August 25, 2021

The Enron Whistleblower

by Not Past It

Background show artwork for Not Past It

Enron, the Houston-based energy giant, was one of the biggest, most well-respected companies in the 90s. But in 2001, it went from top of the heap to bottom of the barrel, real quick. On August 22nd 2001, Sherron Watkins met with the company’s CEO to warn him about the accounting scandal pushing the company to the brink of collapse.

Where to Listen


[ARCHIVAL, Byron Dorgan: Do we have security at the door?… (gavel, gavel, gavel)]

Simone: It’s February 2002. A crowd of anxious onlookers fills an official-looking room.

[ARCHIVAL, Dorgan: And Ms. Watkins, if you would pull the microphone as close as you can, and uh, speak up, the committee would very much appreciate it.]

Simone: At the front of the room is a woman with a neat, blonde bob and a printed silk scarf tied around her neck. She’s sitting at a long table facing a panel of people with a very lengthy name: The Oversight and Investigations Subcommittee of the House Energy and Commerce Committee. 

Simone: In front of her, a name placard reads: Ms. Watkins. 

[ARCHIVAL, Sherron Watkins: I was highly alarmed by the information I was receiving. My understanding as an accountant is that a company could never use its own stock to generate a gain or avoid a loss on its income statement.]

Simone: Sherron Watkins had been summoned to deliver testimony about the company where she was currently a Vice President: Enron. The energy behemoth which had collapsed months earlier in spectacular fashion, crippled by its own massive accounting fraud, leading to the largest corporate bankruptcy in US history at the time.

Simone: And Sherron -- she was the lone voice on the inside -- standing up, speaking truth to power...literally. 


Simone: From Gimlet Media, this is Not Past It, a show about the stories we can’t quite leave behind. Every episode, we take a moment from that very same week in history -- and tell you the story of how it shaped our world. I'm Simone Polanen. 


Simone: On August 22nd 2001, 20 years ago this week, Sherron Watkins met with the company’s CEO to warn him of the accounting scandal that was pushing the company to the brink of collapse. 


Simone: In sticking her neck out, Sherron would expose a whole lot more about corporate America than just the anatomy of one scandal. 


Simone: This is a story of white collar crime, greed, and the costs of forsaking your tribe for the greater good.


Simone: We're gonna circle back on that action item...after the break.


Simone: In 1993, Sherron Watkins was in her 30s, living in New York City, and working for a big accounting firm, performing audits on publicly traded companies. She longed to move back to her beloved Texas, though, so she started looking for jobs. And she thought she found just the right place in a Houston-based energy company…


[ARCHIVAL, Ken Lay: Enron is a company that deals with everyone with absolute integrity. We play by all of the rules. We stand by our word. We mean what we say. We say what we mean.]

Simone: Enron had a reputation for hiring the smartest people. And Sherron wanted to be one of them. She applied for a job, and lucky her, she was hired -- as a director in finance.

Sherron Watkins: Enron was very fast paced. It was fun to work there. It was very entrepreneurial.

Sherron: If you had a good idea, it was actually fairly easy to get a budget approved and chase that idea.

Simone: It was the place to work. They had a swanky office building in downtown Houston with all of those good corporate perks: a gym on site, a fabulous cafeteria, even a Starbucks in the lobby. Remember, we’re in the 90s. Starbucks is the height of culture.

Simone: Employees got luxurious getaways...

Sherron: I used to brag that I didn't have to pay to go skiing, that I’d have one or two trips a year to Beaver Creek and Vail, you know, on Enron's dime.

Simone: But perhaps the sweetest perk of all was the famed Enron-bonus. Sherron says that she often got more than her annual salary all at once.

Sherron: What you make in a whole year, more than that, just got deposited in your checking account. You feel really flushed with cash. 


Simone: The reason Enron could make these insane deposits into their employees’ accounts is that, frankly, Enron was making a shit-ton of money in the energy sector. 

Simone: The company was founded in 1985, the result of a merger between two natural gas companies. It owned thousands of miles of pipelines across North America. But by the time Sherron joined, Enron had started venturing into less tangible types of business, behaving more like a bank. Not just buying and selling natural gas, but building a market where energy could be traded.     


