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David Duncan may be the single most important government witness in Arthur Andersen’s obstruction of justice trial, but since he stepped off the stand May 17, prosecutors have been shoring up their case with documents, e-mails, a videotape and testimony about Andersen partners who refuse to testify. But some of the strongest evidence came Wednesday, when the head of Andersen’s fraud investigations group, David Stulb, testified that he had to stop Duncan from throwing away a potentially embarrassing document on Oct. 31, 2001, leading him to believe Duncan needed guidance in document retention. “He had deer-in-the-headlight type of syndrome, somebody who had not had the type of training nor had not worked with lawyers on a regular basis … he just didn’t consider the ramifications,” Stulb testified under questioning by Andrew Weissmann, an Assistant U.S. Attorney who is a special attorney on the Enron Task Force. Stulb said later he told Andersen in-house lawyer Nancy Temple, a key figure in the prosecution’s case, of his concerns about Duncan. “I was concerned that if he was going to remove this document that maybe he had not had any definitive conversations with the type of relative discovery motions we could be subject to,” Stulb said. Stulb testified that Andersen partner Gary Goolsby, global managing partner for risk management, called him Oct. 29 and asked him to come help with an “emergency” in Houston. He testified that he viewed his role as a resource to Andersen and Enron in responding to an investigation by a special committee of the Enron board, which had just hired Washington, D.C.-based firm Wilmer, Cutler & Pickering to help it prepare a report on what was going on at Enron at the time. Stulb’s testimony, and some other evidence presented by the government during the third week of trial, may support its contention that Andersen, from Oct. 10, 2001, to Nov. 9, 2001, destroyed documents from its work on Enron’s audit with the intention of keeping them away from the Securities and Exchange Commission, which had begun an informal investigation into Enron’s financial reporting. The trial began May 6 in Houston in U.S. District Judge Melinda Harmon’s court. Prosecutors told Harmon they will rest by the end of the day Friday. Harmon said she would hold court on Monday, Memorial Day. Using an FBI agent, the government on May 20 introduced a thick stack of notes taken by key player Temple, the in-house lawyer at Andersen who warned partners to comply with the firm’s document policy, indicating she was thinking as far back as Oct. 9, 2001, that the SEC was likely to investigate Enron-related matters. Temple’s notes for that day also indicate she was thinking about the penalties Andersen faces for violating a cease-and-desist order in 2001 stemming from the firm’s work for Waste Management. (Andersen didn’t admit to any wrongdoing in connection with its Waste Management work.) “Highly probable some SEC investig.,” Temple wrote in the notes. “Restat. And probability of charge of violating C&D in WM. Firm subj of C&E viol and 102 (e).” The prosecutors also showed a videotape of an Andersen training session Oct. 10 during which Michael Odom, a regional practice director in Houston, talked about the need to follow the firm’s document retention and destruction policy. He stressed that documents can’t be destroyed if litigation is filed, but “if it’s destroyed in the course of the normal policy and litigation is filed the next day, that’s great.” “You know, because we’ve done exactly what, we’ve followed our own policy, and whatever there was that might have been of interest to somebody is gone and is irretrievable,” Odom said on the video of the meeting that took place two days before Temple sent her e-mail to Odom reminding him of the policy. In another piece of evidence that can be interpreted as favorable for the government, Patricia Grutzmacher, a former Andersen manager on the Enron account, testified May 21 that her boss on the Enron audit, partner Thomas Bauer, told her that any talk of document destruction always should be interpreted as referring to the firm’s document retention and destruction policy. “He told me that if he ever talked to us about getting rid of documents, it was always in the context of compliance with the firm’s document retention policy,” Grutzmacher said during her direct examination. While Bauer’s words suggest he was anticipating questions about why the firm was destroying mass quantities of Enron-related documents last fall at a time when the company’s stock price was falling and the SEC was already investigating its financial reporting, the jury may not know what Bauer meant by that remark to Grutzmacher. On May 20, the judge learned Bauer would take the Fifth Amendment and won’t testify because of the fear of self-incrimination, and Harmon sustained government objections when defense lawyer Russell “Rusty” Hardin Jr. asked Grutzmacher what she thought Bauer meant in that remark. That