Andersen Auditor Details Shredding of Enron Papers

HOUSTON —  Former Arthur Andersen accountant David B. Duncan testified Monday that he orchestrated a campaign to destroy Enron Corp. audit documents and knew at the time that he was breaking the law.

“I obstructed justice,” said Duncan, testifying for the first time in Andersen’s criminal trial in federal court here. “I instructed people on the [audit] team to follow the document-retention policy, which I knew would result in the destruction of documents.”

The disgraced 43-year-old executive pleaded guilty to obstruction of justice April 9. He is the Justice Department’s key witness in its attempt to convict the Andersen firm on the same charge for shredding tons of Enron audit documents as the energy trader’s accounting came under government scrutiny.

Duncan’s testimony about the firm’s document-retention policy is crucial to the case. Prosecutors contend that an e-mail containing an Internet link to the policy, sent to several partners in mid-October, was intended as a “code” to shred records and delete e-mail related to Andersen’s Enron work.

But several other Andersen executives who received such e-mails have testified that they interpreted them as a reminder to preserve records needed to reinforce the firm’s accounting conclusions.

Much of Duncan’s testimony Monday focused on his rapid ascent at the 89-year-old accounting firm famed for its “talk straight” mantra.

At times sounding sullen, Duncan described how he joined Andersen’s Houston office in the early 1980s, quickly rose from staff accountant to manager and landed a job as the lead partner overseeing the coveted Enron account--all before turning 40.

Last year, he said, he earned about $700,000.

“I did well,” he told prosecutor Andrew Weissmann.

The appearance of Duncan, the only person to admit committing a crime in the Enron scandal, marked the most dramatic moment in the week-old trial.

He is expected to remain on the witness stand for much of the week, explaining the communications he had with senior executives at Chicago-based Andersen as Securities and Exchange Commission investigators closed in on Enron last fall.

Duncan previously told congressional investigators that his shredding initiative was prompted in part by an Oct. 12 e-mail he received from an Andersen attorney that cited the firm’s document policy, which calls for the destruction of memos, correspondence and other records not needed to back up an auditor’s conclusions.

Enron announced Oct. 16 that it intended to restate earnings and reduce shareholder equity by $1.2 billion, touching off a financial collapse that led to the company’s Dec. 2 bankruptcy filing and costing billions of dollars in lost investments.

Even if Duncan fails to establish that he was directed by his superiors, his appearance as a government witness could prove potent. Because case law generally holds that a firm can be held liable for the actions of its employees, prosecutors can tell the jury that Duncan’s admission should be ascribed to Andersen as a whole, with no further proof needed.

But Justice Department officials indicated Monday that they did not intend to rely on Duncan’s guilty plea alone. After calling him to the stand late Monday, prosecutors underscored Duncan’s widespread connections in the firm, citing direct correspondence with Joseph F. Berardino, Andersen’s chief executive until early this year, and his membership on a firm-wide strategic advisory council.

Under questioning from Assistant U.S. Atty. Weissmann, Duncan also detailed how his firm had become entwined with its client, discussing how he tracked the number of Andersen executives who jumped to Enron and how he assisted the energy trader in opposing an SEC plan to restrict accounting companies’ services. Prosecutors may use such details to argue that Andersen felt compelled to protect Enron from investigators.

At one point, Duncan, wearing a striped dark gray suit, rose from the witness chair to point out key locations in Andersen’s offices inside Enron’s Houston headquarters, using a diagram on an easel in front of the jury box. Labels on the diagram indicated several areas prosecutors plan to discuss in later testimony, including the offices of other partners handling Enron’s audit and the location of the shredder.

The outcome of the case may be determined by Andersen’s ability to undermine Duncan’s credibility. Lawyers for the firm lost a bid to obtain notes Duncan’s lawyers took during his interviews with federal investigators, which Andersen said might prove that Duncan changed his account of the document destruction.

Andersen lawyers also have suggested that Duncan agreed to plead guilty and cooperate with investigators not because he committed a crime but because of government pressure.

Prosecutors began heading off that argument Monday, leading Duncan through questions about his cooperation agreement.

“I’ve been told there’s no correlation” between the outcome of the case against Andersen and the sentence he eventually receives, Duncan said. He also said prosecutors insisted on including a provision in the agreement prohibiting him from profiting from the events that took place at Andersen, by writing a book about his role, for example.

Duncan, who was fired by Andersen in January, faces a maximum sentence of 10 years’ imprisonment.

Still unclear Monday was how far Duncan may go to implicate senior executives at the firm.

“I’m just as curious as everyone else,” said Rusty Hardin, Andersen’s lead attorney, outside court.

Duncan’s testimony followed a series of showdowns between prosecutors and Andersen. Hardin protested outside the jury’s presence Monday that U.S. District Judge Melinda Harmon has threatened to turn the proceedings into a “worthless trial” by sustaining prosecutors’ objections to some of his questions about Andersen executives’ intent during certain meetings.

Prosecutors, for their part, requested a hearing this morning, possibly to seek sanctions against Hardin. Prosecutors objected vigorously Monday when Hardin, a Texas lawyer with a folksy style, phrased a question to point out that the prosecutors hailed from big East Coast cities.

The two sides also have clashed repeatedly over the handling of potential witnesses. Hardin last week accused prosecutors of intimidating three potential witnesses, including one who appeared in court to assert her 5th Amendment rights.

Prosecutors on Monday asked Harmon to block another witness’ bid to assert his rights under seal.

Earlier Monday, two other Andersen partners, Amy Ripepi and James Green, testified that they had received e-mails containing a link to the document policy and did not read it as a signal to shred records.

Green said he deleted about 100 Enron-related e-mails after a discussion with his boss but insisted that he did so before learning of the possibility of an SEC probe of Andersen.