Simone: And they seemed to be great at it! They’d been showing really steep growth for a while. While their peers were growing by single digit percentages, it wasn’t unheard of for Enron’s revenue to more than double every year.

Simone: People attributed the company’s success to three Enron men in particular…


Simone: Chairman and CEO Ken Lay, COO and eventual CEO Jeff Skilling, and CFO Andy Fastow.


Simone: I know, that’s a lot of vague titles and a lot of nondescript dude names. So let me break it down.


Simone: Ken Lay was an Enron man. Lay had established a long career in the Texas oil and gas industry, and was close with people in that scene: notably, the Bush family.

[ARCHIVAL, President Bush: Well, first of all, Ken Lay is a supporter. And I got to know Ken Lay when he was the head of the -- what they call the Governor's Business Council in Texas.]


Simone: Apparently, they were so chummy, George W. gave him his very own nickname: “Kenny Boy.” 


Simone: In the corporate press, Ken would often be pictured standing alongside Jeff Skilling. Jeff had climbed the ladder within Enron...he was hired by Ken Lay in 1990 to help the company make the transition from gas pipelines to trading -- basically the reason why Enron’s growth took off. He was ultimately named CEO in early 2001.


Simone: Kinda all you need to know about Jeff is that he famously told his interviewer for Harvard Business School that he wasn’t just smart, he was fucking smart. I’m sure you know the type.


Simone: And finally, reporting to Ken and Jeff was Andy Fastow -- Enron’s Chief Financial Officer since 1998. Part of his job included overseeing the company's accounting, and ensuring the financial health of Enron. He was Skilling’s protege, and kind of a whiz kid.


Simone: Under the leadership of these men, Enron's stock price was strong. More than $90 a share at its peak. Almost no one questioned the company's success, least of all insiders like Sherron Watkins.

Sherron: I never looked at our financial statements. I never looked at our quarterly reporting.  You know, to me, it wasn't part of my job. You're just assuming Arthur Anderson's well-regarded, they're auditing things. It's all okay.

Simone: Arthur Andersen was Enron's accounting firm and had been since Enron’s inception. They were one of the most prestigious firms in the industry. And so everyone who was familiar with Enron -- the industry experts, beat reporters, stock analysts -- they assumed everything was above board. 

Simone: But in certain, insider-y circles, rumors were starting to spread about Enron’s credibility.  There was a sneaking suspicion that the company was flying too close to the sun. And just like Icarus, Enron was about to plummet…

Bethany McLean: I had sort of an odd background for a journalist. I had worked as a banker on Wall Street, a very junior level banker. 

Simone: In 2001, Bethany McClean was a reporter at Fortune Magazine, and she was hearing these rumors. She started asking a simple question: 

Bethany McLean: How does Enron make its money?

Simone: The people she was questioning should have been able to answer. But instead, the responses she got were...kind of weird. Like this one analyst she spoke to from a credit agency… 

Bethany: He started laughing and said, “Well, if you figure it out, why don't you let me know?” (laughs)

Simone: Everyone Bethany talked to kept telling her versions of the same thing: “Don’t worry about it sweetheart.”

Bethany: Because they're just smart and they're going to figure it out. So you don't have to immerse yourself in the details of how they make money. Why would you care? They're smart. They're gonna make money.


Simone: In March of 2001, Bethany published an article pushing back against the overconfidence in Enron. The headline was: Is Enron Overpriced?

Bethany: So the meekest title in history, right? For a story that later became so well known, it landed with a distinct thud and nobody, nobody really cared. People were like, “Yeah, yeah. Enron’s overpriced, whatever.”


Simone: The article may have landed with a thud, but Sherron Watkins remembers seeing it.


Sherron: Bethany McLean had looked at Enron's quarterly financial reporting that was publicly filed with the SEC and noticed that our cash flow was typically negative or break-even the first three quarters of the year, and then -- whammo -- fourth quarter, we'd have this massive amount of cash flow. So it was a very good point.

Simone: Around the time the article came out, Sherron had just been reassigned to work directly under Andy Fastow, the CFO. 


Simone: Sherron was tasked with looking at all the stuff the company owned -- its assets -- to see what Enron could sell off to make some extra money. The assets could be anything from a physical gas storage facility, to an equity investment in an outside company.


