Jeff Skilling Opening Merits Brief on Remand

8/9/2019 Jeff Skilling Opening Merits Brief on Remand

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06-20885

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

UNITED STATES OF AMERICA,Plaintiff-Appellee,

v.

JEFFREY K. SKILLING,Defendant-Appellant.

JEFFREY K. SKILLINGS OPENING BRIEF ON REMAND

FROM THE U.S. SUPREME COURT

On Appeal From The United States District Court

For The Southern District Of Texas, Houston Division

Crim. No. H-04-25 (Lake, J.)

OMELVENY & MYERS LLPWALTERDELLINGERJONATHAN D. HACKERSRI SRINIVASAN1625 Eye Street, N.W.Washington, D.C. 20006

RONALD G. WOODS5300 Memorial, Suite 1000Houston, Texas 77007

OMELVENY & MYERS LLPDANIEL M. PETROCELLIM. RANDALL OPPENHEIMERMATTHEW T. KLINEDAVID J. MARROSO1999 Avenue of the Stars, 7th FloorLos Angeles, California 90067Telephone: (310) 553-6700Facsimile: (310) 246-6779

ATTORNEYS FOR DEFENDANT-APPELLANT JEFFREY K. SKILLING

Case: 06-20885 Document: 00511188326 Page: 1 Date Filed: 07/28/2010


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TABLE OF CONTENTS

Page

-i-

INTRODUCTION ......................................................................................... 1

STATEMENT.............................................................................................. 10

FACTUAL BACKGROUND...................................................................... 11

ARGUMENT............................................................................................... 12

I. THE HONEST-SERVICES FRAUD ERROR REQUIRESREVERSAL OF SKILLINGS CONSPIRACY CONVICTION..... 12

A. The Conspiracy Conviction Can Stand Only If TheGovernment Can Prove That Its Honest-Services Fraud

Theory Was Identical To Its Securities-Fraud Theory ........... 13B. The Government Cannot Establish That Its Honest-

Services Fraud Theory Was Identical To Securities Fraud .... 17

II. THE ERRONEOUS HONEST-SERVICES THEORYINFECTED EVERY OTHER COUNT OF CONVICTION............ 39

A. Securities Fraud (Counts 2, 14, 16-20, 22-26)........................ 40

B. Insider Trading (Count 51) ..................................................... 51

C. False Statements to Auditors (Counts 31, 32, and 34-36) ...... 54

CONCLUSION............................................................................................ 58



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TABLE OF AUTHORITIES

Pages

-ii-

CASES

Al Qaadir v. Gallegos,1995 WL 330628 (9th Cir. June 2, 1995) ................................................. 11

Exxon Shipping Co. v. Baker,128 S. Ct. 2605 (2008) .......................................................................... 4, 12

Feela v. Israel,727 F.2d 151 (7th Cir. 1984)..................................................................... 57

Kennedy v. So. Cal. Edison Co.,268 F.3d 763 (9th Cir. 2001)..................................................................... 11

Kotteakos v. U.S.,328 U.S. 750 (1946) .............................................................................. 9, 47

McNally v. U.S.,483 U.S. 350 (1987) .................................................................................. 13

Neder v. U.S.,527 U.S. 1 (1999) ........................................................................................ 2

Sullivan v. Louisiana,508 U.S. 275 (1993) .............................................................................. 9, 47

U.S. v. Acker,52 F.3d 509 (4th Cir. 1995)....................................................................... 53

U.S. v. Alexius,76 F.3d 642 (5th Cir. 1996)....................................................................... 56

U.S. v. Barona,56 F.3d 1087 (9th Cir. 1995)............................................................... 56, 57

U.S. v. Brown,459 F.3d 509 (5th Cir. 2006)................................................................. 3, 15

U.S. v. Edwards,303 F.3d 606 (5th Cir. 2002)..................................................................... 14



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(continued)

Pages

-iii-

U.S. v. Goodner Bros. Aircraft, Inc.,

966 F.2d 380 (8th Cir. 1992)............................................................... 54, 57

U.S. v. Hands,184 F.3d 1322 (11th Cir. 1999)................................................................. 11

U.S. v. Holley,23 F.3d 902 (5th Cir. 1994)........................................................... 13, 14, 24

U.S. v. Howard,517 F.3d 731 (5th Cir. 2008).............................................................. passim

U.S. v. Johnson,44 F. Appx 752 (9th Cir. 2002)................................................................ 42

U.S. v. Kaiser,660 F.2d 724 (9th Cir. 1981)..................................................................... 42

U.S. v. Pettigrew,77 F.3d 1500 (5th Cir. 1996)..................................................................... 19

U.S. v. Saks,

964 F.2d 1514 (5th Cir. 1992)............................................................. 13, 14

U.S. v. Santos,201 F.3d 953 (7th Cir. 2000)..................................................................... 53

U.S. v. Sardesai,125 F.3d 850 (4th Cir. 1997)..................................................................... 42

U.S. v. Skilling,554 F.3d 529 (5th Cir. 2009)........................................................... 1, 10, 39

U.S. v. Slade,627 F.2d 293 (D.C. Cir. 1980) .................................................................. 53

U.S. v. Smithers,27 F.3d 142 (5th Cir. 1994)....................................................................... 14



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(continued)

Pages

-iv-

U.S. v. Urcioli,

513 F.3d 290 (1st Cir. 2007) ..................................................................... 38

U.S. v. Washington,106 F.3d 983 (D.C. Cir. 1997) .................................................................. 42

Yates v. U.S.,354 U.S. 298 (1957) ........................................................................... passim

Zant v. Stephens,462 U.S. 862 (1983) .................................................................................. 12

STATUTES

15 U.S.C. 78m............................................................................................ 10

15 U.S.C. 78ff............................................................................................ 10

15 U.S.C. 78j.............................................................................................. 10

18 U.S.C. 1346............................................................................................. 1

18 U.S.C. 371............................................................................................. 10



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INTRODUCTION

Jeffrey Skilling was convicted in May 2006 for fraud-related offenses

arising out of the sudden collapse of Enron Corp. in late 2001. He has been

incarcerated in federal prison since December 13, 2006more than three-

and-a-half yearswith almost 20 years remaining on the 24-year sentence

imposed initially by the district court.1

On June 24, 2010, the Supreme Court invalidated one of the two

theories of fraud the government asserted against Skillingi.e., that he

conspired to deprive Enron of its right to honest services under 18 U.S.C.

1346 by taking actions he knew were not in the best interests of Enron

and its shareholders. R:36424.2 The Supreme Court unanimously held the

honest-services statute does not permit the government to try such open-

ended theories of wrongdoing, but instead covers only bribery and kickback

1 This Court vacated the sentence in its 2009 decision, holding that thedistrict court erred in applying a financial institution enhancement. U.S. v.Skilling, 554 F.3d 529, 595 (5th Cir. 2009). A resentencing has yet to occur.

2 Citations are made as follows: R:123 refers to the Record on Appeal,page 123; SR1:123 refers to Supplemental Record #1; SR2:123 refers toSupplemental Record #2; GX100:123 refers to Government Trial Exhibit

100, page 123; DX100:123 refers to Defense Trial Exhibit 100, page 123.Sealed documents are cited by date and title, and identified as sealed.JKS-1:123 refers to materials cited in Skillings Motion to Supplement theRecord on Appeal, Tab 1, page 123. Skilling Br. refers to Skillingsopening brief on his original appeal (Sept. 7, 2007), and Skilling Replyrefers to his reply brief in support of the same (Dec. 21, 2007). U.S. Br.refers to the governments original brief in opposition (Nov. 13, 2007).



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schemes. Skilling v. U.S., 08-1394, Slip Op. at 2. And [b]ecause

Skillings alleged misconduct entailed no bribe or kickback, it does not fall

within 1346s proscription. Id. at 2;see id. at 50 (It is clear that, as

we read 1346, Skilling did not commit honest-services fraud.).

The Supreme Court did not, however, reverse Skillings convictions.

Instead, it remanded the case for this Court to determine whether the district

courts constitutional error in allowing the government to submit its

legally flawed honest-services theory to the jury was harmless as to any of

Skillings 19 convictions. Id. at 50.

