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Editor’s note: On June 10, Sherron S. Watkins, former vice president of Enron, spoke to more than 200 people in the ballroom at the Magnolia Hotel in Houston. The event was presented by Texas Lawyer. Watkins is known for alerting then-Enron chairman Ken Lay to accounting irregularities within the company. A portion of Watkins’ speech appears below, edited for length and style. Now, when I think about, you know, why I felt compelled to meet with Ken Lay, I really had confused all of his charitable giving with him being … a man of integrity. … [H]is focus on those less fortunate made me sort of conclude that he was good all the way around. And I thought, “Goodness .. wouldn’t the captain of the ship like to know that there’s a fatal hole and the Titanic is going to be sinking here, so he needs to man the lifeboats and save as many business lines as possible, try to save some shareholder value.” Well … Ken Lay certainly listened to me for about 30 minutes. I think it’s very understandable that he could conclude that I must be crazy because why would Arthur Andersen, a big, well-thought-of firm, sign off on something that was wrong? … So, I think it was easy for him to gravitate toward good news that I must be a little bit off my rocker. But … from my perspective, I thought I had laid it out pretty clearly. I really left him with one question to answer, which was: The Raptors [special purpose entities that prosecutors allege were used in manipulating Enron's financial statements] owe Enron $700 (million. You know, that’s a counterpart. That’s someone that … should be a third party. Find out who bears that loss. Find out where that $700 million is going to come from. If it comes from outside creditors, outside equity owners of Raptor, great. If it’s coming from Enron stock, from selling Enron shares sometime in the future, then I think we’ve got a problem on our hands that we need to investigate. [T]here’s not too many ways you can answer that. You know, where is that $700 million going to come from? .. I felt pretty strongly that that was the right question to ask. … But what Ken Lay did was authorize a legal investigation into my concerns, but basically he told the lawyers, don’t answer that question that she posed, don’t look at the accounting, don’t answer any of the questions she posed, just see if she has brought up any new facts. Is there anything in these memos, is there anything in the discussions that is a new fact? Well, I still to this day can’t understand how they decided that wordsmithing was going to give them any kind of coverage later in court. I mean, that’s the most bizarre limitation on an investigation I’ve ever heard. It’s almost like I said, “I think we’ve violated some securities laws here.” And they said, “You know, don’t look into that. You know, don’t look into whether or not we truly are violating the law. Just look into whether or not she’s bringing up any new facts. … [W]e have pieced together something we think will hold up in court. Let’s see whether she’s brought up something new.” I mean, it was destined to conclude that I wasn’t bringing up new facts. But … the fall of 2001 was incredibly bleak for me because so many people that I liked and respected in my mind did the wrong thing, went along with group-think, and I guess it is very much like “The Emperor’s New Clothes.” There were all kinds of people in that story, in that children’s fable. You know, there are swindlers that are weaving this fictitious cloth. But the emperor has sent in various ministers to check on the progress of the cloth before the parade, and none of them have been able to see the cloth but they’ve all lied and said that they can. So, I’m a little bit … like the boy before the parade, saying, “There are no clothes here.” Yet to have people actually step to the plate and say, “Yeah, I think she’s right, I think there are no clothes,” they would have to admit that they lied in the first place. Almost everyone that surrounded Ken Lay had been .. around when these structures [special-purpose entities] were hatched. They would have to say that if they didn’t outright bless the transactions, they certainly looked the other way or they failed to understand them. And, so each person seemed to just fall back on that, “Oh, well, Arthur Andersen must know what they’re doing. Don’t ask me, I’m not an accountant. You know, go check with Arthur Andersen.” [T]hat doesn’t play well in civil court. It is certainly not playing well with some of the criminal activities. What I try to counsel college students is … how do you make sure that you’re not part of the growing problem. Because I do have friends that have been indicted and are in very big trouble. I don’t particularly see them as the swindlers in the picture. I see them more as the people going along, intimidated into saying they saw a cloth when they didn’t. But that doesn’t really protect you when … everything has gone to hell in a hand basket. …

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