is frustrating to Hardin, who says he’s been hamstrung on many occasions by Harmon’s evidentiary rulings. “This is the problem with the whole case,” he says. “Wouldn’t the real relevant thing be that she [Grutzmacher] was suggesting it was some kind of code?” Hardin says. Hardin was also largely prevented from asking FBI agent Barbara Jean Sullivan to interpret the stack of documents. SCOPE OF DESTRUCTION Grutzmacher, who said she has been notified she will be laid off in two weeks, testified that she was told twice on Oct. 23 — once in a regular partners/managers meeting for the Enron engagement team and later in a meeting specially called by Duncan — to follow the firm’s document retention and destruction policy. She said Duncan told the group, “‘I’m not telling you to go shred a lot of documents or anything, but you need to be in compliance of the policy.’” Duncan testified earlier in the trial that he directed the Enron engagement team to follow the policy Oct. 23, which was 11 days after he received a copy of an e-mail from Temple that was a reminder to comply with the policy. Grutzmacher provided some eyewitness testimony about the scope of the document destruction that forms the basis of the government’s charge. In the days after Oct. 23, she said she saw footlocker-style trunks lined up along the walls and understood some of them were filled with documents on the way to be shredded. That was “unusual,” she testified. “In the hallway, there were a couple staff, by the file cabinets, cleaning out the file cabinets,” she said. But Grutzmacher said she didn’t immediately begin to purge her own files because she was simply too busy working on Enron’s restatement. She says it was late October before she began one evening to go through the papers on her desk and in her files, but only completed about 50 percent of it before she was ordered Nov. 9 to stop any destruction. She testified no one ever told her to destroy documents because the SEC was coming, or to keep them from people who were entitled to them. She said she never thought she was doing anything wrong by deleting e-mails and destroying documents. She also said Duncan, at Temple’s direction, specifically told her to preserve any drafts and amended memos prepared for the ongoing work on the potential restatement of Enron’s profits related to the Raptor special-purpose entities. “They wanted me to keep my memos, keep everything that was required to complete my memos … and keep audit work papers,” Grutzmacher testified. Grutzmacher said it was her normal practice to destroy documents because Enron was concerned about confidentiality and she kept a shred box beside her desk. “There was very little put into the trash. Almost everything I threw out went into the shred box,” she said. On Thursday, Sharon Thibaut, head of Andersen’s records department, testified the Enron engagement team sent her department an unusually high number of trunks of documents for shredding from Oct. 24 through Oct. 26. The volume was high enough, she testified, to prompt her to ask the firm’s outside shredding contractor to bring its portable shredding truck out for a full day during the week of Oct. 29, instead of the regular half day. She testified, however, that until October 2001, she had received virtually no documents to shred from the Enron engagement. A DIFFICULT DOCUMENT? Houston’s Vinson & Elkins took some strong criticism Wednesday from Stulb for a report it issued Oct. 15 after investigating the allegations raised by whistleblower Sherron Watkins, who raised questions about some of Enron’s off-balance-sheet partnerships and brought them to Ken Lay, then Enron’s chairman. Stulb characterized the brief Vinson & Elkins report as a “whitewash” because of its limited scope and because he considered Watkins a credible whistleblower. “I quickly got an understanding that this was going to be, at least in my mind, a difficult document for us to deal with,” Stulb testified. Stulb said he quickly noticed the report was signed by Vinson & Elkins partner Max Hendrick III, but he found that problematic since Hendrick had worked on some of the Enron projects at issue. Stulb says he was “concerned” and told Duncan that he would find it difficult to take on a project under similar circumstances. Watkins and Vinson & Elkins partner Joe Dilg, now the firm’s managing partner, did the preliminary investigation into Watkins’ allegations at the request of James V. Derrick, Enron’s general counsel at the time. “Clearly V&E may have overreached by being the outside counsel to Enron and conducting an investigation,” Stulb testified. Stulb also testified that he was troubled by the limited scope of the probe — Enron did not ask Vinson & Elkins to second-guess Andersen’s accounting — as well as the use of Vinson & Elkins at all. “If Enron was serious in understanding what issues Sherren Watkins was relating to several parties, in order to protect the board and the company and the shareholders, you would typically want to bring in an independent