
483. 17:09attorneys from across the country many
484. 17:10of them specialize in this area so if
485. 17:12it's not reaching out to us reach out to
486. 17:14somebody uh that can help you navigate
487. 17:16these important waters
488. 17:18um so one of the things sharon i heard
489. 17:21you talk about is that during this time
490. 17:23enron the culture seemed to shift from
491. 17:25this idea of embracing technical
492. 17:27proficiency to
493. 17:29uh embracing salesmanship and
494. 17:31cross-selling and it was all about uh
495. 17:34boosting those numbers can you talk a
496. 17:36little bit about that culture shift that
497. 17:38happened well
498. 17:39that culture shift was at arthur
499. 17:40anderson
500. 17:41oh interesting um yeah i was when i was
501. 17:44in new york for arthur anderson in the
502. 17:46late 80s you know i was um you know i
503. 17:48worked eight years at anderson so
504. 17:51you know ten years is when you're maybe
505. 17:53considered for partner
506. 17:55um so i'm bumping up on that partner
507. 17:57track and they told all of us
508. 17:59experienced managers
509. 18:01that the number one criteria
510. 18:04for making partner
511. 18:07was if we could if we took away all your
512. 18:09clients all your book of business that
513. 18:12you could replace that book of business
514. 18:13in one year
515. 18:15so they were telling us that
516. 18:17salesmanship as an accountant mind you
517. 18:19as an auditor
518. 18:21is more important than
519. 18:23you know technical proficiency standing
520. 18:25up for the rules making sure you're you
521. 18:27know clients were presenting financial
522. 18:29statements that fairly represented their
523. 18:31financial condition it became
524. 18:33salesmanship
525. 18:34and it's a it's a real shame
526. 18:37because anderson's culture that was so
527. 18:39[Music]
528. 18:40um it admirable for so many decades
529. 18:44shifted in the last decade of its life
530. 18:47you know it's it's interesting that i
531. 18:49conflated the two because there really
532. 18:51wasn't a dividing line here it seemed
533. 18:53right there's this conflict of interest
534. 18:54that right now seems obvious but back
535. 18:56then you know they're making millions
536. 18:58and millions of dollars uh in consulting
537. 19:00fees and auditing fees from enron so the
538. 19:03idea that they were going to actively
539. 19:05push back on enron seems somewhat
540. 19:07laughable now
541. 19:08it is um additionally the the sad thing
542. 19:12is that
543. 19:13anderson had a client retention policy
544. 19:16it was really to sniff out
545. 19:19you know a breeding ground for fraud you
546. 19:21know or is it their high executive
547. 19:23turnover
548. 19:25um what's going on with their accounting
549. 19:27treatments is there a pressure on the
550. 19:29bottom line you know just various things
551. 19:32and enron failed that analysis
552. 19:34you know they had a meeting
553. 19:36um in early 2001 about considering that
554. 19:40enron was their riskiest worldwide
555. 19:42client and should we drop them
556. 19:44and they the memo this all came out in
557. 19:46their trial you know their obstruction
558. 19:48of justice trial
559. 19:50so this memo says uh
560. 19:52you know it's a 52 million dollar a year
561. 19:54client it's likely to be a hundred
562. 19:56million dollar a year client sometime
563. 19:58soon
564. 19:58let's just kind of figure out how to put
565. 20:00more
566. 20:01you know eyes on the ball
567. 20:03um
568. 20:04on the enron matter
569. 20:05and you know that that was to their
570. 20:07demise
571. 20:08wow
572. 20:10in early 2000 um i'm trying to keep
573. 20:13these dates straight um andy fasdale
574. 20:15came to you with a spreadsheet can you
575. 20:18talk about what was on that spreadsheet
576. 20:20and why this ultimately led to
577. 20:22your memo
578. 20:23yes well so summer of 2001 i had been at
579. 20:27enron broadband
580. 20:29and that was a
581. 20:30an effort that was kind of before its
582. 20:32time at enron and
583. 20:34they were disbanding it the company you
584. 20:36know the corporation was saying we need
