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Defense attorney Russell “Rusty” Hardin Jr. is doing his best to portray former Arthur Andersen auditor David Duncan, the government’s key witness in Andersen’s obstruction of justice trial, as an innocent family man who was pressured to plead guilty to a crime and testify for the government. During cross-examination over two days last week, Hardin painted a picture of Duncan as a man who believed he did nothing wrong by directing Andersen employees to destroy Enron Corp. documents, but was somehow persuaded to change his mind and plead guilty to a charge of obstruction of justice in the weeks after he was fired by Andersen on Jan. 15. Hardin elicited testimony from Duncan that suggests he began to second-guess his belief he did nothing wrong after a series of meetings with government agents, and after he eventually learned prosecutors considered him guilty. “You were in the middle of a nightmare, weren’t you?” Hardin asked Duncan Wednesday. “This has not been my favorite year,” he replied. That picture differs from the one drawn during direct examination, when Duncan testified he directed Andersen employees working on the Enron engagement team to follow the firm’s document retention and destruction policy at a time he not only knew the Securities and Exchange Commission was investigating Enron, but also knew that Andersen would face severe penalties for violating SEC regulations because of a consent decree in 2001. Hardin’s cross-examination of Duncan is the key exchange in the trial, which began on May 6 in U.S. District Judge Melinda Harmon’s courtroom in Houston. The indictment against Andersen, made public on March 14, was the first to come from a grand jury hearing evidence presented by the Enron Task Force. With the future of the company at stake, Hardin sought a speedy trial. On April 9, Duncan pleaded guilty. Duncan has been sitting in the witness chair during the majority of the second week of the trial. His direct testimony lasted a little more than a day, and Hardin began questioning him early Wednesday. Cross-examination continued as of press time Thursday. Hardin has done a good job of humanizing Duncan and showing Duncan has nothing to hide about his accounting for Enron and his role in the document destruction, says Christopher Bebel, a former Department of Justice and SEC prosecutor who has heard nearly all of Duncan’s direct testimony and the cross-examination. “Duncan comes across as a choir boy,” says Bebel, a partner in Houston’s Shepherd, Smith & Bebel. Bebel says the longer Hardin keeps Duncan on the witness stand, the better for the defense. He believes Duncan is becoming more comfortable with Hardin as the cross-examination continues, and he is not testifying like a hostile witness. The prosecution was less effective in Bebel’s view. “The prosecution obtained enough to sustain a conviction, but the style of the prosecutor’s presentation lacked any human emotion, pizzazz, sex appeal,” he says. “It was dry and appeared to be bogged down in minutia.” GOOD IDEA? Under questioning by Assistant U.S Attorney Andrew Weissmann, Duncan testified he sent the shredding directive Oct. 23, which was four days after Andersen was informed that the SEC had notified Enron of an informal investigation and asked for documents from Enron. He testified that he knew Enron was a high-risk client, knew Andersen could face severe penalties for violating SEC rules, and knew Enron had hired Houston law firm Vinson & Elkins to investigate questions involving some accounting and disclosure issues raised by Enron employee Sherron Watkins. Duncan testified he was directed to ask others to follow the document policy. He said May 14 that Andersen partner Mike Odom forwarded him an e-mail dated Oct. 12 from in-house lawyer Nancy Temple reminding him about Andersen’s document retention and destruction policy. But 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. He said he directed his team on Nov. 9 to quit destroying Enron-related documents. That was after the firm received a subpoena from the SEC on Nov. 8. He repeatedly testified, during direct examination by Weissmann, that no one at Andersen ever told him to stop following the document policy or stop destroying documents prior to the time the firm received the subpoena. SECOND THOUGHTS Hardin spent much of Wednesday attempting to prove that Duncan didn’t believe he did anything wrong while working at Andersen, and that he stood by that assertion for months. Duncan testified he continued to believe he did nothing wrong even after Andersen notified him Jan. 15 that he was being fired. He said he felt that way when meeting with government agents, including prosecutors, on Jan. 14 and 16, and when meeting with congressional staffers Jan. 15. But Duncan testified he began to have second thoughts sometime in late January to February, and he first shared those misgivings privately with his family. He said he engaged in “a lot of soul searching of what was in my head, my intent at