Simone: As she pored over spreadsheets, Sherron started to notice that something was off in the way the accounting had been structured. 


Sherron: The math didn't add up.


Simone: Sherron kept trying to understand what she was seeing in the numbers, pulling a couple of her colleagues into a meeting…  

Sherron: I just kept asking question after question. And finally they both, after more than a couple hours, threw up their hands and just said, “Sherron, we don't understand how it works, but you know, Arthur Anderson has signed off on it, or blessed it in some way, form, or fashion. You know, we don’t understand, but it must work.”

Simone: But Sherron couldn’t let it go. She started to try and detangle Enron’s totally convoluted accounting structures. That’s when she noticed some fishy-looking transactions. 

Sherron: So I kept digging and the more I dug, the more, it just looked horrible. And I'm like, “oh my gosh, we have committed horrible fraud.”


Simone: Okay, here’s where things get technical. I’m like sooo not a finance person. So I’ll let Bethany, the Fortune Magazine reporter, who is a finance person, explain.


Bethany: Enron had devised this really unique scheme where they were essentially using the company’s increasing stock price to mask losses in a portfolio of investments they'd made that were performing disastrously. 


Simone: Enron was actually losing a ton of money on bad investments. But they were the “smartest guys in the room” all right! At least, smart enough to devise a way to hide their company's losses using complex accounting maneuvers.


Bethany: So instead of having to go to analysts and investors who followed the company and say, “We made all these bad investments, we, we really suck. We screwed up.” They figured out a way to hide it by using gains in the company’s stock price to offset these losses and making the losses go poof and just, and just disappear.


Simone: Essentially, Enron was using their climbing stock price like a magic eraser for all of their poor investments. And if it sounds complicated -- like, how does that even work? -- don’t worry, it was designed to be that way. Complexity was sort of Enron’s specialty.

Bethany: The Enron bankruptcy examiner said when he went through Enron’s financial statements -- he was like, “If normal finance is algebra, this is like college level calculus. It's so incredibly twisted and tangled.”

Simone: And if word of this complicated scheme ever became public, it had the potential to completely tank the company.


Simone: By July, just four months after Bethenny’s article, Sherron had pretty much connected all the dots. Everyone else still seemed to be wrapped up in the fantasy of Enron, but Sherron… she was trying to figure out her next move. 

Sherron: My first reaction was to dust off my resume. You know, I hadn't really updated it since I was hired at Enron eight years prior. So I had to put, you know, all my Enron experience on it. 


Sherron: I had a two year old at home and we were, um, attempting to have a second child. I put the second child on hold. I started interviewing and, you know, the back of my mind, I was like, okay, when I have the safety net of another job, um, you know, I need to get up the courage to tell Skilling, you know, this is wrong.


Simone: Sherron was in survival mode. But she wouldn’t get very far into her job search before the next bomb dropped. Because two weeks later...

Sherron: Jeff Skilling quit. It was August 14th, 2001. 


Simone: Out of nowhere, the golden boy -- Jeff Skilling -- abruptly announced he was resigning. For Sherron it was the big, frantically waving red flag she needed to take action.


Sherron: I can’t explain what a shock that is. He had just made Chief Executive Officer that January. Eight months later he's quitting and no good reason was forthcoming. So that told me, oh, you know, he knows these structures are going to blow up on the company in a couple of years. And he's just getting out while the getting's good. You know, he can say, oh, when I left the company, we were in good shape.


Simone: Ken Lay, the company’s chairman stepped back in as CEO after Jeff’s departure. And he tried to cool down concerns from employees… 


Sherron: Ken Lay immediately said, “We'll have an all-employee meeting on Thursday about it, you know, send us questions, do whatever.”

Simone: Sherron saw this as her chance to speak up. An invitation. She wrote up a memo. 

Sherron: I really reacted very knee-jerk, you know, let me send a one-page, anonymous employee hotline, you know, message to, um, Ken Lay. 

Sherron: I did use some pretty inflammatory language, you know, I think I said, um, “has Enron become a risky place to work? For those of us who haven't gotten rich in the last couple of years, can we afford to stay? I'm incredibly nervous we will implode in a wave of accounting scandals.” I think I was trying to get his attention with that choice of wording.