As the case returns to this Court, Skillings convictions are

presumptively invalid, given the conceded error in trying him on a non-

existent theory of criminal liability. The question now is whether the

government can overcome that presumption by proving, beyond any

reasonable doubt, that the erroneous submission of the honest-services

theory to the jury did notaffect Skillings convictions. See Neder v. U.S.,

527 U.S. 1, 18 (1999) (instructional error on elements of crime not harmless

unless it is clear beyond a reasonable doubt that a rational jury would have

found the defendant guilty absent the error); Yates v. U.S., 354 U.S. 298,

312 (1957) (reversal required where it is unclear whether the convictions

rested on legally valid or invalid bases). Unless the government carries that



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burden through a fact-intensive analysis of each count, the convictions

cannot stand, and Skilling must be retried before a jury not exposed to, and

not invited to convict on, an invalid fraud theory.

The government cannot carry its burden. The district court, in ruling

on bail at sentencing, recognized that the submission of an invalid honest-

services theory to the jury likely required reversal of Skillings conviction

for conspiracyCount 1 of the governments case. R:41895-98;see also

U.S. v. Brown, 459 F.3d 509, 523 (5th Cir. 2006) (finding error in submitting

honest-services theory to jury in parallel Enron case not harmless as to

conspiracy count). The government did not dispute that conclusion then, nor

did it do so when Skilling appealed the bail ruling to this Court. See U.S.

Resp. to Skillings Mot. for Bail Pending Appeal at 2, 12, 15 (Oct. 18, 2006)

(sealed); U.S. Resp. to Appellants Mot. for Bail Pending Appeal at 2, 15, 18

(5th Cir. Nov. 27, 2006). In reviewing Skillings bail application in late

2006, Judge Higginbotham went further still, noting that error in the honest-

services fraud theory created serious frailties in 14 of the 19 counts of

conviction, Order, U.S. v. Skilling(5th Cir. Dec. 12, 2006)the one

conspiracy count, the 12 securities-fraud counts, and the one insider-trading

count on which Skilling was convicted, leaving only five counts for alleged

false statements to Enrons auditor, Arthur Andersen (FSA counts),see id.



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Judge Higginbotham was correct as to the 14 counts, but wrong as to

the remaining five. As the district court recognized, reversal of the

conspiracy conviction is required because the government charged Skilling

with multiple objects of the conspiracyincluding securities fraud and

honest-services wire fraudand successfully urged a general verdict form,

ensuring that it would be impossible to know, in view of the general verdict

returned whether the jury imposed liability on a permissible or an

impermissible ground. Exxon Shipping Co. v. Baker, 128 S. Ct. 2605,

2615 n.3 (2008);see Hedgpeth v. Pulido, 129 S. Ct. 530, 530 (2008) (a

conviction based on a general verdict is subject to challenge if the jury was

instructed on alternative theories of guilt and may have relied on an invalid

one). Given the record evidence, argument, and open-ended honest-

services jury instruction the government fought so hard to obtain, reasonable

jurors easily could have found Skilling guilty on the broad, legally wrong

honest-services wire fraud object without finding him guilty on the more

demanding securities-fraud object.

Reversal on the remaining counts is likewise required, for the same

reason: for every count, the jury was allowed and even encouraged to rely

on the legally incorrect honest-services fraud theory in deciding whether to

convict. On the 12 securities-fraud counts, the government obtained a



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Pinkerton vicarious liability instruction, which allowed jurors to rely on

the conspiracy conviction to convict Skilling for any charged act of

securities fraud committed by any other co-conspirator, even if Skilling

himself did not commit the act. Given the governments heavy reliance on

the acts of alleged co-conspirators, it is very possible the jurors did exactly

that. For every securities-fraud count, one or more of Skillings alleged co-

conspirators testified that they themselves had committed the acts of

securities fraud at issue (and in many cases formally pled guilty to them),

while Skilling himself often had little involvement in the statement (or

underlying conduct affecting the statement), and had substantial defenses to

direct liability for the charge. Accordingly, it is likelyif not virtually

certainthat the jurors relied heavily on thePinkerton vicarious liability

instruction in convicting Skilling for the admittedacts of securities fraud by

others. In U.S. v. Howard, 517 F.3d 731 (5th Cir. 2008), this Court reversed

a conviction tainted by aPinkerton instruction in a parallel Enron

prosecution involving one part of thesame alleged overarching conspiracy.

The same result as inHowardmust obtain here.

Count 51the insider-trading countalso must fall with the

conspiracy count. The government explicitly urged the jury to convict

Skilling for insider trading on the theory that he sold Enron shares when he



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became aware that his alleged conspiracy to commit fraud was about to be

exposed. Because the jury could have found that the conspiracy was one to

commit honest-services fraud, then the supposed inside information on

which Skilling tradedthe conspiracywas legally nonexistent. The

insider-trading conviction is thus tainted and cannot stand.

The five FSA counts, finally, are also rendered infirm by the

erroneous honest-services theory. For each of these counts, the government

alleged that management representation letters sent by Enron to Arthur

Andersen falsely stated that there was no material fraud at Enron. The

government also challenged other statements in the letters as false, but

Skilling had substantial defenses to these statements, including scienter and

reliance, and the government spent only minutes on these charges in the

course of the five-month trial. See Skilling Br. at 56-57; Skilling Reply at

45-46. The jurors easily could have credited Skillings defenses, while still

convicting him on the legally impermissible ground that the no material

fraud statement was false in light of the honest-services fraud conspiracy.

In short, having elected to press the honest-services fraud theory

throughout trial and to fight vigorously for an instruction permitting jurors to

rely on it, the government cannot now exclude the possibility that the jurors

applied the erroneous honest-services fraud theory to convict Skilling for



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conspiring to commit an act of fraud that does not legally exist, and then

applied that finding to convict Skilling on every other count. After all, the

whole point of the honest-services fraud theory was to secure a path to

conviction less demanding than full-blown securities fraud.

And make no mistake about it: the government did nothave a clear-

cut case of securities fraud against Skilling.3 Far from it. The governments

lead prosecutors conceded before and after trial that the case against Skilling

was plagued by fundamental weaknesses, Skilling took steps seemingly

inconsistent with alleged criminal intent, there were no smoking gun

documents, government witnesses had been subjected to vicious

impeachment, and, given the scores of lawyers and accountants who

reviewed and approved the disputed conduct, there were serious advice of

counsel issues. Skilling Br. at 19-20. Skilling also presented compelling

evidence that each of the disputed transactions and alleged misstatements

was fully disclosed and known to the public; that Enrons accounting, even

if aggressive, was correct; and that the alleged misstatements made were

true, or at worst immaterial. See Skilling Br. at 24-55; Skilling Reply at 2-

3 A thorough recitation of the evidentiary failures and weaknesses in thegovernments securities-fraud case is set forth in Skillings appellate briefs.

E.g., Skilling Br. at 24-55; Skilling Reply at 2-13. The Court, in thisprocedural settingwhere error has now been establisheddoes notreviewthe trial record in the light most favorable to the government. Infra at 11.



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13. These facts were established not only by defense witnesses, but also by

admission after admission from the governments own witnesses on every

key point in the case,see id., and even by the prosecutors themselves, who

admitted, for example, that they had less than compelling evidence that

Skillings statements materially misled investors, because stock analysts had

not been misled by Enrons filings,see Skilling Br. at 100-01 n.34.

The honest-services theory gave the governmentand the jurya

path to avoid the vulnerabilities of the governments securities-fraud case. It

permitted the jury to convict Skilling, in the governments words, for not

doing his job appropriately, for taking reckless risks, and for creating an

objectionable culture at Enronone that tolerated conflicts of interest,

encouraged aggressive accounting, and promoted taking on increased

risk to hit short-term earnings targets at the expense of long-term business

fundamentals. R:37066, 22848, 36467, 29822-23, 36446, 36455-56.

Although such acts would not necessarily constitute securities fraud,

Skillings jurors were urged to treat them as criminal, on the theory that they

violated fiduciary duties Skilling owed to his employer. That theory of the

honest services crime, the Supreme Court has now held, does not exist.

