The Party Crasher

By Jodie Morse and Amanda Bower

On Feb. 13, the day before she gave the first of two damning testimonials to Congress, Enron vice president Sherron Watkins spent the afternoon in a cluttered conference room in the Rayburn House building on Capitol Hill. It was a cram session of sorts, a final chance for Watkins, her attorney and congressional staff members to review the dozens of subpoenaed documents she would be quizzed on the next morning. As they ate cold pizza, someone drew her attention to an e-mail titled "Confidential Employee Matter" that had been written by one of Enron's external lawyers. "Per your request," it began, "the following are some bullet thoughts on how to manage the case with the employee who made the sensitive report." Her eyes skipped halfway down the page: "Texas law does not currently protect corporate whistle-blowers. The Supreme Court has twice declined to create a cause of action for whistle-blowers who are discharged..."

Her pulse quickened. "I'm reading this and I'm thinking, Oh my God, it's [dated] two days after I met with Ken Lay. Talk about shoot the messenger. I can't believe they looked into firing me," she says, sounding wounded even now in the retelling. "It was a horrible response. There's nothing in there to remind them to remember the code of conduct, the vision and values."

This was how hard Watkins had fallen for Enron. Here she was, almost six months to the day since she first warned chairman Kenneth Lay of "an elaborate accounting hoax." Her boss had long ago confiscated her hard drive, and she had been demoted 33 floors from her mahogany executive suite to a "skanky office" with a rickety metal desk and a pile of make-work projects. The atmosphere had grown so ominous that she had called office security for advice on self-defense. But still, Watkins simply could not fathom that this company, the one she had tried to save from itself, had considered taking away the job she loved.

The next morning Watkins appeared before the tangle of cameras in her periwinkle blazer, with her pastor seated directly behind her. For five hours, she patiently explained the intricacies of the financial schemes that had allowed the energy giant to conceal billions of dollars of debt in dubious partnerships. Though Watkins had not worked in accounting for a decade, she knew the arcane material cold, making it sound as simple and intelligible as long division. She was relaxed enough to give the Representatives a taste of her piercing Texas wit. But her square jaw clenched whenever she spoke about her feelings for the company. She firmly indicted several top executives, yet she insisted that Lay was a "man of integrity." And she spoke almost wistfully of Enron's "electric" atmosphere, of people "energized to change the world." It was Valentine's Day, and she was still very much in love.

For months afterward, Watkins faithfully went to work each day. In the absence of any real assignments, she could only bear witness to all that she had wrought, looking on as Enron auctioned off everything down to the sign at its headquarters (price: $44,000) and as the firm's esteemed accountants, Arthur Andersen, went down in their own wave of scandal.

Only now, a year later, has she begun to think of fashioning a life without Enron. In November, she left her $165,000 job. But her future is shaky. She plans to start a global consulting firm to advise company boards on governance and ethics, though CEOs privately chuckle at the thought of opening up to the gimlet-eyed Watkins. The first to speak out, Watkins has had the most time to acclimatize to her strange new existence. Unlike the FBI's Coleen Rowley and WorldCom's Cynthia Cooper, she does not shy away from describing herself as a whistle-blower or suggesting that her gender may have played a role in her decision to act. She alone has been flirting with celebrity, earning up to $25,000 on the speaking circuit and sharing a $500,000 advance to co-author a book.

At the same time, Watkins is the most self-critical of the three. She regrets "naively [thinking] that I would be handing Ken Lay his leadership moment," regrets not taking her concerns to a higher authority. To get by, she has cloaked herself in her family and church. "Her faith," says William Vanderbloemen, her pastor at Houston's First Presbyterian, "was sharpened." But so, markedly, was her despair. "There were some very bleak moments throughout when you're just so disappointed with human nature, with the power of greed and the power of denial, trying to rationalize that you've done nothing wrong," she says.

Things were different back in Tomball, Texas, a town of 10,000 where Watkins and her younger sister Julie were raised. Today, with its strip malls and megastores, Tomball is at the outer edge of Houston's suburban sprawl. But when Watkins was growing up, it was a no-stoplight town with an oil derrick on each corner. Her ancestors were among the hardy German immigrants who descended in the mid-1800s and helped establish the Lutheran church her mother Shirley Klein Harrington still attends each Sunday. It seemed as if Watkins either knew or was related to everyone in town: One uncle owned the grocery store. Another ran the funeral home. Her aunt was her second-grade teacher.

