2. Proposed Supplemental Instruction for Skillingconviction.wpd

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

IN THE UNITED STATES COURT OF APPEALSFOR THE FIFTH CIRCUIT

No. 06-20885UNITED STATES OF AMERICAPlaintiff-Appelleev.JEFFREY K SKILLINGDefendant-AppellantAppeal from the United States District Courtfor the Southern District of TexasBefore SMITH and PRADO, Circuit Judges, and LUDLUM

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, District Judge.PRADO, Circuit Judge:Ajuryconvicted former Enron Corporation CEO Jeffrey K. Skilling(“Skilling”)forconspiracy,securities fraud, making false representations toauditors,andinsidertrading.Skilling argues that the government prosecutedhimusinganinvalidlegaltheory,thatthedistrictcourtusederroneous juryinstructions,thatthejurywasbiased,thatprosecutorsengaged inunconstitutionalmisconduct,andthathissentenceisimproper.We affirm theconvictions, vacate the sentence, and remand for resentencing.

I. Factual Background

United States Court of AppealsFifth Circuit

F I L E D

January 6, 2009Charles R. Fulbruge IIIClerk

No. 06-208852Skilling’sriseatEnron began when he founded Enron’s Wholesalebusiness in 1990. In 1997, he became Enron’s President and Chief OperatingOfficerandjoinedtheBoardofDirectors.In February 2001, he became Enron’sCEO, and on August 14, 2001, Skilling resigned from Enron.AboutfourmonthsafterSkilling’sdeparture,Enroncrashedintosuddenbankruptcy.An initial investigation uncovered an elaborate conspiracy todeceiveinvestorsabout the state of Enron’s fiscal health. That conspiracyallegedly includedoverstating the company’s financial situation for more thantwo yearsinanattempttoensurethatEnron’sshort-run stock price remainedartificially high.With Congress looking on, the President appointed a team ofinvestigators,theEnronTaskForce.The investigation led to criminal chargesagainst Skilling and many others.Accordingtothegovernment,theconspiracy,ledbySkillingandKenLay(“Lay”), Enron’sCEOuntilSkilling took over (and again after his abrupt exit),workedtomanipulateEnron’searnings to satisfy Wall Street’s expectations.OthertopEnronofficialswerekeyplayersintheunlawful scheme, includingRichardCausey(“Causey”),theChiefAccountingOfficer(“CAO”);AndrewFastow(“Fastow”),theChiefFinancialOfficer(“CFO”);andBenGlisan(“Glisan”), the Treasurer.

A.Conspiracy and Securities Fraud

SeveralofSkilling’sconvictionsstemfromallegationsofconspiracyandsecuritiesfraud. The government presented evidence that SkillingengagedinfraudinseveralofEnron’sbusinessendeavors. As an international, multi-billiondollarenterprise,Enronhadelaboratefinancialdealings.At the time ofitsbankruptcy,the company was comprised of four major businesses:Wholesale,whichboughtandsoldenergy;TransportationandDistribution,whichownedenergynetworks;Retail,orEnronEnergyServices(“EES”),whichsoldenergytoend-users;andBroadband,orEnronBroadbandServices(“EBS”),

No. 06-20885

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ThismeansthatEnronimmediatelyrecognizedincome,discountedtopresentvalue,based on projected future earnings.

3whichboughtandsoldbandwidthcapacity. The government alleged thatSkillingtookspecificfraudulentactionswithrespecttoWholesale, EES, andEBS.Wholesale,themostprofitabledivision,accountedfornearly90%ofEnron’srevenue.The government presented evidence to show that theconspiratorsliedaboutthenatureofWholesale,callingita“logisticscompany,”eventhoughitwasamuchmoreeconomicallyvolatile“tradingcompany.”ConstruingWholesaleasa“logisticscompany”hadimportantramificationsforhowinvestorsvaluedthedivision. In fact, Skilling reportedly told Ken Rice(“Rice”),EBS’sCEO,thatifinvestorsperceivedEnronasatradingcompany,itsstockwould“getwhacked.”The alleged artifice also included masking the lossesofEnron’sotherstruggling subdivisions by shifting the losses to Wholesale.Thatmadethestrugglingdivisionsappearfinanciallysoundandthusencouraged additional investment.EESwasaretailundertakingthatEnroncreatedtosellnaturalgastocustomers inderegulatedmarkets. Although Enron had high expectations forEES’sprofitabilityafteritsinitialstart-upperiod,EESdidnotmeettheseexpectations.As of the fall of 2000, various utilities in California owed Enronsubstantialfees,whichEnronhadalreadybooked as profits under its“mark-to-market accounting.”

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The utilities, however, were suffering heavyfinanciallossesandstoppedpayingthesefees.Under general accounting rules,Enronshouldhaverecordedalossofhundredsofmillionsofdollarsbasedonthefailure of the utilities topaythefees,butSkillingandhisco-conspiratorstriedtohidetheharmbytransferringthelossestoWholesaleso that EES wouldcontinue to show promise, at least on paper.

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