The government cannot now seriously deny the possibility that the

jurors applied the law just as the government urged them to apply it. In the



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prior appeal, the governments position was, in essence, that any honest-

services error was harmless because, absent the error, there was sufficient

evidence for a reasonable jury to find that Skilling committed actual

securities fraud and the other crimes charged. But it has long been settled

that the government cannot establish harmlessness merely by showing that

there was sufficient evidence to convict before a jury unexposed to the

erroneous legal theory. See Kotteakos v. U.S., 328 U.S. 750, 767 (1946)

(rejecting argument that error is harmless if the evidence offered

specifically and properly to convict [the] defendant would be sufficient to

sustain his conviction absent the error). Rather than marshalling sufficient

evidence on its valid theory of prosecution, the governments burden now is

to exclude the possibility that a reasonable jury could have relied on the

invalid theory for any count of conviction. The harmless-error question,

thus, is not whether, in a trial that occurred without the error, a guilty

verdict would surely have been rendered, but whether the guilty verdict

actually rendered in this trial was surely unattributable to the error.

Sullivan v. Louisiana, 508 U.S. 275, 279 (1993). Because it is impossible to

know whether the jury convicted Skilling on any of the 19 counts without

relying on the honest-services theory, all 19 counts must be reversed, and



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Skilling must be retried before a jury that is not permitted to rest any count

of conviction on a legally invalid fraud theory.

STATEMENT

Skilling was convicted on May 25, 2006, on 19 counts: one count of

conspiracy to commit securities or wire fraud (18 U.S.C. 371); 12 counts

of securities fraud (15 U.S.C. 78j, 78ff); five counts of false statements to

auditors (15 U.S.C. 78m, 78ff); and one count of insider trading (15

U.S.C. 78j, 78ff). The jury acquitted Skilling on nine counts of insider

trading. Skilling was sentenced to 292 months and ordered to pay some $40

million in restitution. R:41917-24. Skilling has been incarcerated since

December 2006first in FCI Waseca, and now in FCI Englewood.

On January 6, 2009, this Court affirmed Skillings convictions but

vacated the sentence, holding that the district court erred in applying a

financial institutions enhancement. Skilling, 554 F.3d at 595. The Court

remanded the case for resentencing, but before further proceedings were

held, the Supreme Court on October 13, 2009, granted certiorari to review

two questions presented by Skilling in a challenge to his convictions.

On June 24, 2010, the Supreme Court issued its decision. By a 6-3

vote, the Court rejected Skillings challenge to the impartiality of the jury.

See Slip Op. at 34. The Court unanimously agreed with Skilling, however,



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that the exceedingly broad theory of honest-services fraud asserted by the

government at trial could not legally be applied to Skilling. See id. at 50.

The Court remanded the case for this Court to determine whether the

government can establish that the error in submitting its honest-services

theory to the jury was harmless beyond a reasonable doubt. See id. at 50-51.

FACTUAL BACKGROUND

The factual background of the case is set forth in Skillings prior

briefing. Specific facts relevant to the harmless-error question are detailed

as appropriate in the Argument section below. To be clear, however:

because this is not a sufficiency-of-the-evidence challenge, the Court does

notreview the trial evidence in the light most favorable to the verdict. In

harmless error review, unlike sufficiency of the evidence review, the

prevailing party is notentitled to have disputed factual issues resolved in his

favor because the jurys verdict may have resulted from a misapprehension

of law rather than from factual determinations in favor of the prevailing

party. Kennedy v. So. Cal. Edison Co., 268 F.3d 763, 770 (9th Cir. 2001).4

4

Accord U.S. v. Hands, 184 F.3d 1322, 1330 n.23 (11th Cir. 1999)(Harmless error review, unlike a determination of the sufficiency of theevidence, does not require us to view witnesses credibility in the light mostfavorable to the government.);Al Qaadir v. Gallegos, 1995 WL 330628, at*3 n.5 (9th Cir. June 2, 1995) (It is impossible to determine whether anerror was harmless beyond a reasonable doubt by construing evidence in thelight most favorable to the prosecution.).



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ARGUMENT

Submitting a legally erroneous theory of liability to a jury is a

constitutional error requiring reversal unless the government can prove that

the error is harmless beyond a reasonable doubt. The government cannot

make that showing here on any of the 19 counts of conviction.

I. THE HONEST-SERVICES FRAUD ERROR REQUIRES

REVERSAL OF SKILLINGS CONSPIRACY CONVICTION

Skillings indictment for conspiracy alleged three possible objects:

honest-services wire fraud, money-or-property wire fraud, and securities

fraud. R:152-59. Skilling requested a special verdict form requiring the jury

to identify the object that was the basis for any conviction, but the

government objected and the district court declined to give one. R:35899,

36020-21. The government thus expressly invited the error it must now

overcome: because of the general verdict on conspiracy, it is impossible to

know whether the jury imposed liability on a permissible or an

impermissible ground,Exxon Shipping, 128 S. Ct. at 2615 n.3, and under

Yates, 354 U.S. at 312, reversal is required where it is unclear whether the

convictions rested on legally valid or invalid bases,Howard, 517 F.3d at

736;see Zant v. Stephens, 462 U.S. 862, 881 (1983) (reversal required where

uncertain as to the actual ground on which the jurys decision rested).



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A. The Conspiracy Conviction Can Stand Only If The

Government Can Prove That Its Honest-Services Fraud

Theory Was Identical To Its Securities-Fraud Theory

This Court has long held that a Yates-type error can be proved

harmless beyond a reasonable doubt, ifas relevant herethe government

can prove that the invalid theory it employed at trial was factually identical

to a legally valid theory on which the jury could have relied. See, e.g., U.S.

v. Holley, 23 F.3d 902 (5th Cir. 1994); U.S. v. Saks, 964 F.2d 1514 (5th Cir.

1992). InHolley and Saks, for example, the defendants were convicted of

fraud pursuant to instructions that permitted jurors to find them guilty of

either honest-services fraud or substantive bank or money fraud. But the

Supreme Court decided in McNally v. U.S., 483 U.S. 350 (1987), that to

prove mail or wire fraud, the government had to show that the defendant had

stolen (or conspired to steal) money or tangible property. Depriving a

victim of ones honest services was not enough, and therefore the jury

instructions in Saks andHolley were invalid.

After a careful examination of the trial record in both cases, this Court

held the errors to be harmless, however, because the only honest-services

fraud asserted in either case was a scheme to steal money from the banks at

issue. See Holley, 23 F.3d at 910; Saks, 964 F.2d at 1521-22. In other

words, the government was able to meet its heavy burden of proving



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harmless error because there was a perfect overlap between its honest-

services and money/property theories of the case. See Saks, 954 F.2d at

1521 (the bottom line of the scheme or artifice had the inevitable result of

effecting monetary or property losses);Holley, 23 F.3d at 910 (This

scheme [to obtain fraudulent bank loans] had the inevitable, inescapable,

and unavoidable result of exposing Peoples [Bank] to at least a risk of

loss.) (emphasis added).

In the situation reflected in these cases, the error in submitting an

invalid theory to the jury is harmless because the jury that convicted on that

theory also necessarily convicted on the valid theory, eliminating all

uncertainty as to the ground for conviction. See U.S. Br. at 92. But of

course that harmlessness principle does not apply, by its own terms, where

the record and instructions permit the jury to choose between a valid trial

theory and afactually differentlegally invalid theory, because in that

circumstance it is necessarily impossible to tell which ground the jury

selected. U.S. v. Edwards, 303 F.3d 606, 641 (5th Cir. 2002);see U.S. v.

Smithers, 27 F.3d 142, 146 (5th Cir. 1994) (rejecting government argument

that jury could not have found the defendant guilty without making the

proper factual finding because we cannot tell from the jurys answers [to

verdict form] how it evaluated the evidence).



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The Court applied a corollary of this rule to reverse the convictions in

Howardanother Enron-related case tainted by an invalid honest services

conspiracy charge. InHoward, the CFO of Enrons Broadband division was

charged with conspiracy to commit money-and-property wire fraud and/or

honest-services wire fraud, and with falsifying Enrons books and records.

517 F.3d at 732-33. The government asserted that Howards work on the

disputed Braveheart transactionalso at issue in Skillings caseallowed

Enron falsely to report earnings. It contended that by working on this

fraudulent transaction Howard deprived Enron of his honest services. See

id. When this Court rejected the governments expansive reading of honest-

services liability in yet another Enron case involving the Nigerian Barges

transaction also at issue in SkillingsU.S. v. Brown, 459 F.3d 509 (5th Cir.

2006)the government conceded that Howards conspiracy conviction, like

Browns, had to be reversed, because the conspiracy count the government

pursued (in all three cases) included both legally valid and legally invalid

objects, and the jury had returned (in all three cases) a general verdict on that

count. See Howard, 517 F.3d at 735.

