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With direct testimony by star witness David Duncan, prosecutors in Arthur Andersen’s trial are laying the groundwork to support their claim the accounting firm obstructed justice by destroying Enron Corp. documents. Duncan, the former lead Andersen partner on the Enron audit, testified on Tuesday that he knew Enron was a high-risk client, Andersen could face severe penalties for violating Securities and Exchange Commission rules, and Enron hired a law firm to investigate questions raised about some accounting and disclosure issues raised by Enron employee Sherron Watkins. Duncan also testified that he disagreed with Enron’s decision to label a $600 million loss in its third quarter earnings report in 2001 as nonrecurring. The 43-year-old Duncan began his testimony Monday by telling jurors he is guilty of obstruction of justice because he asked others on Enron’s engagement team to obey the firm’s document retention and destruction policy. “I knew documents would be destroyed,” the former Arthur Andersen partner testified on Monday. He also testified he was directed to ask others to follow the document policy. On Tuesday, Duncan said Andersen partner Mike Odom forwarded him an e-mail from in-house lawyer Nancy Temple reminding him about Andersen’s document retention and destruction policy. He said Temple had asked him within the week before he received that e-mail about the engagement team’s compliance with the policy. “I replied we were irregular at best with the policy. It was not something I focused on, on a regular basis,” Duncan said he told Temple. Temple has submitted an affidavit saying she would take the Fifth Amendment against self-incrimination if asked to testify. Duncan said he came to believe by Oct. 23 that it was a good idea to follow the policy. He said that way necessary documents that weren’t part of final conclusions wouldn’t be around for others to discover in the event of civil litigation or an investigation. “There’s any number of reasons they might be used or misused against the firm,” he said. He called a meeting for the afternoon of Oct. 23 to update the Andersen employees on the Enron engagement team about the situation and to tell them to follow the document retention and destruction policy. He said no one questioned his directive. Duncan, who is tall and slender, was dressed as somber as his demeanor in the courtroom, which was packed for his first full day of testimony. The trial began on May 6 before U.S. District Judge Melinda Harmon of Houston. While Duncan may be the linchpin of the government’s case, much of the drama in the courtroom stems from the growing tension between federal prosecutors and lead defense attorney Russell “Rusty” Hardin Jr., who also is butting heads with Harmon over her evidentiary rulings. Prosecutors went so far as to ask Harmon at an early morning hearing Tuesday to enter an order restricting Hardin’s conduct. Assistant U.S. Attorney Matthew Friedrich alleged in court that Hardin violated an agreement to refrain from mentioning to the jury that the prosecutors come from Boston and New York, and he alleged Hardin wasn’t supposed to talk about himself in front of the jury, citing remarks during voir dire that he is a former teacher with a military background. Friedrich said Hardin also repeatedly laces his questions with jury argument and has more than once continued along a specific line of questioning even after Harmon has sustained objections to that line of questioning. “Federal courts are not supposed to work like that,” Friedrich said. Hardin took offense at Friedrich’s remarks, saying the prosecutors invited his Boston/New York question to a witness because they earlier had asked witnesses eight times if they knew Andersen had hired a “big New York law firm [Davis, Polk & Wardwell]” in early October. “This is the most silly, thin-skinned approach I can imagine,” Hardin said in response to the prosecution’s motion. Hardin said he simply doesn’t understand why the judge, during a bench conference Monday, “accused me of making this a circus.” He said the judge has the power to “muzzle him” in court, but he believes he and his client are not being treated fairly or receiving a fair trial. He suggested a study of the judge’s evidentiary rulings will prove it. “I’m dumbfounded by this,” Hardin said. “Mr. Friedrich says this isn’t personal. Well, I appreciate this. Well, I deplore their conduct.” The prosecutors’ complaint came up after some questions Hardin posed during his cross-examination Monday of Andersen partner Amy Ripepi, the head of the firm’s professional standards group. Hardin asked Ripepi if she thought there was anything surprising to the firm’s hiring of a big New York law firm and anything to the fact the prosecutors came from Boston and New York. By press time Tuesday, Harmon hadn’t ruled on the prosecutors’ request. HEARSAY WOES The admissibility of evidence is becoming a huge issue in the trial, with Hardin suggesting prosecutors are being allowed to use documents that lead to “totally reversible error.” “They know in their heart this is just totally improper and wrong,” Hardin told Harmon on Monday. “This is clearly inadmissible.” Hardin strenuously objected to Harmon’s rulings Monday to allow prosecutors to question Ripepi about e-mail messages between other Andersen partners. He suggested it is improper to allow prosecutors to use those documents to question Ripepi when he was not allowed Friday to question Ripepi on other documents that she didn’t recall ever seeing. But Harmon told Hardin she wasn’t changing her ruling. “The rules of evidence are different. We don’t need to go through this again in front of the jury,” Harmon said Monday. She did ask for a briefing, however. Hardin argued in a memorandum of law filed Monday that prosecutors have wrongly objected on hearsay grounds to certain documentary evidence and testimony related to exchanges between Andersen partners. Hardin contended in the pleading that some e-mails the defense attempted to introduce as evidence should have been admitted under an exception to the hearsay rule. That exception allows documents to be introduced not to prove the truth of a matter, but instead to prove that statements were in fact made. In a brief filed Monday, prosecutors argued statements made by Andersen and its employees are not hearsay under Federal Rule of Evidence 802 because they constitute admission by a party opponent under 801(d)2. It goes to intent, Hardin said in the pleading. He also says the evidence is admissible under the state of mind hearsay exception in Federal Rule of Evidence 803(3). “Under this principle, testimony about statements by Andersen partners that are relevant to establishing their state of mind at the time of the alleged crime are admissible, whether or not those statements are offered to establish the ‘truth’ of the matters asserted,” Hardin wrote. Hardin said the government hasn’t even articulated a reason to exclude the evidence, but he said the prosecutors are inviting the court to commit reversible error. DUNCAN’S KNOWLEDGE Duncan, a partner in Andersen since 1995, testified he made $700,000 in 2001. He was fired on Jan. 15, just days after Andersen told the government it had discovered widespread destruction of Enron documents and asked the government for a speedy investigation. The indictment against Andersen was made public on March 14. With Andersen’s existence on the line, Hardin, of Rusty Hardin & Associates of Houston, asked for a speedy trial. But after Harmon set the trial for May 14, Duncan pleaded guilty on April 9. His sentencing is delayed until after his testimony. Duncan testified Tuesday that he knew about the consent decree Andersen agreed to in 2001 in an enforcement matter relating to its work for Waste Management that permanently prohibits the firm from violating SEC regulations. He also testified that he and others at Andersen knew by Oct. 20 that Enron received a letter on Oct. 17 from the SEC seeking documents and notifying the company of an investigation into its financial reporting. Penalties include a ban to certify audited financials to the SEC. Hardin’s cross-examination of Duncan may be the key exchange of the trial, as he attempts to impeach the witness. Hardin has suggested Duncan didn’t say publicly he did anything wrong in connection with the document destruction until he pleaded guilty. Brenda Sapino Jeffreys is a senior reporter with Texas Lawyer , a division of American Lawyer Media and an affiliate of law.com.

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