585. 20:39to put the brakes on some of this
586. 20:41broadband endeavor
587. 20:43and things were really moving around
588. 20:45rapidly and at enron it was what have
589. 20:47you done for me lately you know the rank
590. 20:48and yank performance review
591. 20:51so i um had two
592. 20:53immediate offers one from investor
593. 20:56relations and one from andy bastow and i
594. 20:59had my qualms about going to work for
595. 21:01andy again
596. 21:03um but he had been recently given the m
597. 21:06a responsibilities
598. 21:08and what he was asking me to do seemed
599. 21:11pretty harmless he said sharon we've got
600. 21:13a lot of assets that business unit
601. 21:15people have told us are not strategic
602. 21:17they're they're in the they're selling
603. 21:19them you know they're not planning on
604. 21:21holding these assets for long um this is
605. 21:24a spreadsheet of 200 assets that are
606. 21:26really held for sale actively marketed
607. 21:29by these business units
608. 21:31you've worked enron wholesale you've had
609. 21:34exposure to the pipeline group you know
610. 21:36all the enron international people i
611. 21:38need you to meet with all the different
612. 21:40business unit people
613. 21:41and determine which of these assets are
614. 21:43really going to sell by year end because
615. 21:46if it's not likely to close by year in i
616. 21:49got to go work some debt deals to meet
617. 21:52our cash flow targets now listen to that
618. 21:54i got to go work some debt deals to meet
619. 21:57our cash flow targets
620. 21:59you know that that was part of
621. 22:01pentagon's demise debt disguised as free
622. 22:04cash flow and that's where um this
623. 22:08listing of assets there were about a
624. 22:10dozen investments that were hedged with
625. 22:12the raptors and that's where the math
626. 22:15didn't add up and when i kept digging
627. 22:18and you know trying to figure out what
628. 22:20was going on with these raptor
629. 22:22structures
630. 22:23and they were
631. 22:24on paper only devised by andy
632. 22:27um
633. 22:28people just really
634. 22:30after two hours they would just throw up
635. 22:32their hands and say
636. 22:34you know i've got to admit i don't
637. 22:36really understand how these things work
638. 22:38but arthur anderson's blessed it so it
639. 22:39must be okay
640. 22:41um
641. 22:43and so these are
642. 22:45these are assets that really aren't
643. 22:46worth anything but they're
644. 22:48well
645. 22:49the assets were worth something um
646. 22:51initially a lot of them were the tech
647. 22:54equity investments that had gone public
648. 22:57and shopped through the roof and enron
649. 22:59had marked them to their highest stock
650. 23:02price
651. 23:03and then
652. 23:05you know of course the tech bus these
653. 23:06publicly traded tech companies had
654. 23:09dropped
655. 23:10and the raptors were
656. 23:13um these
657. 23:15vehicles that supposedly had entered
658. 23:17into
659. 23:19equity drip you know hedging
660. 23:21transactions derivative transactions
661. 23:23with enron agreeing to buy
662. 23:25these equity investments at their high
663. 23:28price
664. 23:29two years down the road
665. 23:31um so it was
666. 23:34you know my first thought when i heard
667. 23:36about it was i can't believe any the the
668. 23:38investors in raptor
669. 23:40yeah have such a high appetite for risk
670. 23:45they were kind of like a put or a call
671. 23:48you know we could put these equity
672. 23:50investments to the raptors at a certain
673. 23:52price you know why in the world
674. 23:55would they enter into these put
675. 23:57transactions with with enron on on these
676. 24:00stocks that were so volatile
677. 24:02and come to find out it was just all on
678. 24:05paper and total fraud
679. 24:07and how much money total are we talking
680. 24:09about here
681. 24:11it
682. 24:12it was 500 million dollars of losses
683. 24:15that were mass in the year 2000
684. 24:18and enron's net income
685. 24:21in the year 2000 was just over 900
686. 24:23million
687. 24:24so on a pre-tax basis this was 50 of
688. 24:27enron's earnings that were fraudulent in
689. 24:30the year 2000.