The government disputed, however, whether Howards substantive

books and records fraud conviction had to be reversed. As in Skillings

case, even though Howards books-and-records conviction was tied directly



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to the tainted conspiracy conviction by aPinkerton instruction, the

government argued the jury surely found that Howard himselfand not one

of his conspiratorswas responsible for falsifying Enrons books. See id.

This Court squarely rejected that kind of speculative approach to

determining the basis for the jurys verdict. The jury may have found

Howard guilty under Count 5 for his own acts or acts caused or directed by

him, the Court acknowledged, but it also may have concluded that

although Howard was not guilty of personally making or causing to be made

the false entries charged in Count 5, he was culpable because the false

entries were made by a coconspirator in furtherance of the conspiracy

charged in Count 1. Id. at 736 (emphasis added). A careful review of the

record established that there was sufficient evidence that a reasonable jury

could have relied on the invalid honest-services conspiracy. Id. at 736-37

(a reasonable jury could have found that [other alleged co-conspirators]

were responsible for making the false entries). Because it was impossible

to determine whether the jury convicted Howard on Count 5 based on his

guilt on the conspiracy count plus acts by [his alleged co-conspirators], the

Court was required to reverse Howards conviction. Id. at 737.

As these cases establish, the government cannot prove a Yates-type

error harmless merely by speculating about what jurors might have found



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based on a hotly contested record. As noted above,supra at 2, 4, 9, 13-16, it

has long been settled that the Government must do more than prove that a

reasonable jury couldhave found the defendant guilty beyond a reasonable

doubt on the legally invalid theory. The Government instead must exclude

the possibility that the jurors relied on the invalid theory, either by showing

that there was insufficient evidence for reasonable jurors to have relied upon

it, or by showing that there was actually only one theory asserted, such that

the jurors necessarily relied on the valid theory in returning a conviction.

See id.; infra at 38, 41-42, 56-57. When the legally invalid theory is distinct

and factually supportable on its own terms, then it is impossible to know on

which theory the jury relied, and the convictions must be reversed. See id.

B. The Government Cannot Establish That Its Honest-Services

Fraud Theory Was Identical To Securities Fraud

The government cannot fairly deny that it asserted a theory of honest-

services fraud against Skilling at trial that was factually distinct from

securities fraud.5 In fact, on direct appeal before this Court, the government

5 The government all but formally abandoned the money-or-property wire

fraud theory, conceding in closing that this was not a case about greed.R:37065. The government and its witnesses also admitted Skilling neverstole any money from Enron; just the opposite, when it was good for thecompany, hegave backto it money to which he had contractually beenentitled. See R:21622-27, 21685, 21690, 21720-25, 21771 (Fastow admittedhe concealed his thefts from Skilling); R:15954, 18024-25, 22986, 24548-49(government witnesses testified that Skilling loved the company and was



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did not even attemptto establish a complete identity between the honest-

services and securities-fraud theories. Rather, it argued only that the honest-

services fraud acts alleged were primarily methods of committing securities

fraud. U.S. Br. at 88 (emphasis added). As shown above, however, it is

not enough to show that the valid theory was the primary basis for liability

asserted. The government must show that the valid theory was the only

factually supportable basis on which the jury could have convicted. The

government cannot possibly carry that burden here.6

The government recently made the same argument unsuccessfully in

U.S. v. Black, No. 07-4080 (7th Cir. 2010)a case that became a companion

to Skillings in the Supreme Court. In opposing Blacks application for bail

on remand, the government argued that the honest-services fraud theory in

very committed and dedicated to it); R:28481-86 (Skilling declined $50million in compensation in order to set an example for management).

6 At oral argument before this Court, the government changed itsdescription of its trial presentation from one in which it said it pursuedprimarily a securities-fraud case, to the more aggressive claim thatvirtually every aspect of its case was aimed at prosecuting classicsecurities fraud. Indeed, the government argued the jury must have foundthat securities fraud was the object of the conspiracy. Ex. E at 41:4-5 (oral

argument transcript). As Judge Prado rightly pointed, howeverand as isfatal to the governments speculation about what the jury mightor musthave decidedIt would have been helpful to have the kind of specialcharges breakdown, then wed know for sure. Id. at 41:7-9. But, ofcourse, Skillings requests for a special verdict form were refused, and

because it is impossible to know on which ground the jury relied, Skillingsconvictions must be reversed. See Yates, 354 U.S. at 312.



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Blacks case was based on the same fraudulent conduct that supported the

[valid] money-fraud theory and, thus, the honest-service liability was

coextensive with the money-fraud liability. Ex. B at 2-3. The government

cited page after page of the trial record where it referred to the two theories

in similar terms. See id. at 3-15. But as Black pointed out in reply, that was

not always the case, the jury instructions expressly treated the two theories

differently, and the record showed there was not complete factual identity

between the two theories of liability. See Ex. C at 3-7 (Black reply); Ex. A

at 6-11 (Black motion). The Seventh Circuit ordered Black released from

federal prison on bail pending further remand proceedings. See Ex. D.

The governments coextensive theories argument is even more

starkly wrong here. Indeed, it is sheer nonsense to suggest that the extensive

trial record on honest-services fraud was limited to, and thus by definition

coextensive with, the record on securities fraud. As shown below,

prosecutors clearly and repeatedly invited the jury to convict on an honest-

services fraud theory precisely because it was distinct fromand easier to

prove thansecurities fraud. Consequently, it is impossible to determine,

on any fair review of the record and given the verdict form the government

demanded, which object offense the jury selected. See U.S. v. Pettigrew, 77

F.3d 1500, 1511-12 (5th Cir. 1996) (Because we are unable to determine on



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review which object offense the jury selected, we reverse.); infra at 38, 42,

56-57 (collecting cases).

1. To start, the jury instructions expressly advised the jury that the

government was asserting two different theories of fraud, and that jurors

were free to convict on eithertheory. R:36412-14. The instruction

emphasized that [t]he Government does not have to prove both of these for

you to return a guilty verdict on Count 1, and the prosecutors exploited this

repeatedly in closing, arguing there were two separate and distinct paths to

conviction of both defendants, or either defendant, on Count 1,see R:37065-

66, 37042, 37047, 37013-14.

The instructions also defined the securities fraud and honest-services

fraud very differently. The securities-fraud instruction included a lengthy

recitation of the various specific and demanding elements, elaborating each

separately. R:36416-23. The honest-services fraud instruction, by contrast,

broadly defined Skillings honest services duty as his fiduciary duty to

Enron and its shareholders, R:36424, and invited jurors to convict him for

breaching that duty if they found that he did not act as a totally faithful

employee and took actions not in the best interests of Enron. Id.

2. Consistent with this wide-ranging instruction, the government

repeatedly elicited testimony from witnesses that Skilling and his alleged



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conspirators breached their fiduciary responsibility, R:21224-25, and their

duties of loyalty, honesty, and honest services, R:37013-14; R:15864-

67 (breached Enron Code of Ethics, which required honesty, candor,

fairness); R:22769-70 (expectation of honesty and candor); R:32262-64

(duty of honesty, candor, fairness); R:36568 (duty of honest services);

R:37043 (duty of honest services). Indeed, in successfully arguing for a

capacious honest-services instruction, the government equated honest-

services with a mere breach of any fiduciary dutynot the limited

securities-fraud theory it now posits: [T]he governments evidence shows

that defendants committed (or conspired to commit) honest-services fraud by

breaching their fiduciary duties to Enron and its shareholders. R:41328.

3. In fact, nowhere in that submission on jury-instruction issuesnor

at any other point during trialdid the government contend that the honest-

services theory it fought so vigorously to present to the jury was actually just

redundant of its securities-fraud case. The government cannot credibly

contend now that it wasted the trial courts time and resources wrestling over

legal theories and instructions that were unnecessary and meaningless. Nor

did the government (or district court) ever advise jurors that they should

only apply the broad honest-services instruction to conduct that already

qualified as securities fraud, or that the only fiduciary breaches the



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government wanted to criminalize were those already criminalized as

securities fraud. To the contrary, as noted above, the jurors instructions

expressly advised them that the government was asserting two different

theories. R:36412-13. And the government wound up its rebuttal closing

argumentsome of the last minutes of a five-month trialby specifically

calling out the honest services theory and emphasizing to jurors that they

could rely on that theory alone to convict Skilling for conspiracy:

[M]ake no mistake, they got wealthy. And in exchange forthat money, they owed their employees a duty, a duty of good

faith and honest services, a duty to be truthful, and a duty to dotheir job, ladies and gentlemen, to do their job and to do itappropriately. The indictment in this case -- please read theinstructions. Please look at the indictment. You do not have to-- we do not have to prove every count in the conspiracy. We

just need to prove that there was an agreement to dosomethingillegal.

