IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 06-20885

UNITED STATES OF AMERICA,

Plaintiff–Appellee

v.

JEFFREY K SKILLING,

Defendant–Appellant

Appeal from the United States District Court

for the Southern District of Texas

ON REMAND FROM THE SUPREME COURT

OF THE UNITED STATES

Before SMITH and PRADO, Circuit Judges, and MOSES, District Judge.

*

EDWARD C. PRADO, Circuit Judge:

Former Enron Corporation CEO Jeffrey K. Skilling was convicted of

conspiracy, securities fraud, making false representations to auditors, and

insider trading. After we affirmed his convictions, the Supreme Court

invalidated one of the objects of the conspiracy charge—honest-services

fraud—and remanded, instructing us to determine whether the error committed

by the district court in submitting the honest-services theory to the jury was

United States Court of Appeals

Fifth Circuit

F I L E D

April 6, 2011

Lyle W. Cayce

Clerk

 District Judge of the Western District of Texas, sitting by designation. *

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harmless as to any of Skilling’s convictions. Because we find that the error was

harmless, we affirm the convictions. In addition, for the reasons stated in our

previous opinion, we vacate the sentence and remand for resentencing.

I. BACKGROUND

In May 2006, Skilling was convicted by a jury of one count of conspiracy,

twelve counts of securities fraud, five counts of making false representations

to auditors, and one count of insider trading. The indictment alleged several

possible objects of the conspiracy, including securities fraud and honest-services

fraud, and the district court’s jury instructions permitted the jury to convict on

any of the alleged theories of guilt. The jury returned a general verdict of guilty

on the conspiracy charge without identifying the specific object of the conspiracy.

The district court sentenced Skilling to 292 months of imprisonment and three

years of supervised release, and assessed $45 million in restitution.

Skilling appealed, arguing, among other things, that his conspiracy

conviction was premised on an improper theory of honest-services fraud. We

affirmed the convictions, holding that the Government’s honest-services theory

was proper under Fifth Circuit case law. See United States v. Skilling, 554 F.3d

529, 595 (5th Cir. 2009), vacated in part, 130 S. Ct. 2896 (2010). We also vacated

the sentence and remanded for resentencing because the district court had

incorrectly applied a sentencing enhancement for substantially jeopardizing a

“financial institution.” See id.

On appeal, the Supreme Court reduced the scope of the honest-services

fraud statute and invalidated the Government’s honest-services theory in this

case. See Skilling, 130 S. Ct. at 2907 (“Because Skilling’s alleged misconduct

entailed no bribe or kick-back, it does not fall within [the honest-services fraud

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statute]’s proscription.”). The Court did not, however, reverse any of Skilling’s

convictions, but remanded the case to us to determine whether the honestservices instruction amounted to harmless error. Id. at 2934–35.

II. STANDARD OF REVIEW

In Hedgpeth v. Pulido, 129 S. Ct. 530 (2008) (per curiam), the Supreme

Court recently confirmed that an alternative-theory error—i.e., where a jury

rendering a general verdict was instructed on alternative theories of guilt and

may have relied on an invalid theory—is subject to harmless-error analysis “so

long as the error at issue does not categorically ‘vitiat[e] all the jury’s findings.’”

Id. at 532 (alteration in original) (citation omitted); see Skilling, 130 S. Ct. at

2934 n.46 (extending the holding of Pulido, which was a case on collateral

review, to this case and other cases on direct appeal). The Court did not

specifically identify the harmless-error standard that is applicable to alternativetheory errors, but it cited to a string of cases that apply a common harmlesserror standard to other types of instructional errors. See Pulido, 129 S. Ct. at

532 (citing Neder v. United States, 527 U.S. 1 (1999) (omission of an element of

an offense); California v. Roy, 519 U.S. 2 (1996) (per curiam) (erroneous aiderand-abettor instruction); Pope v. Illinois, 481 U.S. 497 (1987) (misstatement of

an element of an offense); Rose v. Clark, 478 U.S. 570 (1986) (erroneous burdenshifting as to an element of an offense)). The Court declared that “[a]lthough

these cases did not arise in the context of a jury instructed on multiple theories

of guilt, one of which is improper, nothing in them suggests that a different

harmless-error analysis should govern in that particular context.” Pulido, 129

S. Ct. at 532.

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Consistent with this line of cases, there are two ways to prove the

harmlessness of an alternative-theory error. First, as set forth in Neder v.