Watkins has the kind of booming personality that refuses to escape notice. At 13, she was unimpressed that her principal split his time between running her Lutheran school and teaching the seventh-and eighth-graders. If his administrative duties called, he would simply send them out for an hour-long recess. She complained so loudly that the principal was divested of his two hats and left the school a year or so later. "He needed to pay attention," she remembers, "or we weren't going to learn." Then, as now, Watkins voices her views firmly, and she never filibusters. "She always has an opinion, but it's always backed up," says her sorority sister and close friend Karen Payne. "It's thought through, and it's thought through in less time than anyone else."

Around the same time as the principal incident, Watkins went on a hunting expedition with her father. While he went off to spot ducks, she hung back with her .243-cal. rifle in search of bigger game. Her father returned to find Watkins standing over the carcass of a deer. She set about gutting it so the family could make spicy ground-venison chili. "It stinks, it's gutty, it's nasty," she says. "My father could not take it." He stepped to the side and vomited.

The independence streak came from her mother. Harrington, also a deer hunter and flayer, graduated from the University of Texas at Austin magna cum laude with dual degrees in education and accounting. She taught high school business and authored sample problems for McGraw-Hill textbooks on the side. When Watkins was 14, her parents divorced. While they weren't the first Tomball couple to split up, it was a move radical enough that their church had refused communion to another divorce. But Harrington was hardly fazed. "I am going up there and kneeling, and I dare them not to give me communion," she told Watkins at the time. The minister did not pass her by.

After the divorce, money grew tight. Her mother stopped buying ice cream and began limiting the kids to one pair of shoes each. At 16, Watkins started working the register at her uncle's market and helped put herself through the University of Texas at Austin, where, taking her mother's advice, she earned a degree in accounting. The older she got, the more claustrophobic Tomball seemed. "I had the feeling that the world was happening elsewhere," says Watkins.

She took an accounting job at Arthur Andersen and, after a stint in the Houston office, put in for a transfer to New York City. There she developed a taste for summers in the Hamptons, playground to Manhattan's elite, and winters swimming with stingrays in the Caribbean. Before long, she sounded like any other perpetually irritated New Yorker, haranguing cabdrivers who took the long way home to her small Upper East Side apartment. "New York kind of toughens you up for people doing the right thing," she says. "It almost makes you call bulls___ faster."

Such impudence, while a virtue in New York, was less appreciated when she returned to Houston in 1993 to take a job with Enron. Her mother noted the new attitude. And while Watkins rose quickly through the ranks and was thought of as whip smart, she earned an equally well-deserved reputation for lack of tact. Poised and pleasant with clients, Watkins often barreled right through her colleagues. They nicknamed her the "Buzz Saw." One boss pulled her aside and said, "Sherron, you kind of cut people off at the jugular. There they are bleeding at the neck, and then you decide it was rude, but it's too late, you can't stop the blood flow."

By the time Watkins arrived, Enron was fast shedding its image as a staid natural-gas-pipeline company. Trading chief Jeffrey Skilling and his financial whiz, Andrew Fastow, wanted to build a nimble, "asset-light" firm that could exploit deregulating markets for energy, water, weather derivatives, broadband capacity and anything else that could be turned into a commodity. The strategy spawned explosive growth. By 2000, Enron was the seventh largest company in America. The '90s were fat times for Enron, and the corporate culture oozed in excess. The company rented ski condos in Beaver Creek, Colo., and stocked each with a personal chef. Christmas parties were multimillion-dollar, black-tie affairs with ice sculptures.

"The reason people love Enron is because there was really no defining organizational structure," says Watkins. "If you wanted to start something and go for it, you could. In other companies you could get bogged down behind a boss." One month she was in Panama sizing up a copper mine, the next she was in Hong Kong trying to finance a nickel deal. Sure, Enron was a pressure cooker--employees were evaluated every six months in its now legendary "rank and yank" system--but Watkins thrived on the competition. She also satisfied the taste for frippery that she had acquired in Manhattan. While she steered clear of Houston's snooty charity-ball circuit, she bought a green Lexus SUV and a house in tony Southampton for her and her new husband Rick, a vice president with Canadian Superior Energy.