690. 24:33unbelievable
691. 24:34so these off-balance sheet
692. 24:37numbers that nobody really was aware of
693. 24:40um did you
694. 24:41make a decision uh did you think that
695. 24:44this was fraud at this point or
696. 24:46oversight um
697. 24:48would you what did you think was
698. 24:49happening here
699. 24:51it
700. 24:52shocked me that arthur anderson had
701. 24:54okayed these structures yeah right
702. 24:56they're mining the shop right and i was
703. 24:59i i was just aghast i dusted off my
704. 25:02resume i started to interview with
705. 25:03enron's peer companies
706. 25:06and
707. 25:07you know put the idea of a second child
708. 25:09on hold because now i needed to find
709. 25:12somewhere else to work this was just
710. 25:13horrible
711. 25:14but in a very short period of time jeff
712. 25:17skilling resigned and he had just made
713. 25:20ceo earlier that year
714. 25:22so it told me that that what i had found
715. 25:26was was really probably fraud because
716. 25:29these raptor structures
717. 25:31were going to have a problem
718. 25:34when when the term expired like in 2002
719. 25:37or 2003
720. 25:38um
721. 25:39so i first wrote a one-page anonymous
722. 25:42letter put it in employee dropbox
723. 25:44because ken lay our chairman who was
724. 25:47stepping back in as ceo he had said
725. 25:49we're going to have an all-employee
726. 25:50meeting to discuss this shocking
727. 25:52revelation that jeff skilling has
728. 25:53resigned
729. 25:55um i went to that meeting you know i
730. 25:58knew i delivered a bombshell one page
731. 26:00letter that's the one that said you know
732. 26:01i'm incredibly nervous we will implode
733. 26:03in a wave of accounting scandals
734. 26:05so i sat close listened closely
735. 26:08seemed like kenley was saying all the
736. 26:10right things that we want to you know do
737. 26:12things the right way if anyone's truly
738. 26:14troubled out there please you know talk
739. 26:16to the head of hr
740. 26:18and so that day i did go identify myself
741. 26:21to cindy olsen the head of our human
742. 26:23resources department
743. 26:24and she said well can lay
744. 26:26you know probably ask around to
745. 26:29rip causey the chief accounting officer
746. 26:32and
747. 26:32andy and they probably said everything's
748. 26:34fine
749. 26:36um he does better with face-to-face
750. 26:38meetings you know are you willing to
751. 26:39speak to him and and explain this to him
752. 26:41and i said yes yes i am
753. 26:43and she said i'll make sure he knows i
754. 26:45know you you've been around eight years
755. 26:46you're very credible
756. 26:48so she got me on his calendar for the
757. 26:50next wednesday and so from that thursday
758. 26:53to the next wednesday is when i had a
759. 26:55conversation with an arthur anderson
760. 26:57partner who listened to the whole
761. 26:59details and said i was probably right it
762. 27:01was probably fraud
763. 27:02um
764. 27:03the
765. 27:05other people gave me more information
766. 27:07a
767. 27:08powerpoint slideshow that had been given
768. 27:10to the board some excel spreadsheets you
769. 27:13know so they people were wanting the
770. 27:15truth to come out they were wanting
771. 27:16enron to do the right thing
772. 27:18and they did give me a lot of pieces of
773. 27:20evidence really to bring to my meeting
774. 27:22with ken lane so just for context for
775. 27:24people uh ken lay was the founder and
776. 27:27chairman of enron um if i can go back
777. 27:29for just one moment you mentioned this
778. 27:31anonymous memo you originally
779. 27:33put all your ideas down into one page
780. 27:36can you talk about that decision
781. 27:38and
782. 27:39what you decided to include what you
783. 27:41decided to leave out but most
784. 27:42importantly why did you decide to do at
785. 27:44least initially not attach your name to
786. 27:46that memo