R:37065-66 (emphasis added). The something illegal the jury was invited

to find expressly included Skillings failure to provide his honest services,

or his mere alleged failure to do his job appropriatelyan encapsulation

of the ill-defined overbroad honest-services theory the Supreme Court has

now denounced.

These arguments and the Count 1 jury instruction they specifically

invoke require the reversal of Count 1. Indeed, in ruling on Skillings bail

motion, and in finding that Count 1 conviction likely had to be reversed, the



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district courtwhich sat through the trial, and heard the governments

caseconcluded that the jury instructions compelled this result:

[T]he court instructed the jury in this case that it could convictSkilling of conspiracy by finding that he conspired, inter alia, todeprive Enron of its intangible right to honest services. [T]he

jury returned only a general verdict making it impossible to tellon which of the various objects of the conspiracy the jury basedSkillings conviction.

R:41897. The government notably did notcontest that judgment when

Skilling appealed the bail-pending-appeal issue. See supra at 3.

4. Finally, for every transaction and business decision challenged by

the government at trial as securities fraud, Skilling presented forceful

defenses, as illustrated by Skillings acquittal on nine insider-trading

countsone-quarter of the governments case against him. As to the

remaining transactions, Skilling was able to rebut the governments

securities-fraud case at every turnoften from the mouths of the

governments own witnessesleaving no assurance whatsoever that the

jurors found Skilling guilty on the securities-fraud object of conspiracy. By

contrast, for each transaction, the government consistently articulated a fall-

back honest-services version of its case, which gave the jurors a basis for

finding Skillingseparately liable on that legally invalid theory. On the

record here, unlike in cases like Saks andHolley, one cannot plausibly even

suggestmuch less conclude beyond a reasonable doubtthat any juror



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who convicted Skilling for conspiracy on an honest-services theory

inevitabl[y], inescapabl[y], and unavoidabl[y] also found him guilty

based on the securities-fraud object. Holley, 23 F.3d at 910.

a. EES. When the accounting resegmentation of a part of the EES

business unit was attacked as an effort to mislead investors, Skilling

established through each of the government witnesses, as well as his own,

that the accounting for this transaction was rock solid and complied with

the disclosure rules. Skilling Br. at 45-48; Skilling Reply at 2-4; R:19976-

78, 20277-79, 28996, 29009, 29323-29. And when the government asserted

that Enron had hidden losses in EES business, Skilling showed that these

losses had either not occurred, had not occurred in the way the governments

witnesses described, or were only speculative losses that had to be reserved

against, and that proper reserves had been taken on all accounts. Skilling Br.

at 48-49 (collecting evidence); Skilling Reply at 4 (same). With the

securities-fraud version of its EES case directly challenged, the government

fell back on the argument that Enrons actionslike the EES

resegmentationlacked a business purpose. U.S. Br. at 15. While this

charge is not necessarily a species of securities fraud (given the disclosures

that were made and the accounting rules with which Enron complied), it is

an open-ended honest-services fraud theory, which rests on the premise that



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Skilling and others failed to do their jobs appropriately. Thus, while the jury

could have rejected the securities-fraud version of these allegations the

government presented, it had a second, invalid basis on which to convict.

b. LJM. LJM was a private-investment fund created by Andrew

Fastow that engaged in off-balance sheet and other transactions with Enron.

LJM was a major focus of the governments case at trial. In the securities-

fraud version of its LJM case, the government argued that Fastow entered

into secret, oral side-deals with Rick Causey, Skilling, or others on LJM-

Enron transactions that rendered the accounting and disclosure of those

transactions materially false. But the government also attacked the very

creation of LJM, claiming Skilling never should have approved its

formation. U.S. Br. at 39-42. Under this bad-business-judgment theory of

its casethe honest-services theorythe government contended that

Skilling acted recklessly in approving the structure for LJM, including

approving Fastows conflict of interest in running LJMFastow served as

general partner of LJM, worked as Enrons CFO, and negotiated with Enron

on LJMs behalf. Id. at 40-41.

The arrangement and Fastows conflict, however, were not

conceivably acts of securities fraud (and the government did not dispute

this), as both were fully vetted and approved by Enrons Board on the advice



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of outside legal and accounting advisors, GX995:61; GX996:50-51;

GX1023:14-15; GX1024:16; GX1025:35; GX1026:101; GX1027:13;

GX1029:14-15; GX1031:27; GX1032:76-77; GX1033:12-13; GX1034:13;

JKS-1, and Fastows conflicting role in LJM and Enron had been fully

disclosed in Enrons SEC filings. For example, Enrons 2000 10-K

disclosed that, [i]n 2000 and 1999, Enron entered into transactions with

limited partnerships (the Related Party) whose general partners managing

member is a senior officer of Enron. GX1032:76-77. Enrons proxy

disclosed that Fastow was that senior officer, GX1025:34, and the

companys annual report disclosed the magnitude of LJMs transactions:

In 2000, Enron entered into derivative transactions with the Entities with a

combined notional amount of approximately $2.1 billion to hedge certain

merchant investments and other assets. GX1032:77.

Despite these disclosures, the government challenged LJMs creation

and Fastows role in it as part of its honest-services version of its case. It

argued that Skillings approval of LJM was itself a crime, given the risks

inherent in the Fastow conflict. U.S. Br. at 40. And it had its witnesses

testify that they and other Enron executives believed that the LJM

transactions were misguided and harmed Enron because of Fastows

conflictand that Skilling had been told of their views. R:17242-43,



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29826-27. The government stressed that Skilling and the Enron Board had

been warned about the Wall Street Journal risk inherent in LJMnota

risk that the conflict would violate securities laws, but that the disclosure of

this conflictwhich all agreed occurredwould look terrible to Wall

Street and thereby reflect badly on Enron as a company. R:36529-30.

The government leaned heavily on this honest-services, breach-of-

fiduciary-duty theory in its closing argument:

Lets just talk a little bit about LJM. Youve heard a lot about itin this trial. First and foremost, extremely, extremely unusualto have a chief financial officer of a Fortunate 500 companycontrolling a private fund that was doing deals with Enron.Huge risks associated with it.

Biggest risk? Wall Street Journal risk. They talked about it.They discussed it among the board, among Mr. Lay andMr. Skilling. Mr. Fastow told you that if the Wall StreetJournal picked it up it would look terrible for Enron.

Why would you do this? Why would a company do this? The reasonwhy they did it is exactly the reason that Mr. Fastow told you, to maketheir numbers. So they had a tool, a device, a vehicle to make theirnumbers look the way they wanted them to look.

People at the company raised concerns to Mr. Skilling about LJM.You heard Mr. Rice. He called him up, and he said, I dontunderstand why were doing this. Mr. Rice told you that he had

talked to Mr. Baxter, another senior executive, who also raisedconcern about LJM. Mr. Kaminski raised vigorous concerns aboutthe conflict of interest. You heard Mr. Skilling acknowledge in histestimony that Mr. McMahon, the treasurer before Ben Glisan, alsoraised concerns about LJM.



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Mr. Skilling suggested it to you. So hes getting all thisinformation. People are saying, Why are we doing this? Thislooks bad. This is weird. Why do we have our CFOnegotiating against Enron people? That seems crazy.

R:21414-15 (emphasis added). And even on appeal before this Court

when the government did not anticipate the Supreme Courts invalidation of

its honest-services theorythe government cited as evidence of criminal

conduct the testimony of witnesses who claimed that thefully disclosedLJM

conflict reflected excessive and reckless risks. U.S. Br. at 41-42 (citing

R:22848);see also R:22843-44.

None of those concerns about unusual or crazy business decisions

and reckless but disclosed risks would necessarily establish that Skilling

conspired to commit securities fraud. But they all would suffice to establish

honest-services fraud under the governments broad and erroneous theory

that not doing ones job appropriately is a federal crime. R:37065-66.