By spring 2001, the technology bubble was bursting, and Enron was slipping along with it. In late June, Watkins went to work directly for Fastow, who charged her with finding some assets to sell off. But everywhere she looked she found the same thing: fuzzy off-the-books arrangements that seemed to be backed by nothing more than now deflated Enron stock. No one she asked could--or cared to--explain what was really going on. Knowing that others had got into trouble after challenging Skilling, who by then was CEO of the entire company, Watkins began scouting for a new job and went on a round of interviews at Reliant Energy. Her plan was to sign a new job contract and confront Skilling on her last day at Enron.

But on Aug. 14, Skilling abruptly quit, and Lay invited employees to put any concerns in a comment box. The next morning Watkins sat at her computer and tapped out her first anonymous one-page memo in a single two-hour flourish. "I am incredibly nervous that we will implode in a wave of accounting scandals," she wrote. But the next day, when Lay held a company-wide meeting and didn't allude to her concerns, she arranged a face-to-face appointment for Aug. 22. In the intervening days, she shared her worries with a friend at Andersen and drafted a longer, seven-page memo to hand to Lay. It was even more cataclysmic than the first. She had also annotated a document on one of the suspect partnerships, writing in bright blue letters in the margin: "There it is! This is the smoking gun. You cannot do this!"

Meanwhile, Watkins was getting jumpier. She was waking up at 2 a.m. rehearsing what she would say to Lay. Though she received the Lay family Christmas card each year, the two had barely ever spoken. At one point, she faxed her mother a copy of the memo. Harrington winced at "two sarcastic parts" that sounded somewhat self-serving. The offending passages--"My 8 years of Enron work history will be worth nothing on my resume"; "For those of us who didn't get rich these last few years, can we afford to stay?"--were promptly excised from the final version.

For all the dial-up, the meeting proved relatively uneventful. Lay seemed composed but genuinely concerned and said he would have attorneys look into the questionable deals. Though Watkins counseled against it, Lay suggested--and eventually selected--Enron's law firm, Vinson & Elkins, to conduct the inquiry. Nevertheless, Watkins left feeling buoyed. "I felt, 'Oh, good, now he knows,'" she says. "There was a feeling that I had done the hardest thing in my life, but I had carried the torch and dropped it off." For the first time that week, she slept through the night. In late September, even after netting $1.5 million by exercising personal stock options, Lay told Enron employees that "our financial liquidity has never been stronger." By mid-October, the company announced a $618 million third-quarter loss and a $1.2 billion write-off, tied to the murky partnerships that had worried Watkins. On Dec. 2, Enron filed for Chapter 11.

When her name was leaked in early January, Watkins initially felt a rush. "People were high-fiving. They were pumped and said, 'Attagirl,'" she recalls. She signed autographs in Starbucks; her husband Rick jokingly referred to himself as "Mr. Sherron Watkins." Their daughter Marion, 2, ran around the living room squealing, "Mommy's on the news again." One morning a maintenance crew arrived to move her back up to an executive office.

The high was short-lived. Some laid-off Enron employees began blaming Watkins for not taking her concerns to the Securities and Exchange Commission. Others fumed that in late August and October 2001, after writing her memos, Watkins unloaded $47,000 in Enron stock--moves she says were motivated by advice from her accountant and 9/11 jitters, respectively. By far the most intense criticism has centered on Watkins' decision to sell her story in book and movie deals and on the lecture circuit.

But her message is not one of strict self-promotion. In her speeches, she champions the rights of the individual investor and calls for a reformed corporate-governance structure. She hopes her book will "cleanse the resumes of the good people at Enron." And the fact is, she has to make a living. She has always paid most of the bills, and in September, Rick quit his job to spend more time with the family. Now she brings home the only paycheck. And financial worries have led the couple to postpone their plans for having a second child. "Personally," she sighs, "that has been the biggest repercussion."

As deflated as she can sometimes sound, Watkins does not for a moment regret her actions. A few weeks ago, when she was unpacking the boxes she had taken from her Enron office, she happened upon a green sticky-note pad that the firm once handed out to employees. It contains a quote from Martin Luther King Jr.: "Our lives begin to end the day we become silent about things that matter." She smacked her palm against her forehead. "You look at it and you think, 'Oh, my God, look how many people at Enron stayed silent," she says, "That's what they wrote. And nobody listened.'"