787. 27:48well it was a pretty knee-jerk reaction
788. 27:50you know we find out skilling quits
789. 27:52tuesday at 3 30 after the markets close
790. 27:55and um i typed it up you know wednesday
791. 27:58just wow
792. 28:01and remember i've got some interviews
793. 28:02going i'm trying to
794. 28:05um
795. 28:06you know
796. 28:07find another job i've been
797. 28:09worried that we had committed fraud for
798. 28:11a couple weeks now you know so it's been
799. 28:13on my mind and so i put all that down
800. 28:16and
801. 28:17and where i thought the the problems
802. 28:19were
803. 28:20and i was really wanting him to
804. 28:24you know hire an outside law firm an
805. 28:26outside accounting firm now i really
806. 28:28wish i would have taken a breath and
807. 28:30just tried to find others to go in and
808. 28:32meet with me
809. 28:33also
810. 28:35jordan mintz was an in-house attorney
811. 28:38that worked for
812. 28:40andy fasstown and it came out later in
813. 28:43all the litigation and discovery that he
814. 28:45had been very concerned about these
815. 28:46structures and he had
816. 28:48he had
817. 28:50broken the rules at enron and hired an
818. 28:52outside law firm freed frank to look
819. 28:54into it and that law firm had told him
820. 28:57no this this stuff is just totally bad
821. 28:59totally wrong wouldn't hold water
822. 29:01so if i had found jordan and that report
823. 29:04and the two of us with that our that
824. 29:07other legal report in hand had gone to
825. 29:09ken lay you know possibly he would have
826. 29:11listened to us
827. 29:13so i should have put out a few more
828. 29:15feelers and found you know because look
829. 29:17that evidence was just right there did
830. 29:19you believe ken at this point did you
831. 29:20believe he was being sincere that they
832. 29:22really were looking to address problems
833. 29:25um yes and there were a number of things
834. 29:27that that he
835. 29:29he did that would make you
836. 29:30um think that
837. 29:32so they were asking all the employees to
838. 29:35go to this
839. 29:36link and fill out this anonymous survey
840. 29:39you know asking questions about the
841. 29:40company it was kind of cutesy but he you
842. 29:43know his name is ken lay so we came into
843. 29:46work
844. 29:47um in
845. 29:48early september and they're handing out
846. 29:52bags of lay's potato chips with a little
847. 29:55placard that you know was like you know
848. 29:57nutritional information
849. 30:00and the
850. 30:00the nutritional facts were something
851. 30:02like
852. 30:03complete and honest feedback totally
853. 30:06anonymous and confidential we want to
854. 30:08know what you're feeling what you're
855. 30:10thinking and so that was a huge effort
856. 30:13at getting you know truth known
857. 30:15so you get this feeling that okay he's
858. 30:18he's realizing things aren't right and
859. 30:20he's trying to to find
860. 30:22what's gone wrong within the company
861. 30:24under jeff skilling's leadership
862. 30:26yeah
863. 30:27you know i guess at some point it became
864. 30:29clear
865. 30:30that they weren't going to do the right
866. 30:31thing can you talk about
867. 30:33what happened that made you realize that
868. 30:35you know arthur anderson's not there to
869. 30:37cover they're not going to step forward
870. 30:38nobody else's that you've reached out to
871. 30:40is is going to step forward
872. 30:43can you talk about how that felt at that
873. 30:44point
874. 30:46um well similar to you starting law
875. 30:48school september 10th
876. 30:50um i spoke with vne on september 10th
877. 30:54a private law firm
878. 30:57yeah their primary law firm that it
879. 30:59really helped to bless some of these
880. 31:00structures
881. 31:02but you know i'm i'm still i'm still
882. 31:05going to give it my best shot you know
883. 31:06so i have this long meeting with them
884. 31:08and then the next day is 9 11.