the time.” Duncan said he was having those private second thoughts at the time his attorneys signed a joint defense agreement with Andersen on March 20. It was sometime during February, he said, that he was informed that his status before the Department of Justice had changed from “witness” to “target.” He said government agents first told him sometime in February that they believed he had committed a crime. Duncan testified it was sometime after he met with prosecutors March 21 that he decided he would plead guilty for the document destruction. The 43-year-old Duncan testified on cross that government agents contacted him around Christmas 2001 about meeting with them. He said he understood at that time the meeting would concern Enron’s accounting, but he said it turned out that “a fair period” of the five- to six-hour session on Jan. 14 dealt with Andersen’s document destruction. “It was the first issue we discussed,” he said. Four days earlier, Andersen had announced the massive destruction of Enron documents. Duncan testified that even when Andersen’s indictment for obstruction of justice was made public on March 14, he wasn’t convinced he had committed a crime. “I’m struggling with the date, but I will say that yes, I had not 100 percent concluded at that date that in my mind I had committed a crime,” he said. But on April 5, Duncan said he came to terms of a plea agreement with prosecutors and signed it April 6. The agreement calls for him to testify truthfully, but says prosecutors can ask the judge who sentences him to depart from sentencing guidelines. He said that while the maximum sentence is 10 years in prison for obstruction of justice, he understands he could receive probation. But Hardin also suggested in questioning that by pleading guilty to obstruction of justice, Duncan avoided prosecution for fraud, which carries a higher possible sentence. Hardin also asked him if government agents ever brought up tax matters during their meetings. Duncan testified he did tell them he is somewhat concerned about the tax paperwork for the nanny he and his wife employ. The couple has three daughters, ages 3, 6 and 8. “I was asked at one point if I had any other issues that I thought I should bring to the attention to the government,” Duncan said. “I don’t know that I thought it was Nannygate,” Duncan said in response to a question from Hardin. “I know we had paid our taxes. I wasn’t sure if all of the relevant forms were in order.” He said he was told to get the paperwork in order. Hardin spent much of the day Thursday attempting to show that the document destruction was aimed at getting rid of extraneous documents, and not key memos necessary to support the Enron audit or internal Andersen disputes over accounting issues. While Duncan may have purged some Enron e-mails and documents, he testified he also retained in his personal files or firm Enron files a number of crucial memos. Those include internal memos that document disagreements on accounting issues for Enron, and papers that are critical of Andersen’s accounting for Enron, such as a copy of a letter from Enron whistleblower Watkins to Enron Chairman Ken Lay as well as Andersen partner James Hecker’s report of a conversation with Watkins about her allegations. JUROR EMERGENCY Only a few minutes into testimony on the morning of May 13, Judge Harmon abruptly stopped proceedings. The jurors filed out, and Harmon told spectators to leave the courtroom. She told lawyers they had the choice of staying in the courtroom or leaving. That unexpected order immediately prompted some grumbling by reporters who were fearful they were being shut out of a hearing. It turned out a juror was ill. Harmon called everyone back a few minutes later. Then soon afterward, while Assistant U.S. Attorney Samuel Buell questioned witness Amy Ripepi, head of Andersen’s professional standards group, Hardin stood as if preparing to make an objection. Instead, he alerted the judge to another emergency with that juror. That led to an unscheduled recess of about an hour and rampant speculation among reporters as to the nature of the juror’s illness. THE TENSION MOUNTS If the presence of Duncan wasn’t enough, much of the drama in the courtroom stems from the growing tension between federal prosecutors and lead defense attorney Hardin, who is also butting heads with Judge Harmon over her evidentiary rulings. “Mr. Hardin, please ask a question that’s a real question,” Harmon told him at one point on May 13. Prosecutors went so far as to ask Harmon at an early Tuesday morning hearing 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 also 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 had asked witnesses eight times in the trial by that point 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 on May 13, “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.” By press time Thursday, Harmon hadn’t ruled on the prosecutors’ request for a motion to restrict Hardin’s conduct in court. But during his cross-examination of Duncan, the government’s