Months before Enron’s illegal activities were exposed, Sherron Watkins, then vice president of corporate development, wrote a memo in 2001 to Enron CEO Kenneth Lay about the firm’s shady accounting practices. She was alarmed by the complex web of off-balance sheet vehicles set up by finance director Andrew Fastow, whom she had become wary of when he asked her to lie to an Enron partner about an investment. “I am incredibly nervous we will implode in a wave of accounting scandals,” she wrote to Lay. “The business world will consider the past successes as nothing but an elaborate accounting hoax.” Watkins met with Lay about a week later, when he stepped back into the role of chief executive after the resignation of Jeffrey Skilling. Though he feigned concern about the illicit activity, Watkins learned later that Lay ignored her recommendation to hire outside accounting and law firms to investigate. At the time, she didn’t realize her advice was like telling a bank robber to stop robbing the bank. The company ended up filing for bankruptcy in 2001, with more than 5,000 jobs and $1 billion in employee retirement funds wiped out.
Watkins’s role in uncovering the Enron scandal was key to the corporate juggernaut’s collapse. Her memos proved that Enron executives were aware of the criminality going on in their midst. In the powerful documentary, “Enron: The Smartest Guys in the Room,” which tells the inside story of the scandal, Watkins is prominently featured. Here’s how the top three “smartest guys” ended up:
Ken Lay: He and Skilling were tried together and found guilty in 2006 of deceiving shareholders about Enron’s financial condition by hiding debt and losses in a series of off-balance-sheet entities. Lay died of heart disease two months later while awaiting a prison sentence that could have lasted 45 years.
Jeffrey Skilling: As the company’s hands-on leader, he set the tone that made greedy behavior and shady accounting standard operating procedure. When Skilling abruptly resigned as CEO, he cashed out nearly $60 million in stock – knowing the company was nearing its breaking point. In a 2003 interview, Watkins said, “Jeff Skilling was incredibly charismatic but very, very intimidating. You were certain he was just the brightest guy around, but in hindsight I really feel we were somewhat like cult followers.”
Skilling received a prison term of 24 years — one of the toughest prison sentences for a white-collar offender — for conspiracy, insider trading, securities fraud and making false statements to auditors. The sentence was reduced by 10 years in 2013, driven in part by a 2009 appeals court ruling regarding federal sentencing guidelines. In exchange for the reduced sentence, Skilling gave up about $42 million, all of which will be distributed to victims of Enron’s fraud.
Andrew Fastow: His schemes to defraud the company made him a symbol of corporate corruption. Fastow pleaded guilty to two conspiracy counts and testified against Lay and Skilling. He was sentenced in 2006 to six years in prison and two additional years at home under court supervision. As part of his plea deal, Fastow’s wife, a former Enron manager, served a year in jail for signing a fraudulent tax return.
Sherron Watkins is still considered the closest thing to a hero in the Enron affair. Time selected her as one of three “2002 Persons of the Year.” (The two other were whistleblowers Cynthia Cooper of WorldCom and Coleen Rowley of the FBI).
She says that when she wrote the memo to Kenneth Lay; she wanted to represent “those nameless, faceless shareholders, as well as unsuspecting employees.”
Sherron Watkins was the smartest gal in the room, and no one was listening.