Simone: Sherron decided to submit the memo anonymously. She wanted to get Ken Lay’s attention, but without drawing too much attention to herself.

Sherron: I was nervous. I mean, I printed it out and folded it, put it in an interoffice memo envelope and asked my assistant to, you know, go down to the floor where the employee dropbox was and, you know, try to be not noticed, you know, don't stop and talk to friends you might know. You know, just slip it in the box and keep going.


Simone: Two days later, at the all company meeting, Ken Lay takes the stage to a packed house of confused employees.

[ARCHIVAL, Lay: There seems to be quite a bit of interest in this meeting (laughter)...well, I'm delighted to be back.]


Sherron: I did, um, go to the meeting early so I could get, you know, a close, third row seat.

Sherron: I really wanted to see what the attitude was.

[ARCHIVAL, Lay: I'm sorry Jeff did resign, but you know, he did resign. It was voluntary. I think that's all been pretty well explained now. So the board accepted his resignation and asked me to reassume the CEO's job.]

Sherron:  I was reassured, I mean, Ken Lay got a standing ovation.

[ARCHIVAL, Enron employees: (applause)]

Sherron: It was evident that all the employees were kind of happy that he was back as CEO. He was much more warm and fuzzy than Jeff Skilling. He had this kind of grandfatherly image.


[ARCHIVAL, Lay: And I do think that, uh, the next several months, the next few years are going to be great for Enron and great for Enron's employees.]


Sherron: And, um, I, I heard him say, you know, we want to be doing things the right way. You know, if anyone's truly troubled out there, you know, you can talk to me. 


Simone: Sherron had already sent in her memo anonymously…but after seeing Ken Lay’s speech, she felt reassured…like he genuinely cared about righting the Enron ship. So she did what she thought was right.


Sherron: And within a day I had identified myself to the head of HR and I was on Ken Lay's calendar.


Simone: Just a few days later, Sherron took the long elevator journey up to the 50th floor…to Ken Lay’s office. It’s never fun to be the bearer of bad news, but Sherron felt she had to do it. Maybe there was a chance to save this thing -- at least that’s what she hoped as she waited to be called in.  


Simone: Waited...much like you will have to, dear listener. After the break, Sherron walks into the lion’s den.


Simone: Welcome back. Before the break, Sherron Watkins had just revealed herself as the author behind the anonymous memo warning of widespread accounting fraud at Enron, the energy giant.


Simone: And on August 22, 2001, she headed to a meeting with Enron’s CEO…to lay it all out to Ken Lay. 


Simone: She came prepared: to bolster her claims, she compiled additional memos and spreadsheets and a powerpoint slideshow. She wanted Ken Lay to know just how deep in the shit Enron was. 


Simone: Finally, the moment arrived, and she stepped into his office.


Sherron: I'd been nervous, you know, kind of practicing what I was going to say. And I will tell you that I thought, okay, I'm delivering horrible news. Arthur Anderson's done flawed audit work. Enron has cooked its books. You know, this is horrible, but if we've cooked the books, we need to come clean. You know, we need to, to fess up if we hope to survive.


Simone: Sherron took a deep breath, and waited for a response.


Sherron: He said, “well, have you gone outside the company? Will you give me time to investigate?” And I said, “that's why I'm here,” because it's better off if Enron comes clean about manipulating financial statements. If you're caught from the outside, you're almost definitely going to go bankrupt. 


Simone: In the months that followed, Ken Lay did take some action. He called on the company’s outside counsel to conduct an investigation into Sherron’s allegations.


Simone: But it was kind of a joke. The lawyers weren’t allowed to do basic things, like question Enron’s accounting practices. It gave very much investigation lite -- all flash, no substance.


Simone: And behind the scenes, good ol’ Kenny Boy also turned his attention to Sherron herself. She would later learn that shortly after their meeting, Ken tried to fire her. She would also learn it didn’t happen because there was a real fear that if she did get fired, she’d sue. And all the evidence of fraud that she’d documented would come out in the process. 


Simone: For her part, though, Sherron didn’t want to stick around in Enron’s finance department. She asked for a transfer, and the company obliged. It wasn’t exactly great, though.