United States (which is the most recent of the line of cases cited in Pulido), an

error is harmless if a court, after a “thorough examination of the record,” is

able to “conclude beyond a reasonable doubt that the jury verdict would have

been the same absent the error.” 527 U.S. at 19. If the defendant “raised

evidence sufficient to support a contrary finding,” then the error was not

harmless. Id. Thus, under the so-called Neder standard, a reviewing court,

“in typical appellate-court fashion, asks whether the record contains evidence

that could rationally lead to [an acquittal] with respect to the [valid theory of

guilt].” Id.

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Second, as we held in United States v. Holley, 23 F.3d 902 (5th Cir. 1994),

and United States v. Saks, 964 F.2d 1514 (5th Cir. 1992), an alternative-theory

error is harmless if the jury, in convicting on an invalid theory of guilt,

necessarily found facts establishing guilt on a valid theory. See United States

v. Howard, 517 F.3d 731, 738 (5th Cir. 2009) (stating that Holley and Saks stand

for the proposition that “legally erroneous jury instructions [are] harmless in

fraud cases when the inevitable result of the fraudulent activity proved at trial

Before Pulido, we often applied an “impossible to tell” harmless-error standard to 1

alternative-theory errors. See United States v. Howard, 517 F.3d 731, 736 (5th Cir. 2009)

(cataloguing cases). This standard had its origins in Yates v. United States, 354 U.S. 298

(1957), which states that a general verdict should be set aside when it “is supportable on one

ground, but not on another, and it is impossible to tell which ground the jury selected.” Id. at

312 (emphasis added). The impossible-to-tell standard is more stringent than the Neder

standard; it is closer to the “absolute certainty” standard that the Supreme Court invalidated

in Pulido. See Pulido, 129 S. Ct. at 533 (holding that the absolute-certainty standard is

similar to “a finding that no violation had occurred at all, rather than that any error was

harmless”). Because the impossible-to-tell standard is inconsistent with harmless-error

review, we hereby abandon it.

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established that the defendants participated in the scheme that justified their

convictions on legally correct instructions”). Our rulings in Holley and Saks predate the Supreme Court’s decision in Pulido, but they apply a harmless-error

test that is consistent with the Neder standard, and therefore we affirm their

continuing vitality in our case law.

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III. ANALYSIS

A. The Conspiracy Conviction

The Government asserts that the invalid honest-services instruction was

harmless with respect to the conspiracy conviction. Specifically, it argues that

the evidence presented at trial proved that Skilling participated in a scheme to

deceive the investing public about Enron’s financial condition in order to

maintain or increase Enron’s stock price. If so, then we would be able to

conclude beyond a reasonable doubt that absent the honest-services instruction,

the jury would have convicted Skilling under a valid theory of guilt—conspiracy

to commit securities fraud.

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Before examining the evidence presented at trial, however, we must

address two nonevidentiary arguments raised by Skilling. First, Skilling argues

that the district court’s jury instructions, by permitting the jury to convict on

Skilling argues that to prove harmlessness, the Government must show “complete

2

factual identity” between the valid and invalid theories of guilt. This argument is not

consistent with Neder, which permits a court to find harmlessness based solely on the strength

of the evidence supporting the valid theory, regardless of the evidence presented in support

of the invalid theory. Further, Skilling provides absolutely no support for his erroneous claim

that, to succeed, the Government must show that the valid theory was the only factually

supportable basis on which the jury could have convicted.

The Government’s harmless-error argument is consistent with the indictment, which 3

focused primarily on securities fraud and did not emphasize any act of honest-services fraud

that is not also an act of securities fraud.

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either the honest-services theory or the securities-fraud theory, are dispositive

evidence of the harmfulness of the error. We disagree. The instructions were

clear and easy to understand, and they did not contain any statement that gave

a preference to one theory over another. Moreover, the fact that the jury may

have relied upon an invalid theory of guilt shows only that an alternative-theory

error occurred, not that the error was not harmless. See Paredes v. Thaler, 617

F.3d 315, 318 (5th Cir. 2010) (confirming that a jury instruction on alternative

theories of guilt, one of which is invalid, is not a fatal “structural” error, but

instead is “subject to harmless-error analysis”).

