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HOUSTON � An investigation into possible accounting irregularities at Enron Corp. conducted by Houston’s Vinson & Elkins in the fall of 2001 was “bogus” in the estimation of the Enron employee whose complaints to former Enron Chairman Kenneth Lay prompted the probe. Sherron Watkins, the one-time Enron vice president who brought her complaints to Lay in August 2001, testified Wednesday in the Houston criminal trial of Lay and former Enron Chief Executive Officer Jeffrey Skilling that the V&E lawyers who did the investigation at the company’s behest did not contact all of the former and current Enron employees she thought might provide information about the accounting she found problematic. Watkins said lawyers from V&E, who were hired by Enron General Counsel James Derrick to look into Watkins’ allegations, met with her in September 2001 to tell her the results of their investigation. At that meeting, Watkins testified, V&E partner Joe Dilg became emotional. “His voice started to shake . . . as he talked to me. I thought this man was about to cry,” Watkins testified. “What in the world is going on? Why is this very senior, experienced top-dog lawyer sounding like this when he was talking to me?” Later in the day, under cross-examination, Watkins testified that V&E may have breached a duty to Enron by failing to do a full investigation at that time into her allegations. “They have a duty to the corporation. It is a duty they have if they believe representatives of the company have become corrupt. I do believe they broke the law,” Watkins testified under aggressive cross-examination by Chip Lewis, a defense attorney for Lay. “Are you telling these ladies and gentlemen [of the jury] that V&E was involved in some cover-up?” Lewis asked Watkins. “Why else would Joe Dilg’s voice sound like that? I’ve never seen such an experienced, mature, well-regarded lawyer act so nervous with me,” Watkins replied, as she rubbed her throat. “I think he hated what he was doing.” “Do you think he was committing a crime?” Lewis asked Watkins. “He wasn’t representing the best interest of the Enron corporation and that’s what he was hired to do,” Watkins testified. Dilg was traveling Wednesday and could not be reached for comment. Lewis also asked her to read to the jury a description in the book about Enron she wrote with Texas writer Mimi Swartz, “Power Failure: The Inside Story of the Collapse of Enron,” published in 2003. The book notes that V&E was “perennially listed” in the “Best Lawyers of America” book. Lewis asked Watkins if the firm had a good reputation. “In August 2001, it did have a good reputation,” she said. V&E issued a report on Oct. 15, 2001, titled “Preliminary Investigation of Allegations of an Anonymous Employee,” which the firm gave to Enron. Under questioning from Enron Task Force prosecutor John Hueston, Watkins testified Wednesday that the V&E lawyers met with her on Oct. 16, 2001, to discuss the results of the investigation into her complaints about accounting, including questions she raised about the true third-party nature of some off-balance-sheet structures known as the Raptors. By chance, Watkins testified, Oct. 16 was the day Enron announced its third-quarter financial results, including an approximately $700 million write-down for the Raptors. Watkins testified she told the V&E lawyers she was shocked that Enron chose to write down the Raptors during the third quarter. Instead, Watkins testified, she thought the company should have done a restatement to account for the losses in the Raptors. But after the lawyers from V&E apologized to Watkins for consulting with Enron’s accounting firm, Arthur Andersen, on V&E’s investigation � which Watkins had recommended against � Watkins testified the V&E lawyers said they found the accounting was appropriate. “They said they had Arthur Andersen review all the details of the Raptor structures and they said over and over again the accounting was appropriate,” Watkins testified about that meeting with V&E lawyers in 2001. “They said the optics were bad and that’s why these Raptor structures were written off.” Watkins said she told the lawyers that was illogical, noting that “if the accounting is appropriate when done, you don’t write it down, you let it run its natural course.” Watkins testified that she became agitated during the meeting with the V&E lawyers because she was concerned that the Raptor write-down would ruin her chances of finding a new job outside of Enron. She testified she was actively seeking a new job. “I was very agitated,” Watkins testified about that meeting with the V&E lawyers. “I couldn’t stay in my seat. I was pacing back and forth, concerned about my personal situation. . . . They kept on trying to comfort me.” In the report to Enron, written by partner Max Hendrick, V&E found that the accounting treatment of the Raptors was “creative and aggressive but no one has reason to believe that it is inappropriate from a technical standpoint.” Watkins, who testified in 2002 before a congressional committee investigating the downfall of Enron, testified during the afternoon that Lay made some misleading statements about the Raptor write-down during an analyst conference call on Oct. 23, 2001. Watkins became defensive and combative under cross-examination. During that cross-examination by Lewis, a Houston solo, Watkins said she believed Lay was listening to her concerns when she met with him on Aug. 23, 2001. Watkins testified that she felt she did her job in August 2001 by taking her concerns directly to Lay. “I felt at the end of the meeting, I had done all I could do. I told the captain of the ship,” she testified. Brenda Sapino Jeffreys’ is a senior reporter with Texas Lawyer.

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