The Woman Who Saw Red
Enron Whistle-Blower Sherron Watkins Warned of the Trouble to Come
By Jennifer Frey
Washington Post Staff Writer
Friday, January 25, 2002; Page C01
HOUSTON
When she woke up on Monday morning, Jan. 14, Sherron Watkins was just one of the legions of high-powered executive moms, the kind of woman who drove an SUV, who liked to take her 2 1/2-year-old daughter to preschool on the way to the office, who caught up with her sister by cell phone during her morning commute.
At age 42, Watkins had climbed to the rank of vice president at Enron, she owned a lovely home in an upper-class Houston neighborhood, and she finally had the family she'd so long desired.
Twenty-four hours later, she was the so-called "whistle-blower" in one of the biggest corporate scandals in modern memory, the woman who had warned Enron's now-former chairman, Kenneth Lay, of major irregularities in the company's accounting practices months before the corporation collapsed, embroiled in a major Securities and Exchange Commission investigation.
"I am incredibly nervous," she wrote in that now-infamous six-page memo, "that we will implode in a wave of accounting scandals."
That memo, which she personally gave to Lay in a meeting on Aug. 22, was discovered in a box of documents seized by investigators at Enron headquarters. It was released, in its entirety, on Jan. 15. And Watkins found herself cast as the hero in the Enron scandal: Suddenly, she was the tough-talking Texas woman who had stood up to all the good old boys in the corporate hierarchy, the men who had been making millions while their employees and shareholders watched some, or all, of their life savings evaporate.
And Watkins was in no way prepared for what that meant.
On the morning of Jan. 15, Watkins's sister, Julie Reagan, was returning home after dropping off her two young children at school in their home town of Edmond, Okla., when she turned on National Public Radio and heard newsreader Carl Kassel talking about her sister.
"I was like, OH. MY. GOD," Reagan says. "I drove the rest of the way home with my chin on my chest. [Kassel] kept talking about her all the way until I pulled into my driveway."
So Reagan ran inside, grabbed her phone and dialed her sister's number at Enron.
"I said, 'You're not going to believe it, but Carl Kassel is talking about you,' " Reagan says.
Her sister was not surprised.
"You're not going to believe it," Watkins told Reagan, "but there are news crews parked outside my house."
Stunned, Reagan asked her sister why on earth she had gone to work that morning.
Work, Watkins told her, was a haven. Yes, things had been a mess at Enron headquarters for weeks, months even. Bankruptcy had been declared, retirement funds decimated, lawsuits filed. The building was something of a ghost town, with 4,000 employees laid off from the main office of a company that had, just last year, employed 7,500 in Houston. Documents had been shredded, subpoenas issued.
A haven?
"Because of the security," Watkins explained. "Here, nobody can get past the parking garage."
A Growing Apprehension
A few days after Sherron Watkins's memo was publicly released, a moving crew arrived at her office -- the office she and Reagan jokingly had referred to as "the cubbyhole."
She wasn't being fired. She wasn't being evicted. She was being moved into a new office -- a big one with its own conference table.
"I don't know the motivation for the move," says Watkins's attorney, Philip Hilder. (Through Hilder, Watkins and her husband, Richard Watkins, are declining all interview requests.)
"It might be because, well, they have a lot of room there now."
Watkins used to have an office like that, back last summer, back before she spoke up, before she requested a transfer to a new department because she no longer felt comfortable working for then-Chief Financial Officer Andrew Fastow. (Fastow -- who ran the partnerships related to the devastating $1.2 billion reduction in shareholder equity that Enron announced in mid-October -- was ousted on Oct. 24.)
"She asked to be reassigned," Hilder says, "because she felt that there were severe questions with the accounting and did not want to work for Mr. Fastow."
A former employee at Arthur Andersen -- Enron's auditor, which is also under fire -- Watkins had worked at Enron for nearly eight years when she wound up working under Fastow last July. While looking for assets to sell off for the company, she discovered Enron had, in effect, been hiding significant losses by some of its equity investments.
She was fearful of approaching then-Chief Executive Officer Jeffrey Skilling with what she had discovered. Once Skilling abruptly resigned on Aug. 14, though, Lay invited employees to submit questions, by e-mail or anonymously, about company-related issues. That's when, with some trepidation, Watkins wrote an anonymous letter to Lay, which she deposited in a drop box he had posted.
When her concerns were not addressed at a company-wide meeting on Aug. 16, Watkins grew more wary.
She called a friend and former colleague at Andersen and spelled out what she had found, wanting reassurance that she was not, as she later would put it in her memo, "all wet." That friend concurred with her concerns, going so far as to put them into an in-house Andersen memo -- a memo that also now has surfaced in the Enron investigation.
Resolved to do something to save what she saw as impending disaster, Watkins drafted her six-page memo and faxed it to her mother, Shirley Klein Harrington, a retired business teacher who lived 30 minutes away, in Watkins's home town of Tomball.
