HOUSTON – A former Arthur Andersen LLP partner said Tuesday that he implicitly encouraged his staff to shred Enron-related documents because he believed the Securities and Exchange Commission planned an investigation.
David B. Duncan, who was Andersen's chief auditor on the energy trader's account, also testified that he huddled with superiors after an Enron vice president related worries over some complicated transactions, but that the firm eventually accepted the word of Enron lawyers that everything appeared proper.
Duncan spent a second day on the stand in Andersen's obstruction of justice trial. The accounting firm is accused of destroying documents in advance of a possible SEC probe into Enron.
Duncan pleaded guilty to the charge April 9 and is cooperating with the government in exchange for mercy.
Duncan said he did not explicitly order the mass shredding and deleting that was carried out by the company's audit team, but said he gave employees a reminder about Andersen's document retention policy that prompted them to shred documents.
He said he was unaware at the time that shredding the documents was illegal.
"I told them to not do anything more or less than follow the policy," said Duncan.
Duncan also testified that he was included on a conference call in late August 2001, shortly after Enron vice president Sherron Watkins confided to a friend at Andersen — where she once worked — about accounting problems on major transactions.
Enron told Duncan the company would enlist Vinson & Elkins, its primary outside law firm, to investigate allegations that Enron partnerships called "Raptors" were in deep financial trouble.
"Raptors" were special purpose entities that enabled Enron to keep hundreds of millions of dollars in debt off its books.
Andersen wanted the law firm's opinion on the allegations before Enron's scheduled earnings release on Oct. 16, 2001, Duncan said. He said the firm "concluded they didn't find any merit to the allegations, essentially."
Duncan said he had been interested in part of the Vinson & Elkins report that said Enron allegedly guaranteed that a partnership called LJM, run by Enron's then-chief financial officer Andrew Fastow, never would lose money if it dealt with the energy trader.
Former chief executive officer Jeffrey Skilling has denied any such "handshake deal."
Earlier witnesses have testified that Duncan went against advice from within the firm in early 2001 in allowing Enron to consolidate the four Raptors to try to hide losses by two of them. Andersen later determined the Raptors had to be treated separately.
Enron wound down the Raptors in the third quarter of last year, taking a major financial hit as the company's stock price continued to collapse.
Duncan also testified that he followed in-house Andersen lawyer Nancy Temple's instructions to remove her name from his memo in October discussing the state of the Enron account. He said she wrote that it would increase "the chances that I might be a witness, which I prefer to avoid."
Temple wrote an Oct. 12 e-mail reminding employees about Andersen's document retention and destruction policy.
Prosecutors called Temple to testify last week, but by mail invoked her Fifth Amendment right against self-incrimination.
Duncan testified that Temple once asked him to remove the word "aggressive" from his descriptions of Enron's accounting style in auditing documentation. She preferred the phrase "complex and unique," he said.
If convicted, Andersen could face probation for five years and a fine of up to $500,000. It also could 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.
Andersen is also the subject of a massive class-action lawsuit by Enron stockholders, employees and others.