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Enron chief got warning of troubles in August

Executive wrote of ‘hiding losses’

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WASHINGTON — Even as Enron Corp. Chairman Kenneth Lay boasted to employees of the company's growth, one of them privately warned him in August of the reckless practices that eventually brought down the energy-trading giant.

"I am incredibly nervous that we will implode in a wave of accounting scandals," the employee told Lay in a letter. A "veil of secrecy" surrounded Enron's partnerships, which were keeping huge amounts of Enron debt off the company's books, she said.

"It sure looks to the layman on the street that we are hiding losses," wrote the employee, who was identified by her Houston attorney as Sherron Watkins, Enron's vice president of corporate development.

She said several senior Enron employees "consistently and constantly" questioned the corporation's accounting methods to senior Enron officials, including CEO Jeffrey Skilling. Skilling resigned in August.

In a telephone interview Monday night, Watkins' attorney, Philip Hilder, said Enron responded to the warning letter, but he would provide no details.

Reps. Bill Tauzin, R-La., who is chairman of the House Energy and Commerce Committee, and James Greenwood, R-Pa., released excerpts from the letter to Lay on Monday. The two lawmakers demanded from Enron all records relating to a review of the employee's allegations as part of the panel's investigation of Enron.

Around the time of the August letter, Lay was telling the 20,000-strong work force that growth of the Houston-based company "has never been more certain." Two months later, Lay was phoning President Bush's Treasury and Commerce secretaries seeking help for Enron as it careened toward collapse and its stock price slid.

Employees and retirees helplessly watched their life savings dissolve last fall because the company prohibited them from selling the Enron shares that comprised the bulk of their retirement accounts.

The company entered the biggest corporate bankruptcy in U.S. history on Dec. 2, leaving countless investors burned and thousands of employees out of work.

Enron was the nation's seventh-largest company in revenue, and its collapse has hurt both individual investors and big pension funds around the country.

Florida's fund, for example, has lost more than $300 million. Also roiling the financial system was the impact on major banks, which had lent billions to the high-flying company that had been a darling of Wall Street and viewed as a technological innovator.

As the company struggled to maintain its credit rating last fall, Lay, who has been Bush's biggest campaign benefactor, pointed out to Treasury Secretary Paul O'Neill the government's intervention in 1998 to prevent the collapse of a big hedge fund for wealthy investors.

O'Neill, along with Commerce Secretary Don Evans, have said that while they received calls from Lay in late October and early November, they dismissed any suggestion of intervening to help the company.

Given the magnitude of the troubles at Enron, "I think they (administration officials) had an obligation to be public about the controversy," said Paul Light, director of government studies at the Brookings Institution, a think tank.

The White House should have disclosed the Enron phone contacts to the news media immediately, Light suggested.

O'Neill and Evans have said they saw no need to inform Bush of the October-November telephone conversations.

White House spokesman Ari Fleischer has said that, as far as he knows, nobody at the White House was told of calls from Lay to Bush Cabinet secretaries.

Fears of a conflict of interest involving a big Bush donor may have led to administration officials' not wanting to intervene in Enron's behalf, some analysts suggested.

Because of Enron's heavy donations to Bush's campaigns, administration officials "were tied at the hip to Enron," said Bill Allison, an official of the private Center for Public Integrity. That made it hard to help.

"The appearance would have looked terrible," Allison said. "They felt that they couldn't act on behalf of Enron because of the political fallout."