"I thought it was the right thing to do," Harrington says. "There was no option about whether or not she was going to send it. She knew she had to say something. But all along, she never imagined that she was going to be the only one."
But, as Watkins would find out weeks later, when Enron did implode, she had, indeed, been the only one.
"She was out there in the field all by herself," says her cousin Joe Klein.
Deep in the Heart of Texas
Tomball, a town of a little fewer than 10,000 residents, is teeming with Kleins. Richard Klein, Watkins's uncle, owns Klein Market -- a rare family-run supermarket to survive in this era of mega-chains. Watkins worked there as a teenager, running the cash register. So did her cousin Joe, who now manages the store for his dad. Another cousin, Matthew Klein, runs Klein Funeral Home, across the street from the market. His daddy owns the place.
Watkins's mother has lived here all her life, as did her mother, and her mother's mother. She's married to the mayor, H.G. "Hap" Harrington, who helped rear Watkins and her little sister, Julie, since they were in their early teens.
Settled into the couch of her living room, Harrington is surrounded by pictures of Kleins. There are several of Sherron, and an adorable snapshot of Watkins's daughter. There are stacks of family reunion photos -- one with "just the first 20 cousins," and one with a pregnant Watkins in the back row and her second cousin, country singer Lyle Lovett, a few rows in front.
Lovett was among nearly a hundred Kleins who descended upon Salem Lutheran Church on Sunday to be honored on the church's 100th anniversary, says Harrington. The original Klein ancestors arrived in this part of Texas from Germany in the mid-1800s, and helped establish the church. And so there were aunts and uncles, cousins and second cousins, on hand Sunday.
It was a day for Watkins -- who drove out from Houston with her daughter -- to be wrapped in family.
"Everybody was hugging her, saying they were proud of her," Harrington says. "They all said that she was in their prayers."
Religion played a strong role in Watkins's upbringing. She attended the local Lutheran school through eighth grade. She went to public high school -- first Klein High School, then Tomball High, where she was a member of the Tam O'Shanters drill team -- but her mother believes that it was her religion that led her to be such a devoted student, a member of the National Honor Society.
"Lutheran school always stressed that you do your best for the glory of God," Harrington says.
Upon graduation, Watkins enrolled at the University of Texas, where she took her mother's advice and studied accounting. She graduated in 1981, and received a master's degree the following year, then went to work for Arthur Andersen.
Outspoken and independent since childhood -- Reagan remembers that her big sister used to make her sleep on the floor when she came running into her room at night, claiming nightmares -- Watkins grew bored in the Houston office, despite an exciting personal life that included regular scuba trips to the Caribbean. So she asked for, and received, a transfer to the New York office.
"When that happened," her mother says, "she thought she was in high cotton."
There was nothing of the "little girl lost in the big city" in Watkins when she landed in New York, despite her small-town roots. She rented an apartment near Carnegie Hall until she was able to buy her own place, at Second Avenue and East 57th Street. She summered in the Hamptons, sharing a group house with 21 other young professionals. She traveled. She moved on from the basic German recipes learned from her mother to gourmet cooking. And she picked up some "street smarts," as her mother put it, that would color her already strong personality -- and, occasionally, her language.
"So when she came back here," Harrington says of her daughter, who returned to Houston to work for Enron, "she really had to readjust to this way of life."
In a way, though, Watkins was a perfect Texan. In addition to her mom's long Texas family history, her father, Dan C. Smith III, is a descendant of a former Houston mayor, Dan C. Smith I, who served his term after the Civil War.
"After all," Hilder says, "there's nothing really soft about Texans. They're independent and rough-and-tumble."
A Direct Connection
Jessica Uhl remembers the first lunch she had with Watkins, in 1997. She'd been hired through an Enron recruitment program, and Watkins was assigned to be her mentor. Watkins wasted no time; she spoke bluntly and honestly about the company, surprising Uhl with her candor.
"She was incredibly direct and incredibly articulate and incredibly thoughtful in what she said," says Uhl, who became close friends with Watkins. "It's just a part of her personality. She spoke her mind."
Uhl has been on maternity leave the past two weeks, having just given birth to her first child, so she hasn't been at her desk at Enron to see the fallout in recent days. She expected this to happen, though. Watkins had told her about the letter, about what she had done. It made perfect sense to Uhl.
"Sherron has a unique combination of skills, and that makes her one of the best people in the company to do this," Uhl says. "She has the background. She was a CPA, she's worked at Arthur Andersen. So she completely gets what was going on in a way that other people might not.
"She also had the personality," Uhl continues. "She had the sense of conviction to do what she did, and the ability to articulate what needed to be said."
And she thinks gender is a part of that equation.
"Look at the management team: There's not a lot of female faces up there, and there never has been," Uhl says. "Sherron's a vice president, so she's obviously not an outsider, but there is a dividing line there. If you're not part of the boys' club, maybe that makes it a little easier to take a big risk."