Indeed, the government argued exactly this when opposing Skillings bail

motion before this Court in 2006. It contended that Skillings mere acts of

approving Fastows LJM conflict was a straightforward example of an act

of fraud coming to Skillings attention and of his wrongly countenancing

such acts. U.S. Resp. to Appellants Mot. for Bail Pending Appeal at 11 (5th

Cir. Nov. 27, 2006). Because Fastows conflict was disclosed to

shareholders, this could only be an honest-services theory of fraud. And



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given the substantial flaws in its reliance on secret side deals to prove

securities fraud in connection with LJM,see Skilling Br. at 29-36; Skilling

Reply at 9-14, 74-78, the government cannot conceivably exclude the

possibility that the jury relied on the simpler, easier, and more direct honest-

services theory urged by the government to convict Skilling for conspiracy

to commit fraud in connection LJM.7

7 Two specific LJM transactions illustrate this basic point, but the

evidentiary gaps in the governments securities-fraud-based LJM case werelegion:

The governments appeal brief explicitly highlighted LJMs firstdeal with Enronthe so-called Rhythms transactionas an exampleof Skillings criminal conduct in taking excessive [and] reckless risks,R:22848, and gambling in [a] casino that is insolventi.e., anhonest-services-based allegation. R:22843;see U.S. Br. at 41-42. Yetthere was no conceivable securities-fraud version of this alleged crime toargue or pursue; the government never argued that there was a secret-side

deal underlying this transaction rendering its accounting false, andeveryone agreed that, though risky, the Rhythms hedged had worked.See R:28621-22, 24550-51, 23019-21.

Similarly, Fastow and Causey negotiated an LJM-Enron hedge forthe privately held Avici stock that Enron owned. R:21414-15. Thegovernment complained it was weird and crazy for Fastow to benegotiating with Enron on the dealthe honest-services attack on theAvici transaction. R:36530. The separate securities-fraud attack ran intoa major problem. The government accused Fastow and Causey of

backdating the pricing terms on the hedge (rendering the accountingfalse), R:858, but Kevin Hannon, a government witness, conceded thehedge was notbackdated, despite Fastows claim to the contrary.Skilling Reply at 13-14.

In his appellate briefing, Skilling provided many other reasons why theGovernments securities fraud case with respect to LJM was weak andinfirm, see, e.g., id. at 9-14, and every one of those infirmities cements why



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c. Enrons Wholesale Business. The government also asserted

distinct theories of fraud in connection with Enrons extremely successful

Wholesale energy business. In the honest-services version, the government

contended that it was wrong for Enron to focus on short-term earnings

targets, and that this focus led the Wholesale business to take on far too

much trading risk by steadily increasing the companys overall Value at

Risk (or VaR) exposure in its energy trading portfolios. R:19710-11,

19847, 22389, 36508-12. As the government argued in closing:

The wholesale business, as you heard, at this point in time hadbeen taking on increased risk. They were continuing to -- thetraders were continuing to make bigger and bigger bets to meettheir increased earnings targets.

R:36446.

The alternative, more demanding securities-fraud version of the

Wholesale trading allegations took a different tack and added several

difficult elements to the governments proof. The government could not

argue that Enron hid its overall or shifting risk profile from the investing

public, because Enron disclosed its VaR numbers every quarter in SEC

filings. Skilling Br. at 43. So the government claimed instead that Skilling

mischaracterized Enrons business model by calling it a logistics company

the government cannot meet its burden of proving harmless error as to theseparate honest-services theory it pursued.



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or a market intermedi[ary], when he should have called it a trading

business, akin to a Wall Street firm like Goldman Sachs. R:869, 10753. But

of course Enron, unlike Goldman Sachs energy traders, ownedone of the

largest pipeline and energy distribution systems in the world, and those

logistics and intermediary parts of Enrons business not only made it far

more than a pure trading company, but allowed Enron to meet supply and

demand and cover trading positions and made it perhaps the most

knowledgeable player in the energy business in the world. R:28866-916.

It was thus not only possible, but indeed likely, that if the jury found

that Skilling conspired to commit any fraud in connection with the

Wholesale business, it was honest-services fraud for taking on too much risk

(an appealing jury theory, given that Enron eventually went bankrupt), not

securities fraud for mislabeling the Wholesale business (a largely theoretical,

semantic debate about which Skilling showed opinions could differ).

d. EBS. The government also attacked the EBS business unit,

arguing both that Skilling and others lied about the health of the business

R:36494-508, and that Enron had made significant business misjudgments in

betting on the emergence of the broadband and technology markets,

R:29034-35, 29178-81, 28207-08, 29239-40, 29414. But as Skilling has

shown, the governments evidence that Skilling or others lied or misled



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anyone about the health of the EBS business was based on selective editing

of the relevant statements at issue, which in full context were true and

clearly disclosed the market difficulties that the EBS business was facing

as amply reflected in stock analysts valuations of the business. See Skilling

Br. at 50-55; Skilling Reply at 4-6. Skilling likewise showed that EBSs

revenues were fully and accurately disclosed, so that investors knew exactly

how EBS was positioned, regardless of any cheerleading and puffery about

the business by Enron executives. The governments failure of proof on its

EBS case is hardly surprisingit outright lost a separate trial focused

specifically on EBS. U.S. v. Hirko, No. 03-93 (S.D. Tex. 2005). But for

present purposes, the point is not that there was insufficient evidence on

which to find Skilling guilty of the securities-fraud object for EBS-related

actionsit is that reasonable jurors could just as well have rejectedthe

governments EBS case, and found Skilling guilty of the honest-services

object for some other conduct, or even for EBS-related conduct on the

theory that Skilling made a bad business judgment investing so heavily in

the broadband business when the market was turning against it and the so-

called tech-stock bubble was bursting. R:14759-60, 36497-98.

e. Reserve Accounting. GAAP requires that each quarter companies

take reserves against certain contingent business risks. The government



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asserted that Enrons use of reserves was fraudulent in two different ways.

The securities-fraud version was that Enron over- or under-reserved in

certain accounts and in certain quarters to meet Wall Street earnings targets,

resulting in inaccurate earnings. U.S. Br. at 33-39. But with respect to

every one of these quarters, there was extensivemost-often

uncontradictedevidence that the final reserve amounts were wholly

accurate, carefully reflected and predicted contingent litigation and market

risks, and that even if the reserves were marginally inaccurate, any deviation

was immaterial from an accounting perspective. Skilling Br. at 36-42;

Skilling Reply at 7-9. Again, the record establishing the sound business

reasons for the reserves, the accuracy of their amounts, the ways these

amounts had been tested at Enron and by Arthur Andersen, and the

immateriality of any deviations in the reserves came not only from Skilling

and an accounting expert, but from the governments own witnesses.

R:33927-30, 23555-56, 23559-60, 33920-23, 34029-31, 19599-60.8

8 Indeed, in one quarter (Q2 2000) in which the government alleged that

Enron set a litigation reserve number too low in order to show an extrapenny of earnings to Wall Street, its own witness who adjusted thelitigation reserve (Wes Colwell) admitted that the new litigation reservenumber accurately predicted the settlement value of the underlying litigationat issue, and that, if anything, Enrons reserves for that quarter, understatedthe companys earnings because credit reserves were more substantiallyover-reserved. See R:21742-45, 19594-98;see also R:23555-56, 23559-60,



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Critically, however, the erroneous honest-services theory gave the

jurors an easy fall-back way to convict even if they found the final earnings

to be materially accurate. As the government and its witnesses argued, it

was simply inappropriate and wrong for a company to have earnings

expectations in mind when establishing reserve amounts, even ifthe final

reserve amounts were wholly accurate. E.g., R:36525 (The earnings are

what the earnings are. Its not supposed to be reverse engineered. Its not

supposed to be backwards like that.).

A dramatic example of this honest-services theory of reserves

manipulation concerned an alleged Fourth Quarter 1999 reserve

adjustment. Two investor-relations executives who had nothing to do with

setting reservesMark Koenig and Paul Riekertestified for the

government that Enrons final earnings for that quarter changed by a penny

the day before earnings numbers were released and the day afterWall

Streets earnings forecast changed. Without any knowledge about where

this extra penny came from, R:16119-22, 16130, 16140-41, 19177-80, both

argued that the mere fact this change had been made was wrong and

implicated Skilling in criminal activity, R:16140 (I thinkthats wrong);

18377 (I feltit was wrong). And, of course, while the undisputed

33920-23, 34029-31, 23577, 33923; SR3:4025; R:33923-24, 33926-27;R:19607-09; DX8548.



