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In the first week of Arthur Andersen’s obstruction of justice trial, prosecutors started to lay out evidence that massive document destruction at the firm took place weeks after the Securities and Exchange Commission opened a file on Enron. But the government’s task is to prove the destruction was carried out with the intention to keep documents from the SEC. In a Houston courtroom packed with roughly 100 onlookers — including some plaintiffs and defense lawyers in the civil class action securities litigation against Enron, Andersen and others — a member of Andersen’s professional standards group testified May 9 he deleted 150 to 200 e-mail messages related to Enron Corp. work after receiving an e-mail message dated Oct. 18, 2001, reminding him of the firm’s document retention and destruction policy. The Andersen partner, Ben Neuhausen, said he deleted the messages even though he had no inkling of pending litigation involving Enron and no idea the Securities and Exchange Commission was already looking into Enron’s financial reporting. Neuhausen, a member of the firm’s professional standards group, said the e-mail about the document retention and destruction policy from in-house lawyer Nancy Temple was forwarded to him by another member of the professional standards group, known as the PSG. The message simply contained a link to the policy on the firm’s intranet. He said he was never told to destroy Enron documents. Neuhausen, who had been involved extensively in PSG review of some Enron accounting issues in 2001, said the e-mail did not refer to Enron, but he interpreted it as a reminder to purge his files of unnecessary messages. “I took it as a reminder that we had policies and where to find them. I did go to that intranet link, I did scan through the policy which was pretty lengthy,” he said. “It reinforced my guilty conscience that I was behind in deleting e-mails, that I had a lot more old e-mails than I ought to.” Under cross-examination by Andersen defense attorney Russell “Rusty” Hardin Jr. of Houston, Neuhausen conceded he may have deleted some of the Enron e-mails before that e-mail from Temple. He also said he routinely destroys documents and messages he doesn’t believe he will need again. Neuhausen is the first Andersen employee to take the witness stand in Andersen’s trial on a criminal charge of obstruction of justice. The government alleges the Chicago-based accounting firm destroyed Enron documents at a time when it should have known the SEC was investigating Enron. The trial began May 6 in U.S. District Judge Melinda Harmon’s courtroom. Neuhausen’s testimony did give some support to the prosecution’s theory that Temple’s e-mail was a carefully worded message telling Andersen partners to get rid of documents that could possibly harm Enron’s position with the SEC. “That became a game that they would play, to get rid of these documents so when the SEC showed up, or the lawsuits showed up … [it would be] too late,” Assistant U.S. Attorney Matthew Friedrich said during opening statements May 7. The arrival of a former Andersen accountant caused a furor in the courtroom May 9, when Hardin strenuously objected to prosecutors calling Kate Agnew to the stand, knowing that she would refuse to testify and cite the Fifth Amendment against self-incrimination. Hardin says Agnew, who was a manager on the Enron account, was intending to testify, but prosecutors threatened her with prosecution because they didn’t like what she intended to say in court. Hardin says her lawyer was informed her status would be changed from witness to subject and she was fearful she would be prosecuted. He says he will send a letter to the DOJ asking it to investigate this case and two other related cases. He alleges three witnesses have been intimidated. “That’s nothing more than pure intimidation … . They wanted to send a message,” Hardin says. Assistant U.S. Attorney Andrew Weissmann says they did not threaten her and it was her decision whether to testify. Hardin says it would be “suicide” for the accountant to testify under those circumstances, and he says the prosecutors are simply trying to humiliate her by bringing her into court to take the Fifth. Most prosecutors, according to Hardin, would ask a witness to sign an affidavit swearing they would take the Fifth. “She would have been a dynamite witness,” Hardin says. But after Agnew took the Fifth at the bench, prosecutors instead called Carl Bass, a partner in Andersen’s Houston office who once gave PSG advice to the Enron audit team. Andersen’s position is precarious because the document destruction came as Andersen was on probation with the SEC because of a consent decree in 2001 stemming from its work for Waste Management Inc. Because of that probation, the accounting firm could face penalties from the SEC, including a loss of its right to certify audited financials. Jurors — who were attentive and took notes throughout