Second, Skilling contends that the Government’s opening and closing

statements made it more likely that the jury would rely on the honest-services

theory rather than on the securities-fraud theory. Again, we disagree. The

Government’s opening and first closing statements both mentioned honestservices fraud only in relation to Skilling’s co-defendant, Ken Lay, who, unlike

Skilling, was charged with several counts of honest-services wire fraud. With

respect to Skilling, both statements focused exclusively on conduct that

constitutes securities fraud. In its rebuttal closing statement, the Government

made reference to the honest-services allegations against both defendants,

but it mentioned the honest-services theory in relation to Skilling only once.

Further, it never argued that the jury should convict Skilling solely on the

honest-services theory, nor did it tell the jury that it should disregard the

evidence of securities fraud in reaching a conviction. This single reference to

Skilling’s honest services, in light of the Government’s extensive argument on

securities fraud, merely permitted the jury to decide the case on the wrong

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theory. It did not force or urge it to do so, and therefore, it shows only that an

alternative-theory error occurred, not that the error was not harmless.

Having disposed of these two preliminary arguments, we next turn to the

crux of the matter: whether, under the Neder standard, the evidence presented

at trial proves that Skilling conspired to commit securities fraud. Based on our

own thorough examination of the considerable record in this case, we find that

the jury was presented with overwhelming evidence that Skilling conspired to

commit securities fraud, and thus we conclude beyond a reasonable doubt that

the verdict would have been the same absent the alternative-theory error.

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First, the evidence overwhelmingly proved that Skilling and his coconspirators transferred losses and the risk-management books from Enron’s

struggling retail division, Enron Energy Services (“EES”), to Enron’s Wholesale

division, which accounted for most of Enron’s revenue, so that EES would appear

to be more profitable than it really was. The testimony at trial established that

under the mark-to-market accounting rules that EES professed to follow, it

should have booked hundreds of millions of dollars in losses in the first quarter

of 2001. These losses arose from bad-debt write-offs, errors in how EES had

originally booked the value of its retail contracts, and unanticipated expenses

that could not be passed on to EES’s retail customers. According to the

 We do not rely on the harmless-error test set forth in Holley and Saks. At trial, the 4

Government introduced evidence that Skilling made misleading statements to Enron’s Board

of Directors. Some of these statements were not communicated to the investing public. This

evidence would prove honest-services fraud, but not securities fraud, and so we cannot say

that a conviction on honest-services grounds in this case would necessarily find facts

establishing guilt on securities-fraud grounds. Nonetheless, the fact that the jury had the

option to rely on a pure honest-services theory to convict Skilling has no effect on the strength

of the evidence going to the other alleged fraudulent schemes and on whether that evidence

satisfies the Neder standard.

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testimony, Skilling knew about the extent of the losses attributable to EES

and approved a plan to (1) shift the losses and EES’s risk-management books

(and therefore most of EES’s money-losing components) to Wholesale, even

though the losses arose from EES’s own retail contracts, not from Wholesale’s

business; and (2) justify this “resegmentation” as an operational change, even

though it resulted in no efficiencies, Wholesale had no experience in handling

retail contracts, and Wholesale and EES had different contracting procedures,

origination policies, risk assessments, and marketing efforts. Dave Delainey,

the CEO of EES at the time, testified that he warned Skilling that the

resegmentation was fraudulent because it had no real business purpose and

was designed to hide EES’s losses from investors, and that Skilling approved

the resegmentation anyway.

In his brief, Skilling argues that he “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.” His record

citations, however, do not substantiate his claim. In fact, his argument relies

almost exclusively on his own testimony at trial, which was that he has been

told that the EES resegmentation adhered to generally accepted accounting

principles and that he had not been told that it might be illegal. The jury, by

finding him guilty, necessarily determined that his own self-serving testimony,

in which he contested his liability under any theory of guilt, including the

honest-services theory, was not worthy of belief. Therefore, we too decline to

give Skilling’s testimony any weight in our harmless-error review when

unsupported by other evidence or testimony in the record.