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evidence showed that a reserves adjustment had actually been made several

days earlier than Koenig and Rieker speculated and had been vetted by

Arthur Andersen, R:16123-24, 19179-80, 33919thereby eviscerating any

securities-fraud version of the 4Q 1999 reserves adjustmentthe

government nevertheless emphasized the issue in closing. R:36515-18.

Given the record showing accurate reserves, coupled with the

erroneous fiduciary breach honest-services theory the government

pursued, the jury easily could have determined that Enrons earnings reports

were accurate, but agreed with the governments alternative theory that

Skillings fiduciary duties of honesty and candor required him to avoid

theprocess Enron used to set reserves. R:29610, 37013-14.

f. Enrons Culture. The governments approach to reserves

reflected a more general theory of criminality advocated by the government.

Not willing to rely solely on its contentions that Skilling made affirmative,

material misrepresentations to shareholders about Enrons finances,

constituting securities fraud, R:36492; U.S. Br. at 24-33, the government

also relied on the distinct proposition that Skilling inappropriately directed

Enrons focus toward short-term earnings reports at the expense of the

companys long-term business fundamentals, an argument for the invalid



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legal theory of honest services. U.S. Br. at 79 (Skilling completely

corrupted his position and subverted the entire corporate culture at Enron).

In keeping with the theme, the government insisted in closing

argument there was tremendous pressure at Enron to generate earnings and

hit earnings targets, R:36466, and the culture at Enron was to do

transactions that maximized financial reporting earnings as opposed to

maximizing the economic value of the transactions. R:36467;see also

R:36512 (Weve been talking about this culture at Enron. The witnesses

told you about this culture at Enron, have to hit the number, have to hit the

number.). In 2000 and 2001, the government asked jurors rhetorically,

[W]hat was the most important thing? The actual operations of the

company? No. Meeting the [Wall Street] consensus estimate. R:36513

(quoting Koenig). And as part of its attack on Enrons culture, the

government argued that Enron employees routinely engaged in aggressive

accounting to make the numbers look the way that they wanted them to

look. R:36455-56;see also R:36456 (You heard about a culture, ladies

and gentlemen, where somebody like Wanda Curry -- you remember her.

She was an earlier witness in the case. She worked at the company for 22

years. You heard about a culture where she was fired from her job because

she couldnt make aggressive accounting decisions.).



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These remaining arguments by the government perfectly illustrate the

alternative, legally erroneous view of honest-services fraud that so

pervasively distorted this case: on its view, a corporate executive commits a

criminal act by fostering a culture where employees engage in aggressive

accountingnot inaccurate accountingto meet short-term earnings

targets, rather than focusing on company operations and maximizing

economic value. These are arguments about sound management and how

to run a company. They are not arguments about the ultimate disclosures

Enron made to shareholderswhich the governments witnesses were

repeatedly forced to concede were accurate.

The Supreme Court has now made clear, however, that alleged bad

business management and risk taking that constitutes a breach of fiduciary

duties is notthe crime of mail or wire fraud. But, in Skillings case, the

prosecutors expressly urged the jury to convict him on exactly that invalid

basisand they did so because, from the outset, they knew their case was

plagued by fundamental weaknesses and their evidence of material

misstatements to investors was less impressive than hoped. Supra at 7-8.

* * *

As the foregoing discussion shows, for every transaction the

government attacked at trial, reasonable jurors easily could have rejected the



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governments factually and legally demanding theory that his conduct in

each instance satisfied all the elements of securities fraud, while finding

instead that Skilling committed honest-services fraudas the crime was

erroneously defined for themsimply by breaching his fiduciary duties.

And because every transaction involved multiple alleged co-conspirators,

jurors needed only to find that Skilling conspired to commit honest-services

fraud as to any one transaction (e.g., approving the Fastow-LJM conflict) to

convict him for conspiracy to commit honest-services wire fraud. In other

words, to return a verdict of guilty on conspiracy, jurors never needed even

to considerwhether Skilling himself conspired to commit any act of

securities fraud. For every transaction, there was substantial evidence that

he did not commit securities fraud, but what matters here is that because of

the distinct alternative honest-services fraud theory, the jury was never

required to find beyond a reasonable doubt that Skilling conspired to

commit securities fraud. Because jurors could have relied instead on the

legally erroneous alternative, his conspiracy conviction must be reversed.

See, e.g., U.S. v. Urcioli, 513 F.3d 290, 297 (1st Cir. 2007) (reversing

conviction where prosecutors urged honest-services conviction on legally

valid and invalid factual predicatesreversing conviction even though an



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argument could be made the convictions would arguably have occurred

without reliance on the invalid honest-services theory).9

II. THE ERRONEOUS HONEST-SERVICES THEORY

INFECTED EVERY OTHER COUNT OF CONVICTION

Judge Higginbotham correctly recognized that submission of a legally

erroneous honest-services theory to the jury casts substantial doubt on 14 of

the 19 counts of convictionthe 12 securities-fraud counts and the insider-

trading count, in addition to the conspiracy conviction. He incorrectly

9 In ruling on Skillings initial appeal, this Court notably observed that ifthe governments honest-services theory was erroneous, reversal ofSkillings Count 1 conspiracy conviction was required. See 554 F.3d at 543.In concluding that the governments honest-services theory was in error, andremanding to this Court the question of what the impact that error had onSkillings convictions was, the Supreme Court directed this Court to take afresh look at the harmless-error arguments. In the Courts view, this Court

appeared to prejudge the harmless-error issue by applying a rule ofautomatic reversal for this Yates error, rather than considering whether theerror may be harmless. Skilling, Slip Op. 50 n.47.

The Supreme Court may have misunderstood this Courts opinion, aswell at its jurisprudence. As this Courts opinions in cases like Saks,Holley,andHowardshow, this Court has always held that Yates errors are subject toharmless-error review. See supra at 13-16. Indeed, in arguing the originalappeal, Skilling and the government vigorously disputed whether theharmlessness standard was satisfied on the record of this caseand they

discussed cases like Saks andHolley at length. See, e.g., Skilling Reply at29-46. This Courts statement that reversal would be required if the honest-services theory was erroneous likely reflected the (quite accurate) judgmentthat such an errorcould not be proved harmless on the record of this case,which Skilling and the government had so thoroughly dissected. See id.Because of the Supreme Courts remand order, that prior ruling is not

binding, but it remains instructive.



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concluded that an honest-services error would not affect the five FSA

counts. In fact, the jury easily could have rested its convictions on those five

counts directly on the flawed honest-services fraud allegation: each FSA

alleged that Skilling was responsible for the statement that there was no

material fraud at Enrona statement that is necessarily false if one accepts

the legally erroneous theory that Skilling was participating in a broad

conspiracy to commit honest-services fraud. See infra at 54-58.

As shown below, allof the convictions were directly affected by the

erroneous submission of the honest-services fraud theory to the jury.

A. Securities Fraud (Counts 2, 14, 16-20, 22-26)

The substantive securities-fraud counts were explicitly tied to the

conspiracy count by a Pinkerton instructionagain urged by the

government, over Skillings objection, R:25880-82which permitted the

jurors to use the conspiracy conviction to hold Skilling vicariously liable for

any charged act of securities fraud so long as it was committed by a co-

conspirator, even if the jurors did not believe that he personally committed

the charged act of securities fraud:

A conspirator is responsible for offenses committed byother conspirators if the conspirator was a member of thatconspiracy when the offense was committed and if the offensewas committed in furtherance of, or as a foreseeableconsequence of, the conspiracy.



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Therefore, if you have first found Jeffrey K. Skilling guilty of the conspiracy charged in Count 1 and if you find

beyond a reasonable doubt that during the time [Skilling] was amember of the conspiracy other conspirators committed theoffenses in Counts 2 and 14, 16 through 20, and 22 through 29in furtherance of or as a foreseeable consequence of thatconspiracy, then you may find [Skilling] guilty of Counts 2 and14, 16 through 20, and 22 through 29, even though [Skilling]may not have participated in any of the acts which constitutethe offenses described in those counts of the indictment.