885. 31:10um and you know
886. 31:12that really distracted so many people
887. 31:14from anything you know that my hiring
888. 31:17efforts outside of enron were put on
889. 31:19hold you know it was just what's
890. 31:21happening in the world now
891. 31:23and i was still trying to
892. 31:26you know hope that enron was doing the
893. 31:27best but
894. 31:29you know i
895. 31:30i wasn't queried again after my first
896. 31:33interview with vne
897. 31:35and that's when i was i moved down to
898. 31:37the 16th floor
899. 31:39cruddy little office no no real work to
900. 31:42do and
901. 31:43and you know i started to get very
902. 31:45suspicious about what was going on
903. 31:47because
904. 31:48the jobs that were offered to me
905. 31:50would be beneath my skill set beneath my
906. 31:53position and working for someone that
907. 31:56was basically like the best friend of
908. 31:58rick causey or someone like it looked
909. 32:00like a setup
910. 32:02to fire me or something you know it just
911. 32:04was it was just not good
912. 32:06um but i still kept trying to talk to
913. 32:09different people to get them to
914. 32:10understand what we needed to do
915. 32:13um but yeah at the same time behind the
916. 32:16scenes the wheels were coming off at
917. 32:18enron they came off pretty quick yeah
918. 32:21they decided to write off these raptor
919. 32:23structures and that was announced
920. 32:25mid-october so it still baffles me
921. 32:30that you know ken lay maybe he was
922. 32:32asleep at the switch ceo
923. 32:35but some of the executives that were
924. 32:36under him
925. 32:38that were now in leadership positions
926. 32:40they should have known better
927. 32:42um october 16th you know they announced
928. 32:46we've met our earnings yay everything's
929. 32:48great everything's wonderful but oh by
930. 32:50the way
931. 32:51um
932. 32:52we do have a non-cash write-off
933. 32:55we're adjusting shareholders equity by a
934. 32:58billion dollars down
935. 33:00and where um one of the write-offs is a
936. 33:03544 million dollar
937. 33:06non-cash non-recurring unwind of a
938. 33:08previously disclosed related party
939. 33:10transaction
940. 33:11you know remember 544 million is half of
941. 33:14the earnings from last year you know
942. 33:16like what
943. 33:17you know and how can something be
944. 33:18described as non-cash non-recurring
945. 33:21um
946. 33:22unwind of a previously disclosed related
947. 33:24party transaction anderson told enron
948. 33:26this was not
949. 33:28um something that could be a current
950. 33:31period write-off it has to be a
951. 33:32restatement
952. 33:34but
953. 33:36the next day october 17th 18th and 19th
954. 33:40the wall street journal hit enron with
955. 33:42expose articles front page articles
956. 33:45about
957. 33:46andy fast out his related party
958. 33:48structure
959. 33:49um you know they didn't have all the
960. 33:51facts but they were really exposing some
961. 33:54of the rot at enron
962. 33:56those articles helped start an sec
963. 33:58investigation by friday october 19th the
964. 34:01sec announced that they were doing an
965. 34:03informal investigation of enron's
966. 34:05financial statements and that's what
967. 34:07really started this
968. 34:09quick demise where enron was trading
969. 34:11about 33 a share and by the end of
970. 34:14november it was in the pennies
971. 34:16it didn't take long
972. 34:18this is this it's a fascinating story i
973. 34:21i found a lot of these articles back
974. 34:22from october 16th the 17th 18th tonight
975. 34:25all these stories breaking in the wall
976. 34:26street journal uh the the interesting
977. 34:29thing is here we are 20 years later a
978. 34:31lot of the stuff still happens but
979. 34:33thankfully uh because like sharon was
980. 34:35talking about dodd-frank has these sec
981. 34:38whistleblower protections and incentive
982. 34:40program
983. 34:41this whole wall street journal
984. 34:43expose is sometimes bypassed and the sec
985. 34:46gets involved without this kind of
986. 34:48public scrutiny which sometimes is a