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Skilling also argues that he presented evidence at trial that EES’s losses

“had either not occurred, had not occurred in the way the government’s

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

against, and that proper reserves had been taken on all accounts.” The record

also proves that this claim is false. The testimony at trial clearly showed that

EES’s losses were real, recognizable under mark-to-market accounting rules,

and due to be booked. Skilling points to no evidence, other than his own say-so,

that disputes this finding.

Second, the evidence overwhelmingly proved that Skilling and his coconspirators falsely portrayed Wholesale to the investing public as a low-risk

company that made sustainable profits by delivering gas and electric power to

customers (i.e., a “logistics company”), even though they knew that Wholesale

actually made most of its profits from its highly volatile trading operations. The

evidence presented at trial proved that the majority of Wholesale’s earnings in

2000 and early 2001 came from trading activities, especially from speculative

trading during the California energy crisis. This trading activity created huge

gains (as much as $485 million in a single day) and losses (as much as $551

million in a single day). Witnesses testified that Skilling knew about the

riskiness of Wholesale’s business, but falsely represented to investors and

analysts that Wholesale was a “logistics company,” not a “trading company.”

In addition, from 1999 to the analysts conference during the first quarter

of 2001, Skilling repeatedly prohibited other Enron managers from calling

Wholesale a “trading company” or referring to any of Wholesale’s employees as

“traders,” often citing the negative effect such language would have on Enron’s

stock price. That is, if the market perceived Wholesale to be a trading company,

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it would lead to a decrease in Enron’s price–earnings multiplier, which, in turn,

would drag its stock price down. The managers obeyed Skilling and referred to

Wholesale as a “logistics company” at their own engagements with investors and

analysts.

Skilling argues that he presented sufficient contradictory evidence at

trial proving that Wholesale actually was a “logistics company” because it owned

one of the largest pipeline and energy distribution systems in the world, which

allowed Wholesale to meet supply and demand for its energy customers and

cover its trading positions. Yet again, this evidence is from Skilling’s own selfserving testimony. Moreover, even if we were to believe Skilling’s assertions,

they do not undermine the Government’s proof at trial, which showed that

Skilling fraudulently kept from the investing public the reality that Wholesale

was driving up its profits through highly risky and volatile trading operations,

not through its energy distribution system.

Third, the evidence overwhelmingly proved that Skilling and his coconspirators used LJM and LJM2, which were two partnerships run by Andy

Fastow, who also served as Enron’s CFO at the time, to hide Enron’s

nonperforming assets and book earnings to meet its earnings targets.

Specifically, the testimony showed that Skilling was intimately involved in the

Enron–LJM “Cuiaba” deal involving the sale of Enron’s interest in a power plant

in Brazil and the Enron-LJM “Nigerian Barges” deal involving the sale of

Enron’s interest in power-generating barges off the coast of Nigeria. In both

cases, Fastow testified that Skilling personally asked him, on behalf of LJM, to

buy money-losing assets at a price that no third party would be willing to pay

and, in “secret” oral side deals, guaranteed that LJM would make a certain rate

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of return (or at least not lose any money) while it owned the assets. Skilling also

agreed that Enron would buy the assets back from LJM if a permanent buyer

could not be found, which it was eventually forced to do because both assets

continued to deteriorate in value. For both deals, Enron booked gains on the

sales of the assets to LJM, thereby allowing Enron to meet its earnings targets,

even though neither transaction was a true sale because Skilling’s “secret”

guarantee eliminated any risks LJM might have suffered in the transactions.

This caused Enron’s financial statements to be false and misleading.

Skilling makes a number of arguments about the proof at trial, none of

which are especially relevant. He argues that the Government’s theory at trial

was (1) that the very creation of the partnerships was fraudulent; (2) that the

conflict of interest inherent in the formation of the partnerships was illegal;

(3) that by creating and using these partnerships Skilling was opening Enron

up to excessive risk and was therefore not doing his job properly; and (4) that

the deals themselves made no business sense and therefore Skilling was not

doing his job properly. We disagree with Skilling’s characterizations of the

Government’s case, although we do not need to discuss them since we do not

rely on them. Rather, we find that the evidence is overwhelming that Skilling

was personally involved in the Cuiaba and Nigerian Barges deals and that he

used those deals to cause Enron to book fake profits and hide money-losing

assets from its investors.

