Enron’s Law Firm Conducted Cursory Probe, Witness Says

Enron Corp.’s outside law firm conducted a cursory probe in the fall of 2001 of accounting complaints raised by whistle-blower Sherron Watkins, asking employees who had already approved questionable financial arrangements whether the deals were proper, a lawyer testified Wednesday.

Appearing in the criminal trial of Enron founder Kenneth L. Lay and former Chief Executive Jeffrey K. Skilling, Max Hendrick III, a partner with the Houston law firm Vinson & Elkins, testified that because of the firm’s relationship with Enron, it would have had to bow out if a more extensive probe had been required.

The law firm, which once collected as much as $40 million in fees annually from Enron, would “not be considered independent for the purpose of doing a special or full-blown investigation,” Hendrick, a defense witness, told Lay lawyer Bruce Collins.

Asked by Collins whether he was “prepared to throw away 30 years of professional integrity to conduct a whitewash,” Hendrick replied: “I certainly was not.”

Skilling’s much-anticipated testimony is expected to begin this afternoon. The timing depends on how long attorneys question Jim Derrick, Enron’s former general counsel. Lay aims to testify in the trial as well, but at least three character witnesses for Skilling will follow the ex-CEO on the witness stand.

Watkins, a former Enron vice president, met with Lay in August 2001 to tell him the company needed to come clean about potentially disastrous accounting tricks she had found.

Her prosecution testimony last month about that meeting was intended to bolster government allegations that Lay knew Enron was in financial turmoil when he claimed publicly that the energy trading company was strong in the fall of 2001. The government contends Skilling also lied about Enron’s financial condition before he resigned.

Both men counter that there was no fraud at Enron except that committed by a few executives who skimmed money from secret deals and that the company failed because of bad publicity coupled with lost market confidence. The company collapsed into bankruptcy proceedings in December 2001, just over three months after Watkins met with Lay.

Hendrick testified Wednesday that he and firm partner Joe Dilg agreed in discussions with Lay and Derrick to limit the scope of the investigation.

Hendrick said he and Dilg sought only to find out whether senior Enron managers and Enron’s outside auditors at Arthur Andersen were familiar with issues raised by Watkins and whether a more detailed probe was necessary.

They didn’t dig into accounting propriety or whether executives they interviewed told them the truth.

Watkins had suggested Lay enlist other law and accounting firms without Enron ties to investigate, and she criticized what she considered Vinson & Elkins’ flimsy approach.

But Hendrick told Collins that outsiders would have needed more time to get familiar with the issues Watkins raised, and Lay and Derrick wanted a fast conclusion.

Skilling faces 28 counts of fraud, conspiracy, insider trading and lying to auditors, while Lay faces six counts of fraud and conspiracy.