group,” he said. In an interview, Vinson & Elkins partner Harry Reasoner says Stulb’s testimony is misinformed. “It seems to me that his fundamental complaint is that Enron and Vinson & Elkins made a mistake on relying on Arthur Andersen instead of relying on an outside auditor,” Reasoner says. “It was a preliminary investigation to determine whether or not there needed to be an outside accounting firm.” “Clearly, everyone understood that Vinson & Elkins didn’t have the expertise or confidence to make judgments about accounting issues,” Reasoner says. Stulb said he was concerned that Vinson & Elkins lawyers apparently interviewed only a limited number of individuals at Enron for their investigation, and Jeffrey Skilling, Enron’s former chief executive officer, wasn’t among them. Stulb testified that while he was in Duncan’s office Oct. 31 getting a copy of the Vinson & Elkins report and they were talking about Watkins’ allegations, Duncan proceeded to give him a paper copy of an e-mail from Andersen partner James Hecker, who had talked to Watkins about some of her allegations about Enron’s accounting in August and wrote up a summary of his conversation. In a cover letter in his e-mail, Hecker referred to Watkins’ allegations as a “smoking gun.” Stulb testified that as Duncan proceeded to hand over a copy of Hecker’s e-mail, he started to rip off the cover sheet. “He said, ‘Another smoking gun. We don’t need this,’” Stulb recalled. “And he was going to remove the cover, but I told him not to.” “I said, ‘Dave, I’m not sure if you’ve had any discussions, but you really need to keep all this information, and there’s a strong possibility we will be subject to litigation,” Stulb recalled. He said he mentioned the SEC and the Department of Justice in that conversation, and suggested he should talk to Temple or other ranking Andersen partners for guidance. Duncan’s response, according to Stulb, was “fine.” “I walked away thinking he was na�ve,” Stulb said. He said he described Duncan as acting like a deer in headlights because when “you conduct preliminary interviews of audit partners that have not been subject to litigation or subject to significant scrutiny often professionals will make bad judgments, or innocuous [ones].” “It would be fair to say the [fraud investigations] leadership was looking at what he was doing and had done. He clearly was under pressure, tension,” Stulb testified. Hardin pointed out in cross-examination that Duncan had saved two copies of the Hecker e-mail, and Stulb testified that the e-mail could have been recovered from Andersen’s system as well. Hardin suggests, outside the courtroom, that Stulb’s testimony about Duncan and the smoking gun e-mail isn’t necessarily damaging to the defense because Duncan didn’t destroy the document. He also says it’s difficult to consider Duncan a “corrupt persuader” if he doesn’t even understand the legal implications of document retention. Stulb said he later called Temple and told her of his problems with the Vinson & Elkins report and also told her that Duncan needed some guidance on document retention. He testified that Temple said she would contact Duncan. TENSE TIMES Tension between Hardin and the prosecutors and Hardin and Harmon continues to permeate the proceedings, with Hardin clearly working hard to control his temper and frustration. The hostilities came to a head May 17, after the jury went home for the day, in a shouting match in which the judge characterized Hardin’s tactics as underhanded, and Hardin suggested she is biased against his client in the trial. Harmon expressed dismay in that exchange that the defense team would try to use a document that wasn’t produced to prosecutors during discovery in an attempt to impeach Duncan on the witness stand. “This is the most underhanded thing I’ve ever seen. It’s ludicrous,” Harmon said, saying the defense lawyers agreed not to use documents that weren’t already produced. Hardin suggested that Harmon is biased against the defense and said he resents her comments. “For you to impugn my integrity and our effort, I deeply resent,” Hardin said. “Well, resent away,” Harmon replied. “I’m not going to allow it in.” Harmon issued a memorandum on May 20, explaining her ruling. She said she wouldn’t allow Hardin to introduce the document — a bill from Andersen to Enron for work in October and November 2001 — because it wasn’t produced in discovery, and the lawyers had agreed not to use new documents in the trial. “The Court’s role is to prevent the use of unfair trial tactics,” Harmon wrote. On May 17, one day after the heated argument, Harmon signed an order sought by prosecutors “addressing alleged misconduct” on Hardin’s part. The order says Hardin must refrain, in the presence of the jury, from making sidebar remarks; from making argumentative, detailed objections unless he’s at the bench; from arguing rulings already made by the court or requesting a basis for a ruling; from making any statement of personal belief or mentioning the personal background of government