Nonetheless, the Government’s other arguments (as characterized by

Skilling) are supported by strong evidence, and this evidence, in turn, bolsters

the assertion that Skilling engaged in the two deals on which we rely. Likewise,

we do not rely on any of the other dozen transactions that LJM and LJM2

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executed with Enron, although there is also strong evidence that Skilling and his

co-conspirators committed securities fraud in relation to those transactions as

well. Such evidence further bolsters the assertion that Skilling engaged in the

Cuiaba and Nigerian Barges deals. For all of Skilling’s many counterarguments,

his personal involvement with respect to those two deals is not controverted.

Fourth, the evidence overwhelmingly proved that Skilling and his coconspirators underreported the projected losses of Enron’s broadband division,

Enron Broadband Services (“EBS”), and when those losses became too large to

hide within EBS, merged EBS into Wholesale. Enron had marketed EBS to the

investing public as an important part of its future growth strategy, but the

evidence presented at trial showed that EBS lost money in every quarter of its

existence and only met its earning targets in 2000 by engaging in a series of

transactions that fell outside of its core businesses: (1) the sale of part of its

fiber-optic network to LJM2 at a price that no third party would pay; (2) the

hedging of a gain on its investment in Avici, an Internet start-up, into the

Raptor special-purpose entity, which allowed EBS to recognize the gain as

earnings under mark-to-market accounting; and (3) the “monetization” of a

video-on-demand contract with Blockbuster, which allowed EBS to book

anticipated future earnings from the contract. Skilling knew about all of these

transactions, but failed to tell investors about their impact on EBS’s bottom line.

During the first quarter of 2001, EBS’s managers informed Skilling that

EBS was making almost no revenue from its core businesses and would likely

suffer a loss of $146 million, which was well short of its first quarter target of a

loss of $30 million. After remarking that Enron was getting pressure from

analysts to improve its return on invested capital, Skilling refused to adjust the

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unrealistic earnings target. Instead, he authorized a second monetization of

EBS’s contracts and approved a cost-cutting plan that included the dismissal a

number of EBS employees. Again, Skilling, while selling investors on the growth

potential of EBS, failed to disclose that EBS had almost no revenue from its core

businesses. When EBS continued to deteriorate during the second quarter of

2001 (EBS was due to report a loss of $102 million), witnesses testified that

Skilling approved a plan to merge EBS with Wholesale, knowing that, as a

result, the losses attributable to EBS would be untraceable.

Again, Skilling’s counterarguments are unavailing. It is not true, as

Skilling claims, that the Government’s theory at trial was that Skilling made

bad business decisions; its argument was that Skilling hid those bad business

decisions from investors. Moreover, we disagree with Skilling that the

Government’s case relied upon the selective editing of his statements. The

record shows that Skilling’s comments to investors were more than just hopeful

views about a troubled new venture. Rather, given that EBS was sinking and

Skilling knew it, his comments were deceitful. There was no reason for hope

about EBS’s prospects, and Skilling failed to disclose fundamentally important

facts about EBS’s problems.

Fifth, the evidence overwhelmingly proved that Skilling and his coconspirators manipulated Enron’s accounting reserves for contingent liabilities

in order to hit specific earnings targets (known as “consensus estimates”). The

evidence showed that Skilling knew that missing the consensus estimate by

even a small amount would have a significant negative effect on Enron’s stock

price and, conversely, that exceeding the consensus estimate would have a

significant positive effect on the stock price. Toward the end of the fourth

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quarter of 2002, Delainey told Skilling that Wholesale, which was making huge

profits from its speculative trading, “had a couple of quarters [of reportable

earnings] in its pocket.” Skilling was pleased to hear this news and later said

at an Enron management committee meeting that Enron had significant

reserves that were available to meet its earnings targets for 2000. In fact,

Wholesale set aside $873 million in trading income as reserves for contingent

liabilities, which the testimony showed was a significant over-reservation. After

the end of the accounting year, but before Enron had reported earnings,

Wholesale told Richard Causey (Enron’s Chief Accounting Officer at the time),

who then told Skilling, that Wholesale had extra reserves available. Skilling,

through Causey, communicated to Wholesale that it should shift as much

reserves to earnings as was necessary to report 41 cents per share, which was

7 cents more than the fourth quarter earnings target of 34 cents per share.