Watkins was not a top-tier Enron executive who made millions from the company.
The first paragraph of her memo to Lay makes that clear: "Has Enron become a risky place to work? For those of us who didn't get rich over the last few years, can we afford to stay?" she wrote.
After living the life of a successful, adventurous young professional, Watkins married Richard Watkins in 1997, at the age of 37. The two met through mutual friends at the First Presbyterian Church in Houston, where Watkins is a member.
"She knew she always wanted a family and children," says Reagan, who married and had two children while her big sister was still climbing the corporate ladder.
Marion was born in 1999. With a new house -- valued at more than $500,000 -- in a wealthy neighborhood near Rice University, the Watkinses enjoyed a comfortable lifestyle. They went to Italy to celebrate Rick's 50th birthday, and to Mexico for a summer vacation. Sherron got a Lexus SUV.
"She enjoys life, which is good for her," Reagan says.
An executive in the energy business, Richard Watkins works for a company based in Calgary, Alberta. He commutes to and from Houston, sometimes staying home for a week, other times for shorter visits. After Marion's birth, Sherron Watkins was able to carve out a new role at Enron that involved far less business travel. She hired a full-time nanny, but she manages to get home every night in time to tuck her daughter in.
On the surface, it seemed the kind of life that could make someone just content enough to close her eyes to what was happening around her.
"She's a very loyal person -- loyal to her friends and her family and even her job," Reagan says. "So I think if she didn't care about Enron, she would have left without ever having bothered to correct what was going on. But what she wanted to do was make it right."
And so she spoke up. And was essentially ignored.
When Enron started to fall apart, Watkins -- like her colleagues -- started to panic. On the advice of another cousin, Houston lawyer Alex Klein, she hired Hilder as her attorney, just in case she was called to testify at any SEC hearings. She joked with Joe Klein about watching the plants being removed from the Enron building, and going upstairs to get coffee, only to find the coffeemaker gone.
"She was telling me, 'I've got this paycheck and maybe another one,' " says Joe Klein. The future was so uncertain for everyone at Enron.
"One day, I talked to her, and she thought she was gone," Joe Klein recalls.
A supervisor told Watkins that once she finished her current project, she could gather up her things, but another official interceded, telling Watkins to stay put.
According to both Reagan and Klein, Watkins had begun job discussions with Reliant Energy -- another large energy-services firm based in Houston -- before Enron filed for bankruptcy and the current scandal broke. "When all that stuff started coming out," Reagan says, "they basically said, 'Let's put this process on hold until we see what happens.' "
Hilder said that, to the best of his knowledge, Watkins is not job-hunting at the moment.
And with her new celebrity, she likely has far less reason to be concerned that she'll be involved in any future layoffs.
"She'll keep her job," Joe Klein says, "but eventually what are they going to pay her with? Tiddlywinks?"
'Our Hero'
People call out to Watkins on the street now to thank her. At the Web site www.laydoff.com (a play on Kenneth Lay), a former Enron employee sells T-shirts for the scandal-affected, including one that hails Watkins as "Our Hero." (It misspells her first name as "Sharron.") Watkins has received dozens of e-mails, voice mail and letters of support.
One woman wrote to say Watkins is the kind of example she wants for her 15-year-old.
"I think she's been very encouraged," says Watkins's mother.
Life in the offices at Enron is difficult, but not unbearable. Hilder calls it "awkward."
"Most colleagues are supportive," he says, "and yet there are many of those who just don't know how to treat her."
The television trucks have disappeared from in front of her house on Dunstan Street, where a huge American flag hangs beside the front door.
And she is learning that -- despite her fame -- not everyone has been sucked into the frenzy.
Watkins visited her pastor last week to ask to be added to a prayer chain, looking to the church for moral support in her current crisis. As she talked, she realized that the man had no idea about her current starring role in the Enron fiasco.
"That makes her think," Reagan says, "that things will get back to normal."
Watkins has spent several recent evenings taking Marion with her to dinner at a friend's, the kids playing while the adults unwind.
"It's where she goes to commiserate," Harrington says.
Mostly, though, she has turned to her faith, and her family. Rick Watkins flew in from Calgary the day the news broke to stand by his wife's side.
And little Marion -- who is, of course, oblivious to all of this -- is her mom's greatest escape.
"Her personality is just like her mother's," Harrington says. "She's an independent child, and Sherron was the same way. She wants to be in charge."
On Saturday morning, four days after she first heard her sister's name on NPR, Reagan called Houston to have the usual sister-to-sister morning chat.
At that time, Watkins's biggest crisis was a common one in the life of a mom with a 2-year-old. She was trying -- repeatedly, futilely -- to convince Marion that cookies were not a breakfast option.
And, according to Reagan, Marion was standing her ground.
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