Ex-Andersen Partner: Some Potentially Embarrassing Records Saved

A former Arthur Andersen partner who illegally shredded documents related to Enron Corp. testified Thursday that he preserved several potentially embarrassing records, including one labeled "Smoking guns you can't extinguish."

David B. Duncan, who pleaded guilty to obstruction of justice charges in April, said he kept records related to allegations of questionable accounting practices brought last August by Enron vice president Sherron Watkins.

"I believe I retained (documents) relevant to the Watkins allegation matter in a separate folder," Duncan, told Andersen attorney Rusty Hardin, in a second day of cross-examination at Andersen's obstruction trial.

Andersen contends neither the firm nor Duncan broke any laws and that Duncan took the plea deal under threat of extensive prison time.

In his questioning Thursday, Hardin focused on the important documents that survived the shredder, in an effort to show the jury there was no conspiracy to cover up Andersen's auditing work on Enron's books.

Among the documents Duncan retained was a memo from fellow Andersen partner James Hecker, who took a call from Watkins in August. In the call, Watkins relayed her worries about Enron's questionable accounting of so-called "Raptor" entities and rumors of secret side deals that might have jeopardized the veracity of Enron's financial statements.

The Hecker memo, detailing the conversation with Watkins, was titled "Smoking guns you can't extinguish." Duncan dismissed the title as nothing more than his co-worker's sarcastic wit.

Also preserved were copies of Watkins' complaints, which she shared with former Enron chairman Kenneth Lay. A review by law firm Vinson & Elkins later dismissed many of Watkins' concerns, although some of the issues became flashpoints as investors lost confidence in the energy trader and it skidded into bankruptcy in December.

Duncan, 43, publicly maintained his innocence until April, when he pleaded guilty to obstruction of justice and agreed to testify as part of a plea deal. Obstruction carries a maximum sentence of 10 years, but prosecutors can recommend Duncan be sentenced only to probation.

Duncan, who has been on the stand since Monday, headed the Chicago-based firm's second-largest auditing account until he was fired Jan. 15. He has testified that he did not think asking employees to destroy extraneous Enron documents after the SEC announced an inquiry last October was illegal, but this year came to realize it was.

If convicted, Andersen could be fined up to $500,000 and face probation for five years. It also could also be fined up to twice any gains or damages the court determines were caused by the firm's action and would be barred from auditing publicly traded companies — likely putting the firm out of business.

Tensions between Andersen's lead attorney and U.S. District Judge Melinda Harmon erupted into a shouting match Thursday after proceedings ended for the day.

The dispute was over a bill on the Enron account that defense lawyers submitted. The bill differed by $700,000 from a draft document the government had filed.

Prosecutor Andrew Weissman accused Andersen of hiding documents from the Justice Department and Harmon called the defense lawyers' tactics "underhanded."

Defense attorneys said they only discovered the actual bill Wednesday among 78 billion pages of documents.

"For you to impugn my integrity and our effort, I am deeply resentful," Hardin said.

Harmon replied, "Well then resent away," before storming off the bench.