Hole set to be blown in Enron case as leading witness seeks a way out

Ex-Andersen auditor may not now give evidence in the trial of three former bosses at the energy giant

The prosecution of Kenneth Lay, the former chairman of Enron, along with Jeffrey Skilling, the ex-chief executive, and Richard Causey, who was chief accountant, has been dealt a body blow as a key witness may not now give evidence.

The case against the trio is due to open in a Houston court on 17 January, more than four years after the energy group went bankrupt, and will be the biggest fraud trial in the US in living memory. But the federal prosecutors, who are still smarting after their recent failure to convict the founder of HealthSouth, Richard Scrushy, face having to do without one of their main witnesses, David Duncan, the former Andersen auditor.

Duncan, who was lead partner on the Enron team and earned $700,000 (around £400,000) a year for his efforts, pleaded guilty in 2002 to charges of obstructing justice. He admitted supervising the shredding of hundreds of Enron-related documents at Andersen's Houston offices. Duncan also agreed to co-operate with investigators, and in return sentencing for his crimes has been put off.

He was due to be a witness in the case against Messrs Lay, Skilling and Causey along with Andrew Fastow, the former chief financial officer at Enron, who struck a plea bargain with federal investigators.

However, Duncan's status has been turned on its head by the Supreme Court's ruling in May that Andersen, the accounting firm, was not guilty of obstructing justice, despite having been convicted by lower courts. The Justice Department will shortly apply to the courts to have the conviction of Andersen overturned.

The court's decision, which embarrassed the US financial regulator, the Securities and Exchange Commission, was cold comfort to Andersen, which had collapsed because of the SEC's action against it, and was sold off in bits to its main rivals.

But Duncan has seen this as his chance to clear his name, and applied last week to the Federal District Court in Houston to have his conviction overturned. Duncan's application states that the Supreme Court's decision on Andersen "renders the factual basis for his plea insufficient to support his conviction".

More than that, his lawyers are saying that as Duncan is applying to withdraw his guilty plea, he will not be able to give evidence.

"The lack of immunity makes Duncan unavailable for [cross examination by] the defence attorneys," said Christopher Bebel, a former federal prosecutor who is acting for Duncan. "They can produce transcripts, but that's all."

The Justice Department has not commented on how damaging the withdrawal of Duncan could be to its case against the Enron trio. However, there has been some speculation in Houston that the prosecutors may apply for a delay to the trial to assess a strategy without their main witness.

Enron collapsed in late 2001 after it emerged that the gas pipeline, energy trading and utility investment giant - which was at one point America's 14th- largest corporation - had been hiding billions of dollars worth of liabilities in off-balance sheet special-purpose vehicles.

More than 30 individuals have been charged with offences relating to the collapse, with 16 having offered guilty pleas so far.

However, with over 6,000 people in Houston put out of work by Enron's collapse, and the Californian electricity market unhinged by Enron's actions, there has been a clamour for punishment to be meted out to the people seen as the architects of the financial disaster. These are primarily Mr Lay, who founded the group in 1985 and used its financial muscle to get close to President George Bush; and Jeffrey Skilling, the former McKinsey management consultant who was seen as the architect of Enron's diversification into ever-more complex financial transactions related to the energy business.

Both have maintained their innocence, with Linda Lay, Kenneth's wife, once famously claiming on TV that they were victims of the Enron collapse.

If convicted, Messrs Lay, Skilling and Causey could face up to 30 years in jail each.