R:36409-10. ThePinkerton instruction creates the same problem for each

securities-fraud count that is inherent within the conspiracy count itself: for

each count of conviction, it is impossible to tell whether the jurors relied on

the legally invalid theory (conspiracy) to convict Skilling vicariously for the

acts of others, or on the legally permissible theory (securities fraud) to

convict Skilling for his own acts.

InHoward, 517 F.3d at 737-38, this Court held that the use of an

erroneous honest-services theory in a conspiracy charge required reversal

not only of the conspiracy conviction, but also of a separate books-and-

records count linked to the conspiracy charge by aPinkerton instruction.

The record included evidence that Howards co-conspirators committed

books-and-records crimes themselves, and because the jury couldhave

convicted the defendant not for his own acts but for the acts of co-

conspirators, the error in the conspiracy charge was not harmless beyond a

reasonable doubt as to the collateral books-and-records charge. See id. at



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738. Other courts have consistently reached the same conclusion under

similar circumstances, i.e., where aPinkerton instruction ties a legally

erroneous conspiracy conviction to other substantive counts.10

The same result must obtain here. The government cannot come close

to showing beyond a reasonable doubt that the jurors did notrely on the

legally invalid conspiracy conviction to find Skilling vicariously liable for

each count of securities fraud. In closing, the government quoted the

Pinkerton instruction as providing a sufficient basis for convicting Skilling

for each count of securities fraud based on the acts of his alleged

conspirators. See R:37018 ([Y]ou may find the Defendant guilty even

though he may not have participated in any of the acts which constitute the

offenses described. If it was reasonably foreseeable to him that this was

going to happen, ladies and gentlemen, hes responsible.). Lest there be

10See U.S. v. Washington, 106 F.3d 983, 1014 (D.C. Cir. 1997) (for

firearms charge, jury could have returned guilty verdict predicated onimpermissible conspiracy, requiring reversal of the firearms conviction);U.S. v. Kaiser, 660 F.2d 724, 732 (9th Cir. 1981) (reversal of conspiracyconviction precludes vicarious liability for acts of co-conspirators; reversalof other counts required when impossible to tell whether jury relied onvicarious liability theory); U.S. v. Johnson, 44 F. Appx 752, 755 (9th Cir.

2002) (reversing charges linked to flawed conspiracy conviction with aPinkerton instruction where it was not clear, beyond a reasonable doubt,that the jury would have found Defendants guilty without thePinkertoninstruction); U.S. v. Sardesai, 125 F.3d 850 (tbl.) (4th Cir. 1997) (reversalof collateral charges required where a Pinkerton charge spread[] the taintfrom the error in the false statement charges to the other substantivecharges of the indictment).



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any doubt who those alleged co-conspirators were, the government

emphasized their names, testimony, and confessions to fraud:

Witness after witness after witness came into this courtroom,ladies and gentlemen, and they said, I lied. We lied. I stole.We stole. I committed fraud. We committed fraud. These

people, Ben Glisan, Dave Delainey, Wes Colwell, Ken Rice,Kevin Hannon, Mark Koenig, Paula Rieker, some of the mostsenior executives at Enron, came in and told you that. I lied.We lied. I stole. We stole.

R:36452;see R:36993-94 (Investor relations, finance, wholesale, EBS, and

EES, the upper echelon, ladies and gentlemen. Theyve all admitted lying to

investors. They got up and said I committed crimes. We committed

crimes. We lied.); U.S. Br. at 98 (other conspirators made false

statements during some of the calls and at the conference). The

government even displayed for the jury demonstrative exhibits during

closing argument that tied each and every securities fraud count directly to

the conspiracy count. JKS-7:12-13, 15, 21; JKS-4:6, 24, 25.

The governments heavy reliance on the so-called Global Galactic

document exemplified this approach. In closing argument, the government

called the document three pages of lies and said it makes LJM and its

transactions with Enron a complete sham. R:35637, 36541. Every Enron

financial statement from late 1999 through 2001the bases for the

securities fraud counts against Skillingwas false, the government told the



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jury, because the supposed secret side deals listed on the Global Galactic

document negated proper accounting treatment. But, as the government

conceded, [t]he document is signed at the bottom by Mr. Causey and

Mr. Fastownot by Skilling. R:35637. Thus, the jury could have

convicted Skilling of all the securities fraud counts based on his participation

in an honest-services conspiracy combined with the acts of alleged co-

conspirators Fastow and Causey for their alleged role in Global Galactic.

The problem extends beyond Global Galactic. As shown in the

individual-count analysis that follows, for every charged act of securities

fraud, the government always presented another Enron employee (and

sometimes many Enron employees) who admitted to the acts of securities

fraud in question. Accordingly, for every specific securities-fraud count, the

jurors easily could have accepted the governments invitation to convict

Skilling vicariously for others acts, while rejecting the governments

alternative theory that Skillings own conduct satisfied all the elements of

securities fraud. Indeed, it is not only possible, but likely, that the jurors

relied on the invalid conspiracy charge to convict Skilling for the securities

fraud to which others openly admitted. As shown below, Skilling was never

accused of acting alone, and most often he was far less involved than other

Enron executives in the charged acts and statements. Moreover, unlike



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many of his accused co-conspirators, he did not concede guilt. He pressed

substantial defensesincluding especially scienter and truthto each and

every charge that he personally committed securities fraud.

1. Count 2 (Raptors)

The Raptors transactions challenged in Count 2 were designed,

implemented, and discussed by alleged co-conspirators Causey, Fastow, and

Glisanamong many others. At trial, the government emphasized that

Glisan, Fastow, and Causey in particular were responsible for Raptors, and

the jury heard Fastow and Glisan each testify that they had pleaded guilty to

securities fraud committed in connection with Raptors. See GX3216;

R:21327-28, 21653-57; GX10000; R:24294-96, 24495-504.

Skilling was indisputably much less involved, and in fact denied any

knowledge at all of any Raptors side-deals or of any improprieties with the

structures. R:28826, 28833-36. Glisan, who was the architect of Raptors,

provided extensive testimony that he knew of no side deals and that LJM

was truly at risk in the deal. See R:24591-95, 24660-61, 25008-09. Glisan

said he met twice with Skilling and conceded he never told Skilling there

was anything fraudulent or improper with the Raptors. R:24571-72, 24579.

Based on Glisans testimonyand there was much more supporting

Skillings defenses on the Raptors, Skilling Br. at 29-32; Skilling Reply at 9-



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14the jury easily could have credited Skillings position that he himself

had engaged in no wrongdoing with respect to the Raptors, but still

convicted him vicariously for the alleged criminal acts of Fastow, Causey,

Glisan, or others. R:24248, 36532. Indeed, the government in closing urged

the jury to rely on the conspiracy charge, the vicarious liability instruction,

and the acts of others to convict on Count 2. See JKS-7:25; R:37018.

2. Counts 14, 16-20 (Forms 10-Q and 10-K)

Skillings alleged co-conspirators prepared and made the SEC filings

at issue in these counts. R:21822-23, 36537; GX1026-29, 1032-34. And the

alleged fraud in each of them involved negotiations between Fastow and

Causey in which Skilling was not directly involved (Raptors, Cuiaba, and

Nigerian Barges), or conduct by others (Colwells alleged reserve

manipulation) in which Skilling was concededly not directly involved:

Count 14: Causey, Lay, Fastow, and others signed the 1999 10-K,which was allegedly rendered false by a purported promise made byFastow to Merrill Lynch regarding the Nigerian Barges deal.GX1026; U.S. Br. at 57-58, 46-47; JKS-7:13, 15; JKS-4:6.

Count 16: Causey signed the Q2 2000 10-Q, which was allegedlyrendered false by reserve adjustments made by Wes Colwella

reserve adjustment he conceded he made on his own and neverdiscussed with Skilling. GX1028; Skilling Br. at 38-40; JKS-7:13,15; JKS-4:6.

Count 17: Causey signed the Q3 2000 10-Q, which was allegedlyrendered false by Causey and Fastows agreement concerning the



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Avici-Raptors hedge. GX1029; U.S. Br. at 58-59, 55-56; SkillingReply 13-14;see also R:36496-97.

Count 18: Causey, Lay, Fastow, and others signed the 2000 10-K,which was allegedly rendered false by Colwells later reservemanipulation to decrease stated earnings and the Raptors structurecreated by Fastow, Glisan, and Causey. GX1032;

Documents

Jeff Skilling Opening Merits Brief on Remand