987. 34:50very good thing right sharon allows the
988. 34:52sec to investigate without a big
989. 34:54shredding party which i believe may have
990. 34:56happened here too well and also i think
991. 34:59now with dodd-frank you know someone
992. 35:01like myself i would have reported the 96
993. 35:03things you know so people will report
994. 35:04the things and the reason i say that
995. 35:07um back in the 90s she really did not
996. 35:09the internet was really just getting
997. 35:11going
998. 35:12and
999. 35:13the main page if you wanted to talk
1000. 35:15about a company you went to yahoo's
1001. 35:18finance page
1002. 35:19under the company's ticker symbol that's
1003. 35:21right and that's where you would see a
1004. 35:23big chat board you know and that was
1005. 35:24really the only place for a chat board
1006. 35:26about a company's stock
1007. 35:29and there would be
1008. 35:32you know what looked like
1009. 35:34enron
1010. 35:35employees you know their their handle
1011. 35:37would be enron waterboy or something
1012. 35:39like that
1013. 35:40and there were really warnings
1014. 35:42that be careful this is a house of cards
1015. 35:44and ron's executives are going to go to
1016. 35:46jail one day
1017. 35:47and so there were other people other
1018. 35:49than me in the company upset so there
1019. 35:52would have been maybe multiple people
1020. 35:53going to the sec and earlier you know so
1021. 35:56hopefully this stuff was stopped you
1022. 35:58know i wonder about
1023. 36:00um the 2008 wall street crisis
1024. 36:04because there were
1025. 36:06whistleblowers
1026. 36:07worried about the subprime mortgage
1027. 36:09business they blew the whistle and they
1028. 36:12were
1029. 36:13um fired and they fired they filed socks
1030. 36:16complaints
1031. 36:17you know but just didn't get anywhere
1032. 36:19with them which is part of the reason
1033. 36:20why we have the dodd-frank provisions
1034. 36:23that's right but um you know perhaps the
1035. 36:25wall street mess could have been
1036. 36:27prevented had dodd-frank been in place
1037. 36:29so i think it's a wonderful check and
1038. 36:31balance that really works for the health
1039. 36:33of the system and the u.s chamber of
1040. 36:35commerce and the business roundtable
1041. 36:36should stop lobbying against these
1042. 36:39whistleblower protections
1043. 36:42yeah it's so interesting and talking to
1044. 36:43people over the years uh i think a lot
1045. 36:45of people that step forward as a
1046. 36:47whistleblower is it you know they they
1047. 36:49view that their company that they're
1048. 36:50very loyal to um has been hijacked by
1049. 36:53one or two people who are driving the
1050. 36:55company off-road
1051. 36:57sharon so this term whistleblower um i
1052. 37:00know that this is a term that um has
1053. 37:03evolved and changed when we when i
1054. 37:05started in this
1055. 37:06world it's a term that we sometimes
1056. 37:07didn't use i used the term truth tellers
1057. 37:09that these are the truth tellers because
1058. 37:11they didn't like the term whistleblower
1059. 37:13um what are you what are your views of
1060. 37:14the term whistleblower
1061. 37:16well i i think it's starting to improve
1062. 37:19it certainly normally it was synonymous
1063. 37:21with rat pink snitch
1064. 37:23tattletail
1065. 37:25um but it actually is starting to be
1066. 37:28um a bit more positive you know some of
1067. 37:31it was with the governmental
1068. 37:32whistleblowing to the inspector
1069. 37:34general's offices that happened you know
1070. 37:36in the last few years
1071. 37:38um
1072. 37:39some of the you know there's big big
1073. 37:41whistleblowers like
1074. 37:43you know edward snowden um
1075. 37:45reality winner you know that that people
1076. 37:48are behind their causes
1077. 37:51and champion that they help stop abuses
1078. 37:54of power and wrongdoing
1079. 37:56um
1080. 37:57so i i think they're i think the term is
1081. 38:00is changing but it's it's problematic i
1082. 38:03mean it's been 20 years since enron and