or defense counsel; from mentioning the effect of the indictment or a potential conviction on Andersen; or mentioning or alleging government misconduct without first approaching the bench. Harmon signed the order May 17 after complaints from prosecutors, who alleged Hardin shouldn’t have mentioned to the jury that the prosecutors came from Boston and New York, and should not have told them during voir dire that he is a former teacher with a military background. Prosecutor Matthew Friedrich, another special attorney on the Enron Task Froce, also complained to Harmon that Hardin 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. Hardin says the order isn’t affecting his conduct in court, but he says he’s perplexed by many of the prosecution’s objections to his questions and the judge’s ruling on those evidentiary matters. “In 27 years, I’ve never had objections made or sustained like this,” he says outside the courtroom. The testimony is interrupted by numerous bench conferences, where Harmon chooses to have the lawyers argue objections and points of law. It’s a sore point for Hardin, who has told Harmon he would rather do it in open court. One bench conference Wednesday lasted 24 minutes, as lawyers argued about how Hardin could question witnesses about documents that had been recovered and produced by Andersen in discovery. After court on Thursday, Hardin said, “It’s safe to say the government has a great deal of objection to me, I’m sad to say. Every time we go up to the bench they want her [the judge] to order me not to do this, not to do that … . I have never met such a bunch of whiners in my life.” BLAME GAME One bench conference during the lunch hour Thursday prompted the judge to apologize to reporters covering the trial. Weissmann asked Harmon to consider a jury instruction at the end of the case that jurors should draw no conclusions by the fact several witnesses took the Fifth. Those witnesses are Temple, Bauer and Kate Agnew, who was a manager on the Enron audit. “Don’t blame us that we can’t produce Nancy Temple,” Weissmann argued. “Don’t blame us that we can’t ask Tom Bauer what he said to Patty Grutzmacher on the 23rd.” Hardin told Harmon the government isn’t entitled to that instruction. He argued, as well, that if Harmon grants Weissmann’s request, he should be allowed to put lawyers on the witness stand and question them about why their clients refused to testify. “If the court wants to go down that trail, I’ll welcome it,” Hardin said. Hardin contends the witnesses have been unlawfully pressured by prosecutors and they are taking the Fifth because they are fearful they will be prosecuted. He says the government’s tactic keeps the witnesses from testifying for the defense. Weissmann said, “We’ve spoken to all of these defense counsel and not a single one has made [allegations of] what Mr. Hardin has made in court.” “They don’t want them. These people’s testimony would hurt them. That’s why they don’t want them,” Hardin asserted. “It’s extremely underhanded, to use the court’s word.” At that point, Assistant U.S. Attorney Samuel Buell asked to approach the bench, where the discussion continued out of the earshot of reporters at a time when the jury was at lunch. Reporters were unable to get a message to the judge asking her to hold the hearing in open court. After a few minutes of argument, the discussion ended. As he walked out of the courtroom Buell said, “We’re tired of Mr. Hardin speaking for the press.” A few minutes later, before the jury returned to the courtroom, Harmon apologized to reporters, saying she simply forgot the jury was out. “When Mr. Buell asked to approach the bench I instinctively said, ‘OK,’” she said, adding that she is not trying to keep information from the press. FOLLOW THE POLICY One of Hardin’s running defense themes is that document destruction at Andersen was simply a result of following the firm’s document retention and destruction policy. So he probably couldn’t resist taking a jab at FBI agent Raju Bhatia, who testified Wednesday about his recollection of an interview in February with Michael Jones, an Andersen partner in London who was doing work for Enron. Bhatia testified that Jones discussed an October conference call when he was told, perhaps by Duncan, to follow the policy and get rid of extraneous Enron documents. Bhatia testified that Jones said that led him to delete a number of e-mails and destroy documents that he didn’t think he needed to keep. Bhatia testified that he weeks later wrote up a 302, which is a report of an interview with a witness, based on his “chicken scratch” notes taken during the interview with Jones. Bhatia said he retained his notes, following his normal practice, but discarded early drafts of the 302. “You followed the FBI’s document retention policy, didn’t you?” Hardin asked Bhatia. The jury never heard the answer — Harmon sustained Weissmann’s objection to the question. 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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