Sherron: It was a horrible situation...everything went south for me and I was down in the HR department with no real work to do.


Simone: Over the next several months, Sherron started to look for other jobs. But, to no avail. 


Simone: Two things got in the way: one, 9/11 happened -- sending waves of uncertainty and instability rippling throughout the country. And two, Enron continued to be a growing stain on Sherron’s otherwise pristine resume. 


Simone: Ever since Skilling quit his post as CEO, Enron’s stock had been tanking. 


Simone: In October of 2001, the company reported massive third quarter losses. 


Simone: The Wall Street Journal launched a series of exposes. Andy Fastow, the CFO behind all the fraudulent dealings, got sacked.  


Simone: Enron attempted to merge with a rival, but that fell through, and in December 2001, the company was forced to declare bankruptcy. 


[NEWS CLIP, Reporter: Enron, once the world's largest energy trading company, and now the biggest bankruptcy in history. Overnight, many of Enron's 19,000 employees lost their jobs and savings.]


Sherron: These executives held floor meetings and told everyone, you know, last Friday was your last paycheck. Go back to your desk, clear out your personal items, and go. People were saying, “what about insurance? What about severance?” And it was just kinda like, “no, sorry.” And this was three weeks before Christmas. 


Simone: It wasn't just the swanky white collar workers in Houston who lost their jobs. The Enron Corporation was also giving the boot to lots of blue collar workers. Folks who worked at utility companies that Enron had bought over the years. And a lot of these people had banked their savings and retirement in Enron stock… and now, iit was worthless. 


Simone: Of course, Enron leadership saw those stock losses coming a mile away. For a couple years now, they’d been unloading their shares like crazy. To the tune of over one billion dollars worth of stock. 


Simone: In his final three years at Enron, Ken Lay alone made about one-hundred million dollars from selling Enron stock. That sounds like a lot, but actually, he only sold a fraction of his shares.


Simone: But the top dogs at Enron wouldn’t get away so easily. The Justice Department was paying attention to all of this, and they started a criminal investigation into possible fraud. 


[NEWS CLIP, Margaret Warner: This week, with revelations continuing to emerge about the collapse of Enron Corporation, government investigators focused on how the company managed to hide its losses and debts from the public and the role of the accounting firm that had okayed  Enron's books.]


Simone: On top of that, the Securities and Exchange Commission and both houses of Congress started investigating. And it’s these investigations which unearthed Sherron’s memo to the wider world -- officially crowning her as Enron’s internal whistleblower. 

Simone: And that’s how she ended up here, testifying before Congress in February of 2002. She was still a full time Enron employee. 

[ARCHIVAL, Sherron: I believe that Enron had a brief window to salvage itself this past fall, and we missed that opportunity because of Mr. Lay's failure to recognize or accept that the company had manipulated its financial statements.]


Simone: These hearings transformed Sherron and her prospects, bleaching the stain of Enron from her resume. They set her free, ready to catch whatever opportunities were coming her way. And they were coming… 


Simone: A couple of months after publicly testifying in D.C., Sherron started getting calls for speaking requests…to share her story and her take on corporate ethics. A few months after that, in November 2002, she finally left Enron. By the end of that year, she landed herself on the cover of Time Magazine’s famous “Person of the Year” issue. That year it was “Persons.” Sherron and two other women -- Coleen Rowley and Cynthia Cooper -- who had also called out massive misconduct at their own workplaces. Time dubbed them: “The Whistleblowers.”


Simone: To blow the whistle on a massive corporation, it takes guts. Something deep down in a person's soul. And in Sherron's case, something akin to a spiritual calling.


Sherron: T​there is a parable of the talents in Matthew, in the New Testament of the Bible, that we're all given certain talents. And that the people who take a risk with the talents are rewarded with come and share the master's happiness, and the person that just kind of buries the talent and returns it is not. And so I do feel like I triggered that biblical promise.


Sherron: So I can't say, I wish I hadn't done it because, you know, spiritually and emotionally, there's been so many amazing things happen.