star witness, Hardin took a soft approach as he attempted to portray Duncan as an innocent man who was pressured by the government to plead guilty to a crime he didn’t believe he committed. At the end of the day Thursday, the tension between Harmon and Hardin escalated during a brief hearing on admissibility of a document. Weissmann objected to a defense exhibit, saying the document shouldn’t be allowed into evidence. It was a copy of an Andersen bill to Enron for the month ending Nov. 9, 2001, in which the accounting firm billed Enron about $2.3 million, including work related to the SEC enquiry to Enron. But the bottom line on that document was about $1 million less than the $3.2 million on a bill Weissmann introduced Tuesday when questioning Duncan. Weissmann told Harmon the document wasn’t produced in discovery, and he suggested defense lawyers violated an agreement between the parties to refrain from using anything in the trial that wasn’t produced earlier. Andersen lawyer Lee Rubin, a partner in Mayer, Brown, Rowe & Maw of Chicago, said the defense team didn’t even know they had the document until Wednesday evening. He said they started looking through files after they were alerted the government’s exhibit didn’t include a Bates stamp. Rubin also pointed out that they gave prosecutors a copy of it first thing Thursday morning. “It’s not a document we’ve been sitting on,” he says. Rubin said Andersen has been looking through an estimated 78 billion pages of documents to respond to an SEC subpoena. And Hardin said the bill Weissmann introduced Wednesday is one the defense team never has seen and was likely produced to another government agency. But Harmon expressed dismay that the defense team would try to use a document that wasn’t produced to prosecutors 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. “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.” EVIDENCE FIGHT Hardin has refrained, since an admonishment from Harmon, from asking witnesses, “Are you Waldo?” He brought up Waldo, the character in the children’s book series, during opening statements, suggesting that the search for a “corrupt perpetrator” at Andersen is like a search for Waldo. But the underlying issue remains. Prosecutors want Harmon to prevent defense attorneys from presenting evidence that certain Andersen personnel did not act with corrupt intent when destroying Andersen documents. Leslie Caldwell, director of the Enron Task Force, filed a memorandum arguing that “such instances of innocent conduct are irrelevant” to the underlying charge that some Andersen personnel acted to corruptly persuade people to destroy documents with the intent of impairing an official proceeding. Caldwell wrote that such evidence should be precluded under Rules 403 and 611 of the Federal Rules of Evidence. She suggests Andersen defense attorneys would need to prove that people the government alleges corruptly persuaded others to destroy documents, such as Duncan and in-house lawyer Temple, preserved those very documents. In a response, Hardin suggests the government’s response is “to say the least, surprising.” He argues that the government is refusing to provide a complete list of Andersen partners and employees it asserts acted with corrupt intent, while at the same time arguing that corrupt acts by anyone at Andersen may give rise to a criminal act. “The government is now arguing, in so many words, that Andersen should be precluded from offering evidence that would negate an element of the offense,” Hardin wrote. He argued that it is black letter law in the 5th U.S. Circuit Court of Appeals that intent may be proven circumstantially. He also wrote that while alleged persuaders did eliminate multiple copies of documents, the same documents were preserved elsewhere in central files. He suggests that granting the government’s motion would prevent Andersen personnel from testifying they had an innocent intent when destroying documents related to the Enron account. Lawyers are fighting over other evidence. Andersen’s defense team wants prosecutors to turn over additional notes taken by FBI agents during pretrial meetings with Duncan, known as “302″ forms. Duncan testified Wednesday that there were numerous inaccuracies in the forms. He characterized the misstatements as ranging from “things I believe I did not say to things that I possibly could have said, but don’t believe I said, and to some more minor editorial corrections.” Hardin writes in a motion that the government either provided inaccurate copies of the 302s to the defense team, or they failed to provide Duncan’s corrections to the 302s. He argues Andersen is entitled to the notes under Giglio v. United States, 405 U.S. 150 (1962), and if the corrected statements are exculpatory, under Brady v. Maryland, 373 U.S. 83 (1963). He wants to be able to question Duncan, out of the presence of the jury, on the errors in the notes, so he can use the potentially exculpatory evidence during cross-examination.

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