last week’s testimony — know about that probation. Harmon ruled on May 7 that prosecutors could introduce testimony about some of Andersen’s past dealings with the SEC because of Federal Rule of Civil Procedure 404(b), which sets out some exceptions to the rule prohibiting testimony of previous “bad acts.” The first witness, Thomas Newkirk, an associate director of the division of enforcement with the SEC in Washington, D.C., testified about the Waste Management consent decree and a pending investigation stemming from financial reporting by Sunbeam. Department of Justice prosecutors also put a lawyer from the SEC’s Fort Worth, Texas, office on the stand May 8, testifying the agency opened an informal investigation into Enron’s financial reporting on Aug. 28, after reading a report in The Wall Street Journal that raised some questions about the Houston-based company’s finances. The SEC lawyer, Spencer Barasch, testified, however, the SEC did not send a letter to Enron officials seeking documents for the investigation until Oct. 17, after reading more news reports. He says officials from the Fort Worth SEC office never contacted Andersen about the probe because the investigation was transferred to the Washington, D.C., office for manpower reasons. Neuhausen also testified May 9 that the auditors working on the Enron Corp. account ignored PSG advice in the spring of 2001 on how to account for some off balance-sheet transactions, leading in part to Enron’s $1.1 billion restatement in October 2001, which resulted in a steep decline in the price of the company’s stock. Neuhausen also testified he personally disagreed with Enron’s decision to label the company’s approximately $600 million loss in the third quarter of 2001 as “nonrecurring,” but testified that auditors have no ultimate control over a company’s press releases, even on financial issues. While Neuhausen is the first Andersen employee on the witness stand, former Andersen partner David Duncan is expected to be the key witness in the trial. Duncan, the lead auditor on the Enron account, pleaded guilty April 9 to obstruction of justice; his sentencing is delayed until after he testifies. Andersen’s ability to win an acquittal may hinge on Hardin’s cross-examination of Duncan, who initially told Andersen lawyers he did nothing wrong through his role in the document destruction, but he hasn’t talked to them since he was fired Jan. 15. At press time on May 9, Andersen’s defense lawyers were awaiting a ruling from Harmon on their request for some notes Duncan’s lawyers took during interviews by prosecutors and other government agents. Duncan’s lawyers have asked Harmon to quash a subpoena asking for those notes on the grounds they are privileged. Leslie Caldwell, the prosecutor heading the Department of Justice’s Enron Task Force, sat in the spectators’ pews for the first three days of the trial. Caldwell says she plans to come to court as much as possible during the trial, but declines to describe her specific role in the case. The trial is expected to end by May 29, when Harmon is scheduled for a vacation. The indictment against Andersen, the first issued by the Enron Task Force, was made public March 14. WALDO WEARS THIN In opening statements, Hardin, a partner in Rusty Hardin & Associates, said the government’s search for a “corrupt perpetrator” who instigated the massive document destruction was like a search for Waldo in the children’s book. He asked more than one witness about the location of Waldo, and opened his cross-examination of Neuhausen with the question, “Are you Waldo?” But by the afternoon of May 9 the theme was apparently getting old for the prosecutors. Assistant U.S. Attorney Weissmann told Harmon that Hardin’s constant search for Waldo didn’t belong in the courtroom, and he asked her to instruct Hardin to quit talking about it. Already visibly irritated at times when Hardin asked for explanations for why the judge sustained prosecutor objections to his questions, Harmon gave Hardin the instruction outside the jury’s presence. Outside of Harmon’s hearing, Hardin says, “I’ll probably pass on the Waldo for a while.” THANKS, WSJ Hardin just couldn’t resist taking a jab at the SEC during his cross-examination of Spencer Barasch. Barasch testified that the SEC’s office in Fort Worth opened an informal investigation into Enron’s finances on Aug. 28, 2001, after employees read a story about the company in The Wall Street Journal. But the SEC didn’t send a letter to Enron officials seeking documents until Oct. 17, which was after the SEC officials read another story in The Journal. Prosecutors introduced two more documents that the SEC officials apparently read about Enron. That prompted Hardin’s question to Barasch, “Do we really need the SEC if we have The Wall Street Journal?” Brenda Sapino Jeffreys is a senior reporter with Texas Lawyer , an affiliate of law.com and American Lawyer Media.

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