Simone: What Sherron did at Enron didn’t just have a positive effect on her. It also helped bring about some real policy change. In 2010, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act. This law made sweeping changes to financial regulations in America and created The Whistleblower Program, run by the Securities and Exchange Commission, that partly serves to reward -- and protect -- those who report violations of federal securities laws. 


Simone: Which, okay, I get -- incentivize people to come forward, sure. But I find it kinda shitty that we’re putting that expectation on individuals to hold these institutions accountable. Because if the story of Enron is any indication, it’s really not in most people’s nature to stick their necks out like that. And Sherron agrees.


Sherron: The strongest impression I have from really dissecting Enron and what happened is how important, um, belonging and being part of a tribe is within organizations. Um, that good people sit by and watched bad things happen, um, really because they did not want to risk being kicked out of the tribe.


Sherron: You've got to give people a way of, of addressing, um, bad behavior without the fear that they’ll be, they’ll be ostracized.


Simone: People like to belong, sometimes to the detriment of their own inner voice telling them, “Hey there’s something fishy going on here.” Even as bad actors are exploiting that loyalty to the tribe -- using it to obscure their misconduct. Just like at Enron. 


Simone: I’ve been thinking about something that Bethany McLean, the woman who wrote the early Fortune Magazine article about Enron, said to me in our interview. About the lasting legacy of the company.


Bethany: I think it was the beginning of, um, the beginning of a sort of cynicism and, and a deserving cynicism about corporate America that prevails to this day. And I think the financial crisis, which came shortly thereafter, less than a decade after that, was a continuation of that in a way.


Bethany: And I think the failure of institutions in that way dents all of our collective faith. It dents  society in a way that is really pernicious. And so I think that's, that to me is the legacy of Enron.


Simone: That cynicism that Bethany talks about, I totally feel that. If you’re a major institution, I’m looking at you sideways…I’m expecting the worst, I’m assuming you have no other incentive but to accumulate and hold as much power as possible… and you’re figuring out how to use me to do that. Ugly stuff, but I agree with Bethany when she calls it “deserved.”


Simone: Which is why I admire what Sherron did -- coming forward and proposing, “Hey, we could be doing better.” Rejecting cynicism and choosing optimism. Whatever whistleblower gene she has, that impulse to stand up to the bully, it feels rooted in a genuine belief that things can change for the better…that it’s not too late…and it’s worth the risk of being ostracized by the tribe, if it can serve the greater good. 


Simone: And while I’m thankful people like Sherron have that impulse -- to speak up -- I don’t want to count on it. I’m much more interested in how institutions plan to rebuild trust…make accountability a priority. 


Simone: Don’t worry, I’m not holding my breath. Cynicism dies hard. 


Simone: Not Past It is a Spotify Original, produced by Gimlet and ZSP Media. This episode was produced by Kinsey Clarke and Laura Newcombe. Next week, we are revisiting the coolest toy of the 90s -- Beanie Babies.

Becky E: I'm like, I got to buy these, I got to buy these. And I'm like, okay, I'm going to go for it. I'm going to spend $25 for these gift baskets just to get the Beanies.

Simone: The rest of our team are producers Sarah Craig and associate producer Julie Carli. The supervising producer is Erica Morrison. Editing by Andrea B. Scott, Zac Stuart Pontier and Maura Walz. Fact checking by Jane Ackermann. Sound design and mixing by Bobby Lord & Matt Boll. Original Music by SaxKixAve, Willie Green, J Bless, Peter Leonard, and Bobby Lord. Our theme song is Tokoliana by KOKOKO! With music supervision by Liz Fulton. Technical direction by Zac Schmidt. Show art by Elise Harven and Talia Rochemann. The executive producer at ZSP Media is Zac Stuart-Pontier. The executive producer from Gimlet is Abbie Ruzicka. Special thanks to: Alex Goldmark, Alison MacAdam, Bryant Urstadt, Lydia Polgreen, Dan Behar and Clara Sankey, Emily Wiedemann, Liz Stiles, and Nabeel Chollampat.

Simone: Follow Not Past It now to listen for free, exclusively on Spotify. And follow me on Twitter @SimonePolanen. Thanks for hangin’. We’ll see you next week.


Bethany: This may be inappropriate, but just a tiny word of advice: don't get bogged down in thinking that there are things that Enron was doing that you should understand.