Oct. 17 (Bloomberg) -- A judge voided the securities and bank fraud convictions of Kenneth Lay, the Enron Corp. founder accused of directing one of the biggest accounting frauds in U.S. history, because he died before he could appeal the verdicts.

U.S. District Judge Sim Lake ruled today that federal law requires dismissal of a conviction when a defendant hasn't been able to exercise his right to appeal. Lay, who died in July at the age of 64, hadn't appealed before he suffered a fatal heart attack.

``The law is clear that the guilty verdict against Ken Lay should be thrown out,'' said white-collar criminal defense attorney Jacob Frenkel, a former lawyer with the U.S. Securities and Exchange Commission.

The voiding of the conviction means prosecutors can't seek forfeiture of $43.5 million they had sought from Lay in their criminal case. They also demanded $139.4 million from former Enron Chief Executive Officer Jeffrey Skilling, who was convicted along with Lay of helping hide debt and inflate income. With Lay's death, the government is now seeking to force Skilling, 52, to pay both forfeiture amounts.

Skilling's lawyer, Daniel Petrocelli, said the judge ``did the right thing.'' Skilling is scheduled to be sentenced Oct. 23 in Houston federal court for his role in helping lead the $30 billion fraud that destroyed the company. He faces more than 20 years in prison.

Ruling

The government argued that Lay's estate shouldn't be ``unjustly enriched with the proceeds of fraud.'' Lake said the government and investors can seek payment from the estate in civil litigation, using a lower level of proof than ``beyond reasonable doubt,'' the standard required in criminal cases.

``We will continue to pursue all remedies available for restitution on behalf of the victims of the fraud,'' said U.S. Justice Department spokeswoman Bryan Sierra in an e-mailed statement. Jaclyn Lesch, an agency spokeswoman, declined to say whether the government would appeal Lake's ruling.

Michael Ramsey, who represented Lay, Enron's former chairman, at trial, didn't return a call seeking comment.

Two months after Lay's death, representatives of the estate asked that his conviction be thrown out and his indictment dismissed. An Enron victim, Russell L. Butler, opposed that effort. Lake denied Butler's motion.

`Final Judgment'

``Lay died before sentencing, before a final judgment could be entered, and before a notice of appeal could be filed,'' Lake wrote in today's 13-page decision.

``We're pleased with the judge's ruling and glad that the criminal case against Mr. Lay is at an end,'' said Samuel J. Buffone, an attorney with Ropes & Gray in Washington, who represents the estate. ``By dismissing the indictment and vacating the conviction there's no possibility of forfeiture, criminal fine, or restitution.''

Last month, the estate agreed to pay $12 million to settle claims on behalf of participants in company pension plans. Investors may be able to sue the estate as part of its civil lawsuit, Buffone said.

``In our efforts to secure a sizeable recovery for Enron shareholders, Ken Lay's assets are insignificant,'' said William Lerach, a lawyer for former Enron investors. ``We are seeking billions from the banks that underwrote Enron's deals. So what happens to Ken Lay's conviction and his assets isn't terribly relevant to us.''

`Civil Actions'

Andrew Fastow, Enron's former chief financial officer and star witness at Lay's trial, provided Lerach with evidence of wrongdoing at Enron that allegedly involved several major banks, Lerach said. Fastow, 44, cooperated with prosecutors and was sentenced last month to six years in prison for his role in the fraud.

``It certainly would have been easier for former employees to win damages arising out of Ken Lay's fraud if the court had not erased the conviction,'' said Lowell Peterson, a lawyer who won severance for former Enron employees. He added that ``a tremendous body of evidence was produced at the criminal trial, and I think the chances are still very strong that defrauded people will still be able to recover from Lay's estate.''

Lay was found guilty May 25 of conspiracy to commit securities and wire fraud, wire fraud, securities fraud, bank fraud and making false statements to banks. The verdicts came after a four-month jury trial. The bank-fraud conviction came after a one-week trial before Lake alone. Lay faced at least 20 years in prison at sentencing.

Energy Trader

Enron, once the world's largest energy-trading firm, had more than $68 billion in market value before its bankruptcy in December 2001 wiped out more than 5,000 jobs and at least $1 billion in retirement funds overnight. It was the second-largest bankruptcy in U.S. history, after WorldCom Inc.'s collapse in July 2002.

The government had asked Lake to delay today's ruling until Oct. 23, the date Lay was to be sentenced, so that Congress could have an opportunity to pass legislation that would trump the appeals court rule.

On Sept. 5, Assistant U.S. Attorney General William Moschella sent letters to heads of both Congressional houses, asking them to rewrite the federal criminal code to uphold guilty verdicts against people who die before they can exhaust their appeals. Congress adjourned last month without anyone sponsoring such legislation.

`Got Away With It'

Former Enron pipeline worker Johnnie Nelson, who testified at Lay's trial that he felt the founder of the Houston-based company had betrayed employees, said he was disappointed with today's decision.

``I feel like he got away with it,'' Nelson said. ``It is kind of disappointing, but that's the law. Like I said before, he's in front of his real judge and jury now, so he'll get what's coming to him.''

Enron investor Brian Durbin spoke against Fastow at his sentencing and said he plans to speak against Skilling at the former CEO's sentencing next week.

Of Lay, Durbin said, ``to the people he affected, he's always going to be guilty.''

The case is U.S. v. Skilling, 04-cr-25, U.S. District Court, Southern District of Texas (Houston).

To contact the reporter on this story: Thom Weidlich in New York at tweidlich@bloomberg.net and; Laurel Brubaker Calkins in Houston at laurel@calkins.us.com.

Last Updated: October 17, 2006 21:45 EDT