1083. 38:06i had high hopes
1084. 38:08for a
1085. 38:09you know career
1086. 38:11consulting boards of directors and
1087. 38:14um you know insurance providers of dno
1088. 38:17insurance
1089. 38:18and things like that and i was pretty
1090. 38:20untouchable right about now is when it's
1091. 38:23washing off
1092. 38:24and um
1093. 38:26and it you know appears that i will be
1094. 38:28employable
1095. 38:30wow 20 years 20 years
1096. 38:33you uh just to round off the story for
1097. 38:35everyone that's not aware uh so we
1098. 38:37mentioned andy fastille um he was
1099. 38:40sentenced to six years served five years
1100. 38:42forfeited assets valued at 23.8 we
1101. 38:45talked about ken lay guilty of 10 counts
1102. 38:47of securities fraud and then died three
1103. 38:50months before
1104. 38:51uh sentencing
1105. 38:52and and of course the company filed uh
1106. 38:54for bankruptcy and enron no longer
1107. 38:56exists and arthur anderson was
1108. 38:58criminally prosecuted
1109. 39:00um
1110. 39:01we here we are 20 years later um
1111. 39:04and things have changed
1112. 39:06uh by and large i think for the better
1113. 39:08um what else needs to happen to ensure
1114. 39:11that the next enron doesn't happen
1115. 39:15[Music]
1116. 39:16um
1117. 39:18i mean
1118. 39:19looking at it from a 40 000 foot level
1119. 39:22i think the problems within our system
1120. 39:24are our over use of stock options
1121. 39:28it's it's taking us down a different
1122. 39:30discussion path today
1123. 39:32but back in 93
1124. 39:34we passed a law in this country that um
1125. 39:37corporate salaries above a million
1126. 39:38dollars could not be deducted on
1127. 39:40corporate tax returns
1128. 39:42and that had a very negative unintended
1129. 39:45consequence
1130. 39:46that
1131. 39:47by that point ceos were making 3 million
1132. 39:504 million in cash salaries so those were
1133. 39:52lowered to just below a million but now
1134. 39:55you had to make up the difference and so
1135. 39:57that was done in stock options and stock
1136. 39:59options are not worth anything the day
1137. 40:01they're granted
1138. 40:02because the option exercise price is the
1139. 40:05current stock price of the publicly
1140. 40:06traded company
1141. 40:08and usually they best over time you have
1142. 40:10to stay
1143. 40:11employed by the company the company
1144. 40:13stock price has to go up you can't you
1145. 40:15know
1146. 40:16it um the market could have a collapse
1147. 40:19you know something else could happen so
1148. 40:21if you're trying to make up 2 million in
1149. 40:23cash
1150. 40:24you give an executive five million
1151. 40:26dollars for the stock options because of
1152. 40:28all the time value of money and risk
1153. 40:29inherit and actually those stock options
1154. 40:31being worth five million
1155. 40:33and so the consequence of that
1156. 40:36law was that like in 1990 ceos on
1157. 40:40average made 82 times the average hourly
1158. 40:44worker in america 82 times
1159. 40:46by 2000
1160. 40:48ceos not the c-suite not the c-class
1161. 40:50ceos in this country made 531 times the
1162. 40:54average worker
1163. 40:56most of the analysis right now will tell
1164. 40:58you that the
1165. 40:59c executives you know ceo ceo cfo
1166. 41:02make in the 300s that they make 300
1167. 41:05times above the average
1168. 41:08hourly worker and most of that
1169. 41:09compensation is coming through
1170. 41:11exercising stock options
1171. 41:13so stock option use is exorbitant in the
1172. 41:16us versus europe japan canada
1173. 41:19you know those countries their ceos
1174. 41:21makes 10 or 20 times you know average
1175. 41:24hourly worker but the problem with that
1176. 41:26is once the high executives have stock
1177. 41:29options so do the rank and file
1178. 41:30employees and that makes everyone avoid
1179. 41:34bad news
1180. 41:35nobody wants to to recognize a problem
1181. 41:37and correct it because that could tank
1182. 41:40the stock price and their stock options
1183. 41:42would now be worthless or it's going to
