Duncan Takes the Stand; Judge Makes Potentially Reversible Decision

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The Andersen obstruction of justice trial moved into high gear on Monday as the prosecution's star witness, former Andersen partner and head of the Enron audit team, David Duncan, took the witness stand.

Repeating his guilty plea that was made earlier this year, Mr. Duncan stated under oath, "I obstructed justice. I instructed people on the [Enron audit] team to follow the document retention policy, which I knew would result in the destruction of documents."

Andersen's document retention policy calls for the retention of significant documents and the destruction of drafts, redundant documents, and other items not considered necessary to support the work performed by the firm. The prosecution has called upon several witnesses to interpret this policy and to discuss a memo distributed last October by Andersen attorney Nancy Temple to members of the Enron audit team, including Mr. Duncan, reminding them of the firm's document retention policy. In earlier testimony, Andersen partners Amy Ripepi, head of the firm's professional standards group, and James Green, stated that they did not interpret the Temple memo as a directive to destroy Enron-related documents.

Mr. Duncan met with the Justice Department last January and was fired by Andersen the next day. In April, he agreed to plead guilty to the obstruction of justice charge and agreed to help prosecutors in their investigations of Andersen and Enron. Mr. Duncan faces a maximum sentence of 10 years in prison. It has been suggested that prosecutors will lobby for a lighter sentence if Mr. Duncan's testimony helps them succeed in the courtroom. However, U.S. District Judge Melinda Harmon has warned Mr. Duncan that his sentence may be more severe than he expects.

Mr. Duncan is expected to remain on the witness stand at least through Wednesday, and his testimony is expected to shed light on the complex accounting maneuvers practiced by Enron and possibly endorsed by Andersen.

E-mail Messages Underscore Concern at The Top

Also on Monday, a group of e-mail messages was entered into evidence over the objection of Andersen attorney Rusty Hardin. The messages, which represent electronic correspondence between Andersen partners in the Chicago headquarters office, included a message from the firm's managing partner, C.E. Andrews, that described the potential of the firm becoming a target of the Securities and Exchange Commission (SEC). In one message, Mr. Andrews stated that the firm could be "in the crosshairs" of the SEC should the Commission decide to get tough on accounting firms.

Potential Reversible Decision May Save Andersen

There is speculation that Judge Harmon's decision to allow testimony about previous accounting scandals involving Andersen and former clients Waste Management, Inc. and Sunbeam Corp. may hurt the prosecution in the end. Should Andersen lose this case, their lawyers will certainly appeal, and one possible ground for appeal is that the testimony about the other audits is unrelated to the obstruction of justice charge.

Attorneys have pointed out that Andersen is on trial for obstruction of justice and not questionable auditing, as was the situation in the Waste Management and Sunbeam cases. Furthermore, the employees in those cases are not the same as those involved in the Enron case.

The same judge who is hearing the Andersen case was reversed by the 5th U.S. Circuit Court of Appeals over a 1997 case in which evidence of previous questionable but unrelated activities of the defendant was admitted.

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