Wholesale shifted the money from a “gas and power valuation” contingentliabilities reserve account, even though there had been no changes in the

circumstances associated with the reserve account. Enron then produced a

document for its outside auditors that falsely stated other reasons for the reserve

transfer. Enron’s stock price went up after Enron reported earnings for that

quarter.

In response, Skilling argues that there was extensive evidence at trial

that the final reserve amount accurately reflected contingent liabilities and

that any differences were immaterial from an accounting perspective. We

disagree that the record shows this. A Wholesale accountant testified that, on

Skilling’s command, he released money from the reserve account in order to

make earnings go up, without consideration of the correct reserve amount.

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Such an act is fraudulent: when a company establishes reserves based on the

earnings it wants, its investors do not know if the reserve accounts accurately

reflect the contingent liabilities facing the company, and they do not know that

the company is meeting or exceeding its earnings targets only by moving

reserves from one bucket to another. Further, the amount transferred from

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reserves to earnings was not immaterial, since the transfer allowed Enron to

exceed its earnings targets and caused Enron’s stock price to increase.

Lastly, we note that we do not rely on the Government’s allegation that

Enron fraudulently misstated earnings for the fourth quarter of 1999 and

fraudulently transferred contingent-liability reserves to beat the consensus

estimate for the second quarter of 2000. Although there is strong evidence for

a conviction on these allegations, there is not sufficient evidence to find

harmlessness. Nonetheless, both allegations show that Enron executives had

a pattern of manipulating earnings targets.

These five fraudulent schemes, which formed a large part of the basis for

the Government’s proof at trial, all represent efforts by Skilling and his coconspirators to manipulate Enron’s reported earnings or conceal Enron’s losses

from the investing public with the intent and result of affecting Enron’s stock

In fact, the testimony at trial showed that Enron’s outside auditor told Skilling that 5

it was inappropriate to transfer reserves to earnings after the end of the accounting period.

Moreover, although at least one accounting expert (who testified on Skilling’s behalf) said that

it was permissible to pick a reserve number based on an earnings target so long as the reserve

number is a reasonable estimate of the contingent liability, he admitted that this rule (which

we find dubious) only applied before the accounting period was complete. Here, the change

was made after the end of the quarter. Further, Skilling’s own accounting expert at trial

admitted that the release of reserves to achieve an earnings target would be wrong, as did

another auditor who testified.

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price. Because they are supported by overwhelming evidence, we find that the

honest-services instruction was harmless error beyond a reasonable doubt.

B. The Other Convictions

Skilling also challenges his other convictions for securities fraud, making

false statements to auditors, and insider trading. He argues that because the

district court gave the jury a Pinkerton instruction—which permitted the jury

to hold Skilling vicariously liable for the securities-fraud charges if they found

him guilty of the conspiracy charge—the alternative-instruction error on the

conspiracy charge also taints the other convictions. At oral argument, however,

counsel for Skilling conceded that this challenge is predicated on the existence

of a harmful error that invalidates the conspiracy conviction. Because we find

that the alternative-instruction error in this case was harmless with respect

to the conspiracy conviction, it follows that Skilling has no basis on which to

challenge the remaining convictions.

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IV. CONCLUSION

The alternative-instruction error in this case was harmless beyond a

reasonable doubt. Accordingly, we AFFIRM the convictions on all counts, and,

for the reasons set forth in our previous opinion, we VACATE the sentence and

REMAND for resentencing.

Even if the alternative-instruction error in this case was not harmless with respect

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to the conspiracy conviction, we would still find that the error was harmless with respect to

most of the other charges. The evidence presented at trial proved beyond a reasonable doubt

that Skilling personally committed many of the fraudulent acts that form the basis for the

other charges. Thus, most—if not all—of the other convictions rest on Skilling’s own conduct,

not on the Pinkerton instruction.

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