1184. 41:44take a longer time for them to be worth
1185. 41:46anything
1186. 41:47so that is a big problem
1187. 41:49um i think that's that drives
1188. 41:53gamble the company behavior it
1189. 41:56drives avoiding recognizing problems and
1190. 41:59getting them corrected so if we were to
1191. 42:01do anything in this country i think we
1192. 42:03should
1193. 42:04um
1194. 42:05focus on stock options
1195. 42:07and their use
1196. 42:09wow that's
1197. 42:10thank you for putting that on our radar
1198. 42:12i really appreciate that um
1199. 42:14sharon so you talked about you know
1200. 42:16this so you stepped forward you exposed
1201. 42:19what was happening here and then in this
1202. 42:21next act you've been um telling this
1203. 42:23story
1204. 42:24for many many years and different
1205. 42:26speaking engagements and inspiring
1206. 42:28people
1207. 42:29um you know would be or should be
1208. 42:31whistleblowers to step forward you've
1209. 42:32inspired uh
1210. 42:34the next generation of whistleblower
1211. 42:35attorneys like myself um and now you're
1212. 42:38talking about you know you're now
1213. 42:39employable what is the next act for
1214. 42:41sharon watkins
1215. 42:43well i am teaching corporate governance
1216. 42:45ethics and leadership
1217. 42:47so i do a weekend course at unc
1218. 42:50kenan-flagler's school and i'm soon to
1219. 42:53be the executive in residence at texas
1220. 42:55state university teaching ethics there
1221. 42:58and doing some student mentoring so i'm
1222. 43:00excited i'm i'm jumping into academia
1223. 43:04professor watkins that's very cool
1224. 43:07that's very cool
1225. 43:09well sharon i i really appreciate your
1226. 43:11time i just want to acknowledge you for
1227. 43:13having the courage to go against the
1228. 43:15tide uh when it seemed like 8 000 fish
1229. 43:17were swimming downstream and not doing
1230. 43:19anything you swam upstream
1231. 43:21and pushed against what was an obvious
1232. 43:24fraud scheme but i appreciate everything
1233. 43:26that you've done uh for our country and
1234. 43:28moving uh really being the impetus and
1235. 43:30the driving force for some really key
1236. 43:32legislation uh that's gonna protect
1237. 43:34future whistleblowers so thank you so
1238. 43:37much for all of that
1239. 43:38well jim thank you for the work you do
1240. 43:40and thank you for having me on your
1241. 43:41program today
1242. 43:42absolutely well guys if you're looking
1243. 43:44for a book to read uh sharon put out a
1244. 43:46book in 2004 called power failure the
1245. 43:49inside story of the collapse of enron it
1246. 43:52is a fascinating reading there's lots of
1247. 43:54books out there about this but sharon's
1248. 43:56story uh is the ones you certainly want
1249. 43:58to read to fully understand what
1250. 44:00happened here
1251. 44:01um next week we're going to take another
1252. 44:03dive into a little different area of of
1253. 44:06the law and whistleblowing i'll keep
1254. 44:08that a secret for now make sure you join
1255. 44:10us next time on the next episode of
1256. 44:13fraud in america
1257. 44:15if you believe you've witnessed fraud
1258. 44:17against the government at your job or
1259. 44:19want to learn more about these important
1260. 44:21laws to combat broad visit fraud in
1261. 44:24america.com on our website you can find
1262. 44:26whistleblower lawyers logs from these
1263. 44:29expert attorneys and more you can also
1264. 44:31find a transcript of today's show show
1265. 44:33notes a way to contact our team and a
1266. 44:36way to chip in to make sure we can keep
1267. 44:37bringing you the latest on fraud this
1268. 44:40episode was edited and produced by
1269. 44:41rachel brooks and our theme music is by
1270. 44:44conor chaos a big thanks to our staff
1271. 44:47and researchers of jeb white james king
1272. 44:50emma bass jackie amar kate scanlon brian
1273. 44:53markovitz and max boltman you can learn
1274. 44:55more about them at fraudinamerica.com
1275. 44:59team bryan america is a project of
1276. 45:01taxpayers against fraud education fund